Interest on Lawyers' Trust Account Articles
From the Chair...
The Chair of the Commission on IOLTA discusses current issues and events
From the Chair.
by Herbert S. Garten
Chair, Commission on IOLTA
In the immortal words of Yogi Berra, "It ain't over 'til it's over!"
As most of our readers have heard already, the U.S. Supreme Court issued its decision in Phillips, et al. v. Washington Legal Foundation, et al on June 15, 1998. A deeply divided Court rendered a 5-4 opinion, authored by Chief Justice Rehnquist and joined by Justices O'Connor, Scalia, Kennedy and Thomas, finding that, under Texas law, interest earned on client funds held in IOLTA accounts is the client's private property.
Similar to the Fifth Circuit Court of Appeals decision that it reviewed, the U.S. Supreme Court addressed only the property interest prong of a Fifth Amendment Taking Clause analysis. There was unanimity among the Justices, however, that in order to prove a violation of the Fifth Amendment Taking Clause three questions must be answered in the affirmative: 1) Is there property? 2) Has the government taken that property? and 3) Is there just compensation due for the taking of the property? The majority left for a later day the issues of whether Texas has "taken" client property, or whether respondents are due "just compensation." The case has been remanded to the Fifth Circuit Court of Appeals to make those determinations.
A dissenting opinion, written by Justice Souter and joined by Justices Stevens, Breyer and Ginsburg argued that to consider only one of the three issues implicated by the Fifth Amendment Takings Clause puts undue emphasis on that issue. The dissenters stated, "if it should turn out that within the meaning of the Fifth Amendment, the IOLTA scheme had not taken the property recognized [in the Court's ruling], or if it should turn out that 'just compensation' for any taking was zero, then there would be no practical consequence for the purposes of the Fifth Amendment in recognizing a client's property right in the interest in the first place; any such recognition would be an inconsequential abstraction."
During oral argument, Justice O'Connor, a member of the majority in this case, made a statement that is cause for optimism for the future. At the end of the Petitioner's argument, Justice O'Connor said, "The court below found there's a property interest, a cognizable property interest here. It didn't go on and determine whether there had been a taking. . .Well, I guess it's possible that there might be a property interest, but nonetheless it might turn out at the end of the day there's no taking. No damages, no loss, no taking."
It has been our contention from the beginning that clients experience no financial loss when their attorney properly places their short term or nominal funds in an IOLTA account. We believe, as a result, the Court's ruling regarding property interest ultimately will be, in Justice Souter's words, "an inconsequential abstraction."
That said, where does this decision leave us now?
It will be several years before the courts resolve the remaining issues in this case. As for the present, the U.S. Supreme Court did not find the Texas IOLTA program to be in violation of the Fifth Amendment, and it did not enjoin the operation of the Texas or any other IOLTA program. As a result, the IOLTA rules in every state and the District of Columbia remain in effect. While the ABA cannot provide legal advice, it is the Commission on IOLTA's position that lawyers and banks should continue to adhere to the IOLTA rule in their state and that IOLTA programs should continue to collect interest on IOLTA accounts and disburse grants as before.
The American Bar Association, through its Commission on IOLTA and other entities, remains available to assist state and local bar associations and state IOLTA programs, their officers and staff as they analyze and react to the Phillips decision. As ABA President Jerome Shestack stated: "We are confident that, ultimately, the courts will uphold the constitutionality of this vital resource for the public good. We will continue to work to preserve this program, which provides tens of thousands of the most needy members of our society access to our civil justice system to enforce their rights and resolve their grievances."
U.S. Supreme Court Remands IOLTA Caseby Ken Elkins
On June 15, 1998, the U.S. Supreme Court rendered its opinion in the Texas IOLTA case, Phillips, et al. v. Washington Legal Foundation, et al. Chief Justice Rehnquist authored the 5-4 majority opinion, which Justices O'Connor, Scalia, Kennedy and Thomas joined. The Court ruled that Texas law observes the "interest follows principal" doctrine, and, as a result, interest earned on client funds held in an IOLTA account is client property. The majority opinion expressed no view as to whether Texas has "taken" client property, or whether any "just compensation" is due the respondents. It remanded those issues to the Fifth Circuit Court of Appeals for consideration.
