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The Supreme Court today narrowly upheld a nationwide program
that channels millions of dollars every year to legal services
for the poor by pooling the interest earned on short-term
deposits that lawyers hold in trust for their clients.
The 5-to-4 decision rejected the argument of a conservative
legal group here that the program amounted to an unconstitutional
"taking" of the clients' property. The group, the
Washington Legal Foundation, has conducted a decade-long litigation
campaign against the program, arguing that it violated private
property rights and that the clients of law firms should not
be forced to provide financial support to causes with which
they might disagree.
The majority said today that even assuming that the government
did appropriate money that was technically the property of
the clients, the action did not violate the Fifth Amendment's
prohibition against taking private property without "just
compensation." That was because transaction costs would
otherwise have wiped out whatever interest an individual account
would have earned, Justice John Paul Stevens said.
"Just compensation" under the Fifth Amendment "is
measured by the property owner's loss rather than the government's
gain" and the depositors suffered no actual loss, Justice
Stevens said.
While on the surface the case might have appeared to be an
excursion into the arcane details of banking law, it was an
ideologically charged dispute that has been closely monitored
for years across the legal profession. The American Bar Association,
the chief justices of the 50 states, the National League of
Cities and 36 states were among those filing briefs in defense
of the program, known as Interest on Lawyers' Trust Accounts,
or Iolta.
The program began in Florida in 1981 and has spread nationwide,
either by state legislation or by rules issued by state supreme
courts. Lawyers are often required to hold their clients'
money, like escrow for a real estate closing, for example,
for short periods, and are forbidden by legal ethics codes
from commingling this money with their own accounts. Lawyers
usually deposited the money in trust accounts on which no
interest was earned.
Banks began paying interest on some checking accounts in 1980,
but this offered little benefit to law firm clients because
the costs of opening and closing the short-term accounts,
which exist for a few days or weeks, would exceed the amount
of interest earned in almost every case.
The idea grew of pooling the trust accounts so that net interest
could be generated, and then diverting that interest to help
support legal services programs. With the American Bar Association's
strong support, every state adopted this approach. The accounts
now generate some $160 million a year nationwide, about 15
percent of all money from public and private sources spent
on legal services for the poor.
Five years ago, in a challenge to the Texas program brought
by the Washington Legal Foundation, the Supreme Court ruled
that the interest generated on these accounts was in fact
property that was subject to constitutional analysis under
the Fifth Amendment's takings clause. But the 5-to-4 decision
stopped short of deciding whether the diversion of the money
to legal services programs was actually an unconstitutional
taking.
That was the question in the case decided today, Brown
v. Legal Foundation of Washington, No. 01-1325. It was
an appeal by the Washington Legal Foundation on behalf of
two real estate developers whose money was often placed in
short-term escrow accounts under the terms of the trust program
in the State of Washington.
The Legal Foundation of Washington is the organization set
up under the State Supreme Court's rules to administer the
program, which generates up to $4 million a year in the state.
The United States Court of Appeals for the Ninth Circuit,
in San Francisco, upheld the Washington program.
Justice Stevens said in his opinion today that while the money
the two men had on deposit earned a few dollars for the fund
- $4.96 in one instance and an unspecified smaller amount
in the other - neither man would have earned any interest
through an individual account. In fact, if there had been
any prospect of generating net interest, a lawyer in Washington
would have been ethically obliged to open an individual account
for the client, Justice Stevens noted.
Because the loss to the clients was "zero" and would
always be zero when the program was properly administered,
there was no unconstitutional taking, he said. Justices Sandra
Day O'Connor, David H. Souter, Ruth Bader Ginsburg and Stephen
G. Breyer joined the majority.
In a dissenting opinion Justice Antonin Scalia complained
that the court had endorsed a "Robin Hood taking,"
which he described as "taking from the rich to give to
indigent defendants." Justice Scalia said that "the
normal rules of the Constitution protecting private property
are suspended" for the sake of "the object of the
government's larcenous beneficence."
Chief Justice William H. Rehnquist and Justice Clarence Thomas
joined the dissent, as did Justice Anthony M. Kennedy, who
also filed his own dissenting opinion. Justice Kennedy said
the "forced support of certain viewpoints" raised
First Amendment concerns.
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