Petition of New Hampshire Bar Ass'n, 82-378

• Decision Date: 24 November 1982
• Docket Number: No. 82-378,82-378
• Citation: 122 N.H. 971,453 A.2d 1258
• Parties: Petition of NEW HAMPSHIRE BAR ASSOCIATION and New Hampshire Bar Foundation.
• Court: New Hampshire Supreme Court

Page 1258

453 A.2d 1258

122 N.H. 971

Petition of NEW HAMPSHIRE BAR ASSOCIATION and New Hampshire Bar Foundation.

No. 82-378.

Supreme Court of New Hampshire.

Nov. 24, 1982.

McLane, Graf, Raulerson & Middleton P.A., of Manchester (Jack B. Middleton on the brief and orally), for the New Hampshire Bar Ass'n and the New Hampshire Bar Foundation.

Richard E. Galway, of Manchester, orally, for the New Hampshire Bar Ass'n, as president.

Bruce E. Friedman, of Concord, orally, for the Family and Housing Law Clinic, Franklin Pierce Law Center.

PER CURIAM.

This original petition by the New Hampshire Bar Association and the New Hampshire Bar Foundation seeks approval by this court of an amendment to the supreme court rules to permit attorneys to participate voluntarily in an interest-bearing-trust-account program to aid certain activities providing legal services to the poor.

I. History of the interest-bearing-account program.

The concept of interest-bearing-trust-account program in the United States apparently began in Florida in 1971 as a result of an investigation into means to provide funds for the improvement of the administration of justice. The Board of Governors of the Florida Bar, with the concurrence of the Board of Directors of the Florida Bar Foundation, petitioned the Florida Supreme Court, which approved the interest-bearing-trust-account proposal in 1978. In re Interest on Trust Accounts, 356 So.2d 799 (Fla.1978).

The Florida action followed the lead of other countries. In approximately twenty jurisdictions in at least five countries, interest earned on attorneys' trust accounts is used to support activities which benefit the public. These jurisdictions include ten Canadian Provinces and the Yukon and Northwest Territories, the Republic of South Africa, Namibia, Zimbabwe, and five States in Australia. See Gonser, Almond & Ziegler, Financing Public Services Activities with Interest Bearing Attorney Trust Accounts, 15 Idaho L.Rev. 219, 221 (1979).

In 1978, however, significant obstacles remained for the implementation of the interest-bearing-trust-account program in Florida. First and foremost was the Internal Revenue Service. The primary obstacle was the so-called "assignment-of-interest doctrine," which prohibits a taxpayer from attempting to avoid adverse tax consequences by transferring income to another taxpayer. As a result of efforts of tax counsel retained by the Florida Bar, the Internal Revenue Service in 1981 issued Revenue Ruling 81-209, 1981-2 C.B. 16, which held that the assignment-of-interest doctrine would not pertain "so long as clients could in no way and to no degree control the creation or destiny of earnings generated on their attorney-held funds." Matter of Interest on Trust Accounts, 402 So.2d 389, 391 (Fla.1981).

The second obstacle faced by the Florida program was the federal banking law, because interest-bearing-checking accounts were not permitted on a nationwide basis. Congress enacted the Monetary Control Act of 1980, Pub.L. No. 96-221, § 303, 94 Stat. 132, 146, which authorized interest-bearing Negotiable Order of Withdrawal (NOW) checking accounts. The Federal Reserve Board subsequently approved the use of NOW accounts. The Florida Bar obtained a letter from the General Counsel of the Federal Reserve Board approving the proposed use of NOW accounts for the interest-bearing-trust-account program. See Middlebrooks, The Interest on Trust Accounts Program--Mechanics of Its Operation, 56 Fla.B.J. 115, 117 (1982). In February 1979, the Conference of Chief Justices of the fifty State courts adopted a resolution endorsing the Florida program and recommending its adoption in other States.

