Opinion ID: 775593
Heading Depth: 1
Heading Rank: 1

Heading: iolta

Text: 2 When a lawyer takes the oath of a state bar, he receives the great privilege of admission to the practice of law in that state and pledges to conduct himself in accordance with the code of professional responsibility that accompanies such an honor. Of the many ethical requirements placed upon lawyers, one of the most significant is loyalty to the client. In addition to representing their clients zealously and protecting their legal rights, lawyers must protect the integrity of their clients' property and avoid using their position as the property's temporary guardian to their own benefit. To this end, lawyers have long been required to place their clients' money in bank accounts separate from their own. As early as 1908, professional ethical guidelines required that money of the client or collected for the client . . . should be reported and accounted for promptly, and should not under any circumstances be commingled with his own or be used by him. Canons of Professional Ethics Canon 11 (1908) (amended 1933). Today, almost one hundred years later, lawyers in all fifty states are held to that same high standard of professional conduct. According to the Model Rules of Professional Conduct, [a] lawyer shall hold property of clients or third persons that is in a lawyer's possession in connection with a representation separate from the lawyer's own property. Funds shall be kept in a separate account maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person. Model Rules of Prof'l Conduct R. 1.15(a) (1999). 3 In compliance with these ethical obligations, before 1980, clients' funds were generally pooled in noninterest-bearing, federally insured checking accounts. Phillips , 524 U.S. at 160. Even though, at that time, federal law prohibited federally insured banks from paying interest on checking accounts, such accounts were used to ensure that the funds were available on demand. See 12 U.S.C. &#167 &#167 371a, 146(b)(1)(B), 1828(g). The holding bank received a great windfall from these accounts. Not only did the holding banks use the funds as an interest-free loan, keeping all the derived income, but they also charged the account holder-the lawyer-a fee for services rendered. Only if a sum was very large or was to be held for a long period of time would it be placed in an interest-bearing savings account, because, at that point, the loss of the checking account convenience was outweighed by the value of the interest gained. See Phillips , 524 U.S. at 160-61; see also ABA Comm. on Ethics and Prof'l Responsibility, Formal Op. 348 (1982). When such an account was set up, the client bore the additional costs for any services rendered by the bank and the lawyer in accounting for the interest, remitting it to the client, and generating tax forms for both the client and the Internal Revenue Service. 4 Client trust accounts, however, would not remain interest-free for long. In 1980, Congress passed the Consumer Checking Account Equity Act, codified at 12 U.S.C. &#167 1832, which allowed federally insured banks to pay interest on certain demand accounts, called Negotiable Order of Withdrawal (NOW) accounts. NOW accounts are strictly regulated; they must consist solely of funds in which the entire beneficial interest is held by one or more individuals or by an organization which is operated primarily for religious, philanthropic, charitable, educational, political, or other similar purposes and which is not operated for profit.  Phillips, 524 U.S. at 161 (quoting 12 U.S.C. &#167 1832(a)(2)). Although for-profit organizations, such as corporations, partnerships, associations, and insurance companies, are precluded from establishing NOW accounts for their own benefit, the Federal Reserve Board has determined that they may do so if the funds are held in trust pursuant to a program under which charitable organizations have `the exclusive right to the interest.'  Id. at 161 (citation omitted). 5 Congress could not have better timed its authorization of interest-bearing NOW accounts. Not only had interest rates reached unprecedented levels in the 1970s, but the States were in need of a new source of legal aid funding. An ethical tradition of the legal profession is the provision of legal services to those who cannot afford to pay for them. See Model Rules of Prof'l Conduct R. 6.1 (Legal Background); Geoffrey C. Hazard, Jr., After Professional Virtue, 6 Sup. Ct. Rev. 213, 215 (1989) ([A] lawyer's obligation to represent the poor . . . is a classic canon of the legal profession.). Providing legal services to the poor is a complex undertaking, but at a minimum, all attorneys bear the ethical responsibility at some point in their career to represent indigent clients or in some manner work to make the legal system accessible to those who could not otherwise afford it. To that end, bar associations recommend that their members designate a certain number of hours each year to pro bono services. See Model Rules of Professional Conduct Rule 6.1 (recommending at least fifty hours of pro bono work a year). They also help secure funding to support individuals and organizations that provide indigent legal services. From 1974 to 1981, a large percentage of this funding came from the Legal Services Corporation, a federally funded corporation, which awarded direct grants to local attorneys providing legal services to the poor. See James D. Anderson, The Future of IOLTA: Solutions to Fifth Amendment Takings Challenges Against IOLTA Programs, 1999 U. Ill. L. Rev. 717, 720. In 1981, however, Congress severely limited the scope and budget of the Legal Services Corporation, and as a result, the States and their bar associations were forced to look for new sources of funding. 