Citing property rights, 5th Circuit deals setback for IOLTA Chuck E. Rounds, Jr. Professor of Law, Suffolk University Law School & BHI Scholar.

from NewsLink, Vol. 1, No. 1, Fall 1996

Can the judiciary compel citizens to forfeit interest to a group they oppose philosophically?Until now the answer appeared to have been an unqualified "yes."Under the Interest on Lawyer Trust Accounts (IOLTA) program as operated across the nation, high state courts, which regulate the legal profession, have required the transfer of interest accrued from lawyer-client accounts to certain organizations. These accounts are comprised of retainers, insurance settlements and other funds held by attorneys for the benefit of clients.

The interest, which amounts to millions of dollars nationally, is transferred to groups that ostensibly provide legal help to the poor. Lawyers who fail to comply with IOLTA face the threat of license suspension. Since it was first established in 1978 in the state of Florida, IOLTA has expanded to every state except Indiana.

Since then, IOLTA has raised more than one billion dollars nationally. The program is endorsed by the American Bar Association, which serves as a clearinghouse for coordinating IOLTA's adoption. IOLTA is controversial. First, some believe it violates the Fifth Amendment proscription against taking property without just compensation. Second, IOLTA moneys are often used to finance an array of politically-motivated causes. Clients are being compelled, almost always unknowingly, to support causes for which they may be in direct philosophical opposition. However, the rules of the game are changing. The legal services industry, which IOLTA helps support, now finds itself fighting a rear-guard action against a strong legal challenge.

In September, the United States Court of Appeals for the 5th Circuit in Texas ruled that legal clients have valid property rights to interest on IOLTA funds. In other words, clients' money is indeed clients' money, interest and all. In arriving at its decision, the 5th Circuit reached a different conclusion than an earlier 1st Circuit ruling which held that in Massachusetts the interest "belongs to no one." The 5th Circuit ruling sets the stage for a United States Supreme Court decision on the issue.

In September, the United States Court of Appeals for the 5th Circuit in Texas ruled that legal clients have valid property rights to interest on IOLTA funds. In other words, clients' money is indeed clients' money, interest and all.

Richard Samp, chief legal counsel for the Washington Legal Foundation, called the 5th Circuit ruling a potential "death knell for IOLTA."If so, this could put an end to the practice of politically-controversial activities such as the attempted restoration of rent control in Massachusetts. Rent control, overturned in a 1994 Massachusetts referendum, has been shown time and again to be ruinous to cities and subsequently to the poor. In Massachusetts, however, retaining rent control has long been at the top of the agenda of IOLTA money recipients.

The efforts to overturn the statewide abolition of rent control, in direct opposition to voter wishes, have been relentless.Such efforts bolster criticism that the primary focus of the IOLTA program is political. In the words of one legal services administrator, "...we have to look at ways to change things institutionally as a first priority... [we have to] think about things systematically rather than as individual cases."It's such thinking that has made IOLTA controversial. But the tide may be changing.

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