IOLTA: mathemagic and alchemy

1
IOLTA mathemagic and alchemy

• Lucas Figiel

2
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

3
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

4
Alchemists Regents what made IOLTA possible

• Congressional changes in banking regulations
• IRS rulings
• ABA decision considering IOLTA ethical

5
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

6
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

7
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

8
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

9
Birth of IOLTA

• FL - 1981
• IN - 1993

10
Before IOLTA

• If net interest ? invested for client
• If no net interest ? non-interest bearing account
• Banks benefit

11
After IOLTA

• If net interest ? invested for client
• If no net interest ? into IOLTA
• Public benefits when client cannot

12
IOLTA mandatory in IL

• SC Rule 1.15(d) - all IL attorneys must
  participate
• Mandatory jurisdictions generate more revenue

13
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

14

• 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

15
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?

16
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

17
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

18
Why client cant realize net interest

• Administrative and banking expenses consume the
  interest that is earned
• Opponents contend that what couldnt be earned
  before IOLTA is being earned now

19
Fund Usage

• wrongful eviction
• disabled children
• domestic violence
• educate the public about legal issues
• scholarships
• clinical instruction to law students

20
Also used for

• controversial issues
• gay rights
• legal aid to poor immigrants trying to come to
  the US
• 1st Amendment implications

21
Brown v. LFoW

• March 26, 2003
• IOLTA remains intact

22
5th Amendment Takings

1. Private Property
2. Taken
3. For public purpose
4. Without just compensation

23
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

24
Interest is clients 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

25
Property Taken?

• Takings jurisprudence comes in two flavors
• outright takings permanent, physical occupation
  of property or where the claimant is deprived of
  propertys economic or productive use
• regulatory takings - regulate how the property
  can be used
• Different tests applied

26
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

27
Proper Test?

• Settled by Brown
• Per se test - transfer of interest-income to
  charitable beneficiary appropriates the
  principals beneficial interest in her property

28
For Public Purpose?

• Easily satisfied
• compelling interest in providing legal services
  to millions of needy Americans

29
Without Just Compensation?

• Only uncompensated takings prohibited
• Put owner in same pecuniary position had property
  not been taken
• The loss must be pecuniary

30
Measurement

• Measured by owners loss not governments gain
• If loss is zero then compensation due is zero

31
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

32
IOLTA wins, but

• Whether IOLTA violates First Amendment remains
  unanswered