6 The availability of interest through the establishment of NOW accounts provided a unique opportunity for the legal profession to further two of its most important ethical obligations-ensuring that all individuals, regardless of their financial circumstances, have access to the judicial system and segregating client trust funds from the lawyers' own accounts-without imposing additional societal costs. By pooling client deposits that individually were so small or held for such a short period of time that they would not earn a net positive interest, the States could use the interest earned on the combined deposits -otherwise enjoyed as a windfall by the banks-to fund indigent legal services at no cost to the owner of the principal. Thus, in 1981, Florida created the first IOLTA program. Today, every state in the nation has followed suit. See Phillips, 524 U.S. at 159 n.1; see also Ind. Prof. Conduct R. 1.15(d) (2000) (Indiana, the last state to do so, instituted an IOLTA program after Phillips was decided.). IOLTA programs have been a brilliant success: in 1999, they generated $139 million nationwide. See Caitlin Liu, Court Ruling Threatens A Major Funding Source for Legal Aid, L.A. Times, Jan. 22, 2001 at B3. 7 The Washington State Supreme Court created its IOLTA program in 1984, codifying it in the Washington Rules of Professional Conduct as Rule 1.14. This rule requires lawyers to place client funds that are nominal in amount or expected to be held for a short period of time in either (i) a pooled interest-bearing trust account, the interest from which is paid to the Washington Legal Foundation, (ii) a separate interestbearing trust account for a particular client, or (iii) a pooled interest-bearing trust account with subaccounting that will provide for computation of interest earned by each client's funds and the payment thereof to the client. Wash. Rules of Prof'l Conduct R. 1.14(c)(2). When deciding the type of account to establish, lawyers need not inform their clients or obtain their clients' consent. Instead, lawyers are instructed to consider only whether the funds to be invested could be utilized to provide a positive net return to the client, taking into account (i) the amount of interest that the funds would earn during the period they are expected to be deposited; (ii) the cost of establishing and administering the account, including the cost of the lawyer's service and the cost of preparing any tax reports required for interest accruing to a client's benefit; and (iii) the capability of financial institutions to calculate and pay interest to individual clients. Wash. Rules of Prof'l Conduct R. 1.14(c)(3). 8 As the IOLTA program was being created, the Washington Supreme Court also ordered the incorporation of the Legal Foundation of Washington, a nonprofit charitable organization dedicated to improving the availability and quality of legal representation for the poor. The Legal Foundation of Washington itself does not litigate or educate but accomplishes its mission by distributing funding to different nonprofit and educational associations through a grant application process. In 1990, the IOLTA program provided $3.9 million to the Legal Foundation of Washington, and in 1995, it provided $2.7 million. 9 This appeal challenges one specific aspect of Washington States's IOLTA program: its application to individuals who, during real estate transactions, place money in the hands of an escrow or title company that employs at least one Limited Practice Officer (LPO), a state-licensed non-lawyer who is permitted by the state to select, prepare, and complete the appropriate legal documents incident to the closing of real estate and personal property transactions . . . .  Wash. Admission to Practice R. 12. The position of LPO was created in 1983 in response to a Washington Supreme Court decision holding that laypersons performing those tasks were engaged in the unauthorized practice of law. See Bennion, Van Camp, Hagan & Ruhl v. Kassler Escrow, Inc. 635 P.2d 730 (Wash. 1981). Although IOLTA has applied to lawyers since its inception, it did not apply to LPOs until 1995 when the addition of subsection h to Admission to Practice Rule 12 and the enactment of Admission to Practice Rule 12.1 (collectively the IOLTA rules) imposed on LPOs the same requirements that apply to practicing lawyers. Under Rule 12.1, client funds must be placed in an IOLTA account unless (i) the parties to a real estate transaction enter a written agreement requesting an interest-bearing account andspecifying the manner of distribution of accumulated interest to the parties to the transaction; (ii) the funds are deposited in a separate interest-bearing trust account for a particular party to a real or personal property closing on which accumulated interest will be paid to that party; or (iii) the funds are deposited in a pooled interest-bearing trust account with subaccounting that will provide for computation of interest earned by each party's funds and the payment thereof to the respective party. Wash. Admission to Practice R. 12.1(c)(2). 10 Although escrow and title companies, like attorneys, use separate client trust funds to hold their clients' deposits, for the purpose of this decision, the similarity stops there. Unlike attorneys, escrow and title companies have never taken advantage of the interest-bearing capabilities of NOW accounts, even though they both used non-interest bearing checking accounts before NOW accounts were established. Escrow and title companies have not deemed NOW accounts to be realistic options for their client trust funds due to the difficulty and expense attendant to the crediting of the proper amount of interest to each person whose funds have passed through the escrow account. Furthermore, these companies handle transactions on behalf of for-profit corporations for which client funds cannot be legally deposited in NOW accounts. Thus, even if the IOLTA rules did not exist and the principal would generate net interest, escrow and title companies would not establish interest-bearing NOW accounts. 11 Before the enactment of the IOLTA rules, escrow and title company client trust funds did not earn interest. They did, however, receive benefits from the holding banks in the form of earnings credits. The credits, which accrued to the company itself, were used to offset bank fees for a variety of services, including accounting services and wire transfers. With the enactment of Rule 12.1, however, many banks -but not all -have stopped offering earnings credits to escrow and title companies opening IOLTA accounts. To make up for the loss of earnings credits and the corresponding rise in bank fees, some escrow companies -but not all -now charge IOLTA fees. As an example of these charges, Appellants provide a sample settlement statement, which includes an IOLTA/Accounting fee of $5.39 charged to both the buyer and the seller.