Washington Legal Foundation v. Texas Equal Access

• Citation: 86 F.Supp.2d 624
• Decision Date: 28 January 2000
• Docket Number: No. A-94-CA-081 JN.,A-94-CA-081 JN.
• Parties: WASHINGTON LEGAL FOUNDATION, et al., v. TEXAS EQUAL ACCESS TO JUSTICE FOUNDATION, et al.
• Court: U.S. District Court — Western District of Texas

86 F.Supp.2d 624

WASHINGTON LEGAL FOUNDATION, et al., v. TEXAS EQUAL ACCESS TO JUSTICE FOUNDATION, et al.

No. A-94-CA-081 JN.

United States District Court, W.D. Texas, Austin Division.

January 28, 2000.

COPYRIGHT MATERIAL OMITTED

Steven W. Smith, Law Offices of Steven W. Smith, Austin, TX, Daniel J. Popeo, Richard A. Samp, Washington Legal Foundation, Washington, DC, for Washington Legal Foundation, William R. Summers.

Michael J. Mazzone, Dow, Cogburn & Friedman, Houston, TX, for Michael J. Mazzone.

Darrell E. Jordan, Hughes & Luce, L.L.P., Dallas, TX, H. Robert Powell, Hughes & Luce, Austin, TX, Brittan L. Buchanan, Hughes & Luce, L.L.P., Austin, TX, Richard A. Johnston, Hale and Dorr, L.L.P., Washington, DC, Francine Rosenzweig, Hale & Dorr, L.L.P., Boston, MA, Geoffrey S. Stewart, Jones, Day, Reavis & Pogue, Washington, DC, for Texas Equal Access to Justice Foundation.

H. Robert Powell, Hughes & Luce, Austin, TX, Brittan L. Buchanan, Hughes & Luce, L.L.P., Austin, TX, Richard A. Johnston, Hale and Dorr, L.L.P., David A. Wilson, Hale and Dorr, L.L.P., Washington, DC, Francine Rosenzweig, Hale & Dorr, L.L.P., Boston, MA, Geoffrey S. Stewart, Jones, Day Reavis & Pogue, Washington, DC, for W. Frank Newton, Chairman, Texas Equal Access to Justice Foundation.

Darrell E. Jordan, Hughes & Luce, L.L.P., Dallas, TX, H. Robert Powell, Hughes & Luce, Austin, TX, Harry G. Potter, III, Attorney at Law, Austin, TX, Brittan L. Buchanan, Hughes & Luce, L.L.P., Austin, TX, Nancy A. Trease, Assistant Attorney General, Austin, TX, for Thomas R. Phillips, Raul Gonzalez, Jack Hightower, Nathan Hecht, Lloyd A. Doggett, Bob Gammage, Craig T. Enoch, John Cornyn, Rose Spector.

Rande K. Herrell, Attorney General's Office, Austin, TX, for Supreme Court DFTS, defendant.

Scott J. Atlas, Vinson & Elkins, Houston, TX, J. David Bickham, Jr., Vinson & Elkins, Austin, TX, Robert A. Long, Jr., Caroline M. Brown, Covington & Burling, Washington, DC, Robbi B. Hull, Vinson & Elkins, LLP, Austin, TX, for Iolta Programs (NAIP), amicus.

MEMORANDUM OPINION AND ORDER

NOWLIN, District Judge.

Before the Court is the above-entitled cause of action. A bench trial was held before this Court on September 22, 1999 and September 23, 1999. Plaintiffs submitted Plaintiffs' Post-Trial Brief (Clerk's Doc. No. 141) on November 2, 1999. Defendants submitted Defendants' Post-Trial Brief (Clerk's Doc. No. 143) on November 29, 1999. Having considered the testimony and evidence presented at trial, as well as the relevant law, the Court enters the following Opinion and Order. This Memorandum Opinion and Order constitutes the Court's findings of fact and conclusions of law. See FED.R.CIV.P. 52(a).

I. Procedural Background

The Plaintiffs in this cause of action are: the Washington Legal Foundation, a nonprofit public interest law and policy center; Michael Mazzone, a Texas resident and attorney licensed to practice law by the State Bar of Texas; and William Summers, a Texas resident and consumer of legal services. Plaintiffs bring this case pursuant to 42 U.S.C. § 1983 asserting that Defendants' mandatory Interest on Lawyers' Trust Account ("IOLTA") program violates the First and Fifth Amendments of the United States Constitution. The IOLTA program is implemented and overseen by Defendant the Texas Equal Access to Justice Foundation ("TEAJF"). In 1984, the Texas Supreme Court Justices adopted Article XI of the Rules of the State Bar of Texas which established the IOLTA program. In 1988, the Justices made the program mandatory. This Court entered an order on January 4, 2000 dismissing the Texas Supreme Court Justices on the basis of legislative immunity.

