Washington Lawyer

Speaking of Ethics: Interest on Lawyers' Trust Accounts

From Washington Lawyer, June 2003

By Ernest T. Lindberg

ethicsOn March 25 the U.S. Supreme Court ruled in a Washington state case that use of interest on lawyers’ trust accounts (IOLTA) to fund legal aid programs does not violate the Fifth Amendment protections against takings.

The ruling in Brown v. Legal Foundation of Washington, No. 01-1325, upheld a 2001 en banc ruling by the Ninth Circuit Court of Appeals. An estimated total amount of $160 million is held in IOLTA program accounts nationally. Although many recent writings focus on the benefit to legal assistance for low-income persons, it is useful to note the funding process and how IOLTA functions in the District of Columbia. The D.C. program is expressly identified in Rule 1.15(e) (Safekeeping Property) of the D.C. Rules of Professional Conduct, which provides:

Nothing in this rule shall prohibit a lawyer or law firm from placing clients’ funds which are nominal in amount or to be held for a short period of time in one or more interest-bearing accounts for the benefit of the charitable purposes of a court-approved “Interest on Lawyers Trust Account (IOLTA)” program.

The D.C. Court of Appeals adopted an IOLTA program in February 1985 on petition of the D.C. Bar by adding a new paragraph (C) to DR 9-103 that expressly permitted IOLTA accounts meeting the requirement of appendix B to Rule X of the court’s Rules Governing the Bar of the District of Columbia. Appendix B sets out detailed rules to be followed in establishing and administering IOLTA accounts. Paragraph (e) of D.C. Rule of Professional Conduct 1.15 is substantially identical to DR 9-103(C). Incorporation of the rules contained in appendix B to Rule X and the admonition that they must be followed in setting up IOLTA programs are found at Comment [3] to Rule 1.15.

The D.C. IOLTA program is of the opt-out variety: lawyers and law firms may file a written notice of declaration excusing themselves from maintaining an IOLTA account, but absent such a filing an IOLTA account is required. The form for providing a notice of declination is provided by the clerk, and submitted to the chief judge of the D.C. Court of Appeals or to the chief judge’s designee. If the notice was filed on or before November 1, 1985, it need not be renewed for any ensuing year.

Any lawyer or law firm that has not filed a notice of declination on or before July 1, 1985, may elect to decline to participate in any ensuing year by filing a notice of declination with the chief judge or the chief judge’s designee within a 31-day period commencing on the first day of March of each year.

Notwithstanding the foregoing, any lawyer or law firm may petition the court at any time and, for good cause shown, may be granted leave to file a notice of declination at a time other than those specified above. An election to decline participation may be revoked at any time by filing with the chief judge or the chief judge’s designee a request for enrollment in the program.

A lawyer or law firm that does not file with the chief judge or the chief judge’s designee a notice of declination in accordance with the foregoing provisions shall be required to maintain accounts in accordance with section (a) of appendix B of Rule X.

The accounts considered in section (a) are those accounts that include only clients’ funds, which are nominal in amount or are expected to be held for a short period of time. No interest from such an account shall be made available to a lawyer or law firm. The determination of whether clients’ funds are nominal in amount or to be held for a short period of time rests in the sound judgment of each attorney or law firm. Notification to clients whose funds are nominal in amount or to be held for a short period of time is not required.

An IOLTA program may be established with any financial institution that is authorized by federal, D.C., or state law to do business in the District of Columbia or the state in which the lawyer’s or law firm’s office is situated and that is a member of the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation, or successor agencies. Funds deposited in such an account shall be subject to withdrawal upon request and without delay. Because the remittance of these funds to the District of Columbia Bar Foundation requires careful and correct action by the financial institution, a very senior member of the Office of Bar Counsel advises lawyers to run from any financial institution that shows the least hesitation about what an IOLTA is or what documentation is required.

Improper handling of IOLTA funds may subject a lawyer or law firm to the same concerns arising from matters under Rule 1.17 (Trust Account Overdraft Notification). Funds in IOLTA accounts are also within the purview of Rule 1.15, as discussed in D.C. Ethics Opinion 251 (1994). When both the client and a third person claim an interest in settlement proceeds held by a lawyer in the lawyer’s IOLTA account, the portion of the proceeds in the dispute should not be disbursed to the client if the lawyer reasonably believes the third party has a just claim to such portion. The disputed proceeds should be retained in the account until the dispute is resolved. Any undisputed portion of the settlement proceeds must be distributed promptly to the parties entitled to receive such portions.

As the U.S. Supreme Court considers the constitutional issues IOLTA may generate, it is the administrative requirements of the program that make it exciting for the practitioner.

Legal ethics counsel Ernest T. Lindberg and Lisa Weatherspoon are available for telephone inquiries at 202-737-4700, ext. 231 or 232, or by e-mail at [email protected].