94 F.3d 996 (5th Cir. 1996), 95-50160, Washington Legal Foundation v. Texas Equal Access to Justice Foundation

Docket Nº:95-50160.
Citation:94 F.3d 996
Party Name:WASHINGTON LEGAL FOUNDATION; William R. Summers; Michael J. Mazzone, Plaintiffs-Appellants, v. TEXAS EQUAL ACCESS TO JUSTICE FOUNDATION; W. Frank Newton, Chairman, Texas Equal Access to Justice Foundation; Thomas R. Phillips, Chief Justice; Raul Gonzalez, Justice; Jack Hightower, Justice; Nathan L. Hecht, Justice; Lloyd A. Doggett, Justice; Bob Gam
Case Date:September 12, 1996
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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Page 996

94 F.3d 996 (5th Cir. 1996)

WASHINGTON LEGAL FOUNDATION; William R. Summers; Michael

J. Mazzone, Plaintiffs-Appellants,

v.

TEXAS EQUAL ACCESS TO JUSTICE FOUNDATION; W. Frank Newton,

Chairman, Texas Equal Access to Justice Foundation; Thomas

R. Phillips, Chief Justice; Raul Gonzalez, Justice; Jack

Hightower, Justice; Nathan L. Hecht, Justice; Lloyd A.

Doggett, Justice; Bob Gammage, Justice; Craig T. Enoch,

Justice; John Cornyn, Justice; Rose Spector, Justice;

Supreme Court Dfts, Defendants-Appellees.

No. 95-50160.

United States Court of Appeals, Fifth Circuit

September 12, 1996

Page 997

Richard Abbott Samp, Daniel J. Popeo, Washington, DC, Steven Wayne Smith, Austin, TX, for Washington Legal Foundation and Summers.

Michael J. Mazzone, Dow, Cogburn and Friedman, Houston, TX, pro se.

Brittan L. Buchanan, Austin, TX, Darrell E. Jordan, Hughes & Luce, Dallas, TX, H. Robert Powell, Hughes and Luce, Austin, TX, for Texas Equal Access to Justice Foundation, W. Frank Newton, Thomas R. Phillips, Raul Gonzalez, Jack Hightower, Nathan L. Hecht, Lloyd A. Doggett, Bob Gammage, Craig T. Enoch, John Cornyn and Rose Spector, defendants-appellees.

Harry Grant Potter, III, Nancy Ann Trease, Office of the Attorney General for the State of Texas, Austin, TX, for Thomas R. Phillips, Raul Gonzalez, Jack Hightower, Nathan L. Hecht, Lloyd A. Doggett, Bob Gammage, Craig T. Enoch and Rose Spector, defendants-appellees.

Allan van Gestel, Goodwin, Procter & Hoar, Boston, MA, for Massachusetts Bar Foundation, amicus curiae.

Randall C. Berg, Jr., Florida Justice Institute, Miami, FL, for National Association of Interest on Lawyers' Trust Accounts (IOLTA) Programs, Inc., Alabama Law Foundation, Inc., Arizona Bar Foundation, State Bar of Arizona, Arkansas IOLTA Foundation, Inc., The Legal Services Trust Fund Commission of the State Bar of California, The State Bar of California, Colorado Bar Association, Colorado Lawyers Trust Account Foundation, Connecticut Bar Association, The Connecticut Bar Foundation, The Florida Bar, The Florida Bar Foundation, Hawaii Justice Foundation, Idaho Law Foundation, Inc., Idaho State Bar, Lawyers Trust Fund of Illinois, Illinois State Bar Association, Lawyer Trust Account Commission of the Supreme Court of Iowa, The Iowa State Bar Association, Kansas Bar Foundation, Kentucky IOLTA Fund, Louisiana State Bar Association, Maine Bar Foundation, Maine State Bar Association, Maryland Legal Services Corporation, Maryland State Bar Association, Massachusetts IOLTA Committee, Massachusetts Legal Assistance Corporation, State Bar of Michigan, Michigan State Bar Foundation, Minnesota State Bar Association, The Mississippi Bar Foundation, The Missouri Bar, Missouri Lawyer Trust Account Foundation, State Bar of Montana, Nebraska Lawyers Trust Account Foundation, Nevada Law Foundation, New Hampshire Bar Association, New Hampshire Bar Foundation, The IOLTA Fund of the Bar of New Jersey, New Jersey State Bar Association, New Jersey State Bar Foundation, State Bar of New Mexico, New Mexico Bar Foundation, New York State Bar Association, IOLTA Fund of the State of New York, North Carolina Bar Association, North Carolina Association of Black Lawyers, Ohio Legal Assistance Foundation, Oklahoma Bar Foundation, Inc., Oregon Law Foundation, Oregon State Bar, Pennsylvania Bar Association, Lawyer Trust Account Board (Pennsylvania), Philadelphia Bar Association, South Carolina Bar Foundation, State Bar of South Dakota, Tennessee Bar Foundation, Tennessee Bar Association, Vermont Bar Foundation, The Virginia Bar Association, Legal Services Corporation of Virginia, Legal Foundation of Washington, Washington State Bar Association, King County Bar Association (Seattle), West Virginia Bar Foundation and West Virginia State Bar, amicus curiae.

