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When the Florida Supreme Court in 1989 began requiring lawyers to pool small amounts of money that they hold in trust for clients into interest-bearing checking accounts to help fund indigent legal services, the interest generated was around $19.5 million. But reductions in bank interest rates, combined with the banking industry’s refusal to support the so-called Interest on Trust Accounts (IOTA) program, have reduced the revenues available for legal services for the poor in Florida to about $11 million today. Worried that funding for legal assistance would continue to plummet, the Florida Bar Foundation, which administers the IOTA program, asked the Florida Supreme Court earlier this month to amend the rules regulating IOTAs. The Bar Foundation sought to require all financial institutions that handle these accounts to treat them “in parity” with non-IOTA accounts with regard to interest and dividends. The hope was that such a move would increase IOTA revenue levels at least to what they were a decade ago. Last Friday, the Florida Supreme Court granted the foundation’s request. The court’s ruling requires banks and financial institutions that hold IOTA accounts to pay prevailing market interest and dividend rates on these trust funds. Institutions that choose to continue participating in the program will have six months to come into compliance with the new rules. The supreme court ruling also expands the types of authorized investments for IOTA funds to include money market funds that are registered with the Securities and Exchange Commission and that are made up solely of U.S. government securities. Until now, IOTA funds only could be held in federally insured checking accounts or daily bank repurchase agreements. With current interest rates ranging from 3.5 percent to 5 percent, the Bar Foundation anticipates that the court decision will hike IOTA revenues between $17 million and $26 million a year. Because of reduced revenues, the foundation has had to cut legal aid grants 15 percent over the last two years. In 2000, legal aid grants were $10.9 million, down from $12.6 million in 1997-98. Tony Karrat, executive director of the Legal Aid Service of Broward County, says the ruling will give his organization, which currently receives $350,000 a year from the Bar Foundation, the opportunity “to start meeting the needs of the low-income in our community in a more meaningful way.” FLORIDA FIRST TO IMPLEMENT INTEREST ON ACCOUNTS Florida pioneered using interest on trust accounts to fund indigent legal services in 1981. At the beginning, it was a voluntary program and most lawyers in the state did not participate. In 1989, the Florida Supreme Court made the program mandatory. Lawyers are permitted to deposit into IOTA accounts only those client funds that either are too small to invest for the client’s benefit or that they expect to keep for too short a time to make investment practical. Currently, the average daily balance in IOTA accounts statewide is $1.5 billion. Nationally, 27 states have launched mandatory programs, which they call IOLTA or Interest on Lawyers’ Trust Accounts. Another 23 states, the District of Columbia and the Virgin Islands have voluntary IOLTA programs, according to the American Bar Association. These programs have become increasingly important to legal services organizations across the country. In Florida, Legal Services Corp., a private nonprofit organization created by Congress, and the Florida Bar Foundation, are the two main funding sources for free civil legal services for the poor. But in the past two decades, Congress has cut back funding to Legal Services Corp. Federal funding for Florida’s 12 Legal Services Corp. grantees — which includes Legal Aid Service of Broward County and Legal Services of Greater Miami — totaled $13.25 million in 2000, down slightly from $13.26 million the year before, despite growing demand for services. CONSTITUTIONAL CHALLENGES TO IOLTA PROGRAMS IOLTA programs across the country also face constitutional challenges relating to the use of interest on client funds for indigent services without compensation or client approval. In 1998, the U.S. Supreme Court ruled in a Texas case that the interest earned on IOLTAs is the property of the client. But justices did not hold that the IOLTA program was unconstitutional or that it should be eliminated. Instead, in a 5-4 vote, the high court remanded the case to the lower courts to determine whether there is a taking of the client’s property, and, if so, whether just compensation is due. Thursday an en banc panel of the 9th U.S. Circuit Court of Appeals reheard a case challenging the constitutionality of the Washington state IOLTA program, which ultimately could determine whether IOLTAs will survive nationally. Several other states have filed amicus briefs in the case. Because of differences between the federal circuits, the case could reach the U.S. Supreme Court for an ultimate decision on the fate of these programs. Currently, 285 Florida banks participate in the IOTA program; only 23 of them hold 75 percent of IOTA principal balances. Atlanta-based SunTrust Banks Inc. leads the pack, followed by Bank of America and First Union Corp. both based in Charlotte, N.C. The Florida Supreme Court ruling will affect as many as 1,250 accounts with $100,000 or more in deposits, says Florida Bar Foundation president A. Hamilton Cooke, a Jacksonville attorney who argued the case for the foundation on June 4. “This has the potential of increasing our income to get us back to the level we were at in 1989 when IOTA went mandatory, and potentially could be more than that,” Cooke says. Florida Bar President Terry Russell, who presented the Bar’s position in the oral arguments, says the ruling was needed because there has been no market pressure for financial institutions to pay competitive interest and dividend rates on IOTA accounts. “Lawyers tend to deposit [the money] into accounts and forget about it,” he says. FOUNDATION WILL VET BANKS Individual attorneys won’t have to worry about monitoring bank compliance with the ruling. The Bar Foundation will do that and will determine which financial institutions are eligible to participate, Cooke says. It will then tell lawyers where they can put their clients’ money. “We will do everything we can to encourage the banks to comply,” he says. “If they don’t, we will have no other alternative than to go to the lawyer and tell them their bank is not an eligible institution to hold a trust account. As a result, they will then have to move their IOTA account to an institution that does comply with the new rules.” Tom Cardwell, a shareholder at Akerman Senterfitt in Orlando who represented the Florida Bankers Association during oral arguments, says his members have no objection to the new rules. He hopes they will strike a balance between the interests of the Bar Foundation and those of financial institutions. But, he cautions, that the Bar Foundation needs to understand that banks often base their interest rates on different factors including the size of a customer’s account and past business relationships. “We wanted to make sure those factors would be taken into account when analyzing rates, so we could compare apples to apples, oranges to oranges, or mangos to mangos,” Cardwell says.

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