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Best Practice

Vol. 9, nos. 3 & 4

On Delivery of Legal Assistance to Older Persons

December 1998

New Challenges to Legal Assistance to Legal Assistance for the Elderly Poor: The Texas IOLTA Case

By : Matthew G. Batista, J.D.
Staff Attorney, TCSG

Several recent developments in the provision of legal services for older persons in economic and social need have emphasized the importance of concerted state planning for those services. The Center for Social Gerontology (TCSG) has focused on many of these developments -- LSC restrictions and budget cuts, the uncertain status of the Older Americans Act, and state planning generally -- in past issues of Best Practice Notes.

Involvement in state planning is crucial for the Aging Network to ensure that legal assistance programs, regardless of funding sources, include on the state and local levels, the needs of older persons when devising their state plans. For most states, state planning centers on that of the Legal Services Corporation (LSC), which has periodically required states to devise and submit plans for delivering legal assistance to the poor. Our recent National Survey on Elder Rights Advocacy and Legal Assistance for the Elderly found that of AAAs responding, over 60% fund LSC providers. Meanwhile, 88% of the AAAs and 57% of the Developers responding reported no involvement in LSC planning efforts. From these numbers it is clear that more participation is needed.

This article presents yet another reason for the aging network to get involved in state legal services planning: the constitutional challenge of state-sponsored Interest On Lawyer Trust Accounts (IOLTA) programs. IOLTA programs provide over $100 million nationwide to civil legal assistance programs for the poor -- including poor older Americans -- a funding source that is second only to LSC. This important source of funds is currently being challenged on constitutional grounds in the case of Phillips et al. v. Washington Legal Foundation. It goes without saying that a loss of that magnitude would devastate efforts to provide effective legal assistance to all low-income individuals.

As an example of the impact of IOLTA programs on older people, in Michigan, programs receiving IOLTA funds assisted over 7,000 older Michiganians in 1997. Although this figure represents the number of older clients served by the programs not those served just with IOLTA funds (the Michigan State Bar Foundation, like nearly all IOLTA programs, does not have a reporting system that includes demographics of clients served with IOLTA funds specifically), it nevertheless demonstrates that IOLTA-funded programs do serve a significant number of older people and emphasizes that assistance to these individuals would be severely affected by a loss of IOLTA funds.

Background on IOLTA

IOLTA programs, which are authorized by state statute and/or state Supreme Court rule, are a significant source of funds for legal assistance programs. They provide these funds through a unique arrangement between attorneys, courts, and banks. Attorneys place certain funds they receive from clients into a separate, interest-bearing bank account. Not all client funds are required to go in the account -- only those funds that "could not reasonably be expected to earn interest for the client or [that] the interest which might be not likely to be sufficient to offset the cost of establishing and maintaining the account, service charges, accounting costs and tax reporting costs which might be incurred in attempting to obtain interest." This typically includes funds that are held for too short of a time period to accrue interest, or are too small to accrue interest on their own. Banks in which the IOLTA accounts are set up, many of which do not charge fees to IOLTA accounts, transfer interest earned on the accounts to the state IOLTA program. With those funds, the state IOLTA program finances legal assistance programs.

The idea for this arrangement began in Australia in the 1960's and was introduced in the U.S. when banks were permitted by Congress to pay interest on certain checking accounts. In 1979, Florida created the first IOLTA program. Currently IOLTA programs operate in all 50 states and the District of Columbia. The structure of these programs varies; currently, twenty-seven states have mandatory programs; twenty-one have programs in which attorneys may "opt-out" of participation; three states have voluntary programs.

IOLTA programs create a win-win situation for the delivery of legal assistance to the poor. They provide much-needed funds for legal assistance programs for low income individuals, including the most vulnerable older persons, with no cost to the public. Unlike tax-funded state and federal programs like LSC and Older Americans Act Title IIIB, IOLTA programs use funds that not only are not public funds, but are funds that would not otherwise exist but for the IOLTA program. Therefore, no one loses anything, and society as a whole gains by helping to provide access to justice.

Challenges Faced by IOLTA Programs

As rosy as the above picture seems, IOLTA programs do have their detractors. Programs in Massachusetts, Washington state, Florida, and Texas have all faced lawsuits claiming that clients have a "property interest" in the interest that accrues to their funds in their attorney's IOLTA account. These constitutional challenges are brought under the Fifth Amendment, which, made applicable to the states through the Due Process clause of the Fourteenth Amendment, states "...nor shall private property be taken for public use, without just compensation." To show that this clause, commonly referred to as the "Takings Clause," has been breached, it must be shown that: (1) there is property involved, (2) the government has taken that property, and (3) just compensation has not been provided for the property by the government.

Of these challenges to IOLTA programs, the challenge in Texas to the Texas Equal Access to Justice Foundation, Phillips et al. v. Washington Legal Foundation, has gone the farthest and poses the most serious threat to not only the program in Texas but perhaps also to all other IOLTA programs. To update those who may not have been following the case, some background information is provided.

