Legitimate Alchemy in the 20th Century: IOLTA Proceeds Are No Fool's Gold; Criticism of the Fifth Circuit's Decision in Washington Legal Foundation V. Texas Equal Access to Justice Foundation

By Kimrey, Blaine C. | The Review of Litigation, Winter 1998 | Go to article overview

Legitimate Alchemy in the 20th Century: IOLTA Proceeds Are No Fool's Gold; Criticism of the Fifth Circuit's Decision in Washington Legal Foundation V. Texas Equal Access to Justice Foundation


Kimrey, Blaine C., The Review of Litigation


Fifth Circuit Holding

On September 12, 1996, a three-judge panel of the United States Court of Appeals for the Fifth Circuit unanimously held that lawyers' clients have a constitutionally cognizable property interest in the proceeds earned on funds deposited in Interest on Lawyer's Trust Accounts ("IOLTAs").' The decision by the Fifth Circuit to vacate2 in part the district court's award of summary judgment to the defendants3 and remand Washington Legal Foundation v. Texas Equal Access to Justice Foundation for further consideration is perplexing for numerous reasons, the most significant of which is that the holding contradicts almost every other court that has addressed the issue, including two other circuit courts.4 Recognizing the magnitude of the Fifth Circuit's decision, the Supreme Court of the United States granted certiorari to the petitioners on June 27, 1997, to answer the limited question of whether lawyers' clients have a constitutionally cognizable property interest in IOLTA proceeds.5

Authored by Circuit Judge John Minor Wisdom,6 the Fifth Circuit's decision ultimately could be the death knell for IOLTA programs in Texas, Louisiana, and Mississippi and perhaps in the nation as a whole. As Circuit Judge Fortunato Pedro Benavides noted in his dissent to the Fifth Circuit's rejection of en banc review, "[T]he opinion is bound to create dificulties and confusion for the district court on remand . [This] poses an unwarranted threat to a primary source of funding for public interest legal organizations in this circuit at a time when these organizations are already struggling for their lives financially. "7

Judge Benavides's concern and criticism are well-founded. Contrary to the Fifth Circuit's holding, the fruit of IOLTA programs is no fool's gold and clients do not have a constitutionally cognizable property interest in IOLTA proceeds. In analyzing Texas Equal Access to Justice Foundation, Judge Wisdom relied on the traditional rule that interest follows principal. Judge Wisdom reasoned that since the interest generated by the IOLTA program follows from individual clients' principal, the interest, as well as the principal, is the clients' property.9 Questioning characterization of IOLTA interest as a successful attempt at alchemy, Judge Wisdom said the panel viewed "the IOLTA interest proceeds not as the fruit of alchemy, but as the fruit of the clients' principal deposits." 10 IOLTA interest, however, is more appropriately construed as the fruit of the aggregation principle rather than the fruit of clients' principal deposits, and the aggregation principle is a creation of the states. Because the aggregation principle is the brainchild of the states, that which flows solely from such aggregation falls within state control. As this Note will demonstrate through analysis of the Fifth Circuit's decision in light of other decisions on the issue, state IOLTA programs have unearthed a real treasure for clients of legal aid organizations without implicating a constitutionally cognizable property interest.

In Texas alone, the IOLTA program has raised approximately $10 million annually in recent years for nonprofit organizations that provide legal services to low-income people.ll But just because the program achieves socially desirable results does not mean that the program is constitutional. As Supreme Court Justice Holmes warned, "[A] strong public desire to improve the public condition is not enough to warrant achieving the desire by a shorter cut than the constitutional way of paying for the change." 12 Like District Judge James Nowlin, this Note author is aware of the risk of desirable social consequences clouding constitutional inquiry. 13 But as the district court's initial ruling in Texas Equal Access to Justice Foundation rested squarely in the constitutional realm, 14 so does this Note, which after this point will not address social policy.

II. Genesis of the IOLTA Debate

Some background should help to provide an understanding of the issues the Fifth Circuit faced in addressing the claims in Texas Equal Access to Justice Foundation. …

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