IOLTAs Unmasked: Legal Aid Programs' Funding Results in Taking of Clients' Property

By Douglas, Kevin H. | Vanderbilt Law Review, October 1997 | Go to article overview

IOLTAs Unmasked: Legal Aid Programs' Funding Results in Taking of Clients' Property


Douglas, Kevin H., Vanderbilt Law Review


I. INTRODUCTION

States have implemented Interest on Lawyers' Trust Account programs ("IOLTAs")1 to generate revenue for legal aid. IOLTAs raise money through the creation of an economy of scale by directing attorneys to place clients' trust funds that could not profitably draw interest in individual checking accounts into an unsegregated interestbearing bank account ("IOLTA account").2 By significantly reducing the expense that results from opening and maintaining separate accounts for individual clients, the IOLTA account profitably draws interest when individual client accounts could not.3 The interest generated from the IOLTA account is used to fund legal aid programs according to the specifications in the rules of the particular state's IOLTA, while the clients' principal is returned on demand to the attorney. Following the implementation of the original program in Florida in 1981, forty-nine states and the District of Columbia have adopted IOLTAs.4 These programs currently raise $100 million annually in funding for legal aid.5

This Note examines whether a state's expropriation of the interest generated from clients' principal in IOLTA accounts results in an unconstitutional taking of clients' property.6 Part II provides the historical and legal background of IOLTAs and discusses the often cursory judicial dismissal of the takings issue at the state level and the rejection of takings claims by both the Firsta and Eleventh" circuits. It then analyzes the Fifth Circuit's unprecedented holding in Washington Legal Foundation v. Texas Equal Access to Justice Foundation,9 the first case at any level to hold that clients possess a property interest in IOLTA funds. Part III examines whether clients have a constitutionally-recognizable property interest in IOLTA revenue. Particular attention is given to the claim that the inability of clients to benefit economically from IOLTA-generated interest precludes the finding of a property right in IOLTA funds. Part IV discusses whether, given the fact that clients do possess a property interest in IOLTA revenue, the government's' expropriation of IOLTA proceeds amounts to an unconstitutional taking of clients' property. Part V analyzes the constitutional rationale for invalidating IOLTAs in the face of claims that the abrogation of these programs would have dire consequences for the provision of adequate legal services to the indigent. Part VI summarizes why IOLTAs result in an unconstitutional taking of clients' property.

II. HISTORICAL AND LEGAL BACKGROUND

A. Implementation of IOLTAs

Although other countries have used similar programs since the 1960s,1 the development of IOLTAs in the United States was only made possible by the passage of the Depository Institutions Deregulation and Monetary Control Act of 1980 ("DIDMCA").12 The Act authorized the creation of negotiable order of withdrawal ("NOW") accounts, which operate as interest-bearing checking accounts.l3 The Act allows individuals, certain charitable non-profit organizations, and public entities to use these accounts.l4

Attorneys hold clients' funds in trust under a variety of circumstances, including situations in which money is required for filing fees, real estate closing costs, or personal injury settlement drafts.5 Prior to the passage of DIDMCA, attorneys held trust money in non-interest bearing accounts, giving banks interest-free use of the funds.le The legalization of NOW accounts allowed attorneys to hold eligible clients' funds in interest-bearing checking accounts.l7

Not all NOW-eligible clients are able to draw interest profitably, however, since the administrative expense of opening and maintaining individual NOW accounts for some clients will exceed the interest accruing to these accounts.ls The developers of IOLTAs recognized that attorneys did not place the trust funds of these clients into individual interest-bearing accounts, but instead placed the funds into a non-interest bearing pooled account held in the lawyer's name. …

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IOLTAs Unmasked: Legal Aid Programs' Funding Results in Taking of Clients' Property
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