Law360 (October 15, 2026, 4:14 PM EDT) -- Three nonprofits are mounting a legal challenge to a provision of the North Carolina state budget that strips funding for civil legal aid services historically provided by the state's Interest on Lawyers' Trust Accounts program, saying the maneuver flouts directives by the Tar Heel state's top court and violates the First Amendment.

Pisgah Legal Services, Legal Aid of North Carolina Inc. and the Charlotte Center for Legal Advocacy have taken aim at state lawmakers after they redirected NC IOLTA funding to indigent defendants in the state budget passed this summer — a decision that effectively cut off grant funding for civil legal assistance programs statewide.

In a lawsuit filed Monday in Wake County Superior Court, the groups said the budget provision flies in the face of a 2007 North Carolina Supreme Court order mandating the state's IOLTA program, which they said also vested the IOLTA board and the high court itself with the exclusive authority to direct grant distribution.

"By converting non-taxpayer funds from the Supreme Court's IOLTA program, earmarking those funds for private lawyers, and stripping the Supreme Court and the state bar of their roles in supervising and directing the use of these funds, the court's order has been effectively overruled by the General Assembly," the complaint states.

The groups also said restrictions baked into the budget language that prevent NC IOLTA from awarding grants to certain organizations based on the advocacy they provide suppress free speech and "amount to flagrant constitutional violations."

Legal Aid of North Carolina, a nonprofit that provides free civil legal services to individuals without the means to pay for it, was previously the largest recipient of NC IOLTA funding, receiving $6.2 million in 2025.

Both Pisgah Legal and the Charlotte Center for Legal Advocacy, or CCLA, were also recipients of NC IOLTA grants prior to the passing of the state budget.

According to the complaint, the NC IOLTA program has long used the income generated from the interest earned on lawyers' trust accounts to fund civil legal services for low-income residents. The recipients of those services include immigrants, domestic violence survivors, victims of natural disasters and veterans.

For decades, the NC IOLTA program was voluntary. But in 2007, the nonprofits said the North Carolina Supreme Court made participation for lawyers mandatory.

In a unanimous decision, the justices specifically tasked the North Carolina State Bar with overseeing a mandatory IOLTA program that was "consistent with" the state bar's plan governing the existing voluntary program, the suit alleges.

Under the existing plan, the nonprofits said, IOLTA funds were specifically earmarked for "civil legal services for indigents" and could not be used to fund the "private interests of the legal profession." The plan also vested the NC IOLTA board and the state Supreme Court with sole supervisory and regulatory power over the program, they said.

But a shift in the political tide brought increased scrutiny of the NC IOLTA program last year, with state Republican lawmakers expressing concerns that grants were going to what they viewed as left-leaning organizations that promote diversity, equity and inclusion initiatives.

The unease manifested in a yearlong funding freeze beginning in the summer of 2025, which forced Legal Aid of North Carolina to shutter offices in rural communities and lay off staff. The organization is nonpartisan and does not engage in political advocacy or lobbying, according to its website.

Some of Legal Aid's clients include members of the Lumbee Tribe, which is headquartered in Pembroke, North Carolina. Legal Aid of North Carolina's Pembroke office, in rural Robeson County, was among those forced to close in October 2025.

The temporary freeze became largely permanent in July, when the Republican majority in the North Carolina General Assembly passed the state's long-overdue budget with a provision that significantly curtailed both the amount of NC IOLTA funding available for civil legal aid grants and the type of organizations that are eligible to receive it.

The budget specifically redirects IOLTA funds to the Private Assigned Counsel Fund of the Office of Indigent Defense Services, a state agency that hires criminal defense attorneys for individuals who cannot afford them.

The budget also prevents NC IOLTA from awarding grants to any organization that offers immigration services, provides representation for gender-affirming healthcare or engages in public policy or grassroots advocacy.

In Monday's lawsuit, Pisgah Legal, Legal Aid and CCLA allege the budget effectively abolished the existing NC IOLTA program and replaced it with a "new program of the General Assembly's making." They said it also forces the use of nontaxpayer dollars to fund a program, IDS, that the state is "already required to pay for."

The suit alleges lawmakers never sought or received approval from the state Supreme Court in violation of the high court's 2007 order.

"Nothing about the Supreme Court's order even remotely suggests that the court ordered the use of non-taxpayer funds to fund state government's existing budgetary obligations, such as providing lawyers to criminal defendants," the nonprofits said.

They accused lawmakers of trying to nullify the justices' 2007 order in violation of the separation of powers clause in the North Carolina Constitution, and they said the restrictions on funding for groups that provide public advocacy flout the First Amendment's guaranteed freedom of speech.

The suit names North Carolina House Speaker Destin Hall, Senate President Pro Tem Phil Berger, the North Carolina state bar and the NC IOLTA board and its individual members as defendants.

In a statement announcing the lawsuit, the executive director of Pisgah Legal, Jackie Kiger, described IOLTA funding as a "critical lifeline" for people in North Carolina.

"Redirecting these funds away from legal aid programs will mean turning people away and forcing them to try to navigate complex legal systems alone," she said.

Legal Aid of North Carolina, meanwhile, said it didn't take the decision to sue lightly.

"Legal Aid never wanted to be in the position of challenging an act of our state legislature," the nonprofit said, adding that its "first responsibility is to our clients and to our mission."

CCLA echoed that sentiment in a statement of its own, saying: "We are compelled to stand up for the clients we serve, uphold the constitutional principles at stake, protect the integrity of the IOLTA program, and ensure that these funds continue serving the North Carolinians they were intended to help."

Peter Bolac, executive director of the state bar, said, "We're reviewing the complaint and have no additional comment at this time." Bolac and state bar leaders had opposed the budget provision changing NC IOLTA's grant funding process when it was announced over the summer.

A spokesperson for Hall declined to comment on pending litigation, and a representative for Berger did not immediately respond Thursday to a request for comment.

The legal groups are represented by Paul M. Cox, Andrew H. Erteschik, Caroline Mackie, Andrea M. Schwehr and Kayla B. Zollinger of Poyner Spruill LLP.

Counsel information for the defendants was not immediately available.

The case is Pisgah Legal Services VS Destin C. Hall, case number 26CV038703-910, in Wake County Superior Court.

--Editing by Patrick Reagan.

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