ABA COMMISSION ON INTEREST ON LAWYERS' TRUST ACCOUNTS (IOLTA)
Comments on Multidisciplinary Practice Recommendation and Report (Report 109)|
of the Commission on Multidisciplinary Practice
August 3, 1999
The American Bar Association has supported the creation of Interest on Lawyers' Trust Accounts (IOLTA) programs in every state and in the District of Columbia for almost two decades. It views IOLTA as an integral component in the funding of civil legal services to the indigent. The ABA formed an Advisory Board and Task Force on IOLTA in 1981. Two years later, the ABA Board of Governors passed a resolution officially approving the concept of state IOLTA programs.
In 1986, the ABA Commission on IOLTA was created, with the charge to: (1) collect, maintain, analyze and disseminate information on programs involving the use of interest on lawyers' trust accounts for the support of law-related public service activities; (2) make recommendations for Association policy on the creation and operation of IOLTA programs; (3) maintain liaisons with state IOLTA programs; and (4) oversee the IOLTA Clearinghouse, which provides information, materials and technical assistance on IOLTA program design and operation.
In 1988, the ABA House of Delegates echoed the Board of Governors' support for IOLTA by passing a resolution encouraging all states to adopt or convert to mandatory IOLTA programs. And, through a resolution passed in 1991, the House reaffirmed its support for the IOLTA concept.
Not only has the ABA expressed its support for IOLTA through resolutions, but it has regularly filed amicus briefs in litigation challenging the IOLTA concept. Since 1992, the ABA Standing Committee on Amicus Briefs and the Board of Governors have approved the filing of six amicus briefs in the federal courts (four before United States Courts of Appeals and two before the United States Supreme Court) in actions challenging IOLTA. Thus, the Association's strong support for this innovative funding source, which in 1998 provided over $143 million nationally for the provision of legal services to the poor and the administration of justice, has been, and continues to be, unwavering.
Currently, IOLTA programs exist in every state and the District of Columbia Twenty-seven programs are mandatory, twenty-one are opt-out and three are voluntary. Forty-six of the programs were created by state supreme court order and five were created by state statute. Every state and the District of Columbia have operative IOLTA rules that most often are contained in the state's ethical rules governing lawyers. Although ABA Model Rule of Professional Conduct 1.15 (safekeeping property) does not specifically mention IOLTA, in most states, the IOLTA rules have been incorporated into the state's safekeeping of property rule.
II. Specific Concerns of the Commission on IOLTA Regarding Multidisciplinary Practice
The Commission on IOLTA takes no position on the broad issues being considered by the Commission on Multidisciplinary Practice. However, if multidisciplinary practice (MDP) becomes widely accepted in this country, it is vital that IOLTA eligible funds continue to be deposited into IOLTA accounts, and we not see a reversion to the pre-IOLTA practice of depositing such funds into non-interest bearing accounts. 1 Otherwise, critical resources that are now used to fund the provision of legal services to the poor and the administration of justice will be lost, with only the banks profiting from that loss.
The Commission on IOLTA is also concerned more generally with the safekeeping of client funds deposited with MDPs. While it is clear from the current Report that funds deposited with lawyers for legal fees or other client trust purposes must continue to be segregated by the MDP, there are other likely scenarios that are not addressed. For example, there are situations in which client funds will be deposited with a MDP and both the services of a lawyer and non-lawyer will be utilized by the client for the same matter or transaction, such as a real estate transaction. In addition, there are situations in which a client of a MDP may obtain services from a lawyer and a non-lawyer in related matters, such as obtaining psychological counseling due to marital stress and then seeking legal counseling regarding the filing of a divorce. If one retainer is paid to the MDP, will it be deposited in a segregated account? What if the non-lawyer services were rendered first, will the retainer be moved into a segregated account only once the legal services are requested?
To address these and other murky situations that are likely to arise, the Commission on IOLTA strongly recommends that all retainers and other funds received on behalf of a client of the MDP be subject to the rules of professional conduct governing a lawyer's receipt, safeguarding and distribution of funds, including the Interest on Lawyers' Trust Account (IOLTA) Rules. This is sound public policy to adopt because the rules governing a lawyer's handling of client trust funds set very high standards and thus afford much protection for clients against the mishandling or misappropriation of their funds. Indeed, the Commission on IOLTA is unaware of any other profession that is subject to such exacting standards related to the receipt, safeguarding and distribution of client funds. Furthermore, it certainly will be simpler administratively and less likely for funds to be improperly deposited if there is only one set of rules in effect regarding the handling of funds deposited with the MDP on behalf of the client.
