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The National Law Journal
November 21, 2001
Annie Hsia
Use of attorney trust account interest to fund legal aid
services does not violate the U.S. Constitution's takings
clause, the 9th U.S. Circuit Court of Appeals held on Nov.
14. Washington Legal Foundation v. Legal Foundation of
Washington, No. 98-35154. The 7-4 decision reversed an
earlier ruling that Washington state's Interest on Lawyers'
Trust Account (IOLTA) program did effect a taking.
The case was filed by five plaintiffs, including two businessmen
who regularly bought and sold real estate. Money for their
transactions was handled by escrow companies that used "limited
practice officers" (LPOs) -- state-licensed nonlawyers
who prepare closing papers.
In 1995, IOLTA rules for lawyers became applicable to LPOs.
With few exceptions, LPOs must now put client funds into IOLTA
accounts.
Interest generated by IOLTA accounts goes to the Legal Foundation
of Washington, a nonprofit organization that distributes grants
used for legal representation of the poor. The businessmen
charged that this process violates their First and Fifth Amendment
rights.
In a 1998 case, Phillips v. Washington Legal Foundation,
the U.S. Supreme Court decided that the owner of principal
held in a Texas IOLTA program had a property interest in the
accrued interest. But it left open the second issue of whether
the IOLTA program actually effected a taking without just
compensation, remanding the matter to the 5th Circuit. In
October, that circuit ruled there was a taking.
Developing its own analysis, the 9th Circuit rejected the
Supreme Court's 1982 per se takings test created in Loretto
v. Teleprompter Manhattan CATV Corp., and applied the
ad hoc analysis the high court used in Penn Central Transp.
Co. v. City of New York (1978).
Circuit Judge Kim M. Wardlaw's majority opinion said the
per se test had not "typically been employed outside
the context of real property," and was "particularly
inapt" when the property in question is fungible money.
Under ad hoc analysis, a taking occurs when a regulation forces
some people to bear burdens alone that should be borne by
the public as a whole.
Here, the 9th Circuit ruled, the regulation did not have
an economic impact on the businessmen because escrow companies
traditionally deposited client funds into noninterest bearing
accounts, if not into IOLTA accounts. The court added that
even if there was a taking, the compensation due would be
"nil."
The court did not reach the plaintiffs' free speech issue,
which was remanded for further proceedings.
Dissenting, Judge Alex Kozinski said the majority opinion
was not supported by any case authority except Justice Stephen
G. Breyer's dissent in Phillips. "Although Justice
Breyer was in distinguished company in Phillips, his opinion
lacked one important ingredient: a fifth vote," Kozinski
wrote.
James J. Purcell of Seattle, lead counsel for the plaintiffs,
said they plan to appeal in light of the new circuit split.
But David J. Burman, a partner at Seattle's Perkins Coie
and counsel for the Legal Foundation of Washington, thought
there would be enough votes in the Supreme Court now to uphold
the 9th Circuit's position.
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