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Victory for IOLTA Programs at Supreme Court

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Tony Mauro
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The U.S. Supreme Court on Wednesday rescued IOLTA programs from a vigorous constitutional attack, ruling 5-4 that states may pool clients' escrow funds in bank accounts and give the interest to legal aid programs.

The ruling was a major victory for legal aid organizations in all 50 states, which depend heavily on Interest on Lawyers' Trust Accounts. Last year, IOLTA programs, usually administered by state courts, generated more than $200 million for such programs, making them second only to the Legal Services Corp. as a funding source.

"We're pleased that this critical funding source will remain intact, said Texas Supreme Court Justice Harriet O'Neill in a statement. "IOLTA funding allows the poorest Texans access to basic legal services, services that are desperately needed to protect women and children from domestic violence and to provide legal assistance to the elderly who have nowhere else to turn."

O'Melveny & Myers Washington, D.C., partner Walter Dellinger, the former acting solicitor general who argued in favor of IOLTA on behalf of the Washington State Supreme Court, said the ruling "as a practical matter settles once and for all the hugely important issue of legal funding for the poor."

For more than a dozen years, the Washington Legal Foundation has challenged the programs as a violation of the Fifth Amendment, arguing that the interest earned in the accounts belongs to the clients and cannot be taken by the state without just compensation.

In 1998, the conservative D.C. public interest group won an initial victory, when the Supreme Court ruled in a Texas case that the interest was, constitutionally speaking, the property of the clients. But it left unresolved whether IOLTA programs amounted to a taking and whether clients were owed any compensation.

The Court answered those questions Wednesday in a Washington state case also brought by the Washington Legal Foundation. Writing for the majority in Brown v. Legal Foundation of Washington, No. 01-1325, Justice John Paul Stevens said the Court assumed the IOLTA programs amount to a taking, albeit a minimal one -- and for a valid public purpose.

"The overall dramatic success of these programs in serving the compelling interest in providing legal services to literally millions of needy Americans certainly qualifies the ... distribution of these funds as a 'public use' within the meaning of the Fifth Amendment," Stevens wrote.

But Stevens went on to state that "just compensation" for clients whose interest is taken in a properly run IOLTA program is zero. "If petitioners' net loss is zero, the compensation that is due is also zero." He said that under the Fifth Amendment, just compensation should be measured "by the property owner's loss rather than the government's gain."

Justice Antonin Scalia angrily dissented, arguing that the majority had ignored precedent and adopted an untenable interpretation of the Fifth Amendment.

"Perhaps we are witnessing today the emergence of a whole new concept in Compensation Clause jurisprudence: the Robin Hood Taking, in which the government's extraction of wealth from those who own it is so cleverly achieved, and the object of the government's larcenous beneficence is so highly favored by the courts (taking from the rich to give to indigent defendants) that the normal rules of the Constitution protecting private property are suspended," wrote Scalia. "One must hope that that is the case. For to extend to the entire run of Compensation Clause cases the rationale supporting today's judgment -- what the government hath given, the government may freely take away --would be disastrous."

Scalia was joined by Chief Justice William Rehnquist and Justices Anthony Kennedy and Clarence Thomas.

Kennedy wrote a separate dissent asserting that the majority ruling may violate the First as well as the Fifth Amendment, by permitting the "forced support of certain viewpoints." The programs do not allow property owners to opt out if they object to the use of the money, Kennedy noted.

"One constitutional violation (the taking of property) likely will lead to another (compelled speech.) These matters may have to come before the Court in due course."

Indeed, the Washington Legal Foundation has a compelled-speech First Amendment claim pending against IOLTA programs in both the Texas and Washington cases.

But Richard Samp, the Washington Legal Foundation's chief counsel, said it was not clear if that line of attack will be pursued after Wednesday's ruling.

"Whether we continue to pursue First Amendment claims in light of today's decision is something we will have to discuss with our clients," said Samp. "I can't say at this point." Samp said he was disappointed by the ruling.

Timothy Dowling, chief counsel of the Community Rights Counsel, which wrote a brief in the case opposing the takings claims, applauded the Court for taking a narrow view of the just compensation clause: "The Court has seen through the empty legal reasoning of property rights extremists."

The announcement of the ruling Wednesday was unusual because it gave a new name to the case that neither party had requested. It was originally -- and confusingly -- titled Washington Legal Foundation v. Legal Foundation of Washington. But the Court renamed it Allen Brown and Greg Hayes v. Legal Foundation of Washington, apparently accepting the determination of the 9th U.S. Circuit Court of Appeals that the Washington Legal Foundation and two others named had no standing to bring the case because they had not suffered any loss.

The Legal Foundation of Washington receives and distributes the IOLTA funds in Washington state. Brown and Hayes were real estate purchasers who claimed they lost small amounts of interest because of the IOLTA program. In Brown's case, the amount of interest at issue was $4.96.


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