News: CJ Exclusives

Order Requires Lawyers to Surrender Interest

Program meant to help needy citizens now mandatory, N.C. Supreme Court says

Does the interest earned on lawyers’ client trust accounts belong to the owners of the funds or to the state government? The N.C. Supreme Court last year sided with state government on that question when it ordered all lawyers to participate in the Interest on Lawyers’ Trust Accounts program or face administrative suspension of their law licenses.

First implemented in 1983, North Carolina’s IOLTA is meant to help needy citizens who can’t afford legal services. State government uses the interest earned on lawyers’ short-term trust accounts to issue grants to ensure the poor have legal representation. The fund has allocated $50 million in North Carolina over the last 25 years for this purpose, according to the N.C. State Bar.

Every state operates an IOLTA program, and most, including North Carolina, do so by order of the state Supreme Court. Thirty-seven states have a mandatory IOLTA, which obligates all lawyers who have trust accounts to participate. The remaining states allow lawyers to either opt-out or participate voluntarily.

North Carolina was an opt-out state for most of the program’s lifespan, but an order issued Oct. 11 by the state Supreme Court switched IOLTA to mandatory status. Lawyers who maintain short-term trust accounts are now required, on penalty of administrative suspension, to participate.

The move from opt-out to mandatory has helped the IOLTA program gain needed revenue, said Evelyn Pursley, executive director of N.C. IOLTA.

“Many IOLTA programs nationwide are showing decreases because of lower interest rates and principal balances, so this has meant we were able to keep our income steady and even improve it,” she said.

When the state Supreme Court made its ruling in October, three-fourths of the number of lawyers in North Carolina already had IOLTA accounts, Pursley said. The court’s order prompted lawyers to create 2,800 new trust accounts, giving the program a 25 percent jump in revenue, she said.

Free-market criticism

The American Bar Association says that IOLTA benefits the public without cost to taxpayers, but some limited-government groups oppose the program. Writing for a Cato Institute publication, Cassandra Chrones Moore, an adjunct scholar with the Competitive Enterprise Institute, criticized the involuntary nature of mandatory IOLTA programs.

“The IOLTA program substitutes the interests of the IOLTA committee and the state bar for those of the client — an ethical breach,” Moore wrote.

Others say that some IOLTA revenue goes to liberal advocacy groups. In a policy analysis for the Cato Institute, Charles Rounds, Jr., a professor at Suffolk University Law School in Boston, gave several examples of legislative advocacy groups in Massachusetts, Washington State, and Texas that were on the IOLTA grant list.

“Where do the millions of dollars in the IOLTA income stream go? The simple answer is that they go into the pockets of any lawyer, lobbyist, or legal group that has the right connections,” Rounds said.

In North Carolina, the largest grant, $1.83 million, appropriated during fiscal 2008 went to Legal Aid of North Carolina, a nonprofit that provides free legal services for the indigent. Other grantees include the N.C. Justice Center, $685,000, Legal Services of Southern Piedmont, $140,000, and the Land Loss Prevention Project, $70,000. Smaller grants went to fund internships at several public and private universities, including Campbell Law School and UNC School of Law.

The American Bar Association maintains that the program is vital for ensuring equal protection under law. “These funds help hundreds of thousands [of] low income people in communities throughout the United States to resolve everyday disputes like spousal and child abuse, domestic relations, child support, consumer and housing problems,” the bar association says on its Web site.

Court precedent

The U.S. Supreme Court has upheld the right of states to confiscate interest earned on client trust accounts for public purposes. In 2003, the court ruled, 5-4, that Washington State’s IOLTA requirement was not a “regulatory taking” of private property and that it did not violate the “just compensation” requirement of the Fifth Amendment.

In his dissent, Justice Antonin Scalia challenged the majority’s conclusion by arguing that interest earned on a trust account is the property of the clients who own the principal amount in the bank.

“Perhaps we are witnessing today the emergence of a whole new concept in Compensation Clause jurisprudence: the Robin Hood Taking,” Scalia wrote, “in which the government’s extraction of wealth from those who own it is so cleverly achieved, and the object of the government’s larcenous beneficence is so highly favored by the courts (taking from the rich to give to indigent defendants) that the normal rules of the Constitution protecting private property are suspended.”

David N. Bass is an associate editor of Carolina Journal.