320 likes | 442 Views
IOLTA: mathemagic and alchemy. Lucas Figiel. “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. IOLTA?.
E N D
IOLTA: mathemagic and alchemy Lucas Figiel
“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
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
Alchemist’s Regents: what made IOLTA possible • Congressional changes in banking regulations • IRS rulings • ABA decision considering IOLTA ethical
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
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
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
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
Birth of IOLTA • FL - 1981 • IN - 1993
Before IOLTA • If net interest invested for client • If no net interest non-interest bearing account • Banks benefit
After IOLTA • If net interest invested for client • If no net interest into IOLTA • Public benefits when client cannot
IOLTA mandatory in IL • SC Rule 1.15(d) - all IL attorneys must participate • Mandatory jurisdictions generate more revenue
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
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
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?
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
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
Why client can’t realize net interest • Administrative and banking expenses consume the interest that is earned • Opponents contend that what couldn’t be earned before IOLTA is being earned now
Fund Usage • wrongful eviction • disabled children • domestic violence • educate the public about legal issues • scholarships • clinical instruction to law students
Also used for… • controversial issues • gay rights • legal aid to poor immigrants trying to come to the US • 1st Amendment implications
Brown v. LFoW • March 26, 2003 • IOLTA remains intact
5th Amendment Takings • Private Property • Taken • For public purpose • Without just compensation
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
Interest is client’s 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
Property Taken? • Takings jurisprudence comes in two flavors: • outright takings – permanent, physical occupation of property or where the claimant is deprived of property’s economic or productive use • regulatory takings - regulate how the property can be used • Different tests applied
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
Proper Test? • Settled by Brown • Per se test - transfer of interest-income to charitable beneficiary appropriates the principal’s beneficial interest in her property
For Public Purpose? • Easily satisfied • compelling interest in providing legal services to millions of needy Americans
Without Just Compensation? • Only uncompensated takings prohibited • Put owner in same pecuniary position had property not been taken • The loss must be pecuniary
Measurement • Measured by owner’s loss not government’s gain • If loss is zero then compensation due is zero
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
IOLTA wins, but… • Whether IOLTA violates First Amendment remains unanswered