Washington Supreme Court Sides with Credit Unions, Allows them to Continue Offering Interest on Lawyer's Trust Accounts
FEDERAL WAY, Wash. -- In a pivotal move for Washington's credit unions, the Washington State Supreme Court recently ruled that they can remain on a list of financial institutions where attorneys house interest on lawyer's trust accounts or IOLTAs.
At issue was a "comprehensive" review conducted in 2003 by the Washington State Bar Association of the Washington Rules of Professional Conduct, which was sent to the Washington Supreme Court in 2004. The association recommended an amendment to RPC 1.14(c) regarding the use of credit unions to house trust accounts, including IOLTAs, according to Judy Berrett, WSBA director of member and community relations. WSBA's contention was because trust accounts must be insured and NCUA only insured attorney trust accounts holding client funds belonging to credit union members, the association believed that NCUA would not insure accounts that held noncredit union member funds even though the trust accounts belonged to a credit union member, for example, the attorney.
In a statement, Berrett said since "only a very small" number of Washington attorneys housed their trust accounts in credit unions, WSBA recommended removing credit unions from the list of financial institutions allowed to house trust accounts.
WSBA did tell Credit Union Times, "At this time it is unknown whether the NCUA insures trust accounts containing funds belonging to noncredit union members."
At press time, NCUA said it was in the process of responding to WSBA's statement but said it may take a day or two to put together a definite response.
The Washington State Supreme Court agreed with arguments from the Washington Credit Union League to allow attorneys to house their trust accounts at credit unions. Several Washington credit unions, including the state's largest, $6.4 billion BECU, wrote letters of support to the court, according to the league.
"The court made the right decision preserving choice for consumers, in this case for attorneys and their clients in Washington State," said Stacy Augustine, WCUL senior vice president of policy and public advocacy.
Augustine said there are roughly 21 credit unions in Washington that offer IOLTAs. Had the Supreme Court sided with WSBA, credit unions would have had to tell their attorneys to take member accounts to a bank, she said. An even bigger impact of the court's decision is a halt on an "erosion" of credit union expansion.
"This is the kind of thing that can chip away at credit union powers," Augustine said. "There was a time in history when credit unions may have been able to take public funds. We just wanted to stop any gradual erosion."
With IOLTAs, attorneys routinely hold funds in trust for clients to pay costs related to legal services like court filings, depositions and business transactions. If these funds are large in amount or held for a long period of time, the attorney customarily deposits these monies in an interest-bearing account for the benefit of the client. In an IOLTA program, interest from collective, short-term trust accounts is paid to a nonprofit foundation for programs like providing legal services to the poor. To the extent that interest on any single client's deposit could be made available for the benefit of that client, the program does not alter long-standing trust account practices within the legal profession that acknowledge the fiduciary option.
The league said because credit unions often pay higher rates on accounts and because interest earned on an IOLTA goes directly to the Legal Foundation of Washington administered by the WSBA, the Supreme Court's decision will result in additional funds for the legal foundation. These funds are used to fund legal services for those who cannot afford them.
Augustine said the provision in NCUA's interim final rule on share insurance that has ties to IOLTAs and addresses if pass-through coverage for employee benefit plans should cover nonmembers, has been an "ongoing problem with field of membership." In its statement, WSBA said the league corroborated the opinion that NCUA would not insure attorney trust accounts, including IOLTA accounts that held noncredit union member funds. Augustine said WSBA "is mostly accurate."
"The issue of whether these accounts are insured or not is related to the NCUA's pass-through insurance rules for all federally insured credit unions," Augustine said. "It all boils down to membership. If credit unions were not constrained by field of membership, there wouldn't be a problem insuring trust accounts. Because the NCUA only insures accounts for people in a credit union's field of membership, trust accounts maintaining funds for nonmembers can be problematic."
Augustine said NCUA might say it is "required to enforce the law as written, and the Federal Credit Union Act creates some definite problems for insuring non-member funds."
"I've had this conversation with the NCUA," she said. "They were sympathetic, but until we change the law, I think they're stuck, unless they are willing to engage in some very creative rulemaking."
Meanwhile, John Annaloro, WCUL president/CEO, said the court's decision will go far for credit unions.
"The decision demonstrates the effectiveness of the league's lobbying efforts educating and influencing the farthest reaching and most powerful branches of Washington state government," Annaloro said.
Annaloro also said it helped that one of the league's "tactical goals for a number of years" has been to build relationships with court officials and lawmakers. Through Political Action Committee contributions, the league has supported campaigns and held receptions for state legislators. Because many of Washington's credit unions' fields of membership cover the entire state, building those relationships is even more critical.
"It's a new skill needed for today's competitive environment," Annaloro said.