Long hearing on SB 31: bar groups, legal-aid providers and nonprofits oppose changing IOLTA rules that fund civil legal services

Senate Bill 31, introduced by Senator Barry Usher, would change handling of interest on lawyers’ pooled trust accounts (IOLTA accounts). The sponsor characterized the issue as a question of who controls interest on client funds and asked the committee to consider whether clients should decide how nominal-interest income on pooled trust accounts is distributed.

Opponents—who were numerous and included the Montana Justice Foundation board president Carlo Canty, Montana Legal Services Association (MLSA), the Montana Justice Foundation’s executive director, CASA program directors, private-practice attorneys and bankers—testified that the existing IOLTA framework is needed to fund civil legal aid and a range of nonprofit programs and that the bill would create administrative burdens, tax and banking complications, and reduced funding for clients who currently rely on grants supported by IOLTA revenue.

Carlo Canty, president of the Montana Justice Foundation board, described the foundation’s role in dispersing IOLTA funds and said the board operates independently of the Supreme Court. “No institution, group, or branch of government has the ability to sway where the money goes,” Canty said, and urged the committee to preserve the existing program.

Testimony outlined three practical points the opponents said weigh against SB 31: (1) most funds that go into pooled trust accounts are nominal and held briefly, producing fractions of a penny in interest for individual clients; (2) federal banking rules and the IRS revenue notices create constraints that make splitting interest technically and administratively complex for law firms and banks; and (3) IOLTA-funded grants support civil legal aid, CASA programs, and other nonprofit services that assist veterans, children in foster care, domestic-violence survivors, and low-income Montanans.

Alyssa Chambers, executive director of the Montana Justice Foundation, provided examples showing how small balances yield vanishingly small interest—she testified that $10,000 held six months at a low rate generates only cents of interest—and argued that the administrative costs and tax reporting requirements of moving to individualized accounts would likely exceed any interest benefit to individual clients. Mary Reeves, a former MLSA client and board member, described how civil legal aid assisted her and urged the committee to preserve IOLTA funding.

Banks and financial-institution witnesses described operational complications if lawyers must offer new account choices to clients or if nominal trust funds were individually held: some banks decline to participate in IOLTA programs due to extra administration, and creating many individualized small-interest accounts would increase administrative workload and customer-service costs.

Lawyers in private practice testified that the current Rule 1.18 (Montana Rules of Professional Conduct) already directs practitioners to place nominal or short-term funds in pooled IOLTA accounts while moving larger or long-term client funds into separate interest-bearing client accounts that benefit the client directly. Opponents told the committee the rule’s existing framework already protects client interests and that SB 31 would create unintended tax consequences, FDIC/coverage complications, and client confusion.

Sponsor Senator Usher closed by pressing the committee to consider whether legislative oversight of the distribution of nominal interest is appropriate; he framed the policy as a constitutional appropriation concern and argued the legislature had the authority to revisit how the interest is dispensed. Opponents strongly disputed the premise that the current program is unlawful or that the Supreme Court is improperly appropriating funds.

Why it matters: IOLTA revenue funds civil legal aid and many small nonprofits in Montana; opponents warned changes would reduce that funding, impose costs on law firms and banks, and complicate compliance with federal tax and banking rules.

What’s next: The hearing generated extensive opposition testimony; the transcript records no final committee vote on SB 31 during the session covered.