July 2001

Your IOLTA Account

by Barbara C. Clark
Guest Columnist

January 2001 was an eventful month at the Legal Foundation of Washington (LFW). It marked the end of our 15th year of funding legal services to low-income people through the Interest on Lawyers Trust Account (IOLTA) program in Washington. It was also the fourth anniversary of our IOLTA program’s lawsuit with the Washington, D.C.-based Washington Legal Foundation. Finally, on January 10, 2001, a three-judge panel from the 9th Circuit Court of Appeals ruled that interest on IOLTA accounts was the property of clients, and that there was a taking of this property by the IOLTA program.

The Court of Appeals remanded the case back to U.S. District Court Judge John C. Coughenour for a finding on whether any compensation is due. The Legal Foundation of Washington submitted a petition for a rehearing en banc to the 9th Circuit, which has been set for June 21, 2001 in San Francisco.

The 9th Circuit ruling did not undo either of the IOLTA rules (RPC 1.14 and/or APR 12), and lawyers and limited practice officers (LPOs) should continue to follow them.

The principle behind IOLTA has always been that if a client can benefit from the interest on funds placed in a trust account, he must. Attorneys and LPOs should always consider the size of the client’s funds and the length of time they will be held before deciding where to put them. If the client can gain a positive net return, the funds should be placed in a separate account for the client. If there is no net benefit for the client, then the funds must be placed in an IOLTA account.

There is no magic figure to guide you in deciding exactly how much money would constitute a positive net return for your client. This has always been up to the judgment of individual attorneys and LPOs, who must determine how much it would cost to account for the funds, complete an IRS Form 1099 for the client, submit it to the Internal Revenue Service, and cover bank fees.

Even with the most careful attention to how client funds are accounted for, a lawyer or LPO may make a mistake. If you have mistakenly placed client funds in an IOLTA account, move the funds to a separate account as soon as you learn of it, and then contact the Legal Foundation of Washington. You may request a refund in writing of the interest paid by the bank to the Foundation. LFW staff will work with you and your bank to ascertain the exact amount of interest earned and any bank fees paid on the account.

We continue to work closely with financial institutions throughout the state to encourage reductions in fees charged on IOLTA accounts. (See http://www.legalfoundation.org/ for a list of banks which do not charge fees.) We have also been successful in encouraging banks to raise the interest rate paid on IOLTA-pooled trust accounts.

Wells Fargo remains the outstanding bank in Washington, paying four percent interest on IOLTA accounts; Bank of America and US Bank have also taken leadership positions. US Bank charges no fees on IOLTA accounts, and Bank of America pays two percent interest.

We solicit your support to move your IOLTA account to one of these banks, or ask your bank to match what these banks are doing. It will make a tremendous difference to the pro bono and legal services programs in your community.

Q: My bank has offered me "earnings" credits on my account. All I have to do is open two accounts: an IOLTA account and a noninterest-bearing disbursing account. All client funds are initially placed in the IOLTA account, and then are quickly moved to the noninterest-bearing disbursing account in order to generate extra earnings credits to buy special bank services. Is this permissible?

A: No, according to Formal Opinion 193. (See the WSBA Web site at www.wsba.org/lawyers/ethics/formalopinions/193.htm.)

Q: A bank has offered to provide me with extensive banking services, including the purchase of computers and software, if I will move my IOLTA account to their bank. They will pay the Legal Foundation of Washington a lesser interest rate than on regular IOLTA accounts that do not get the special extensive banking services. Is this permissible?

A: The practice is permissible only when the Legal Foundation is not paid a lesser amount because of your actions. In this case, because the account earns less than other IOLTA accounts at the same bank, it would not be permitted. See Informal Opinion 1591. For a copy of the opinion, call the WSBA Ethics line at 206-727-8284 and leave a message including your e-mail address.

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