In those cases in which the funds deposited are unable to earn net interest for the client, a subsidiary benefit of this policy would be to ensure that such funds are deposited in IOLTA accounts, the interest from which is used to further the Association's goals of promoting improvements in the American system of justice (Goal I) and promoting meaningful access to legal representation and the American system of justice to all persons regardless of their economic or social condition (Goal II). Thus, as a matter of public policy and practical administration and as a means of advancing Association goals, the Commission on IOLTA urges the Commission on Multidisciplinary Practice to amend its Recommendation and Report to include these recommendations. (See III below for specific suggested amendments.)
III. Proposed Amendments to the Current MDP Recommendation and Report to Address the Commission on IOLTA's Concerns
A. Amendment to the Recommendation
The Commission on IOLTA submits the following amendment to paragraph 14(C)(relating to the certification by the CEO and board of directors of the MDP) as follows (new language is bolded):
It will establish, maintain and enforce procedures to
protect a lawyer's professional obligation to segregate funds assure that the rules of professional conduct governing a lawyer's receipt, safeguarding and distribution of client funds, including the Interest on Lawyers' Trust Account (IOLTA) Rules are strictly applied to all client funds received by the MDP. For these purposes, a "client" is a client of the MDP, whether seeking legal services, non-legal services or a combination of the two.
B. Amendment to the Report
The Commission on IOLTA recommends that the discussion of "Legal Fees and Client Trust Accounts" be amended as follows (new language is bolded):
The Commission also notes that lawyers in MDPs must fulfill their professional obligations to charge reasonable fees and to segregate client funds. Commingling of client funds with those of a lawyer or law firm is a serious disciplinary problem. Many jurisdictions require that fees paid by clients remain segregated until earned by the lawyer. Lawyers in an MDP may not have the same direct supervision over the handling of funds that they do in a law firm.
Moreover, whereas fees paid by clients to law firms are by definition legal fees, fees paid by clients to MDPs will often cover both legal and non-legal services. Thus, a lawyer in an MDP must take special care that payment for legal services and funds received on behalf of a legal services client are clearly disignated as such and segregated from other funds of the MDP as required by the rules of professional conduct. In this regard, the MDP must also comply with any and all financial recordkeeping rules of the jurisdiction in which the legal services are being delivered.
To ensure that all client trust funds deposited with MDPs are adequately protected, any retainer funds paid by the client or any funds received on behalf of a client of the MDP shall invoke the application of the jurisdiction's rules of professional conduct governing the receipt, safeguarding and distribution of funds belonging to a client and the utilization of trust accounts, including the Interest on Lawyers' Trust Accounts (IOLTA) Rules. To attempt to apply different standards regarding the handling of client funds within the MDP to different transactions is impractical and fraught with pitfalls for the lawyer, the client and the MDP. Therefore, the Commission believes that the only sound and practical approach to the handling of client funds by the MDP is to require the application of one set of standards, and those should be the exacting ones applied to lawyers.
The Commission on IOLTA urges the Commission on Multidisciplinary Practice to adopt these proposed amendments to ensure that client funds are properly safeguarded and that lawyer participation in IOLTA does not precipitously decline if multidisciplinary practices flourish. By doing so, the Commission on Multidisciplinary Practice will further the profession's ability to maintain the public trust and aid IOLTA programs' ability to fund programs that provide vitally important legal services to the poor and further the administration of justice.
1. Only those funds that are held for a short period of time or are of an amount that cannot generate net interest for the client are eligible for deposit in an IOLTA account. Prior to amendment of the banking laws in 1981, lawyers traditionally placed these funds in pooled, non-interest bearing demand accounts, separate from their own funds. Those amendments permitted banks throughout the country to pay interest on certain demand accounts. These accounts, known as NOW accounts, are available only to one or more individuals, government agencies or non-profit philanthropic, religious, educational or political organizations. IOLTA programs take advantage of the provision that permits a non-profit philanthropic organization to maintain a NOW account. Under an IOLTA program, a lawyer or law firm establishes a NOW account for which the interest, less bank charges, is paid to the state IOLTA program.