Thank you for sharing!

Your article was successfully shared with the contacts you provided.
A 9th U.S. Circuit Court of Appeals ruling that Washington state law clients should be compensated for interest on trust accounts would spell doom for New Jersey’s similar program if the U.S. Supreme Court makes the case the law of the land. The appeals court, in Washington Legal Foundation v. Legal Foundation of Washington, No. 98-35154, ruled Jan. 10 that Interest on Lawyer Trust Account programs take property without just compensation in violation of the Fifth Amendment. The unanimous three-judge panel ruled that IOLTA monies belong to the clients who own the principal and that funneling the funds into programs for those who can’t afford legal representation could, pending some number-crunching at a lower court, violate the Fifth Amendment. “In sum, we hold that the interest generated by IOLTA pooled trust accounts is property of the clients and customers whose money is deposited into trust, and that a government appropriation of that interest for public purposes is a taking entitling them to just compensation under the Fifth Amendment,” wrote Judge Andrew Kleinfeld, joined by Judges Stephen Trott and Barry Silverman. “If the clients’ money is to be taken by the state of Washington for the worthy public purpose of funding legal services for indigents or anything else, then the state of Washington has to pay just compensation for the taking.” The case is one of two IOLTA challenges brought by the Washington Legal Foundation, a conservative public interest organization, headed by former attorney general Dick Thornburgh, which advocates reform of the justice system. The other case is about to be argued in the 5th Circuit. In Washington Legal Foundation, et al. v. Texas Equal Access to Justice Foundation, No. 00-50139, a federal District Court in Texas held that there was no 5th Amendment violation. The Texas case has already been to the U.S. Supreme Court, which held, in Phillips v. Washington Legal Foundation, 524 U.S. 156 (1998), that interest on lawyer trust accounts is a property right. But the court did not address whether the IOLTA program amounted to a taking for which compensation was due, remanding the question. The District Court judge held an evidentiary hearing and decided that IOLTA programs were not a taking. The 9th Circuit decision is believed to be the first to hold that the programs are, in fact, a taking. The case now goes back to the Western District of Washington for a determination of what would be just compensation to clients. Advocates of IOLTA programs took a cautious approach to the ruling. “As for implications for programs that are outside of Washington, you really can’t know until it goes back to the District Court,” says Thomas Brown, an associate at Heller Ehrman White & McAuliffe in San Francisco, who wrote an amicus curiae brief on behalf of IOLTA programs in six states. Melville Miller Jr., president of Legal Services of New Jersey Inc., says that although the decision is no direct threat to New Jersey’s IOLTA program, it “will add to the uncertainty and confusion concerning the validity of IOLTA programs nationally.” Miller has reason to be concerned about the U.S. Supreme Court putting its imprimatur on the 9th Circuit ruling. Legal Services received $10.4 million from IOLTA interest last year, about 75 percent of New Jersey’s $13.8 million total payouts, says IOLTA Fund Executive Director Ellen Ferrise. Ferrise points out that the examples of accrued interest used by the 9th Circuit assumed a 5 percent interest rate, far more than the 1.6 percent that New Jersey’s fund realizes. Five percent may be realistic for, say, a money market account, but it is out of the league for IOLTA fund accounts, she says. She also says that because IOLTA deposits are nominal and short-term and because interest rates are so low, the administrative cost of refunding payments to individual clients would exceed the amount of interest they could have gained. In the 9th Circuit ruling, Kleinfeld acknowledged in his opinion that there is a practical problem with returning interest to clients, but not an insolvable one. “The amount of time and trouble involved in collecting, allocating and distributing interest to clients depends on how often it is done,” Kleinfeld wrote. “If done once, it is probably a costly nuisance. If done frequently, it may become delegable to nonprofessional staff using off-the-shelf software.” “[A] client, whether out of desire that he or she get every penny coming to them, a feeling of getting ‘nickeled and dimed’ or an objection to contributing money to lawyers’ and judges’ favorite charity, may think it is worth having a lawyer spend $19.95 worth of time to get the client $20 in interest,” the court said. Jason Hoppin of The Recorder contributed to this article.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.