iolta: mathemagic and alchemy lucas figiel. “positive net return” interest paid on the account...

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 invested for client

• If no net interest non-interest bearing account– Banks benefit

After IOLTA

• If net interest invested for client

• 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 $140 million yearly nationwide

• 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

5th Amendment Takings

1) Private Property2) Taken3) For public purpose4) 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 balancing1) degree of interference with complainant's investment-backed expectations;

none2) the severity of the economic impact on the complainant; and

minor3) the nature of the government's action

fair regulations in highly regulated industry

Proper Test?

• Settled by Brown• Per se test - transfer of interest-

income 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