U.S. Supreme Court says no to IOLTA
In a major victory that could undercut funding for free lawyers for tenants, the U.S. Supreme Court ruled in June that the interest collected
by attorneys on escrow accounts (called IOLTA) belongs to the attorneys’ clients, not to the government.
The high court’s decision could eventually end the nationwide IOLTA system that sends millions of dollars to legal services agencies,
including $7.8 million last year to Massachusetts legal aid groups alone. Most of these funds are spent to give free lawyers to tenants to sue small property owners, using legal tactics
to delay eviction and run up an owner’s costs.
But the court’s decision, a narrow 5-to-4 ruling, only addressed one legal question: who owns the interest generated when
attorneys deposit client’s escrow money into these special accounts? The court followed the ancient rule that interest follows principle and said that the interest is
the private property of the clients.
The court did not rule on the legal question of whether the IOLTA system that gives this interest to free-lawyer agencies constitutes a
taking under the Fifth Amendment of the U.S. Constitution, which says: ...nor shall private property be taken for public use without just
Similarly, the court did not rule on whether just compensation must be paid for taking the interest from
The case is expected to return to lower courts in Texas, where it originated, to litigate these remaining issues. Though it may seem obvious
to property owners how the case should resolve, the outcome is by no means clear, and IOLTA could remain intact for a long time.
Massachusetts ignores ruling
Meanwhile, the Massachusetts Board of Bar Overseers announced immediately that the U.S. Supreme Court ruling would not affect Massachusetts
lawyers and affirmed that they would continue to enforce the state’s mandatory rules governing IOLTA...until there is a change.
This response was anticipated as a way to perpetuate the legal aid funding for as long as possible, forcing Massachusetts to have its own
court test on IOLTA, to verify that the ruling applies here.
As usual, litigation is costly, slow and none too helpful, so pressure against these free-lawyer agencies needs to be continued through
picketing and educating the public about their abuse of small property owners.
Won’t stop illegal activity
In 1996, Congress placed restrictions on free-lawyer agencies across the country who receive federal tax dollars, in an effort to curb the
lobbying and other political activities of these groups.
But a report in the Wall Street Journal (8/24/98) suggests that these agencies are thumbing their nose at Congress when they think they can
get away with it. The report described a hidden-camera videotape of legal services lawyers who had flown to Mexico and were advising Mexican migrant farm workers on how to sue their
U.S. farmer-employers. Congress specifically prohibited legal assistance to aliens outside the U.S., as well as lobbying, union-organizing activity, and class-action suits
designed to alter social policy through litigation. The Mexico trip had cost the legal aid agency $10,000 plus 400 hours of legal time. It’s being investigated by Congress.
The Wall Street Journal report suggests that these ideologically motivated agencies may be beyond reform. Despite legal
restrictions, these groups spend considerable time lobbying at state legislatures across the country for anti-property-owner causes like rent control, just cause eviction,
and lead paint abatement.