Paulsen v. Texas Equal Access to Justice

• Decision Date: 02 December 1999
• Citation: 23 S.W.3d 42
• Parties: (Tex.App.-Austin 1999) James W. Paulsen; Independent Bankers Association of Texas; Texas Bankers Association; and Texas Savings & Community Bankers Association, Appellants v. Texas Equal Access to Justice Foundation, Appellee NO. 03-98-00709-CV
• Court: Texas Court of Appeals

Page 42

23 S.W.3d 42 (Tex.App.-Austin 1999)

James W. Paulsen; Independent Bankers Association of Texas; Texas Bankers Association; and Texas Savings & Community Bankers Association, Appellants v. Texas Equal Access to Justice Foundation, Appellee

NO. 03-98-00709-CV

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

December 2, 1999

Rehearing Overruled March 23, 2000.

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 353RD JUDICIAL DISTRICT NO. 98-06951, HONORABLE MARGARET A. COOPER, JUDGE PRESIDING

Judgment Vacated and Cause Dismissed

Before Justices Jones, Yeakel and Patterson

J. Woodfin Jones, Justice

Appellants James W. Paulsen (Paulsen), Independent Bankers Association of Texas, Texas Bankers Association, and Texas Savings and Community Bankers Association (collectively, Bankers) sued the Texas Equal Access to Justice Foundation (the Foundation), appellee, seeking declaratory and injunctive relief. The trial court denied all requested relief. The Texas Supreme Court then declined to hear a direct appeal. Before this Court, appellants have abandoned the request for injunctive relief and now seek only a declaration that (1) IOLTA ("interest on lawyers trust account") accounts generally and in this particular case are "general" not "special" accounts; (2) the relationship between an attorney-depositor and the financial institution that administers an IOLTA account is that of creditor and banker, respectively; (3) the financial institution holds legal title to all sums deposited in the IOLTA account at issue in this case; (4) the financial institution incurs no legal liability to third parties, including the attorney's clients, solely because it participates in the IOLTA program; and (5) Paulsen is not subject to professional discipline for failure to participate in the Texas IOLTA program, pending definitive resolution of that program's constitutionality. We will vacate the trial court's judgment and dismiss the cause for lack of a justiciable controversy.

FACTUAL AND PROCEDURAL BACKGROUND

The Texas IOLTA program, like similar programs instituted in almost every other state, was established to raise money to provide legal assistance to low-income Texans. The "Rules Governing the Operation of the Texas Equal Access to Justice Program" oblige attorneys to participate, subject to suspension of their law licenses. See Tex. R. Equal Access to Justice Prog. 24 (State Bar Rules art. 11). When an attorney holds client funds, the money should ordinarily be deposited into a trust account to earn interest for the client. But where the amount held is nominal, such that it could not be expected to earn enough interest to offset the cost of maintaining a separate trust account, the funds are required to be deposited into an IOLTA account. See Tex. R. Equal Access to Justice Prog. 4, 6. The IOLTA account pools all such deposits from the attorney; collectively, the sums generate interest where no individual deposit could. The interest is then paid to the Foundation, which distributes the interest received from all IOLTA accounts in Texas to low-income legal services. See Tex. R. Equal Access to Justice Prog. 4, 10.

A constitutional takings challenge to Texas's IOLTA program was brought in Phillips v. Washington Legal Foundation, which resulted in a 1998 United States Supreme Court decision holding that interest earned on an IOLTA account is the private property of the clients of the attorney who established the account. 524 U.S. 156, 172 (1998). That case is now on remand to the United States District Court for the Western District of Texas for further proceedings to determine whether those funds have been "taken" by the state without just compensation. While Phillips did not decide the ultimate issue of whether compliance with the IOLTA program effectuates a governmental taking of client property, it is fair to say that the constitutionality of the program is uncertain in the wake of the Supreme Court's decision. It is that uncertainty that appellants hope to resolve in this action.

The Phillips decision left many questions unanswered, in part because of the procedural framework in which the case was brought. That case was an appeal from the trial court's grant of summary judgment and so arrived before the Supreme Court without the benefit of discovery. Since the record was essentially devoid of details, the Phillips decision made no reference to banking law or the particulars of an IOLTA contract between an attorney and bank. The Phillips decision therefore makes no reference to the distinction recognized in Texas banking law between "general" and "special" accounts; this distinction, appellants assert, would have led to a different ruling. Appellants urge us to clarify what they characterize as the Supreme Court's misstatement of Texas law and to hold that both the principal and the interest earned on "general" accounts-and IOLTA accounts are apparently all "general"-are the property of the bank and not the client. Since the interest earned is bank property, appellants argue, there is no unconstitutional taking involved when the bank pays that interest to the Foundation.