By Order dated January 19, 1995, this district court granted summary judgment for Defendants on the basis that Plaintiffs could not establish a constitutionally cognizable property interest because, but for the IOLTA program, no interest could be earned on the funds in the IOLTA account. Washington Legal Foundation v. Texas Equal Access to Justice Foundation, 873 F.Supp. 1, 7 (W.D.Tex.1995). The Fifth Circuit reversed this court, concluding that the interest earned on client funds held in IOLTA accounts is a property interest within the reach of the Fifth Amendment. Washington Legal Foundation v. Texas Equal Access to Justice Foundation, 94 F.3d 996 (5th Cir.1996). The Supreme Court affirmed the Fifth Circuit's decision and determined that the interest income generated by the Texas IOLTA program is the "private property" of the owner of the principal. Phillips v. Washington Legal Foundation, 524 U.S. 156, 118 S.Ct. 1925 1934, 141 L.Ed.2d 174 (1998). This holding was limited to its determination of the existence of a property interest in the interest income. Id. The Supreme Court remanded the case for consideration of whether or not IOLTA funds have been "taken" by the State, as well as the amount, if any, of just compensation due Plaintiffs. Id. Thus this Court must once again consider the fate of IOLTA.

II. What is IOLTA?

The Texas Interest on Lawyers Trust Account ("IOLTA") is fashioned from a complex web of federal banking regulations, state law, Internal Revenue Service Rulings, and ethical rules. All these rules work in conjunction to create a unique class of revenue which the state then directs to the delivery of legal services to low income individuals.

In 1980 Congress passed legislation creating Negotiable Order of Withdrawal ("NOW") accounts, which allowed federally insured banks to pay interest on demand accounts. 12 U.S.C. § 1832. Absent an agreement with the client, Texas ethical rules require lawyers to keep client funds separate from the attorney's funds and that these funds be available to the client upon demand. TEX. DISCIPLINARY R. PROF. CONDUCT 1.14, reprinted in TEX. GOV'T CODE ANN., tit 2, subtit. G app. A (Vernon's Supp.1998) (TEX. STATE BAR R. ART. X, § 9). Before the creation of NOW accounts, lawyer trust accounts were almost without exception non-interest bearing accounts. Therefore, only banks benefitted from the deposits lawyers made into client trust accounts.

NOW accounts are permitted only for deposits that consist of funds "only where the entire beneficial interest is held by one or more individuals or by an organization which is operated primarily for religious, philanthropic, charitable, educational, political, or other similar purposes and which is not operated for profit." 12 U.S.C. § 1832(a)(2). For-profit corporations and partnerships are prohibited from earning interest on demand accounts. Id. The Federal Reserve Board, however, has interpreted § 1832(a) to convey that corporate funds may be held in NOW accounts if the funds are held in trust pursuant to a program in which charitable organizations have the exclusive right to the interest earned. See Phillips at 159, 118 S.Ct. 1925 (citing Letter from Federal Reserve Board General Counsel Michael Bradfield to Donald Middlebrooks (Oct. 15, 1981)).

Article XI of the State Bar Rules of Texas provides that an attorney who receives funds that are "nominal in amount or are reasonably anticipated held for a short period of time" must place these funds in a separate interest-bearing NOW account that is denominated an IOLTA account. TEX. STATE BAR R., Art. XI, § 5(A); TX. R. EQUAL ACCESS RULE 4, 7 (West 1999). Under the IOLTA rules, an attorney must initially determine whether the funds are capable of earning a net interest for the client. Id. RULE 6. In making this determination the attorney must decide if:

such funds, considered without regard to funds of other clients which may be held by the attorney, law firm, or professional corporation, 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 the interest on such funds for the client.

Id.

The Internal Revenue Service does not attribute income earned in an IOLTA account to the individual client for federal income tax purposes so long as the client has no control over the decision whether to place the funds in the IOLTA account and does not designate who will receive the interest generated by the account. See Rev.Rul. 81-209, 1981-2, C.B. 16; Rev.Rul. 87-2, 1987-1 C.B. 18. Under the Internal Revenue Code any interest from a non-IOLTA pooled account or sub-account must be reported separately. Rev.Rul. 87-2, 1987-1 C.B. 18.

The TEAJF is the designated beneficiary for the interest earned on the funds in the Texas IOLTA Program. The TEAJF is a non-profit organization established by the Supreme Court of Texas. TEX. STATE BAR. R., Art. XI, §§ 3, 4; TX. R. EQUAL ACCESS RULE 9(a). The TEAJF distributes these funds to nonprofit organizations whose primary purpose is the delivery of legal services to low income individuals. TX.R. EQUAL ACCESS RULE 10.

The parties to this litigation agree that the TEAJF does not enforce the portion of Rule 6 stating that an attorney must consider whether a client's funds can generate net interest "without regard to the funds of other clients." Id. RULE 6.

III. Standing

Standing is a judicially-developed doctrine designed to ensure an Article III court is presented by parties before it with an actual case or controversy. Lujan v. Defenders of Wildlife, 504 U.S. 555, 561, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992) ("[S]tanding is an essential and unchanging part of the case-or-controversy requirement of Article III").

To establish standing, a party must allege a "personal injury fairly traceable to the defendant's allegedly unlawful conduct and likely to be redressed by the requested relief." Id. That injury must be "distinct and palpable and not abstract or conjectural or hypothetical." Id. (Internal quotes omitted). This injury requirement ensures that courts will decide only...