Interest on Lawyer Trust Accounts

Interest on Lawyer Trust Accounts (IOLTA) is a type of program in which interest earned from money held in a lawyer trust accounts is aggregated and required to paid to another state agency, subsidizing legal services for those who cannot afford them.

History

The practice is that a law firm or lawyer placees short-term deposits into a single checking account. Prior to 1981, commercial banks were prohibited by federal law from paying interest on demand deposits (e.g. checking accounts), so the question who was entitled to the interest did not arise, since there was no interest paid. After 1981, interest was not paid to the client, because the deposits credited to each client were nominal in amount, and the administrative cost of tracking the interest was too great. It was about that time that the state bar organizations came up with the idea of having all of the interest swept from the account and used for public purposes. The Supreme Court of the United States has upheld the constitutionality of IOLTA programs.

In many jurisdictions, when a client gives money to a lawyer (e.g. an advance on fees, or money to hold for a transaction such as a real estate sale) the lawyer must place those funds in a separate trust account; the rules governing the practice of law do not let the lawyer claim the money until it is earned. However, the interest earned on those moneys is often less than the amount the bank charges to administer the interest. Before IOLTA, a client was legally entitled to any interest his account generated. But because of unscrupulous banking and lawyering practices, the bank or the lawyer may have kept the earned interest (which often went unnoticed by the client).

IOLTA programs were designed to convert the earned interest to private organizations providing legal services. IOLTA programs were first established in Australia and Canada in the late 1960s to generate funds for legal services to the poor. The Florida Bar Foundation launched the first American IOLTA program in 1981.

Explicitly, IOLTA applies only to funds that are "nominal in amount or held for a short period of time" so larger amounts of money held for single clients are claimed to be exempt. That means, in effect, that IOLTA transfers may involve small amounts of money held for a long time, "or" significant amounts of money held for a short time.

pecifics by state

Each state maintains its own IOLTA program, the District of Columbia, and the U.S. Virgin Islands operate IOLTA programs, each under its own rules and regulations. Thirty-one jurisdictions require lawyers to participate in IOLTA participation; it is otherwise optional.

Typically, the aggregated interest is paid to and administered by a state bar association and used to subsidize various legal programs. Examples of programs funded are those that assist with indigent defense, family law matters, other pro bono projects, and community legal education programs.

A client is ostensibly allowed to receive his legally earned interest if the funds are large enough or will be held for a long enough period of time to generate net interest that is sufficient to allocate directly to the client. In practicality however, because of the banking and lawyer ethics rules required to establish a separate trust account for an individual client, most lawyers cannot or are unwilling to preserve a client's rights to any legally earned interest.

Legality

IOLTA program compliance is an exception to Rule 1.15 of the Model Rules of Professional Conduct and DR 9-102 of the Code of Professional Responsibility regarding . IOLTA compliance allows a state agency to take a minimal amount of money that might otherwise belong to a client. A number of court cases have arisen in which parties argued that IOLTA programs are unconstitutional, but that is "not" the law, as of October 2008. The Supreme Court of the United States upheld the constitutionality of IOLTA in "Brown v. Legal Foundation of Washington", 538 U.S. 216 (2003), reasoning that there is no "taking" of client money, because IOLTA does not apply to all amounts of money that could ever be paid to a client.

References

* [http://www.iolta.org iolta.org]
* [http://supct.law.cornell.edu/supct/html/01-1325.ZS.html "Brown v. Legal Foundation of Washington"]
* ABA Model Rule of Professional Conduct, Rule 1.15 Safekeeping Property [http://www.abanet.org/cpr/mrpc/rule_1_15.html]