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No matter how well intentioned IOLTA programs may be, they are wrong unless they are voluntary. The 9th U.S. Circuit Court of Appeals ruled this month that the interest belongs to the client. The decision found that the Washington state “Interest on Lawyers Trust Accounts” (IOLTA) program constituted a “taking” entitling clients to “just compensation under the Fifth Amendment.” It sent Washington Legal Foundation v. Legal Foundation of Washington, 01 C.D.O.S. 297, back to a lower court to determine what that compensation should be. Proponents are hoping to salvage 9th Circuit IOLTA programs by arguing that the loss of interest is so small that in most cases “just compensation” is little or nothing. But mandatory IOLTA programs also violate client First Amendment rights. Individual legal consumers are compelled to contribute to legal aid programs arguing public positions that some oppose. The 9th Circuit didn’t reach this issue. The First Amendment claim will be the basis for further challenges to mandatory programs to the extent they survive this latest setback. It wouldn’t be difficult for IOLTA managers and state bars to avoid constitutional challenges. They could ask, “May we?” before taking a client’s trust fund interest on a small or short-term deposit for legal aid programs. Even though some states have made IOLTA voluntary for lawyers, most of the legal system is not used to treating client choice with similar deference. So instead we have continuing litigation over IOLTA programs that already has produced one Supreme Court decision, Phillips v. Washington Legal Foundation, 524 U.S. 156. This 1998 case held that clients had a “property interest” in trust account interest earned by the Texas IOLTA program. The decision guided the 9th Circuit analysis. Phillips is back in the 5th Circuit on remand and is set for oral arguments in February, with opponents expecting to land a knock-out punch to the Texas program. That result is anticipated in a recent Texas appellate court decision, which states that a client can order a lawyer to withdraw the client’s funds from an IOLTA account. Before IOLTA existed, banks kept the money earned on client trust accounts. Ethics rules prevented lawyers from receiving any interest on the accounts. Bar associations created IOLTA to capture the “lost” interest and divert it to legal aid. This compulsory diversion was a controversial policy choice. The result has been opposition to IOLTA since day one from those who for various reasons — political, social, economic, even religious — oppose the activities of agencies that receive IOLTA funding. Critics like Suffolk University law professor Charles E. Rounds Jr. argue that “a substantial portion” of IOLTA funds nationwide actually goes to “political activity … lobbying and general legislative advocacy,” instead of helping “the legal needs of the poor.” Leading the charge against IOLTA plans is the Washington Legal Foundation, a D.C.-based group headed by former attorney general Dick Thornburgh. It was the lead plaintiff in Phillips and the 9th Circuit case. The Foundation’s advisory committees have contributed four nominees for the new Bush cabinet. IOLTA proponents may not like the individual rights arguments made by the Foundation, but they will have to learn to accommodate them. The other, individual challengers to the Washington state IOLTA program (which also covered certain real estate escrows) complained both about loss of interest and the activities supported by the IOLTA fund. They may have been made unenthusiastic by some of the reported cases of state IOLTA beneficiaries. Professor Rounds cites a Washington IOLTA grantee that prevented a public housing authority from evicting a resident who tried to run over his neighbor with a car. Voluntary programs with disclosure requirements will create additional bureaucratic requirements for lawyers, who will end up being responsible for explaining alternatives to clients. More conscientious attorneys will want to spell out in detail the competing concerns raised by IOLTA. Even legal consumers who oppose legal aid activities still may want to participate in voluntary programs. An IOLTA pooled account is cheaper in most instances than setting up a separate individual client account. Often its administrative costs will be less expensive than calculating and paying out the interest in a non-IOLTA pooled account to individual clients. Small practitioners — who before IOLTA had to pay bank charges for trust accounts because their general accounts were too small to qualify them for a fee waiver — would continue to receive a free IOLTA account. Ultimately, IOLTA won’t solve the representation problems that legal aid programs attempt to address. That requires top to bottom reform, and measures that drive down the costs of legal services for all consumers and also simplify dispute resolution. But meanwhile, clients should not be forced to participate in IOLTA programs against their will. If supporters keep insisting on mandatory programs, the programs are going to continue to be challenged in the courts and other branches of government. And they are going to continue to lose. George M. Kraw is a San Jose, Calif., attorney. His e-mail address is [email protected]

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