IOLTA remains in place

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"Under our rules, the client then makes a claim, it’s reviewed, they can then be paid their interest from the IOLTA funds. They can be made whole.” Patricia K. Ballman State Bar President

The U.S. Supreme Court ruling upholding the use of Interest on Lawyer Trust Account (IOLTA) programs is good news for Wisconsin legal service groups, which receive more than $1 million annually from IOLTA money.

Patrick Norris is the executive director of the Wisconsin Trust Account Foundation Inc., which distributes IOLTA funds in Wisconsin. Throughout the past year, the group has distributed $1.1 million to legal service groups serving the poor, Norris said. The prior year, the amount distributed was $1.6 million.

Norris had been anxiously awaiting the Supreme Court’s decision, which was likely to affect IOLTA programs nationwide.

“The impact of it first and foremost is that the IOLTA program will continue to be a viable source of funds for legal service organizations that provide their services to poor people,” Norris said. “There’s a great weight of uncertainty removed from all of the IOLTA programs across the country, including this one in Wisconsin.”

IOLTA Challenge

In Brown v. Legal Foundation of Washington, the U.S. Supreme Court looked at the question of whether the use of IOLTA accounts constituted an illegal taking of money from clients. The program in Washington was designed to have lawyers place client funds that could not otherwise have earned interest into IOLTA. The interest from that account was then paid to the Legal Foundation of Washington, which used the money for tax-exempt, law-related charitable and educational purposes.

The Washington Supreme Court expanded the rules to apply to Limited Practice Officers (LPOs), non-lawyers, who were licensed to act as escrowees in real estate closings. The petitioners in the case had funds that were deposited by LPOs into IOLTA accounts. They challenged the use of that interest as a violation of the Fifth Amendment’s Just Compensation Clause.

In a 5-4 decision written by Justice John Paul Stevens, the majority court found that the placement of client funds, which would not otherwise have earned interest, in an IOLTA account was not a “regulatory taking.” However, the transfer of the interest on those funds could be a per se taking.

As a result, the Fifth Amendment required that it meet two criteria — it had to serve a public use and there had to be just compensation. Stevens wrote that the interest served a public use when it was turned over to the Legal Foundation of Washington. Turning its attention to the second requirement, the majority determined that since the owners of the funds experienced no direct loss — because the funds would not otherwise have earned interest — there was no violation of the Just Compensation Clause.

Stevens wrote, “A state law that requires client funds that could not otherwise generate net earnings for the client to be deposited in an IOLTA account is not a “regulatory taking.” A law that requires that the interest on those funds be transferred to a different owner for a legitimate public use, however, could be a per se taking requiring the payment of “just compensation” to the client. 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.”

Stevens was joined by justices Sandra Day O’Connor, David H. Souter, Ruth Bader Ginsburg, and Stephen Breyer. Justice Antonin Scalia wrote a dissent, joined by Chief Justice William H. Rehnquist, and Justices Anthony M. Kennedy and Clarence Thomas. Kennedy also wrote a separate dissent.

Scalia’s dissent indicated that the petitioners in the case were entitled to the fair market value of the interest generated by their funds in IOLTA accounts.

“When a State has taken private property for a public use, the Fifth Amendment requires compensation in the amount of the market value of the property on the date it is appropriated…” Scalia wrote. “In holding that any just compensation that might be owed is zero, the Court neither pretends to ascertain the market value of the confiscated property nor asserts that the case falls within one of the two exceptions where market value need not be determined.”

Decision’s Impa
ct

If the U.S. Supreme Court had found that IOLTA programs violated Fifth Amendment protections in the Legal Foundation of Washington case, it would have potentially shut down IOLTA programs nationwide.

Norris speculated that if Scalia’s dissent had been the majority position, “it probably would have closed our IOLTA program.” He noted that Wisconsin’s program was different from Washington’s original program in that it allows clients to opt out of the program. Wisconsin’s program also is different in that it does not include money from escrowees who handle real estate closings.

State Bar President Patricia K. Ballman explained that when the Legal Foundation of Washington case went to the Supreme Court, the State Bar began taking a look at Wisconsin’s IOLTA rules. She indicated that they felt good about some of the safeguards that are a part of Wisconsin’s IOLTA program. For example, if clients believe they could have made interest from their money, they can appeal.

“Under our rules, the client then makes a claim, it’s reviewed, they can then be paid their interest from the IOLTA funds,” Ballman said. “They can be made whole.

“We thought that difference might distinguish us in the event there was an adverse decision regarding Washington’s case because Washington does not have that appeal process.”

She acknowledged that if the dissent had been the majority position, it would have put Wisconsin’s program in jeopardy. The State Bar had begun developing a contingency plan that it would have followed if the Supreme Court had ruled against the Legal Foundation of Washington.

“We decided that we would file an emergency petition with our Wisconsin Supreme Court, asking the court to order that our lawyers here in Wisconsin continue to follow our Wisconsin Supreme Court rules pending the full study of our own IOLTA rules to see if they were or were not fatally flawed in the same way that the Washington rules were,” Ballman said.

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She noted that this would have placed Wisconsin lawyers in a quandary, wondering if the Legal Foundation of Wash-ington decision meant the Wisconsin program was unconstitutional, while the Supreme Court Rules in Chapter 13 called for lawyers to participate in the IOLTA program. Fortunately, Wisconsin lawyers will not have to face that question.

The Supreme Court’s majority decision reaffirming the use of IOLTA means “business as usual,” Norris said, noting the impact the decision had nationwide.

“The amount of money that is generated across the country in the IOLTA program is millions and millions of dollars that didn’t exist before the fed allowed interest on checking accounts,” Norris explained. “It has been a boon to organizations providing legal services to people.”

Tony Anderson can be reached by email.