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The Los Angeles Times
Thursday, November 15, 2001
Henry Weinstein
A federal appeals court rejected claims Wednesday that a
program that generates millions of dollars for legal assistance
for the poor violates the Constitution.
In a reversal of a previous appellate decision, the U.S.
9th Circuit Court of Appeals ruled 7 to 4 for the program,
which takes interest earned on money temporarily held by lawyers
for their clients and distributes it for legal services for
the poor.
The program, known as IOLTA (interest on lawyers' trust
accounts), provides $13 million a year to 102 legal services
programs in California and $149 million nationwide. Every
state legislature has created such a program.
The case before the 9th Circuit originated in Washington
state, where the program was challenged by a conservative
public interest law organization.
Judge Kim M. Wardlaw, writing for the 9th Circuit majority,
emphasized that the government action of taking the interest
arises from a public program "adjusting the benefits
and burdens of economic life to promote the common good.
"In creating the IOLTA program, Washington concluded
that the health, safety, morals or general welfare [of the
state] would be promoted," she wrote.
The constitutional provision on the taking of private property
"does not prevent the government from being able to regulate
how people use their property but limits that ability to what
is 'just and fair,' " Wardlaw wrote.
She said the plaintiffs in this case, who objected to having
their money used for IOLTA, had not been singled out but "as
participants in our legal system are required to place their
funds in IOLTA trust accounts that generate funds at no cost
to them and that expand access to the legal system from which
they benefit."
Wardlaw also emphasized that the interest bearing trust
accounts are required by law to protect a client's finances
from attorney fraud.
The loss of the right to earn interest on that money "has
no economic value," and consequently there is no unconstitutional
taking of private property, she wrote.
The court's majority concluded that the plaintiffs' loss
was nil and that they were entitled to no compensation.
Judge Alex Kozinski issued a sharp dissent.
"Our court deprecates one of the cherished protections
of the Bill of Rights the right not to have the government
take away private property without just compensation,"
he wrote.
Kozinski said the IOLTA program was no different from the
government taking a homeowner's valuable painting for use
in a museum without paying the painting's owner.
The program was created in the early 1980s, at a time when
federal funding for legal services programs was cut back by
President Reagan's administration. It has been an important
component of funding poverty law programs ever since.
IOLTA represents the second largest source of funding for
legal services programs nationally, trailing only the $329
million provided by the federal Legal Services Corp., said
Judy Garlow, who administers the IOLTA program for the State
Bar of California.
In recent years, the IOLTA money has become even more important
to poverty law programs because most of it comes with few
restrictions, unlike the federal legal services funds, which
cannot be used for class action suits, lobbying or some other
purposes.
Several years ago, the Washington Legal Foundation, a conservative
public interest organization based in the nation's capital
that strongly supports property rights, launched a concerted
court attack on IOLTA programs.
Earlier this year, a three judge panel of the San Francisco
based 9th Circuit agreed that the interest belongs to lawyers'
clients and that giving the money to anyone else, even for
"a very worthy purpose" such as legal aid, is wrong,
unless compensation is provided.
The 9th Circuit then agreed to rehear the case which had
started with a suit the foundation filed against the IOLTA
program in Washington state leading to Wednesday's ruling.
Poverty Lawyers Praise Decision
Poverty lawyers and other supporters of legal services hailed
the decision, which affects programs in nine Western states,
including California.
"This is a victory for low income people and a morale
boost for the legal aid lawyers and volunteer lawyers who
work so hard to help low income people," said Barbara
Clark, executive director of the Washington state agency that
distributed $6.2 million in IOLTA funds this year to 35 legal
services programs.
"We are very happy with the ruling," said Dan
Grunfeld, executive director of Public Counsel, the public
interest program of the Los Angeles and Beverly Hills bar
associations. "IOLTA funds make a real difference in
our ability to deliver crucially needed legal services to
people who don't have them, including legal work to get kids
adopted out of foster care."
If the ruling had gone the other way, the Legal Aid Foundation
of Los Angeles would have faced the loss of $900,000, which
would have curbed its work in helping victims of domestic
violence or slum landlords, said Bruce G. Iwasaki, the program's
executive director.
Paul Kamenar, senior executive counsel of the Washington
Legal Foundation, said the organization was disappointed and
plans to seek review of the decision by the U.S. Supreme Court.
Legal experts said they thought it likely that the Supreme
Court would take the case, because the U.S. 5th Circuit Court
of Appeals in New Orleans ruled differently from the 9th Circuit
in a similar case out of Texas last year.
Banking Laws Changed in 1980
Before 1980, lawyers were required to hold their clients'
money in special trust funds that were available on demand.
Often the money was held briefly. The interest was too small
to justify opening a separate account.
In 1980, Congress changed the banking laws and permitted
the creation of interest bearing checking accounts. Lawyers
realized that they could pool their many trust accounts and
earn a good deal of interest.
In 1981, legislatures in several states, including California,
authorized the diversion of the pooled interest money into
a state fund for legal aid, and the program was named IOLTA.
Critics who contend that legal services programs have a
liberal orientation began to scrutinize the program, and in
1998 the first legal challenge to IOLTA reached the U.S. Supreme
Court. Siding with conservative activists, the high court
ruled 5 to 4 that interest earned on the trust accounts is
the property of individual clients, not the lawyers or the
government.
"Interest follows principal," wrote Chief Justice
William H. Rehnquist, citing an ancient maxim of English law.
Therefore, interest accumulated in trust accounts held by
lawyers belongs to "the client for whom the principal
is being held," Rehnquist said.
The high court stopped short of saying IOLTA programs were
unconstitutional. It sent the case back to Texas for lower
courts to decide whether the clients' money was being taken
improperly by the government.
Meanwhile, the foundation filed a virtually identical challenge
to the Washington program.
Federal trial Judge John C. Coughenour of Seattle upheld
the Washington program, but his ruling was reversed by the
9th Circuit in January. In a decision written by Judge Andrew
Kleinfeld, a three judge panel held that using the interest
for IOLTA was an illegal taking of private property.
But Wednesday, the larger panel of 9th Circuit judges sharply
disagreed.
In addition to the private property claim, the Washington
Legal Foundation challenged the IOLTA program on 1st Amendment
grounds, contending that it compelled people to use their
money for a program they did not like. The 9th Circuit did
not rule on that issue and sent the case back to Coughenour
for further proceedings on that point.
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