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Why Several Recent Court Decisions May Result In Huge Losses Of Legal Aid Funding


Tuesday, Oct. 30, 2001

For more than a decade, programs providing legal services to the poor have been a favorite target for conservatives. During that time, legislative efforts to de-fund (and thereby destroy) legal aid programs generally failed. But taking a page from the liberal playbook, conservatives turned to the courts to overcome legislative disappointment.

Those strategies are now bearing fruit. Recent federal court of appeals decisions threaten to cut off a main funding supply for legal services programs nationwide and curtail drastically the kinds of legal services available to Americans without means.

IOLTA: A Legal Aid Funding Mechanism

The focus of the conservative legal attack has been on a legal aid funding mechanism employed by 48 states and the District of Columbia. The mechanism is known as IOLTA, an acronym for Interest on Lawyers' Trust Accounts. The idea behind IOLTA developed out of a change in federal banking law.

Lawyers often receive money that is to be held in trust for a client — such as money to pay closing costs, or pending claim. Prior to 1980, lawyers who received such money would deposit it in a non-interest bearing trust account, on which checks could be written. At the time, federal law prohibited banks from offering interest-bearing checking accounts. Thus, lawyers were effectively precluded from obtaining interest on their clients' short-term trust deposits.

In 1980, however, Congress authorized banks to offer "NOW" accounts. At the risk of oversimplification, "NOW" accounts pay interest on principal, but only if that interest goes either to an individual or a bona-fide non-profit organization. Congress continued to prohibit for-profit corporations and partnerships from earning interest on such accounts.

Using IOLTA-NOW Accounts to Help the Poor

Accordingly, while a law firm could not benefit from a NOW account's interest, a non-profit could — and that difference is what led to IOLTA.

Most states quickly capitalized on this change in banking law. They required lawyers to deposit their small, quick-turnaround trust deposits (that is, those deposits that would not ordinarily earn interest) into separate IOLTA-NOW accounts. Then they directed that the interest on such accounts must go to non-profit legal aid groups.

Edward Lazarus writes about, practices, and teaches law in Los Angeles. A former federal prosecutor, he is the author of two books — most recently, Closed Chambers: The Rise, Fall, and Future of the Modern Supreme Court.

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