Legal News

The Recession?s Latest Legal Casualty: IOLTA

By Dan Slater

Our profession is taking a pounding in The Current Cycle: Law-firm layoffs, once headline news on the legal beat, now merit only a mention. Budget shortfalls and over-burdened defenders are putting the 6th Amendment’s guarantee of counsel to the test. And Madoff-related losses have hamstrung many criminal justice organizations.

To many of you, however, some of these miseries were fairly intuitive results of a tough economy.

But have you ever heard of Interest on Lawyers’ Trust Accounts, or IOLTA programs? They’re also taking a hit.

In what the New York Times calls “an odd twist,” legal aid societies have been hit hard by the Federal Reserve’s steep reduction of its interest rate, which plunged last month to near zero. Legal aid societies, it turns out, depend heavily on revenues that are tied to the federal funds rate.

So-called IOLTA programs — which in 2007 provided $212 million to legal aid groups, according to the ABA — draw interest earned from short-term deposits that lawyers hold in trust for clients during, for example, real estate transactions or personal injury payouts. The interest is mainly donated to legal services for the poor. As a result of the interest rate drop, reports the Times, many legal aid groups across the country are expecting staff cuts to reach 20 percent or more over the coming months, even as requests for their services have risen by 30 percent or more due, in part, to soaring foreclosures and unemployment.

“We are watching the interest rates with a sense of horror,” Steven Eppler-Epstein, the director of Connecticut Legal Services, told the NYT.

But not everyone is unhappy. Richard A. Samp, chief counsel of the Washington Legal Foundation, a conservative law firm, told the Times that the IOLTA programs amounted to “a slush fund for legal aid groups to do the kind of work the Congress has prohibited them from doing with public money.” His group argued before the Supreme Court that the programs were an illegal seizure of private income, but the court, in 2003, held otherwise, calling them justified for the public good.

Full post as published by Law Blog - WSJ.com on January 20, 2009 (boomark / email).