California Bar Journal
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Federal court strikes at heart of IOLTA program
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believe that once the trial judge in Washington analyzes how IOLTA actually works, he will see that clients don’t lose anything and find that the Washington program is constitutionally permitted.”

In its unanimous ruling, the three-judge panel wrote,  “. . . The interest generated by IOLTA pooled trust accounts is property of the clients and customers whose money is deposited into trust, and . . . a government appropriation of that interest for public purposes is a taking entitling them to just compensation under the Fifth Amendment.”

The judges added, “The Fifth Amendment does not prohibit the taking of private property for public use; it allows it. What it prohibits is the taking of private property for public use ‘without just compensation.’”

The Washington suit

The lawsuit in Washington challenges the extension of the IOLTA program in that state to cover funds held by “limited practice officers,” non-attorneys who work in title companies. California’s program does not contain such a provision.

Interest on Lawyer Trust Account programs exist in all 50 states, funded by interest earned on client funds placed in an attorney’s trust account for a short period of time. Although the amount of the interest for individual clients tends to be quite small, cumulatively the programs collect about $100 million nationally every year.

“These funds are used for critically important assistance to low-income clients, who need legal help to escape domestic abuse, redress home equity fraud, obtain needed medical care, and to secure food, shelter and a subsistence income,” said Andrew Holcombe, chair of the California Legal Services Trust Fund Commis-sion.

The dispute

Legal services programs, which saw the federal Legal Services Corp. virtually dismantled in the 1980s, see the money as a stable, non-political source of funds.

But IOLTA programs have been challenged in recent years by conservative legal groups as a taking of client money.

The Supreme Court ruled in 1998 in a Texas case that even the small amounts of interest held in client trust accounts belong to the client, but it did not decide whether their use amounts to a taking.

No constitutional decision

The court also did not decide if the use of such money is constitutional. A federal judge in Texas ruled last year that IOLTA programs do not amount to a taking of client property and that such programs are constitutional. The case is on appeal.

In California, $10 million was allocated from the general fund last year for an “equal access fund” to augment the work done by legal services programs.

Gov. Gray Davis added another $5 million to the fund in his proposed budget this year.

The appellate panel in the Washing-ton case noted that as a practical mat-ter, it may be too costly and time-con-suming to distribute interest to clients.

It depends, wrote Judge Andrew J. Kleinfeld, “on how often it is done. If done once, it is probably a costly nuisance. If done frequently, it may become delegable to non-professional staff using off the shelf software.”