Webcontent Managers' Note: This article was reprinted with permission from Minnesota Lawyer and reporter Barbara Jones.

Legal aid may get a boost in funding due to proposed changes in IOLTA account requirements.

Interest on Lawyers Trust Accounts (IOLTA) could generate substantially more funds for Legal Aid groups if the state Supreme Court adopts a proposal backed by the Minnesota State Bar Association (MSBA).

The MSBA has asked the high court to amend its rules to require lawyers to maintain IOLTA accounts in financial institutions that pay a market rate of interest. While some major banks are already paying interest at rates similar to those that would be required under the proposed rule, at least one bank in Minnesota pays only .001 percent interest on such accounts.

Lawyers deposit client monies in pooled IOLTA accounts when they will only be held for short periods of time. In Minnesota and numerous other states, the interest on such accounts is used to fund Legal Aid programs.

Over the years, IOLTA funding has become a major source of revenue for Legal Aid groups. However, when bank interest rates plummeted in the early part of the decade, much of this funding dried up. While interest rates have taken a major upswing in recent years, some banks continue to offer extremely low rates for IOLTA accounts.

The change advocated by the MSBA would increase the amount of IOLTA funding available to Legal Aid substantially. Those involved say it could add up to millions of dollars.

"There are reports from a number of states [with similar rules] that have noted a significant increase in Legal Aid revenue," said Winona attorney Kent Gernander, a member of an MSBA ad hoc "working group" on IOLTA.

Jeremy Lane, executive director of Mid-Minnesota Legal Assistance, told Minnesota Lawyer that the increase in interest has made an "astonishing" difference in other states. "The numbers knocked our socks off," he said.

The move will make a significant difference in Legal Aid organizations' ability to represent poor clients, Lane stated. He observed that the post Sept. 11-economy has been hard on the organizations, which have lost interest funding and grant money. They have had to turn away clients because of lack of resources, he said. "This proposal will be very helpful in helping us recapture lost ground," he added.

The American Bar Association (ABA) Commission on Interest on Lawyers' Trust Accounts has studied the issue, but did not release a public report about IOLTA issues. It collected information from IOLTA programs with the understanding that the information would remain confidential and would be used only within and for the benefit of the IOLTA program community. The commission cannot share this information, according to ABA spokesperson Karl Camillucci.

However, the ABA did report in a recent newsletter that Florida's trust account income grew by 298 percent between June 2004 - when interest rules similar to the Minnesota proposal were established - and June 2006.

Pay attention

The new rule seeks to institutionalize the interest rate requirements so that Legal Aid funding isn't dependent on a good relationship between a bank and the legal community, according to Lane. The new rule would also encourage banks that haven't been paying attention to the issue to get on track, he added.

Lane noted that many lawyers haven't been paying attention to the interest issue because neither the lawyer nor the client has any pecuniary interest in the interest on IOLTA accounts.

"Attention was not being paid, but many bar leaders were very willing to take the issue out of the zone of indifference," Lane stated.

Public hearing scheduled

The MSBA's petition is now pending before the Supreme Court, which has scheduled a public hearing for Dec. 12. (The court's order setting the public hearing and the full text of the MSBA petition are available in the Oct. 2 issue of Minnesota Lawyer.)

The petition seeks an amendment to Minnesota Rules of Professional Conduct (MPRC) Rule 1.15, which currently requires that IOLTA accounts pay interest but doesn't specify an amount.

Under the proposed rule, financial institutions would have a choice. To comply with the amended rules, an IOLTA account would need to pay no less than the interest rate or dividend generally available to non-IOLTA depositors at the same institution when the IOLTA account meets or exceeds account eligibility requirements.

As an alternative, the proposed amendments would permit the institution to pay a "safe harbor" rate equivalent to 80 percent of the Federal Funds Target Rate (the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight).

No negative netting

The new rule also would allow IOLTA funds to be held in money market accounts and sweep accounts. (Sweep accounts are those that are "swept" overnight with the funds deposited into a money market and redeposited into a bank account in the morning.) For larger accounts, the return on a sweep account can be significantly higher than a regular return, Gernander said.

The new rule would also address banking fees and would prohibit the practice of negative netting, where a bank charges fees incurred by one IOLTA account against the earning of another. Under the proposed amendment, a bank could not take fees or charges in excess of the earnings accrued on an IOLTA account for a given period either from the principal of that account or from earnings on other IOLTA accounts.

It also would define the "allowable reasonable fees" that a bank may charge against an IOLTA account to per-check charges, per-deposit charges, sweep fees and similar charges assessed against comparable accounts by the bank. The lawyer maintaining the account would be responsible for all other fees incurred in connection with the IOLTA account.

The rule also would include an explicit statement that only funds that could not accrue earnings for a client, net of allowable costs, may be placed or retained in an IOLTA account. This is the general practice with IOLTA accounts but was added in view of the U.S. Supreme Court's 2003 decision in Brown v. Legal Foundation of Washington. In a 5-4 decision, the Brown court held that the IOLTA program was not a compensable taking of property where the state mandated a non-IOLTA account if interest could be generated for the client. The court relied heavily on the fact that the owners of the funds put in trust would not have any net earnings on the funds because of their de minimis nature, and that the state required that client funds that could earn money should not be deposited in IOLTA accounts.

Clear skies for IOLTA

Gernander told Minnesota Lawyer that the proposed rule change follows initiatives taken in other states following the Brown decision. Currently six states have similar rules and rule changes will soon take effect in two more states.

Although those involved in IOLTA and Legal Aid funding have been aware for some time that additional revenue could be raised with higher interest rates, many organizations were unwilling to take any action until the Brown decision clarified the constitutionality of IOLTA accounts and removed a cloud over IOLTA programs created by the pending litigation, said Gernander.

But after Brown approved IOLTA funding of Legal Aid, the ABA IOLTA commission and the National Association of IOLTA Programs appointed a task force to study best practices for IOLTA accounts and rule changes that would enhance the funds' capacity to earn money for Legal Aid, said Gernander. Minnesota's proposal is an outgrowth of that task force.

But in the meantime, Minnesota lawyers were meeting with banks and encouraging them to do what they could to enhance IOLTA revenues, Gernander said.

For the most part, the banks have been accommodating, according to lawyers.

"The rates required by the new rule are not much different than the rates paid by the two largest banking institutions in Minnesota that handle IOLTA accounts," said Minneapolis attorney Roger Stageberg, a member of the ad hoc group. "They recently have been cooperative in raising the rates to the level required by the new rule."

The new rule will bring smaller banks' rates up and keep the bigger banks' rates up, he said. For the most part there has been little opposition by bankers, he added.

"It's been a rewarding success for those of us interested in raising money for Legal Aid," Stageberg said.