Interest on Trust Accounts (IOTA)
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II. Bar Position
IV. Facts and Statistics
Rules implementing mandatory participation in the Interest on Trust Accounts (IOTA) program and revamping governance of The Florida Bar Foundation (the administrator of the IOTA program) were approved by the state Supreme Court on July 20, 1989.
Effective Oct. 1, 1989, the mandatory IOTA rules implemented the court's unanimous ruling of Jan. 26, 1989, calling for all Florida lawyers holding “nominal or short-term” client funds in trust to participate in the program. Under IOTA, client or third-party trust deposits, determined by the attorney or law firm to be too small in amount or expected to be held for too short a time to make investment for the individual client practical, are pooled by the attorney or law firm into an interest or dividend-bearing account at an eligible financial institution benefiting IOTA. The Florida Supreme Court requires all nominal or short-term client trust funds to be deposited into IOTA accounts unless the funds can otherwise earn income for the client in excess of the costs incurred to secure such income. Attorneys or law firms may invest trust funds for the benefit of individual clients or third persons whenever practical and are precluded from depositing such funds into IOTA accounts.
Under the voluntary IOTA program, about 20 percent of Florida's attorneys with trust accounts participated, raising about $3.5 million annually. Proponents of mandatory IOTA estimated that when all attorneys with trust accounts participated, $10 million would be raised each year at current interest rates.
Proponents of mandatory IOTA participation argued that such participation would eliminate costly, time-consuming recruitment campaigns; help the legal profession enjoy a better reputation; employ economies of scale; provide maximum impact on public interest programs; avoid ethical concerns of attorneys using client trust funds as a compensating balance to secure preferential treatment from financial institutions; and other reasons.
Opponents of mandatory participation argued that participation should be a matter of free choice – lawyers should not be compelled to participate in what amounts to charitable endeavors against their will. Concerns were also raised that the interest earned on "nominal or short-term" client funds might be used to further causes in which they do not believe.
In June 2001, the Florida Supreme Court approved modifications to the IOTA program proposed by the Foundation to increase IOTA revenue. The proposed amendments to the IOTA Rule would:
– Introduce competition by allowing investment companies to offer IOTA accounts.
– Add short-term government money market funds, together with appropriate safeguards, to checking accounts and REPOs as financial products approved for IOTA funds.
– And define institutions eligible to hold IOTA funds as only those institutions choosing to participate that pay IOTA account depositors the highest interest rate or dividend generally available at their own institution to non-IOTA customers – through use of checking accounts, short-term government money market funds or REPOs – when IOTA accounts meet the same minimum balance or other requirements.
The Florida Bar Board of Governors voted unanimously to support the proposed Rule amendments at its Mach 30, 2001, meeting.
The Foundation initially implemented the “interest rate comparability” in 2001. However, short-term interest rates fell shortly thereafter. In 2005, interest rate comparability was re-implemented and IOTA revenue grew to an average of $44 million in annual revenue from the previous annual average of $11 million.
II. Bar Position
A. American Bar Association Position
The ABA policy on lawyer trust accounts as stated in the Policy and Procedures Handbook is as follows: "Approve in principle the concept of state programs, where authorized by the law of that state, for the use of interest on lawyer funds for the support of lawrelated public service activities."
The ABA also has urged voluntary and opt-out programs to convert to “mandatory” status and state legislatures not to use IOLTA revenues as a substitute for public funding for government obligations that arise under the Constitution or other laws.
The ABA Commission on IOLTA, the IOLTA Clearinghouse, and the National Association of IOLTA Programs (NAIP) have supported the development and efficient operation of IOLTA programs in all jurisdictions. The Commission provides direct technical assistance to programs, and publishes the only national source of information about developments in the IOLTA field. Jointly with NAIP, the Commission also sponsors the “IOLTA.org” website as a resource for the general public about IOLTA and for IOLTA programs.
B. The Florida Bar Position
The Florida Bar was instrumental in the founding and implementation of the voluntary IOTA program in Florida. The Florida Bar's Board of Governors originally supported comprehensive IOTA, then reversed itself. At its September 1988 meeting, the Board approved mandatory IOTA only with an opt-out provision.
In September 1994, and again in February 1999, the Public Interest Law Section of The Florida Bar adopted the position to oppose any legislation that would eliminate, impair or change the Interest on Trust Accounts Program.
A. The Florida Bar/The Florida Bar Foundation
Efforts to bring IOTA to Florida began in 1971 when Florida Bar staff began to collect information from jurisdictions outside the United States which had implemented interest on trust account programs. (The concept has been used in Australia and Canada since the 1960s.) In 1976, Justice Arthur England of the Florida Supreme Court offered a detailed proposal for consideration by The Florida Bar's Board of Governors. In December 1976, the Bar formally petitioned the Florida Supreme Court requesting the adoption of a program to allow interest to be earned on lawyers' trust accounts. The court in March 1978 approved the program [In Re Interest on Trust Accounts, 356 So.2d 799 (Fla. 1978)] which would be administered by The Florida Bar Foundation.
