Mandatory IOLTA program not a taking under Fifth Amendment

Law Reporter, Jun 2000

Mandatory IOLTA program not a taking under Fifth Amendment.

Washington Legal Found. v. Texas Equal Access to justice Found., - F. Supp. 2d -, No. A-94-CA-081 JN, 2000 VVL 257372 (WD. Tex. Jan. 28,2000).

A U.S. district court held that a mandatory Interest on Lawyers' Trust Account (IOLTA) program is not a taking under the Fifth Amendment and, therefore, does not require just compensation.

Here, a client paid his attorney a retainer, which the attorney was required to put in an IOLTA account after he determined the deposit would not generate net interest. The attorney and others filed suit against the foundation that oversees the IOLTA program, alleging, among other claims, that the program constitutes a taking under the Fifth Amendment and, therefore, requires just compensation. The trial court granted defendant summary judgment, ruling that plaintiffs had not shown a property interest protected by the Fifth Amendment. The Fifth Circuit Court of Appeals reversed. Washington Legal Found. v. Texas Equal Access to Justice Found., 94 F.3d 996 (5th Cir. 1996), 39 ATLA L. Rep. 388 (Dec. 1996). The U.S. Supreme Court affirmed the Fifth Circuit's decision, but remanded the case to the trial court to determine whether the interest generated through IOLTA has been taken and, thus, requires just compensation. Phillips v. Washington Legal Found., 118 S. Ct. 1925 (1998).

The trial court noted that it must determine whether a regulatory taking has occurred by considering the following factors: the (1) severity of the economic impact on the takings claimant, (2) extent to which the regulation interferes with investment-backed expectations, and (3) nature of the government regulation. Turning to the first factor, the court observed that the costs of administering money placed in a non-IOLTA account exceed those of an IOLTA account. These costs would subsume any interest earned on the funds if they were placed in a non-IOLTA account. Thus, because no net interest could be generated absent IOLTA, the economic impact of the regulation on plaintiffs is negligible. Moreover, the court said, plaintiffs cannot have a legitimate investment-backed expectation of interest because any funds placed in IOLTA cannot earn net interest without IOLTA. Finally, the court rejected plaintiffs' argument that the regulation unfairly singles them out to bear the burden of providing legal services to the poor. Plaintiffs are bearing no burden at all, the court found, because IOLTA costs them nothing.

The court also determined that even if a taking had occurred, plaintiffs are not entitled to just compensation. The question, the court noted, is what monetary amount of net interest or benefit was lost because the finds were placed in IOLTA. The court rejected plaintiffs' arguments that other methods of depositing money-such as in-firm pooling or sub-accounting-would generate interest on the funds outside of IOLTA. These methods, the court noted, either would not earn net interest because the amount of funds is too low or would require costs that exceed any net interest generated. Additionally, the court rejected plaintiffs' theory that the finds can provide a net benefit to the client by decreasing an attorney's costs. The court noted that allowing attorneys to benefit from clients' trust accounts-regardless of whether they pass the benefit on to their clients-is an ethical violation prohibited by the ethics rules. Thus, the court concluded, plaintiffs failed to demonstrate that a compensable loss occurred.

Accordingly, the court dismissed plaintiff' claims.