Vol. 76, No. 4, April 2003

IOLTA Funding for Legal Aid

by Pat Ballman

On Dec. 10, 2002, the U.S. Supreme Court heard arguments in Brown v. Legal Foundation of Washington on whether the state of Washington's IOLTA (Interest on Lawyer Trust Accounts) program constituted an unconstitutional taking of property under the 5th Amendment, which says: "private property [shall not] be taken for public use without just compensation." Under IOLTA programs, which exist in all 50 states, lawyers are directed to invest client funds into pooled accounts when, due to the amount of the funds, the time the funds are expected to be invested, and the interest rate, the funds would not generate enough interest to pay the costs of establishing and administering a separate account. Interest from the pooled accounts is channeled to groups that administer legal aid programs for the poor. Last year IOLTA accounts generated about $1.5 million in Wisconsin, or about 24 percent of the money spent in the state on civil legal services for the poor.

An earlier challenge to IOLTA programs had been before the Supreme Court in 1998, when the Court ruled in a case challenging the Texas IOLTA program, that the interest generated was the "property" of the clients. But in that case, the Court stopped short of ruling whether directing the funds into IOLTA accounts was an unconstitutional "taking" requiring "just compensation" to the clients.

On March 26, 2003, the U.S. Supreme Court, in a 5 - 4 decision, held in the Washington case that because "just compensation" is measured by the owner's pecuniary loss, which is zero whenever the IOLTA law is obeyed, there was no violation of the Just Compensation Clause. The decision and dissents can be found at http://supct.law.cornell.edu

In Wisconsin, SCR 20:1.15(c) requires lawyers to deposit client funds into IOLTA accounts if the amount is so nominal or it is expected to be held for such a short period that the lawyer, using sound judgment, determines that no interest could be earned for the client after the costs of opening and administering the account. If the client disagrees, SCR 13.03(4) allows a review procedure and a refund to the client if the funds could have earned interest. SCR 13.04(4) also provides that failure to participate in the IOLTA program constitutes professional misconduct.

Everyone who cares about providing civil legal services for the indigent is extremely pleased that the Supreme Court upheld these IOLTA programs. If it had not, in Wisconsin we would have faced the huge task of replacing the lost $1.5 million in funding for legal services for the indigent. And every state around the nation would have faced a similar challenge.

It was a narrow victory, with well reasoned dissents. But a victory.

Wisconsin Lawyer