IOLTA and the Washington Legal Foundation Case

Lucas FigielAdapted by RWS

IOLTA?• Scheme that takes advantage of

bank regulations to generate significant revenue for legal service programs

• Purpose: – to provide services for the indigent – to improve the administration and

access to justice

Consumer Checking Account Equity Act in

1980• Federal banking restrictions relaxed

• Banks authorized to offer Negotiable Order of Withdrawal (“NOW”) accounts

• Operate like checking accounts

NOW Requirements:

• All interest must go to charitable purpose

• none of the funds in the account may belong to a for-profit corporation unless the designated charitable organization has the exclusive right to the interest

Before IOLTA• If net interest invested for client • If no net interest non-interest

bearing account– Banks benefit

After IOLTA• If net interest invested for client• If no net interest into IOLTA

– Public benefits when client cannot

IOLTA mandatory in IL• SC Rule 1.15(d) - all IL attorneys

must participate

• Mandatory jurisdictions generate more revenue

What goes into IOLTA?• Client funds that cannot earn net

interest – Either individually or pooled

• Targeted money:– Nominal client funds – funds expected to be held for a short

duration

Earnings• IOLTA generates over $140

million yearly nationwide

• Lawyers Trust Fund of IL – 2001 net IOLTA Income: $3,971,932

• Service Charges: $488,762• Handling Fees: $ 49,958

Comparison to LSC

• IOLTA funds come second to those distributed by the LSC

• LSC 2003 budget $329,300,000• Disbursed to Illinois

– 2003 - $11,737,172– 2002 - $11,737,172– 2001 - $11,711,351

Why client can’t realize net interest

• Administrative and banking expenses consume the interest that is earned

• Opponents contend that what couldn’t be earned before IOLTA is being earned now

Fund Usage• wrongful eviction• disabled children• domestic violence• educate the public about legal

issues• scholarships• clinical instruction to law students

Also used for…• controversial issues

– gay rights – legal aid to poor immigrants trying to

come to the US • 1st Amendment implications

Brown v. LFoWSupreme Court of Washington

LPOs- what are they?

Standing issue- bank services withdrawn?

Brown and Hayes are in the real estate business

Allen Brown $14,793.32 for 16 days interest estimated is $2.00

Greg Hayes $90,521.29 for 2 days and estimated interest is $4.96

5th Amendment Takings1) Private Property2) Taken3) For public purpose4) Without just compensation

Purpose of Takings Clause• Prevent the government from

forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole

Interest is client’s property?

• Circuit split settled by Phillips• Interest that accrues belongs to

the owner of the principal • Interest is created by client funds

and not the government

Property Taken?• Takings jurisprudence comes in two

flavors: – outright takings – permanent, physical

occupation of property or where the claimant is deprived of property’s economic or productive use

– regulatory takings - regulate how the property can be used

• Different tests applied

Test used to establish a taking

• Per Se – for outright appropriations and practical equivalent

• Ad Hoc – regulatory taking requires careful balancing1) degree of interference with complainant's investment-backed expectations;

none2) the severity of the economic impact on the complainant; and

minor3) the nature of the government's action

fair regulations in highly regulated industry

Proper Test?• Settled by Brown• Per se test - transfer of interest-

income to charitable beneficiary appropriates the principal’s beneficial interest in her property

For Public Purpose?• Easily satisfied

• compelling interest in providing legal services to millions of needy Americans

Without Just Compensation?

• Only uncompensated takings prohibited

• Put owner in same pecuniary position had property not been taken

• The loss must be pecuniary

Measurement • Measured by owner’s loss not

government’s gain

• If loss is zero then compensation due is zero

Held• (1) that just compensation is

measured by the net value of the interest that was actually earned by petitioners

• (2) by operation of the Washington IOLTA Rules, no net interest can be earned by the money that is placed in IOLTA accounts in Washington

IOLTA wins, but…• Whether IOLTA violates First

Amendment remains unanswered