The petitioners' argued that no property interest is implicated in this case because the only client funds that may properly be placed in an IOLTA account are those that cannot earn net interest for the client. The Court disagreed. It ruled that a physical item does not lose its status as "property" simply because it lacks a positive economic or market value. Property, the Chief Justice wrote, also consists of "the group of rights that the so-called owner exercises in his or her dominion of the physical thing, such as the right to possess, use and dispose of it." Although the interest income at issue in this case may have no economically realizable value to its owner, the Court ruled that possession, control, and disposition nonetheless are valuable rights intrinsic to property.
Justice Breyer wrote a dissent that Justices Stevens, Souter and Ginsburg joined. He agreed with the petitioners that no property interest is implicated in this case.
Justice Souter authored a dissent joined by Justices Stevens, Ginsburg and Breyer. It asserts that the Court either should have decided all three Takings Clause issues together (i.e., is there property, has the state taken the property, and is just compensation due as a result of the taking?) or returned the case to the Fifth Circuit Court of Appeals to do the same. Justice Souter wrote that this approach would reduce the risk of placing undue emphasis on the existence of a generalized property right that may turn out to be an entirely theoretical matter, especially when, in his estimation, the respondents will have a difficult time prevailing on the other two issues.
To find a "taking," the court must consider:
- the nature of the government's action,
- the economic impact of that action, and
- the degree of any interference with the property owner's reasonable, investment-backed expectations. See Penn Central Transp. Co. v. New York City, 438 US 104 (1978).
- there is no physical occupation or seizure of tangible property,
- there is no apparent economic impact, since the client would have no net interest to go in his or her pocket (IOLTA or no IOLTA), and
- the facts present neither anything resembling an investment nor any apparent basis for the client to reasonably expect to obtain net interest.
The ultimate resolution of the remaining Taking Clause issues will take several years. In the mean time, the U.S. Supreme Court neither found the Texas IOLTA program to be unconstitutional, nor it did order the Texas or any other IOLTA program to stop operating. As a result, the IOLTA rules in every state and the District of Columbia remain in effect.
Today, IOLTA programs operate in all 50 states and the District of Columbia. Twenty- seven are comprehensive, 21 are opt-out and three are voluntary. State legislatures authorized the IOLTA rules in five states, while 46 states (including D.C.) have rules authorized by order of the highest court in the jurisdiction. In 1996, IOLTA revenues were approximately $110.5 million nationally. Since 1981, IOLTA revenues have exceeded $1 billion, the vast majority of which have gone to programs that provide indigent civil legal services and related purposes.
IOLTA is a critical part of an indigent civil legal services delivery system that has evolved in the United States over the past two decades. State IOLTA programs make grants in support of equal access to justice through the provision of direct legal services, the provision of pro bono services, improvements in the administration of justice and law related education. Many IOLTA grantees help to resolve the everyday legal problems that families confront, including stopping family violence (see story on page 3), preventing illegal evictions and providing support for debt counseling clinics.
The American Bar Association remains convinced of IOLTA's constitutionality and of the sound public policy that has encouraged its growth. In response to the Supreme Court's June 15, 1998 Phillips decision, ABA President Jerome Shestack stated: "We are confident that, ultimately, the courts will uphold the constitutionality of this vital resource for the public good. We will continue to work to preserve this program, which provides tens of thousands of the most needy members of our society access to our civil justice system to enforce their rights and resolve their grievances."
Ken Elkins is the Assistant Staff Counsel for the ABA Commission on IOLTA.
Phillips v. Washington Legal FoundationFrequently-Asked Questions and Answers About the U.S. Supreme Court Ruling
Q. Did the United States Supreme Court rule that the Texas IOLTA program is unconstitutional?
The Court only ruled that, under Texas law, "the interest income generated by
funds held in IOLTA accounts is the private property of the owner of the
principal." The Court expressly did not rule on whether the funds have been
"taken" by the State or whether just compensation is due. In order to prevail
under the Fifth Amendment Takings Clause, there must be a finding that there is
private property, that the property has been "taken," and that some
compensation is due the property owner. The Court ruled only on the first issue
and remanded the other two issues to the lower court for determination.