Background on Phillips v. Washington Legal Foundation

In February 1994, the Washington Legal Foundation (WLF), a conservative non-profit policy organization; Michael Mazzone, a Texas attorney; and William Summers, a client of Mr. Mazzone, filed a suit against the Texas Equal Access to Justice Foundation, the organization that runs the Texas IOLTA program; its chairman, W. Frank Newton; and the Justices of the Texas Supreme Court alleging that the Texas IOLTA program violated their First and Fifth Amendment rights. The suit sought a declaratory judgment finding the IOLTA program unconstitutional, and an injunction prohibiting mandatory participation in the IOLTA program, as well as the return of interest earned on Mr. Summers' money that was placed in an IOLTA account.

The U.S. District Court for the Western District of Texas dismissed the suit, holding that WLF and the other plaintiffs did not demonstrate a property interest in the funds placed in the IOLTA account. In September 1996, The Fifth Circuit Court of Appeals overturned the District Court and held that the client had a property interest in the funds placed in the IOLTA account , and the client therefore owns the interest that is generated by his or her funds. After some other legal wrangling, in 1997, both sides petitioned for a writ of certiorari (i.e. ask the Supreme Court to hear the case). The U.S. Supreme Court accepted the petition of the Texas IOLTA program and the Texas Supreme Court on the limited question of "whether interest earned on client funds in IOLTA accounts is 'private property' of either the client or the attorney for purposes of the Takings Clause of the Fifth Amendment." The case was argued before the U.S. Supreme Court in January 1998.

The Phillips Decision

On June 15, 1998, the U.S. Supreme Court, in a 5-4 decision , upheld the Fifth Circuit Court of Appeals ruling that clients do have a "property interest" in the interest accrued in IOLTA accounts. The Court specifically left open the remaining two parts of the test to determine whether IOLTA programs are unconstitutional: whether that property was "taken" by the government and whether, therefore, the clients are due "just compensation." The Court sent the case back to the Fifth Circuit to determine those issues.

The majority opinion for the Court relied on the rule that "interest follows principal." That is, when interest accrues to principal that has been deposited in a bank, that interest is the property of the owner of the principal. The majority explained that a state cannot “transform private property into public property without compensation simply by legislatively abrogating the traditional rule that 'earnings of a fund are incidents of ownership of the fund itself and are property just as the fund itself is property.'" In other words, a state cannot create a program like IOLTA and simply say that the program is exempt from traditional state law. In its petition, the Texas IOLTA program had argued that Texas law does not follow "interest follows principal" as an absolute rule and therefore it does not control. The Court did not agree.

The Supreme Court also rejected the argument that the interest from client funds is not "property" because the funds could not produce the interest on their own. In other words, because the only funds placed into IOLTA accounts are, by rule, funds that are so small in amount or are held for such a short period of time that they would not generate enough interest to offset the costs associated with opening and maintaining an interest bearing account, there is no property in which to have an interest. The Court pointed out that the rule itself acknowledges that interest is created and therefore is property; it did not matter to the majority that in practical terms, the costs would consume what little interest was accumulated on the account.

It was this difference between what is created in theory and how it plays out in reality that was focused on by the dissents in Phillips. In his dissent, Justice Souter argued that the majority’s ruling amounted to "an essentially abstract proposition" that may "ultimately turn out to have no significance in resolving the real issue raised in the case, which is whether the IOLTA scheme violates the Takings Clause of the Fifth Amendment." The basis for Justice Souter's argument is that the three issues in a takings claim can, under Fifth Amendment jurisprudence, be considered at the same time. The majority opinion considered only the first issue, whether the client has a property interest, because that was the only issue considered by the Fifth Circuit Court of Appeals and the Petitioners (the Texas IOLTA program, et al.) did not raise that fact as an error. Justice Souter acknowledged that for procedural reasons the Court should not resolve all three issues in this opinion, but rather should determine if the remaining issues, whether there was a "taking" of the property and whether there has been "just compensation" for the taking, could reasonably be resolved against the Washington Legal Foundation. If so, Justice Souter argued, the case should be sent back to the Fifth Circuit for them to consider all three issues. By considering the property issue alone, said the dissent, the Court risked "placing such undue influence on the existence of a generalized property right as to distort the taking and compensation analyses that necessarily follow before the Fifth Amendment’s significance can be known."

Justice Breyer, in his dissent, agreed with Justice Souter that the "property interest" part of a Takings Clause analysis should not be separated from the other two parts. Justice Breyer continued by arguing that even when considering the property question as presented to the Court, the Majority reached the wrong conclusion. The problem, he argued, is that the circumstances surrounding IOLTA interest "differ dramatically" from those normally associated with interest production and, therefore, the "interest follows principal" rule cannot apply. The crucial differing circumstance, according to Justice Breyer, is that without the IOLTA program and its accompanying rules, no interest would be generated. In other words, "the client could not have had an expectation of receiving interest without that [IOLTA] intervention. Nor can one say that IOLTA rules excluded, or prevented, the client’s use of his principal to generate interest that would otherwise be his." The client had no right to use the principal to generate interest because the principal was being held by the attorney for matters related to the client’s case.

