IOLTA programs get mixed (good and bad) blessings.

Two U.S. Courts of Appeal have parted company on the legitimacy of IOLTA programs. The Fifth Circuit in Washington Legal Foundation v. Texas Equal Access to Justice Foundation, 270 F.3d 180 (5th Cir. 2001), held that Texas's program constituted a "taking" under the Fifth Amendment's so-called takings clause, which prohibits "private property" being taken for "public use, without just compensation." But a month later the Ninth Circuit reached the opposite conclusion in Maxwell v. Legal Foundation of Washington, 271 F.3d 836 (9th Cir. 2001 en banc, withdrawing 248 F.3d 1201), which was a challenge to the Washington state program.

The Texas IOLTA (interest on lawyers' trust accounts) program was inaugurated on a voluntary basis in 1984, after the enactment of the Depository Institutions Deregulation and Monetary Control Act of 1980 made possible interest-bearing trust accounts, called NOW accounts for negotiable order of withdrawal, allowing lawyers to pool client funds. IOLTA was made mandatory by a Texas Supreme Court rule in 1988 requiring that lawyers who receive in the course of their practices "client funds that are nominal in amount or are reasonably anticipated to be held for a short period of time shall establish and maintain a separate interest-bearing demand account at a financial institution and shall deposit in the account all those client funds."

The theory of IOLTA is that NOW accounts are not feasible, or would yield no "net interest," for individual clients because the funds would be nominal or the period of time held would be brief. Pooled, however, the funds yield interest, said to be approximately $5 million annually, and in the Texas case, those funds go to the Texas Equal Access to Justice Foundation (TEAJF), which was established by the Texas Supreme Court and which distributes the funds to organizations providing legal services in "low-income persons." In fact, in 1982, in Formal Opinion 348, the American Bar Association Committee on Ethics and Professional Responsibility had stated that IOLTA programs did not transgress ethical rules, basing its conclusion on the ground that the interest generated in the pooled accounts was not clients' property.

The Texas case has a long history, and it bids fair to become longer. The Texas program was challenged in the mid-1990s by a client owning IOLTA funds and the Washington Legal Foundation, described as a public interest law firm, on the grounds that it impermissibly took...

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