Q. Is the Texas IOLTA program still operational?
The Court did not enjoin operation of the Texas program or any other IOLTA
program. Instead, it remanded the case to the lower court to determine if there
has been a taking and if any just compensation is due.
Q.Does this opinion affect other state IOLTA programs?
At this point, the Court's decision does not affect other IOLTA programs. The
Court only ruled that under Texas law, clients have a property interest in the
interest generated from IOLTA accounts. It did not rule on the constitutionality of
the Texas program or any other IOLTA program.
Q. Should lawyers continue to participate in IOLTA programs?
The IOLTA rules that exist in every state remain in effect. It is also important to
remember that lawyers' compliance with these rules and their continued
participation in the program help to provide equal access to justice, as the
monies generated from IOLTA accounts fund programs that provide direct legal
services to the poor, pro bono legal services, improvements in the administration
of justice and law related education.
Prepared by the ABA Commission on IOLTA - June 1998
Grantee Spotlight. . .
Nevada's Washoe County CASA Program
by Mary Herzik
Established in 1977, the Court Appointed Special Advocate (CASA) program is a nationwide movement of community volunteers who speak for abused and neglected children in court.
CASA founder Judge David Soukup of Seattle, Washington explains the development of the volunteer Guardian ad litem concept in personal terms: "As a judge, I had to make tough decisions: to take a child from the only home that he's ever known, or leave him someplace where he might be abused. I needed someone who could tell me what was best for that child--from the child's perspective."
From this beginning, a national child advocacy movement was born. Today, nearly 128,000 volunteers in more than 640 CASA programs nationwide are "speaking up" for children in the courts.
Washoe County's CASA program started in 1982 under the leadership of Judge Charles M. McGee. The Reno Junior League provided initial support for the project, and six members became Washoe County's first CASA volunteers. Today, the program has 150 volunteers handling more than 200 new cases referred from Family Court each year. A professional staff of five oversees the program.
Grants from the Nevada Law Foundation's IOLTA program provide funds to contract the services of a program attorney. In 1997, the IOLTA program supported a model of child representation that uses a CASA/Attorney team for representing a child's "best interests."
The increasing complexity of legal issues that volunteers face in their casework, coupled with a need to draft motions and other legal documents on the child's behalf goes beyond the resources of a trained volunteer. National studies have shown the CASA/Attorney model to be particularly effective. In fact, a recent Oregon Task Force on Juvenile Justice endorsed this model noting, "the best advocacy for abused and neglected children can be provided by an attorney and lay volunteer who work cooperatively. An effective statewide, coordinated system for the appointment of advocates should be patterned on this team model." ( Achieving Our Mission--A Management Guide for CASA Program, National CASA, Appendix, p. 21).
So what exactly does CASA do? The following case is typical.
There are three children in the King family: Ray (7), Dawn (6) and Marie (3)(these names have been changed for purposes of this article). The Washoe County Department of Social Services removed the King children from their home in April 1993 after discovering severe bruising on their bodies. In addition, the King home had no food or electrical power.
At the time, Ms. King was moving from home to home and from job to job. When she finally achieved some stability, the children returned home. A CASA continued to monitor the case, however, and he noticed bruising on the children during a home visit in December 1993. He discovered that mom had allowed her abusive boyfriend to move into the home, thinking that the Washoe County Department of Social Services "wasn't looking."
Once again, the children were removed from the home, and the case was transferred to the State of Nevada, Division of Child and Family Services (DCFS) in February 1994. DCFS's objective was to pursue long-term foster care services and to find a permanent home for the King children. The CASA remained on the case.
Ms. King agreed to relinquish her parental rights to the children if their maternal grandparents living in New Mexico could adopt them and if she could have pictures of the children periodically. In February 1994, an Interstate Compact for the Placement of Children (ICPC) commenced to facilitate the placement of the King children. In May 1994, the children were placed with the maternal grandparents. Currently, the children are available for adoption, and the maternal grandparents are the designated adoptive parents. All three children sadly are "special needs" children and have serious behavioral, emotional and physical problems associated with parental abuse.
