IOLTA:
mathemagic and alchemy
Lucas Figiel
“Positive Net Return”
• interest paid on the account less
– maintenance costs
– the costs of accounting for the interest
• IOLTA programs realize positive net
return because
– pooling on massive scale
– lower administrative costs
IOLTA?
• Scheme that takes advantage of bank
regulations to generate significant
revenue for legal service programs
• Purpose:
– to provide services for the indigent
– to improve the administration and access
to justice
Alchemist’s Regents: what
made IOLTA possible
• Congressional changes in banking
regulations
• IRS rulings
• ABA decision considering IOLTA
ethical
Consumer Checking Account
Equity Act in 1980
• Federal banking restrictions relaxed
• Banks authorized to offer Negotiable
Order of Withdrawal (“NOW”)
accounts
• Operate like checking accounts
NOW Requirements:
• All interest must go to charitable
purpose
• none of the funds in the account may
belong to a for-profit corporation
unless the designated charitable
organization has the exclusive right
to the interest
Internal Revenue Ruling
81-209
• Income shifting prohibited by the
assignment of income doctrine
• the client not exercise any authority
over whether or not to participate in
the program in order for the interest
generated from her funds not to be
included in her gross income
Ethics
• Professional Rules prohibit attorneys
from profiting from client funds and
commingling them.
• Formal opinion issued by ABA in 1982
– Participation consistent with ethical duty
Birth of IOLTA
• FL - 1981
• IN - 1993
Before IOLTA
• If net interest
client
 invested for
• If no net interest  non-interest
bearing account
– Banks benefit
After IOLTA
• If net interest
client
 invested for
• If no net interest  into IOLTA
– Public benefits when client cannot
IOLTA mandatory in IL
• SC Rule 1.15(d) - all IL attorneys must
participate
• Mandatory jurisdictions generate
more revenue
What goes into IOLTA?
• Client funds that cannot earn net
interest
– Either individually or pooled
• Targeted money:
– Nominal client funds
– funds expected to be held for a short
duration
Allen Brown $14,793.32 for 16 days
interest estimated is $2.00
Greg Hayes $90,521.29 for 2 days and
estimated interest is $4.96
Billions of dollars are
earned. What gives?
• Although a client is unable to realize
net interest on her funds, IOLTA
programs somehow realize billions
• Alchemy?
• The work of a mathemagician?
Earnings
• IOLTA generates over
yearly nationwide
$140 million
• Lawyers Trust Fund of IL
– 2001 net IOLTA Income: $3,971,932
• Service Charges: $488,762
• Handling Fees: $ 49,958
Comparison to LSC
• IOLTA funds come second to those
distributed by the LSC
• LSC 2003 budget $329,300,000
• Disbursed to Illinois
– 2003 - $11,737,172
– 2002 - $11,737,172
– 2001 - $11,711,351
Why client can’t realize net
interest
• Administrative and banking expenses
consume the interest that is earned
• Opponents contend that what couldn’t
be earned before IOLTA is being
earned now
Fund Usage
•
•
•
•
•
•
wrongful eviction
disabled children
domestic violence
educate the public about legal issues
scholarships
clinical instruction to law students
Also used for…
• controversial issues
– gay rights
– legal aid to poor immigrants trying to
come to the US
• 1st Amendment implications
Brown v. LFoW
• March 26, 2003
• IOLTA remains intact
th
5
1)
2)
3)
4)
Amendment Takings
Private Property
Taken
For public purpose
Without just compensation
Purpose of Takings Clause
• Prevent the government from forcing
some people alone to bear public
burdens which, in all fairness and
justice, should be borne by the public
as a whole
Interest is client’s
property?
• Circuit split settled by Phillips
• Interest that accrues belongs to the
owner of the principal
• Interest is created by client funds
and not the government
Property Taken?
• Takings jurisprudence comes in two
flavors:
– outright takings – permanent, physical
occupation of property or where the
claimant is deprived of property’s
economic or productive use
– regulatory takings - regulate how the
property can be used
• Different tests applied
Test used is outcome
determinative
• Per Se – for outright appropriations and
practical equivalent
• Ad Hoc – regulatory taking requires
careful balancing
1) degree of interference with complainant's investment-backed
expectations;
none
2) the severity of the economic impact on the complainant; and
minor
3) the nature of the government's action
fair regulations in highly regulated industry
Proper Test?
• Settled by Brown
• Per se test - transfer of interestincome to charitable beneficiary
appropriates the principal’s beneficial
interest in her property
For Public Purpose?
• Easily satisfied
• compelling interest in providing legal
services to millions of needy
Americans
Without Just Compensation?
• Only uncompensated takings
prohibited
• Put owner in same pecuniary position
had property not been taken
• The loss must be pecuniary
Measurement
• Measured by owner’s loss not
government’s gain
• If loss is zero then compensation due
is zero
Held
• (1) that just compensation is
measured by the net value of the
interest that was actually earned by
petitioners
• (2) by operation of the Washington
IOLTA Rules, no net interest can be
earned by the money that is placed in
IOLTA accounts in Washington
IOLTA wins, but…
• Whether IOLTA violates First
Amendment remains unanswered