NLADA Update, June 15, 1998

Supreme Court Decision in Phillips v Washington Legal Foundation 524 US 156, 118 SCt 1925 (1998)

It sent a case involving IOLTA funds, currently the second largest funding source for legal services programs, back to the U.S. Court of Appeals for the Fifth Circuit for a decision on whether Texas had "taken" private property through its IOLTA plan and should pay "just compensation" for it.

"The poor in America have enormous unmet legal needs," said Clinton Lyons, executive director of the National Legal Aid & Defender Association (NLADA). "Funding from IOLTA programs has helped keep alive the American promise of equal justice for all. The Supreme Court did not rule on the constitutionality of the IOLTA programs, and critical issues have been sent back to the lower court for review. We are sure that the courts will uphold this vital program."

IOLTA programs provide about $100 million a year to legal assistance programs. Next to the federally funded Legal Services Corporation, they are the second largest source of monies for programs that seek to ensure equal access to justice for poor families and persons. IOLTA grants to the civil legal aid programs have grown in importance as Congress has cut LSC funding and imposed restrictions on the range and kinds of services that LSC-funded programs can offer their low-income clients.

Virtually all the states have programs in which the interest on small and short-term deposits that lawyers hold in trust for their clients is pooled. The deposits are generally so small that administrative costs would outweigh any interest they could earn as individual accounts. But collectively, the combined interest adds up to more than $100 million nationally, which IOLTA plans in each state allocate to civil legal assistance and other legal programs.

The Supreme Court divided 5-4 in its decision in Hon. Thomas Phillips v. Washington Legal Foundation, a case challenging the Texas IOLTA plan, which is mandatory for the state's lawyers. In that state, IOLTA interest income goes to the Texas Equal Access to Justice Foundation, which provides funding to legal services programs.

The ruling declares the interest on short-term deposits belongs to the clients, but leaves it up to the lower court to decide whether state IOLTA programs are a "taking" of private property for which compensation must be paid.

Read the opinion