Unfortunately, because of communication problems between DCFS (Nevada) and New Mexico, the adoption process has been stalled temporarily. In addition, a conflict with New Mexico's special-needs documentation and assessments (psychiatric, educational and developmental) has resulted in a request for further evaluation at the grandparents' expense. This too has contributed to the temporary stall in the process.
So where does CASA fit into this picture? The CASA volunteer, Randy, has been actively involved in this case since day one. He knows all of the players involved on a personal level. Other than the maternal grandparents, Randy knows the King children better than anyone. He has dealt with Ms. King, the children's father, the procession of social workers and therapists.
Randy was instrumental in facilitating the children's placement with the grandparents in New Mexico, which is the only stable home they have known. He also coordinated the services to meet the children's special needs both in Nevada and New Mexico, and Randy has been a persistent advocate for these children caught between the bureaucracies of two states.
While both New Mexico and Nevada have thousands of children in the system, Randy has only three: Ray, Dawn and Marie King. Foster care, ICPCs and adoptions will happen, but a CASA volunteer can make sure that they happen in a manner that is in the children's best interest.
The CASA volunteer becomes the glue that holds our fragmented social services efforts together. Randy has participated in numerous phone calls, case staffings and court hearings all meant to speed up the process and to ensure that the King children are the focus of everyone's efforts. After all, everyone agrees that the grandparents should adopt the King children, and if a CASA is willing to spend the time and energy to ensure that this adoption becomes a reality, everybody wins--especially the children.
As this case illustrates, CASA volunteers sometimes are the only consistent figure in an overloaded social services system. CASAs have only one or two cases, while a social worker may have 40 or more. CASAs have time to build relationships with the children, care providers and others working closely with them. The end result is reducing the length of time of out-of-home placements, achieving permanency and minimizing placement changes along the way.
The Washoe County CASA Program is indebted to the Nevada Law Foundation for its grants to the program over the past decade. As stated above, through IOLTA grants, the program contracts with a local attorney who provides invaluable legal support to the CASA volunteers, ensuring recommendations that CASAs make are sound and considered. As a result, the Washoe County CASA program is growing both in the numbers of volunteers and in its commitment to children's advocacy.
Mary Herzik is the CASA Executive Director of the Washoe County CASA Program in Reno, Nevada. The program is affiliated with the 2nd Judicial District Court, Family Division.
IOLTA News & Notes
New Executive Director in New Jersey
Veteran Executive Director of the IOLTA Fund of the Bar of New Jersey, Ruth Birkhead, has retired after almost a decade at that position. Ellen D. Ferrise has been named the new Executive Director. Ferrise started Ferrise & Company in 1996 to provide advice about financial strategies, credit and cash management to small and mid-sized companies. In 1997, she served as a loan consultant reviewing loans and loan portfolios, lending practices and credit administration for several small banks. Ferrise also facilitated the evaluation of multiple proposals for complex cash management services as a banking consultant to a New Jersey university. In a third project, the New Jersey Department of Labor hired Ferrise to lead and coordinate certain aspects of a local plant closing as part of their "Response Team" program.
Ferrise's extensive banking experience also includes a stint as a commercial lender, where she examined the financial statements of hundreds of small companies. Her expertise in financial evaluations and credit analysis helped many companies obtain appropriate financing in the short term and "credit readiness" for the long term.
After five years at Chemical Bank (now Chase Bank) and nine years at Barclays Bank of New York (now part of Bank of New York), she joined CoreStates Bank in 1991 where she managed its middle-market lending activities in the northern New Jersey region. Responsible for client relationships and business development, Ferrise has met and worked with many entrepreneurial, closely-held and family-owned businesses in the New Jersey/New York market.
You can reach Ellen Ferrise by e-mail: email@example.com or by phone: 732/247- 8222.
Briefing Schedule Set in Washington State
The Ninth Circuit Court of Appeals has set a briefing schedule in the Washington State IOLTA litigation, Washington Legal Foundation, et. al. v. Legal Foundation of Washington, et al. Appellants' brief is due on or before July 29, 1998, and Appellees' brief is due on or before August 28, 1998. Appellants may file a reply brief within 14 days of service of Appellees' brief. Amicus curiae briefs are due within the time allowed the party whose position the brief will support.
