TAFOL President Scores a Victory for Property Rights

by | Oct 12, 1996

TAFOL President Michael J. Mazzone emerged victorious as both a Plaintiff and a participating lawyer recently when the U.S. Court of Appeals for the Fifth Circuit dealt a potentially fatal setback to programs that siphon money from lawyers' bank accounts to fund liberal legal causes.

TAFOL President Michael J. Mazzone emerged victorious as both a Plaintiff and a participating lawyer recently when the U.S. Court of Appeals for the Fifth Circuit dealt a potentially fatal setback to programs that siphon money from lawyers’ bank accounts to fund liberal legal causes.

In the case of Washington Legal Foundation, et al. v. Texas Equal Access to Justice Foundation, decided on September 12, 1996, the Fifth Circuit held that clients have a property right in the interest that accrues on their funds held in lawyers’ trust accounts. In this one stroke, the Court cut the legs out from under a Texas program that finances liberal lawsuits by skimming the interest off the trust accounts that lawyers establish to hold their clients’ funds.

The name of this program is IOLTA, which stands for “Interest on Lawyer Trust Accounts.” Such programs are active not only in Texas but in virtually every state in the Union. All IOLTA programs rest on one basic premise, which the Fifth Circuit ruling smashed to pieces—the premise that clients have no property rights in the interest that their money earns while sitting in a lawyer’s trust account.

Under Article XI of the State Bar Rules, Texas lawyers are required to maintain IOLTA accounts for all client funds that are “nominal in amount or are reasonably anticipated to be held for a short period of time.” The interest earned on these accounts is then paid to the Texas Equal Access to Justice Foundation (“TEAJF”), which in turn pays money to organizations who are supposed to provide legal services to the poor in civil matters.

On its face, the idea that a money holder has no right to the interest on his money is preposterous. But for many years, the courts have held just that, placing great weight on the fact that the amount of interest accruing to any one client is normally so small as to be negligible. When the interest is pooled together, however, it totals in the millions. Texas IOLTA revenues have climbed as high as $9 million in a year, although falling interest rates have reduced the flow of funds in recent years.

The Fifth Circuit case began in 1994 when Mazzone, who is a Texas lawyer, and one of his clients, along with the Washington Legal Foundation, sued the Texas Supreme Court and the TEAJF, claiming that Texas’ mandatory IOLTA program violates the First and Fifth Amendments of the U.S. Constitution. Mazzone donated many hours of professional effort to the cause, while TAFOL funded his expenses at the trial and appellate levels.

The Fifth Circuit reversed the district court’s judgment, which had upheld the constitutionality of the Texas IOLTA program. The appellate court also remanded the case to the trial court for a determination of whether the clients’ interest income was taken against their will.

The Fifth Circuit rejected the State’s argument that IOLTA is “modern day alchemy,” that property can be created from nothing. The court refused to base property rights on anomalies in banking regulations and the “fickle” tax code, which the State relied upon to support its arguments. “This short-sighted view of property renders it unacceptable,” the Court said.

The Fifth Circuit’s decision should end mandatory IOLTA in Texas and perhaps other states in the Fifth Circuit. However, the Court’s decision conflicts with decisions of the First and Eleventh Circuits, both of which held that clients have no property rights in the interest earned on their funds held in IOLTA accounts, that IOLTA interest belongs to no one, and that, therefore, the state can take the interest. This important matter may very well be headed to the Supreme Court. If so, Mazzone intends to continue acting as a spokesman for the constitutional protection of property rights, and TAFOL will continue
to support him.

In his brief to the trial court, after many pages of closely reasoned legal argumentation, Mazzone asserted that the only moral purpose of government is to protect individual rights. He then included the following quotation from Ayn Rand:

It was the concept of individual rights that had given birth to a free society.
It [is] with the destruction of individual rights that the destruction of freedom
[has] to begin. A. Rand, “Man’s Rights,” The Virtue of Selfishness 95 (1964).

The Fifth Circuit’s opinion can be found and downloaded on the Internet at: http://www.law.utexas.edu/us5th/us5th.html

* * *

TAFOL was planning to file an amicus brief with the U. S. Supreme Court in Hopwood v. Texas, but the Court let stand the Fifth Circuit decision, which had struck down the University of Texas Law School’s affirmative action program. This deprived TAFOL of the opportunity to submit an amicus brief. However, affirmative action in education is not dead, and the Fifth Circuit’s decision applies only to states within that judicial circuit. So, further court challenges are virtually certain.

Copyright © The Association for Objective Law. All rights reserved. Republished in Capitalism Magazine by permission of TAFOL.

The Association for Objective Law is a non-profit corporation whose purpose is to advance Objectivism, the philosophy of Ayn Rand, as the basis of a proper legal system.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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