In anticipation of Revenue Ruling 81-209, the Florida Supreme Court approved a voluntary interest-bearing-trust-account program by court rule. The history of the program in Florida has been chronicled in four decisions of that State's supreme court. See Matter of Interest on Trust Accounts, 402 So.2d 389 (Fla.1981); Matter of Interest on Trust Accounts, 396 So.2d 719 (Fla.1981); Matter of Interest on Trust Accounts, 372 So.2d 67 (Fla.1979); In re Interest on Trust Accounts, 356 So.2d 799 (Fla.1978). California, Colorado, Idaho, and Maryland have also adopted interest-bearing-trust-account programs.

II. The New Hampshire Bar proposal.

The petition filed by the Bar Association and the Bar Foundation, including the proposed amendment to Supreme Court Rule 37, calls for a voluntary program for New Hampshire lawyers with respect to so-called commingled or pooled trust deposits, which are currently on deposit in non-interest-bearing accounts. The specific features of the proposal are as follows:

1. The proposal provides that only interest from fund deposits so short in duration or so small in amount that the interest on a single client's deposit cannot, as a practical matter, be credited to the client, would be used for legal service programs. The proposal does not alter the long-standing trust-accounting principle that lawyers have a fiduciary obligation to place funds in an interest-bearing account and to credit the interest to the client when it is practical to do so.

2. The program does not deprive clients of interest on their trust funds. The present practice of retaining such commingled funds in non-interest-bearing accounts generates no income for the clients and benefits only the banking institutions in which the deposits are maintained.

3. The program does not affect the rule prohibiting the use of trust-account funds or earnings by an attorney or law firm. N.H.Sup.Ct.R. 37(7).

4. The present program concerns only those accounts involving clients' funds where the administrative cost and resulting tax liability make it impractical to place the clients' funds in an interest-bearing account.

5. The program is voluntary and does not impose new or additional administrative burdens. The duty to place clients' funds in a trust account for short-term and nominal deposits is unaffected, and the attorney will still maintain an account segregated from his own funds. See N.H.Sup.Ct.R. 37(7). The only change is that attorneys participating in the program will now place that account at interest.

6. The financial institutions which have the interest-bearing accounts, not the attorneys, will transmit interest and furnish quarterly reports to the Bar Foundation.

7. Under the program, attorneys are not required to notify clients that their funds are being deposited in such an account because clients' approval regarding participation is unnecessary. There is no impropriety in an attorney advising clients of his willingness to advance the cause of the administration of justice in New Hampshire by participating in the program.

The Internal Revenue Service stated in Revenue Ruling 81-209 that interest earned on nominal and short-term trust accounts which is paid over to a Bar Foundation pursuant to a court-established interest-bearing-trust-account program, is not computed in the gross income of the client. 1981-2 C.B. at 17. Similarly, in view of the fact that interest will be paid over to the Bar Foundation to use for charitable purposes, there should be no federal income tax consequences for any entity or person. I.R.C. § 501(c)(3).

The funds will be disbursed by the Bar Foundation solely for the support of legal services to the disadvantaged, for public education relating to the courts and legal matters, and for such other programs as may be approved by this court, provided that such income shall be applied only to activities permitted to be conducted by organizations exempt from taxation under Internal Revenue Code section 501(c)(3). The exact determination of the appropriations of these funds will be made by the board of directors of the Bar Foundation based upon recommendations of the grants committee, which will consist of attorneys appointed by the Bar Association who are participating in the program.

III. Constitutional implications.

It is well settled that a State cannot take private property without affording the owner the constitutional protection of procedural due process. Mullane v. Central Hanover Tr. Co., 339 U.S. 306, 318-19, 70 S.Ct. 652, 659-660, 94 L.Ed. 865 (1950). The question may arise as to whether participation in this program conflicts with this constitutional guarantee, as clients may appear to be denied the right to earn interest for their own benefit from their small, short-term trust accounts. In order to assert the constitutional claim that the program constitutes a "taking" of client property in violation of the fifth and fourteenth amendments to the United States Constitution and...