Although this lawsuit is slightly different from those that the Washington Legal Foundation filed against the Texas and Massachusetts IOLTA programs, the underlying issues remain the same. As in Texas and Massachusetts, the plaintiffs alleged an unconstitutional taking of property in violation of the Fifth Amendment to the U.S. Constitution. In addition, the plaintiffs argued that their rights to free speech and association under the First Amendment were violated because their funds finance activities that they do not support.
This case is different than the other two, however, in that it focuses on Limited Practice Officers. LPOs are professionals whom the Washington Supreme Court license to practice law. They are called LPOs or Certified Closing Officers and are licensed solely to complete real estate closing documents. Escrow firms, title companies, mortgage companies, banks and law firms employ LPOs, and the Washington Supreme Court mandated their participation in the state's IOLTA program on December 9, 1995. The mandate was the result of the Washington State Bar Association Legal Aid Committee's protracted effort that lasted for more than two years.
In addition, the issue in this case is slightly different than the Texas and Massachusetts cases in that the plaintiffs here receive benefits from the client funds held in trust. The benefits come in the form of extensive services, including computer hardware and software and on-going technical assistance.
Sweep Accounts Come to Illinois
The Illinois Supreme Court approved an amendment to Rule 1.15(d)(1) of the Illinois Rules of Professional Conduct (the "IOLTA rule") to allow the use of "sweep" accounts for IOLTA. The amendment became effective on April 1, 1998.
With the new rule, Illinois joins Arizona, Connecticut, Florida, Massachusetts and New Hampshire as states that allow attorneys and law firms with high-balance pooled client trust accounts to use sweep accounts and earn a higher rate of return for IOLTA.
"We think that sweeps will give us a boost," said Ruth Ann Schmitt, Executive Director of the Lawyers Trust Fund of Illinois. Noting that the average interest rate on IOLTA accounts in Illinois is 1.87 percent, she added, "sweeps will allow us to earn significantly higher rates on some of our bigger accounts, and hopefully, they will help to change the overall interest rate climate."
The Lawyers Trust Fund's staff is working with financial institutions to develop appropriate sweep products.
For more information about Illinois' sweep account program, or to obtain a copy of the rule language, call Ruth Ann Schmitt at 312/372-5906 (e-mail: firstname.lastname@example.org).
Maryland Legislature Enacts New Legal Services Funding
The Maryland General Assembly has enacted legislation creating a surcharge on civil filing fees to help fund civil legal service to low-income persons. Governor Parris Glendening signed the bill into law on May 21, 1998. The Maryland Legal Service Corporation (MLSC), the state's IOLTA program, will administer the new funding, which is projected to be at approximately $3 million annually.
MLSC Executive Director Bob Rhudy said, "The third time is a charm. We had an excellent lead sponsor in State Senator Leo Green, Vice Chair of the Senate Judicial Proceedings Committee, and an outstanding coalition of statewide supporters. Despite some very real opposition, we were able to prevail."
This was the third consecutive year that the Maryland General Assembly considered the legal services filing fee surcharge legislation. The bill was the Maryland State Bar Association's highest legislative priority this session. Maryland Chief Judge Robert Bell, Attorney General Joseph Curran, the Maryland Coalition of Civil Justice (the state's legal services planning group), Legal Aid Bureau (the LSC grantee), Maryland Trial Lawyers, other legal services programs, state aging and human services agencies, domestic violence centers, labor and religious organizations, and other social services programs all strongly supported the bill.
The statute establishes a $10 surcharge on civil cases in the circuit court (Maryland's court of general jurisdiction) and a $2 surcharge in state district court actions. As a result of the new legislation, MLSC's funding will be collected in a special fund of the Maryland Office of the Courts and appropriated annually by the Maryland General Assembly. For further information, contact Robert J. Rhudy at the Maryland Legal Services Corporation, 15 Charles Plaza, Suite 102, Baltimore, MD 21201, 410/576-9494, or by e-mail at email@example.com
The views expressed in Dialogue are those of the authors and do not necessarily represent the policies of the American Bar Association. The contents of this magazine have not been approved by the ABA House of Delegates and do not constitute ABA policy. © 2001 American Bar Association ISSN 1092-2164