All parties to this suit agree on the constitutionality of IOLTA. Appellant Paulsen is an attorney who has received a $1,000 retainer from a client and claims uncertainty as to his rights and obligations with respect to this money. The Equal Access to Justice Rules require him to deposit the $1,000 in an IOLTA account or risk suspension of his license to practice law, yet he claims the Phillips decision exposes him to liability to his client for breach of fiduciary duties if he does deposit the funds. Bankers are the principal trade organizations for Texas financial institutions. They claim that the contracts signed by their members and attorneys establishing IOLTA accounts are brought into question by the Phillips decision. While the banks are contractually obligated to pay IOLTA interest to the Foundation, they also fear liability from threatened lawsuits should they continue to participate in the IOLTA program.

Appellee, the Foundation, does not disagree with appellants as to the constitutionality of the IOLTA program. In fact, the Foundation has vigorously defended the IOLTA program as a defendant in the ongoing Phillips litigation. It apparently disagrees with appellants only as to how far this Court should go in deciding the ultimate constitutional issues involved. This lack of adversarial debate between the parties was noted in an amicus brief tendered by David Furlow, an attorney who disputes the constitutionality of the IOLTA program.

DISCUSSION

The Uniform Declaratory Judgments Act gives courts the power to "declare rights, status, and other legal relations whether or not further relief is or could be claimed." Tex. Civ. Prac. & Rem. Code Ann. 37.003 (West 1997). The determination of jurisdiction over a declaratory judgment action is a question of law and so is subject to de novo review. See Texas Dep't of Pub. Safety v. Moore, 985 S.W.2d 149, 153 (Tex. App.-Austin 1998, no pet.).

An action for declaratory relief is subject to the same jurisdictional requirements as any other action brought in our courts. "Subject matter jurisdiction requires that the party bringing the suit have standing, that there be a live controversy between the parties, and that the case be justiciable." State Bar of Tex. v. Gomez, 891 S.W.2d 243, 245 (Tex. 1994) (plurality opinion) (citing Texas Ass'n of Business v. Texas Air Control Bd., 852 S.W.2d 440, 443-46 (Tex. 1992)). The parties before us cannot satisfy these threshold jurisdictional requirements. Because the trial court lacked subject matter jurisdiction over this case, we will vacate that court's judgment and dismiss the cause.

Appellant Paulsen

Paulsen seeks declaratory judgment because, by refusing to deposit a $1,000 client retainer in his IOLTA account, he claims he faces the imminent suspension of his law license. It is not at all clear from the record that the suspension of Paulsen's license is inevitable or imminent. In a post-submission brief, however, Paulsen attached a letter he received from the Foundation informing him that disciplinary action will be initiated if he does not comply with IOLTA rules. Assuming without deciding that we can consider this letter, and further assuming that the letter confers standing on Paulsen, we nonetheless conclude that his suit must be dismissed for want of jurisdiction, for he has not demonstrated any justiciable controversy with his putative opponent in this case.

The crux of the claimed dispute between Paulsen and the Foundation lies in the interpretation of the Supreme Court's Phillips decision. Paulsen argues that if we accept as a correct statement of Texas law the Phillips holding that interest earned in IOLTA accounts is client property, ¹ then the decision places him in an ethical quandary. If he continues to participate in the IOLTA program, Paulsen believes he breaches his ethical duty to his client when he contracts with his bank to turn IOLTA interest over to the Foundation. On the other hand, if he does not give the interest to the Foundation, he breaches professional ethics rules and stands to lose his law license. The Foundation disagrees with Paulsen only as to whether Phillips creates ethical uncertainty. It believes that Phillips answered only the question of whether a client could ever have a property right in interest that would not exist without the IOLTA program; the Foundation believes Phillips did not establish conclusively that IOLTA interest is always client property. That question will be decided by the federal district court on remand. This dispute, then, centers on how broadly Phillips can be read.

What is troubling about this appeal is that the parties all believe that an attorney can ethically participate in the Texas IOLTA program. Paulsen merely claims that someone else might construe Phillips differently, and that...