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American Lawyer Media
Tuesday, December 10, 2002
Tony Mauro
Four years ago, the U.S. Supreme Court ruled
that the interest generated by lawyers' trust accounts was
the property of clients.
But on Monday, the Supreme Court appeared hesitant to take
the next two steps: declare that so-called IOLTA accounts,
which pool client money held in escrow, violate the Fifth
Amendment's takings clause, and then rule that clients should
be compensated.
The tenor of oral arguments in Washington Legal Foundation
v. Legal Foundation of Washington, No. 01-1325, suggested
that IOLTA programs in all 50 states and the District of Columbia,
which generate $200 million annually for legal aid programs
for the poor, might survive the Fifth Amendment takings challenge.
The programs -- IOLTA stands for Interest on Lawyers' Trust
Accounts -- were launched in 1981 and have grown to become
the second biggest source of support for legal assistance
programs, behind the federally funded Legal Services Corp.
The sticking point for most justices appeared to be the minuscule
-- or even nonexistent -- amount of compensation that clients
would be entitled to if the Court ruled against IOLTA programs.
Although the accounts earn considerable interest overall,
even critics of IOLTA acknowledge that for individual clients,
the interest is tiny because their money remains in the accounts
for short periods of time, often while a real estate transaction
is pending. In addition, whatever interest could be allocated
to individual clients would likely be eaten up by bank fees.
"The interest never gets to the person who gets the
principal," said Justice David Souter at one point. "The
bank gets to keep it."
"If the compensation is zero, how is it a taking?"
Justice Sandra Day O'Connor asked former Solicitor General
Charles Fried, who argued on behalf of the Washington Legal
Foundation, which has been litigating against IOLTA for a
dozen years.
Fried said that even if the interest belonging to clients
is "five dollars or two dollars," and even if that
is reduced by bank charges, there is economic value to what
has been taken from clients. "It doesn't disappear [even]
if there are expenses in collecting it," Fried insisted.
What happens to the money, Fried added later, "is not
any of the government's business."
But O'Connor seemed dubious, suggesting several times that
"there might be a due process argument" against
IOLTA, but not one based on the Fifth Amendment just compensation
clause.
As is often the case, Justice O'Connor could be the key vote,
since she was part of the 5-4 majority in the 1998 ruling
in Phillips v. Washington Legal Foundation, which first
found that IOLTA interest belonged to clients.
Monday's argument marked the beginning of the second week
in which Chief Justice William Rehnquist was absent from the
bench. He is recovering from Nov. 26 knee surgery that has
left his leg in a cast that makes it difficult for him to
sit for sustained periods of time. Rehnquist, who is not expected
to return to his center seat until January, says he will participate
in rulings based on reading briefs and transcripts of oral
arguments.
Fried, anticipating questions about the small amount of compensation
available to IOLTA clients, argued that one remedy could be
an injunction that would prevent IOLTA programs from taking
client money -- which he acknowledged would be "the equivalent
of shutting down the program."
But that led Justice Stephen Breyer to assert that "without
this program, you couldn't have earned any interest"
at all. Justice Ruth Bader Ginsburg also noted that if IOLTA
programs were dismantled, "the big gainer is the bank."
Fried answered that in the competitive banking industry, a
bank's gains would be eventually returned to customers.
David Burman of Seattle's Perkins Coie, representing the
Washington state IOLTA program, was the only advocate to mention
what has emerged as a subtext of the IOLTA case. One of the
briefs in support of IOLTA contains excerpts from a Washington
Legal Foundation fund-raising letter that boasts that its
litigation will deal a "death blow to the single most
important source of income for radical legal groups across
the country."
Burman suggested that the discussion of an injunction as
a possible remedy for the alleged takings violation highlights
the "subjective ideological" reason behind the IOLTA
challenge.
"We believe there is no taking," said Burman. "The
property was transferred" on the way to a real estate
transaction. It was also incalculably small, Burman argued.
"So if you can get away without calculating it, the
state can take anything," Justice Anthony Kennedy said
sarcastically.
O'Connor asked whether the constitutional problem could be
resolved by adding a "little explanatory clause"
that gives clients the option not to have their money go into
IOLTA programs.
Burman started to agree, but Justice Ginsburg interjected
that "you couldn't do it" because of tax laws. If
the client has control over the disposition of the interest
money, Ginsburg explained, it becomes taxable income. Burman
agreed.
Former Acting Solicitor General Walter Dellinger III also
argued, representing the justices of the Washington Supreme
Court who favor the program.
Dellinger said IOLTA amounts to a regulatory program, not
a taking, in part because the Washington court created it
to serve an "important regulatory goal." That goal,
Dellinger said, was to "avoid the appearance of self-dealing
by lawyers" that would result if interest money did not
go to charitable organizations.
Dellinger also offered a fallback rationale for the program,
namely that it amounted to a tax beyond the reach of takings
challenges. "Why not treat this as a valid revenue measure?"
Dellinger asked.
To which Justice Antonin Scalia retorted, "Courts have
the power to tax?"
Dellinger replied that courts can charge fees, and the IOLTA
interest could be viewed in that light.
No matter what the outcome of the case, IOLTA programs will
not be free of litigation. Challenges to IOLTA based on the
First Amendment are still pending in the Washington state
case and in the Texas case that resulted in the 1998 Phillips
decision. The Washington Legal Foundation claims IOLTA amounts
to unconstitutional government-compelled speech because it
forces clients to fund activities and programs with which
they might disagree.
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