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IOLTA LITIGATION

Background:

Prior to the 1980's, nominal or short term client funds were held in non-interest bearing checking accounts. Lawyers routinely pooled these funds in one account because it would have been prohibitively expensive to open and maintain a separate account for each client. Interest that could have been gained on these accounts did not benefit either the client or the lawyer. The only parties that benefited were the banks, which used the accounts for free.

Under IOLTA, these same nominal or short term funds are still pooled into one account. The only difference is that, with changes in the banking laws and the explicit permission of federal regulators, banks may remit interest on these pooled accounts to a non-profit organization: the IOLTA program. (In Maine, the IOLTA program is administered by the Maine Bar Foundation). The IOLTA program issues grants for the provision of civil legal aid to the poor, the administration of justice and law-related education, all of which are vital to our democratic system’s guarantee of equal access to justice for all.

Under IOLTA no one loses anything. Only nominal sums or funds held for a short period of time go into IOLTA accounts. Such things as court filing fees, real estate closings, settlements and retainers may be placed in IOLTA accounts. If a client’s deposit is large enough or held for a long enough time to earn interest for the client net of banking charges and administrative fees, the funds may not be placed in an IOLTA account.

Case History: Phillips, et al., v Washington Legal Foundation et at., no. 96-1578

On 7 February 1994, The Washington Legal Foundation and others filed suit against the Texas Equal Access to Justice Foundation, its chair and the individual Justices of the Texas Supreme Court. The suit for injunctive relief was filed in the U.S. District Court in Austin. The complaint alleged that IOLTA grants were made in violation of the Plaintiffs’ rights under the First and Fifth Amendments.

On 19 January 1995, the District Court dismissed the suit holding that Plaintiffs failed to allege any legally recognized claim under the Fifth Amendment. In addition, the court ruled that because Plaintiffs had not shown a property interest in the interest generated by IOLTA accounts, they could not claim that they were being forced to support financially the organizations that receive funding from IOLTA. The Plaintiffs appealed to the U.S. Court of Appeals for the Fifth Circuit.

On 12 September 1996, a three judge panel of the Fifth Circuit Court of Appeals ruled that Texas’ traditional rule that interest follows principal applies to client funds placed by attorneys in accounts under Texas’ IOLTA program, and any interest that accrues belongs to clients as owners of principal; unless they agree otherwise. In addition, the court ruled that the appellees are immune form monetary damages under the Eleventh Amendment Immunity Clause.

On 26 September 1996, the Texas IOLTA program and the Texas Supreme Court filed a motion for rehearing and a suggestion for rehearing en banc.

Many entities filed motions and were granted leave to file amicus curiae briefs in support of en banc rehearing. They included the American Bar Association (ABA), more than thirty state bar associations and the National Association of IOLTA Programs (NAIP).

On 14 February 1997, the Texas IOLTA program and the Texas Supreme Court filed a motion to stay the issuance of a mandate pending the filing of a petition for certiorari.

On 5 March 1997, the Fifth Circuit Court of Appeals denied the issuance of a stay of the mandate.

On 1 April 1997, Judge James Nowlin, U.S. District Judge for the Western District of Texas, Austin Division, to whom the case was remanded, issued an order staying any action in the matter, pending disposition of the petition for writ of certiorari.

On 4 April 1997, the Texas IOLTA program and the Texas Supreme Court filed a petition for a writ of certiorari before the United States Supreme Court.

Many entities filed amicus curiae briefs in support of the petition for a writ of certiorari including the ABA, state and local bar associations and NAIP.

On 5 May 1997, the Washington Legal Foundation and other respondents filed a response and a cross-petition for a writ of certiorari before the U. S. Supreme Court (on the Eleventh Amendment immunity issue).

On 27 June 1997, the Supreme Court granted the petition for certiorari filed by the Texas Supreme Court and the Texas IOLTA program, limiting the issue to be e considered to the Fifth Amendment claim. On the same day, the Court denied the petition for certiorari filed by the Washington Legal Foundation.

On 25 August 1997, the Texas IOLTA program ant the Texas Supreme Court filed their brief on the merits before the Supreme Court. Nine amicus curiae briefs were filed in support of petitioners by entities and individuals such as the ABA, NAIP, the Conference of Chief Justices, the Council of State Governments, 35 state attorneys general, more that 40 state bar associations and several local bar associations.

On 10 October 1997, the Washington Legal Foundation and other respondents filed a response to petitioners’ brief on the merits. Eight entities, including the Association for Objective Law, the Pacific Law Foundation and the National Right to Work Legal Defense Foundation filed amici curiae briefs in support of respondents.

On 10 November 1997, petitioners filed a reply brief to respondents’ brief.

On 13 January 1998, the Supreme Court heard oral argument of this matter. The Court will rule on this litigation during the 1997 Term, which ends on 29 June 1998.

On June 15 the U.S. Supreme Court ruled that, under Texas law, interest on client funds held in IOLTA accounts is the client's private property.  The Court expressly left open for consideration the issues of whether Texas has "taken" any property and, if so, what "just compensation," if any, is due the respondents.  It remanded those issues back to the lower court for consideration.  It is the Maine Bar Foundation's belief that IOLTA is legal and constitutional.

On March 26, 2003 the Maine Bar Foundation joined other IOLTA programs and projects around the country in celebrating the U.S. Supreme Court ruling (in Brown v. Legal Foundation of Washington) that IOLTA programs do not violate the Fifth Amendment.   M. Calien Lewis, MBF's Executive Director says that in so ruling, the Court upheld the view that IOLTA is a constitutional means of funding legal aid for the poor.

Although the case reached the Court on a challenge from Washington State, the Court's ruling lifts a cloud that has hung over IOLTA programs in all 50 states.  At issue was the practice of placing certain client funds in special bank accounts which allow for the pooled interest to accrue to IOLTA programs.  These funds are then distributed to legal aid and other law-related educational and service projects which have assisted hundreds of thousands of low-income citizens over the last two decades.