Kenneth M. Elkins, Chicago, IL, for American Bar Association, amicus curiae.

David J. Beck, Beck, Redden & Secrest, Houston, TX, for State Bar of Texas, amicus curiae.

Appeal from the United States District Court for the Western District of Texas.

Before WISDOM, GARWOOD and JONES, Circuit Judges.

Page 998

WISDOM, Circuit Judge:

The plaintiffs-appellants appeal the district court's denial of their motion for summary judgment and the court's award of summary judgment to the defendants-appellees, in which the district court upheld the constitutionality of the Texas statute, Interest on Lawyers Trust Accounts Program (IOLTA), and found that the defendants are entitled to limited immunity under the Eleventh Amendment. For the reasons that follow, we REVERSE the judgment of the district court in part, VACATE and remand in part, and AFFIRM in part.

I.

Statement of Facts

Clients often give their attorneys money to be held in escrow, such as retainer fees or closing costs for a transaction. In Texas, traditional ethical rules require attorneys to place this money in a trust account that permits withdrawal on demand. The ethical rules also allow attorneys to aggregate all client funds into a single trust account and prohibit attorneys from commingling their own money with the trust fund. Because federal law prohibited banks from paying interest on demand accounts, 1 these accounts formerly amounted to interest-free loans to the banks.

In 1980, new banking regulations allowed negotiable order of withdrawal (NOW) accounts, 2 which operate as interest-bearing checking accounts. NOW accounts created a vehicle for attorneys to pool client funds into an interest-bearing trust account, provided that none of the funds belong to a for-profit corporation. 3 Attorneys, however, may not deduct the costs of maintaining the trust account from the interest earned, because such a practice would constitute an impermissible benefit from the management of the trust account in violation of the ethical rules.

The creation of NOW accounts led to the development of IOLTA programs. The IOLTA concept arises from the premise that there are still situations in which, because of the nominal amount of a client's funds to be held or the brief period for which a client's funds will be held, NOW accounts are not feasible; the costs of maintaining such accounts outweigh the interest that each client would have earned. In these situations, the trust accounts still operated as interest-free loans to the banks. IOLTA is an attempt to switch this benefit from the banks to legal providers for the indigent.

Under its statutory power to regulate the state bar, the Texas Supreme Court created its IOLTA program in 1984, which is modeled after IOLTA programs used in other states and which seeks to capitalize on this banking anomaly. The IOLTA program originally permitted attorneys to place client funds that were "nominal in amount" or were "reasonably anticipated to be held for a short period of time" into an unsegregated interest-bearing bank account (IOLTA account), the interest of which is paid to the Texas Equal Access to Justice Foundation (TEAJF), a non-profit corporation created by the Texas Supreme Court. 4 At that time, Texas's IOLTA program was voluntary, meaning that an attorney could choose whether to participate but clients had no choice, other than to select an attorney who did not maintain an IOLTA account.

The TEAJF's purpose is to manage and distribute the interest earned from the IOLTA accounts to non-profit organizations that "have as a primary purpose the delivery of legal services to low income persons", 5 with the exception that no funds may be used to finance class action lawsuits or to lobby on behalf of a political candidate or issue. 6

Page 999

Nearly all states have similar systems, which were designed to provide much-needed finances to legal providers for the impoverished. States have drastically slashed the budgets for such programs over the years; in 1993, the Texas legislature even refused to enact a modest increase in court filing fees to compensate for temporary IOLTA shortfalls.

Initially, the Texas IOLTA program did not meet expectations. Attorneys were reluctant to deposit their client funds into IOLTA accounts and impoverished Texas citizens still were unable to obtain legal assistance because of a lack of resources. Texas's voluntary IOLTA program yielded only $1 million per year. Following the lead of several other states and the recommendation of the American Bar Association, in 1988, the Texas Supreme Court made attorney participation in the IOLTA program mandatory, requiring that attorneys deposit client funds in IOLTA accounts under certain circumstances. 7 The revised rules, which became effective in 1989, state that

[a]n attorney ... receiving in the course of the practice of law ... client funds that are nominal in amount or are reasonably anticipated to be held for a short period of time, shall establish and maintain a separate interest-bearing demand account at a financial institution and shall deposit in the account all those client funds. 8

The rules further guide an attorney's decision as to whether funds are suitable for deposit in an IOLTA account, stating that a client's funds may be deposited in an IOLTA account only if

such funds, considered without regard to funds of other clients which may be held by the attorney ..., could not reasonably be expected to earn interest for the client or if the interest which might be earned on such funds is not likely to be sufficient to offset the cost of establishing and maintaining the account, service charges, accounting costs and tax reporting costs which would be incurred in attempting to obtain interest on such funds for the client. 9

Under the mandatory IOLTA program, Texas realized a dramatic increase in IOLTA revenue, with recent earnings of approximately $10 million per year. The TEAJF...

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