Income tax problems effectively postponed implementation for three years and led to The Florida Bar Foundation filing a modification of the original plan. On July 16, 1981, the court issued its opinion approving a revised program [In Re the Matter of Interest on Trust Accounts, 402 So.2d 389 (Fla. 1981)].
Problems with income tax aspects of the program were finally resolved on Aug. 31, 1981, when the Internal Revenue Service issued Revenue Ruling 81209. That ruling maintained that interest earned on lawyers' trust accounts under such a plan as adopted in Florida would be treated as taxable to the Foundation, and not to clients, so long as the only amounts maintained in the commingled trust account were nominal in amount and held for a short duration. In 1987, the Internal Revenue Service issued Revenue Ruling 87-2 maintaining that interest income earned on pooled [lawyers’ trust] accounts under a plan like Florida’s IOTA program is not included in the gross income of either the clients or the lawyers.
The Florida Bar Foundation petitioned the Florida Supreme Court to change IOTA from voluntary to comprehensive. Under the requested "comprehensive" plan, all trust funds would earn interest (where all client or third person trust funds would earn income either for the client or third person, or, if the costs to secure income exceeded the income, for IOTA). The Foundation reasoned that such an approach would not only generate more money for legal services but would head off the potential ethics problem of attorneys receiving free banking services for keeping client funds in non-interest bearing accounts. The Court ruled in January 1989 that the IOTA program would be mandatory instead of comprehensive, noting that a comprehensive program could impose undue administrative and accounting problems for lawyers handling non-IOTA funds. The Court postponed an implementation date to give Bar and Foundation officials adequate time to develop a governance plan that would guarantee greater Bar membership participation in the selection of Foundation directors. This plan was approved by the Court on July 20, 1989. The new plan raised the maximum number of Foundation board of director members from 24 to 29 and gave the Bar Board of Governors a greater voice in determining who will serve as directors.
How IOTA works:
IOTA only makes use of client trust deposits which would otherwise be sitting idle in interest-free checking accounts. It only makes use of client trust deposits so small, or expected to be kept for so short a time, that income cannot be made available to the individual client or third person as a practical matter because the costs to secure the income would exceed the amount of income earned. IOTA does not impose any administrative burdens on attorneys or law firms. IOTA allows financial institutions to recover their costs for involvement in the program. Service charges paid by IOTA are deducted from the interest before it is sent to the Foundation by the financial institution. The interest is then used for grants to legal aid offices, loans and scholarships for law students, which the Foundation uses to promote public service and pro bono, or projects that enhance the administration of justice.
B. Judicial Challenges
Cone v. State Bar of Florida, 819 F2d 1002 (CA11 1987), cert. denied, 484 US 917, 108 S.Ct. 268, 98 LEd 2d 225
The Eleventh Circuit Court of Appeals considered a client’s claim that she had a constitutionally protected property right to IOLTA revenues. The client’s constitutional claims turned on one question: was the interest earned on nominal or short-term funds held in an IOTA (Interest on Trust Accounts) account the client’s property for purposes of the Fifth and Fourteenth Amendments?
The plaintiff relied on the traditional property doctrine that interest follows principal: “interest goes with the principal, as the fruit with the tree.” (Himely v. Rose, 9 US (5 Cranch) 313, 3 LEd 111 (1809)). The Eleventh Circuit, however, reasoned that this doctrine necessarily assumes the existence of a fruit-bearing tree. In the absence of the IOTA program, the plaintiff’s money would not have borne any fruit (i.e., interest) for her or for anyone else. In other words, because the client’s principal could not earn net interest for the client and would not have produced interest prior to IOTA, she was not entitled to the interest earned solely by virtue of the Florida IOTA program. See, Cone v. State Bar of Florida, 819 F2d 1002 (CA11 1987), cert. Denied, 484 US 917, 108 S.Ct. 268, 98 LEd 2d 225.
Washington Legal Foundation, et al. v. Massachusetts Bar Foundation, et al., 993 F2d 962 (CA1 1993)
In 1991, the Washington Legal Foundation, individual lawyers and clients sued the Massachusetts IOLTA program in federal district court, claiming that the program violates the due process and free speech provisions of the U.S. Constitution. The plaintiffs alleged that the use of client money to generate interest involves a taking prohibited by the Fifth Amendment. They argued further that their First Amendment rights are violated when IOLTA money is used to fund activities that they find ideologically offensive. The U.S. District Court dismissed the Washington Legal Foundation complaint, holding that clients have no property rights in the interest generated by IOLTA accounts, nor do they have a constitutionally protected beneficial interest in the use of those funds. The court also found that the state’s IOLTA rule expresses a content-neutral commitment to improving the administration of justice. On appeal, the First Circuit Court of Appeals upheld the district court’s decision. At the ABA Commission on IOLTA’s request in 1991, the ABA filed an amicus curiae brief with the First Circuit Court of Appeals in support of the Massachusetts IOLTA program. See, Washington Legal Foundation et al. v. Massachusetts Bar Foundation, et al., 993 F2d 962 (CA1 1993).
