Established in the early 1980s, Interest on Lawyers’ Trust Accounts (IOLTA) programs have now become a common fixture nationwide. Despite their widespread adoption, however, IOLTA has been subject to several constitutional challenges over the years.
According to the American Bar Association (ABA), IOLTA is a “method of raising money for charitable purposes, primarily the provision of civil legal services to indigent persons.”
Typically, when lawyers handle large sums of money for a client — such as settlement checks or fees advanced for services not yet performed — the funds are deposited into a trust account where they earn interest for the client.
When these amounts are small or are held for only a short time period, however, the interest they would be able to earn under this arrangement would not outweigh the cost associated with the necessary set up.
Under these circumstances, funds are traditionally placed into pooled trust accounts containing nominal and short-term deposits from a number of clients.
Prior to IOLTA, these funds earned no interest, as the money was typically placed into a checking account for easy access.
According to the ABA, “these trust funds [also] earned no interest because it is unethical for attorneys to derive any financial benefit from funds that belong to their clients.”
Once Congress approved legislation in the 1980s allowing checking accounts to begin earning interest, it opened the door for a new arrangement to be made.
Under IOLTA programs, clients’ nominal and short-term funds are placed into “a single, pooled, interest-bearing trust account” where the interest generated is forward to the state “to fund a variety of charitable causes.”
“IOLTA is a unique and innovative way to increase access to justice for individuals and families living in poverty and to improve the justice system,” wrote the Board of Overseers of the Bar for the State of Maine.
“Without taxing the public, and at no cost to lawyers or their clients, interest from lawyers’ trust accounts is pooled to provide civil legal aid to the poor and support improvements to the justice system,” the Board continued. “IOLTA is a critical ongoing source of funding for civil legal aid.”
Today, every state—including Washington, D.C., Puerto Rico, and the U.S. Virgin Islands—operates some form of an IOLTA program.
Despite their widespread usage, these programs became subject to a series of constitutional challenges starting about a decade after they first began going into effect.
Most prominently, the United States Supreme Court considered a case in 2003 that challenged the constitutionality of IOLTA under the Just Compensation Clause of the Fifth Amendment.
Under this provision, the government is required to give property owners “just compensation” if private property is taken for public use.
In this case — known as Brown v. Legal Foundation of Washington — it was argued that taking the interest earned on a client’s money while stored in an IOLTA account and using it for public purposes violates the Fifth Amendment.
The 5-4 decision declared, however, that “just compensation” is measured by a property owner’s loss rather than the government’s gain. Since the funds deposited into an IOLTA account could not have, by definition, generated interest for them otherwise, the Court ruled that such programs do not violate clients’ Fifth Amendment rights.
“Because that compensation is measured by the owner’s pecuniary loss—which is zero whenever the Washington law is obeyed—there has been no violation of the Just Compensation Clause of the Fifth Amendment in this case,” the majority concluded.
This majority opinion was authored by Justice John Paul Stevens and joined by Justice Sandra Day O’Connor, Justice David H. Souter, Justice Ruth Bader Ginsburg, and Justice Stephen Breyer.
The dissenting opinion was authored by Justice Antonin Scalia and joined by Chief Justice William Rehnquist, Justice Anthony M. Kennedy, and Justice Clarence Thomas. Justice Kennedy also authored his own, separate dissenting opinion.
Justice Scalia argued in this opinion that the majority “create[d] a novel exception to our oft-repeated rule that the just compensation owed to former owners of confiscated property is the fair market value of the property taken.”
“Our precedents compel the conclusion that petitioners are entitled to the fair market value of the interest generated by their funds held in interest on lawyers’ trust accounts (IOLTA),” Scalia wrote.
According to Scalia and the other dissenting Justices, once a client’s funds have earned interest, that money becomes the property of the client.
“Perhaps we are witnessing today the emergence of a whole new concept in Compensation Clause jurisprudence: the Robin Hood Taking, in which the government’s extraction of wealth from those who own it is so cleverly achieved, and the object of the government’s larcenous beneficence is so highly favored by the courts (taking from the rich to give to indigent defendants) that the normal rules of the Constitution protecting private property are suspended,” the dissent argued.
Similar challenges centering around the status of interest generated by IOLTA were made in a number of other cases over the years at the state and federal level. Each time, however, the courts ruled that the interest earned on money deposited in these accounts is not a client’s property, often on the basis of the Supreme Court’s majority opinion in Brown.
The first major challenge to IOLTA — Washington Legal Foundation, et al. v. Massachusetts Bar Foundation, et al. — was filed in 1993 and featured a claimed “property right to the beneficial use of the deposited funds.”
Because the program’s name included the term “trust,” Washington Legal Foundation argued that a trust relationship was created between lawyers and clients wherein the clients had a right to the beneficial use of the funds in these accounts.
The First Circuit rejected this interpretation and found that depositing funds into an IOLTA program’s account does not transform the fiduciary obligation between attorneys and their clients.
Washington Legal Foundation also raised First Amendment concerns in their suit, alleging that the use of these funds for “political and ideological causes” violated clients’ right to free speech and association.
The First Circuit ruled, however, that “the interest earned on IOLTA accounts belongs to no one, but has been assigned, by the Massachusetts Supreme Judicial Court, to be used by the IOLTA program.”
Consequently, the First Circuit held that clients are not “compelled…to join, affirm, support or subsidize ideological expression of IOLTA recipient organizations in any way.”
Click Here to Read the First Circuit’s Full Decision
That said, this was not the last time that First Amendment concerns regarding IOLTA programs were raised, as they resurfaced ten years later when Kennedy addressed them in his dissenting opinion for Brown.
Kennedy explained in his dissent that he agreed with Scalia’s dissenting argument “in full,” but felt that it “seem[ed] appropriate to add” that IOLTA allows the State to “[grant] to itself a monopoly which might then be used for the forced support of certain viewpoints.”
“Had the State, with the help of Congress, not acted in violation of its constitutional responsibilities by taking for itself property which all concede to be that of the client, the free market might have created various and diverse funds for pooling small interest amounts,” Kennedy wrote.
“These funds would have allowed the true owners of the property the option to express views and policies of their own choosing,” Kennedy continued. “Instead, as these programs stand today, the true owner cannot even opt out of the State’s monopoly.”
“The First Amendment consequences of the State’s action have not been addressed in this case, but the potential for a serious violation is there,” Kennedy concluded.
Click Here to Read the Full Majority and Dissenting Opinions
Sounds like legalized stealing.