Interest on Lawyers' Trust Accounts: Private Interest in the Public Interest

An alarm has been set off among lawyers, in New York and across the nation, by the U.S. Supreme Court’s recent decision in Phillips v. Washington Legal Foundation, 1998 WL 309070 (U.S. 1998), concerning Texas’ Interest on Lawyers’ Trust Accounts (IOLTA) program. Lawyers are wondering whether they should continue to place client funds in the pooled interest-bearing accounts established under such programs. The answer is: absolutely.

July 15, 1998

New York Law Journal
July 15, 1998

Interest on Lawyers’ Trust Accounts: Private Interest in the Public Interest
By Deborah Goldberg

An alarm has been set off among lawyers, in New York and across the nation, by the U.S. Supreme Court’s recent decision in Phillips v. Washington Legal Foundation, 1998 WL 309070 (U.S. 1998), concerning Texas’ Interest on Lawyers’ Trust Accounts (IOLTA) program. Lawyers are wondering whether they should continue to place client funds in the pooled interest-bearing accounts established under such programs. The answer is: absolutely.

IOLTA programs, including the one in New York, pool a unique category of client funds. Only those that cannot produce economic gain for the client go into an IOLTA account. Generally those funds are such small or short-term deposits that the transaction costs of opening and maintaining separate interest-bearing accounts would be greater than any interest those deposits could generate. IOLTA programs thus pool otherwise barren funds, which can then be made productive without costing the clients a cent. In New York, the interest from this pool is then distributed to organizations providing legal services to the poor.

The Texas IOLTA program was challenged on the ground that diverting interest to a public purpose was an unconstitutional taking. But the Court in Phillips did not decide the constitutionality of that program or any other. The decision thus has no immediate practical implications - including for the program that has been operating in New York since 1983 (known as IOLA) - and in fact may never have any practical import anywhere. For all we know at this point, the alarm sounded may be a false alarm.

Phillips may turn out to be nothing more than an academic exercise in property theory, because the Court addressed only one of the three essential elements of the taking claim. The Court held that interest generated on funds pooled pursuant to the Texas IOLTA program was the property of the clients. But the majority did not address the remaining two open questions: whether the clients’ property has been “taken” within the meaning of the Fifth Amendment and, if so, whether that property has any compensable value. The answer to both of those questions could be, and should be, a definite no.

It is difficult to see how IOLTA programs “take” anything from the client. No person or entity whose funds would be pooled in an IOLTA program could otherwise have received any interest from that money. As the lawyer and client plaintiffs in Phillips conceded, they suffer no financial loss because of IOLTA.

Before IOLTA programs were implemented, small and short-term deposits went into non-interest-bearing checking accounts. Banks then kept the interest actually earned on the deposits and used it to increase their own profits. The new regulatory structure introduced with IOLTA programs thus deprived depositors of nothing.

Even if it could plausibly be claimed that IOLTA programs effect a “taking,” the property at issue could have no compensable value. Compensation is measured by the loss to the property owner. But only funds incapable of generating any net income to the depositor go into the IOLTA account in the first place. When property is taken, but the owner loses nothing, the “just compensation” is zero.

IOLTA programs - including the IOLA program here in New York - are therefore safe now, while Phillips goes back to the trial court and the litigation wends its way through the judicial system. More importantly, the programs should ultimately be safe from a takings claim altogether. While that constitutional claim is being decided, however, lawyers in New York can, and indeed, must continue to comply with IOLA requirements dictated by law. The decision in Phillips has not in any way affected the statute or regulations in this state.

But New York lawyers here should do more than follow the letter of the IOLA law. We should be actively supporting the program, which provides badly needed funds for legal services to the poor. Clients should understand that, without spending a penny of their own money, they help enormously to ensure that indigent battered spouses, disabled children, struggling tenants, and defrauded consumers receive the legal services they so desperately need. The public should understand that, without funding for legal services, equal justice under law is a sham.

Encouraging support for IOLA, and for legal services generally, is more important now than ever. In recent years, Congress has radically reduced funding for legal services and has restricted the ability of federally financed lawyers for the indigent to provide full and zealous representation of their clients. Such lawyers can no longer file class actions or accept attorneys’ fees, and they are limited in the constitutional claims they can file. After years of support for legal services by both Democratic and Republican administrations in New York, Governor Pataki this year vetoed a bipartisan budget funding those services.

New York lawyers cannot allow these funding cutbacks, lawyering restrictions, and attacks on IOLTA programs to go unchallenged. The very first Ethical Consideration in the Lawyers’ Code of Professional Responsibility reminds us that “[a] basic tenet of the professional responsibility of lawyers is that every person in our society should have ready access to the independent professional services of a lawyer of integrity and competence.” EC 1-1A. The Code also recognizes that it is an “important function[] of the legal profession ... to assist in making legal services fully available.” EC 2-1. The Association of the Bar of the City of New York has taken an important step to meet this responsibility in issuing its “Call for the Repeal or Invalidation of Congressional Restrictions on Legal Services Lawyers.” 53 The Record 13 (Jan./Feb. 1998).

But private lawyers, individually, can do more to fulfill their professional obligations. Providing pro bono assistance would be a great help, of course, but our Congressional representatives and Governor need to hear that private attorneys trying to survive in a highly competitive legal market cannot begin to replace the services of experienced and dedicated full-time lawyers for the poor. Private lawyers should also help build and strengthen IOLA, by depositing funds in IOLA accounts whenever appropriate and educating others about the key role it plays in securing equal access to justice.

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ABOUT THE AUTHOR
Deborah Goldberg is a Senior Attorney at the Brennan Center for Justice at NYU School of Law. The Center is involved in a constitutional challenge to congressional restrictions on legal services.