On March 31, 2003, the U.S. Supreme Court granted the Texas IOLTA program’s petition for writ of certiorari, which was filed on June 26, 2002. The Court also vacated the decision of the Fifth Circuit Court of Appeals, which had found that the Texas program violated the Fifth Amendment, and remanded the case to the Fifth Circuit for further consideration in light of the Court’s decision in Brown v. Legal Foundation of Washington.
The Supreme Court remanded the case to the Fifth Circuit for consideration in light of Brown, apparently requiring the ultimate dismissal of the plaintiff’s Fifth Amendment claims but not addressing the First Amendment issues. (In contrast to the Washington State case, the First Amendment claims were considered at the district court level and were dismissed after a trial.) In late 2003, however, the plaintiffs decided not to pursue these claims any further, and agreed to dismiss the case with prejudice. The Fifth Circuit Court entered the dismissal order on October 30, 2003.
The Texas Equal Access to Justice Foundation had filed the petition in June 2001, seeking review of the October 15, 2001 decision by a panel of the Court of Appeals for the Fifth Circuit in the case of Washington Legal Foundation vs. Texas Equal Access to Justice Foundation, 271 F.3d 835 (5th Cir. 2001). In 2000, a district court ruling had dismissed both the First and Fifth Amendment Claims filed in the case. The decision by the Fifth Circuit did not address the First Amendment issues in its 2001 decision.
The Texas case was originally filed in 1994, and led to a trip to the Supreme Court in 1997, when the Court issued its decision in Phillips, et al. v. Washington Legal Foundation, et al., 524 U.S. 156, 118 S.Ct. 1925 (1998), which found that clients have a property interest in the interest generated on lawyer’s trust accounts. The Court remanded further consideration of the Fifth Amendment issues to the lower courts, resulting in the district court and Fifth Circuit rulings in 2000 and 2001.
Washington State Litigation
On March 26, 2005, the U.S. Supreme Court issued its decision in Brown v. Legal Foundation of Washington, 538 U.S. 216,123 S.Ct. 1406 (2003), upholding the constitutionality of IOLTA under the Just Compensation Clause of the Fifth Amendment. Justice Stevens authored the 5-4 majority decision, which Justices O’Connor, Souter, Ginsburg and Breyer joined. In its ruling, the Court held that even assuming that a law requiring that the interest generated on IOLTA accounts be transferred to a different owner amounted to a per se taking, such a taking was for a valid public use and the amount of just compensation due was zero. As a result, the Court found that the operation of the IOLTA program of Washington does not violate the Fifth Amendment.
The case was remanded for consideration of the plaintiff’s First Amendment claims. Pursuant to the Supreme Court’s remand, the case returned to the district court for the Western District of Washington in 2003. The remaining plaintiffs agreed to dismiss the First Amendment Claims with prejudice, and on February 2, 2004, the court entered a stipulated order of dismissal. The Supreme Court’s decision affirms previous decisions in favor of the Washington State program by the Ninth Circuit Court of Appeals, Washington Legal Foundation vs. Legal Foundation of Washington, 271 F.3d 835 (9th Cir. 2001), and the District Court of the Western District of Washington. Washington Legal Foundation v. Legal Foundation of Washington, No. C97-0146C (W.D. Wash. January 30, 1998).
– 50 states, the District of Columbia and the U.S. Virgin Islands have interest on trust account programs modeled after Florida's.
– In 46 jurisdictions, participation in the IOTA program is mandatory. Those states include five of the largest state bars in the country – Texas, New York, Illinois, California and Florida.
– 33 jurisdictions have adopted interest rate comparability.
– For the fiscal year 2012-13, $5.5 million was generated by Florida’s IOTA program. That amount was down from pre-2007-09 recession levels of $44 million because of the severe drop in short-term interest rates.
– More than $450 million has been generated by Florida’s IOTA program since its inception in 1981.
– $426.8 million in grant funds have been awarded in Florida since 1982. Of that amount $389.6 million went for legal assistance to the poor, $12.1 million went for programs involving law students in public service and pro bono, and $25.1 million went for improvements in the administration of justice.
Prepared by The Florida Bar Department of Public Information and Bar Services with assistance by The Florida Bar Foundation.