Possible Scenarios

As mentioned earlier, the Supreme Court remanded Phillips to the Fifth Circuit Court of Appeals to rule on the other two issues in the Takings Clause analysis. It will likely be many months or perhaps even years before a ruling is issued on the other two issues. The Fifth Circuit has sent the case back to the U.S. District Court for the Western District of Texas for discovery on both of the issues, which will undoubtedly be time consuming. Also, simply getting a ruling from the Fifth Circuit will take time. When the Fifth Circuit originally heard the appeal, over one year passed between the time the court heard the case and issued a decision.

When the Fifth Circuit does rule on the two issues, one side or the other will undoubtedly petition once again for a writ of certiorari on those issues in order to make a final determination of the fate of the Texas IOLTA program. This step will take time as well; the first time the Supreme Court heard the Phillips case, it granted the Texas IOLTA program and the Texas Supreme Court's petition for a writ of certiorari on June 7, 1997, the case was argued on January 13, 1998 and a decision was released on June 15, 1998.

If the Supreme Court ultimately finds that the Texas IOLTA program is a taking without just compensation, and therefore unconstitutional, the Texas program and all other IOLTA programs would have to adjust the structure of the program or shut down. Depending on the wording of such a ruling, as well as how closely other state IOLTA programs follow the same system as Texas, other states may or may not be immediately affected. It is conceivable that some states would refuse to shut down without a separate ruling directly against them. Nevertheless, a clear U.S. Supreme Court decision stating that the Texas IOLTA program is unconstitutional would be a major threat to all programs.

So what are the chances that the Supreme Court will find the Texas IOLTA program unconstitutional? The American Bar Association Commission on IOLTA notes that "to find a 'taking,' the court must consider: 1) the nature of the government's action, 2) the economic impact of that action, and 3) the degree of any interference with the property owner's reasonable, investment-backed expectations." Considering the benevolent purpose of the program, the nature of the interest created by the IOLTA program, as well as the rules which create the program, it seems unlikely that the challenge to IOLTA will succeed. However, considering the outcome in the first round, it would be unwise to be too confident.

Although the Phillips case has thus far laid a foundation for undermining the basis for IOLTA programs, most states' IOLTA programs are taking a "wait and see" approach. The Supreme Court did not issue an injunction against the Texas program or any IOLTA program, so for now it is "business as usual." Several states have issued statements instructing bar members to continue to use their IOLTA accounts and assuring them that, in the event of a ruling against the Texas IOLTA program, personal liability to their clients will most likely not be an issue.

Ramifications of the Case and the Role of the Aging Network

If the Supreme Court were to ultimately rule that the Texas IOLTA program is not an unconstitutional taking, programs would continue uninterrupted (until perhaps the Washington Legal Foundation comes up with another method to attack them ). The real question is: What will happen to legal assistance to low income individuals if the Texas IOLTA program is ruled unconstitutional? Aside from the logistics of how other states would be effected discussed above, losing $100 million would seriously jeopardize the provision of legal assistance to older people and to the poor generally. Among other effects, it would likely force legal assistance programs to continue the paring down of staff and perhaps types of cases handled that began with the LSC funding cuts and restrictions that were introduced in 1995.

The possibility of these changes alone underscores the importance to the Aging Network and other interested organizations of not only keeping track of the Phillips case in particular, but also of making or maintaining contact with both the individuals and organizations responsible for state planning of legal assistance and the IOLTA programs themselves. Although a final Supreme Court decision is most likely years away, TCSG encourages, at the very least, members of the Aging Network to become educated on the issue and get involved in a discussion with legal assistance providers and their state IOLTA program about what the loss of IOLTA funds would mean for older people in their state and what alternative strategies could be implemented to ensure that low income older persons and low income persons generally have access to legal assistance.

The "wait and see" approach taken by most IOLTA programs means that, for the most part, active planning for the “worst case” scenario is not currently being undertaken. Therefore, at this time the best place for members of the Aging Network to focus their attention is on the LSC statewide planning process. By becoming involved in the overall state planning for legal assistance for the poor, members of the Aging Network, while working to ensure that the legal problems of older people are included, should also be kept abreast of IOLTA developments.

As noted at the beginning of this article, the Aging Network has had minimal involvement in LSC state planning efforts, in spite of the high percentage of AAAs that provide Title III funds to LSC programs. The threat of the loss of IOLTA funds -- much of which goes to LSC programs -- re-emphasizes the need for the Aging Network to become active players in the LSC and IOLTA planning processes so that the legal needs of older Americans are a central part of these planning efforts.

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