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The National Law Journal
Wednesday, June 19, 2002
Marcia Coyle
The Washington Legal Foundation's decade-long drumbeat against
mandatory IOLTA programs will come to a head in the U.S. Supreme
Court next term. The justices on June 10 agreed to hear arguments
in Washington Legal Foundation v. Legal Foundation of Washington,
No. 01-1325, a challenge to Washington state's IOLTA (Interest
on Lawyers' Trust Accounts) program.
The high court's decision to resolve whether the Washington
program constitutes a "takings" of clients' property
without just compensation, in violation of the Fifth Amendment,
came on the heels of a 7-7 decision by the 5th U.S. Circuit
Court of Appeals not to hear en banc a panel ruling that the
Texas IOLTA program does violate the Fifth Amendment. The
Washington Legal Foundation had also challenged the Texas
program.
The 5th Circuit panel ruling conflicted with the 9th Circuit's
decision upholding the constitutionality of the Washington
IOLTA program last January and the stars were aligned for
cert review by the Supreme Court.
The basic IOLTA programs in both states are "exactly
the same," said Richard Samp of the Washington Legal
Foundation. "Some state programs are voluntary in the
sense that lawyers can choose to participate." The Texas
and Washington programs are mandatory, he explained, adding,
"The Washington program is somewhat broader because it
applies not only to funds held by lawyers but also to funds
held by real estate professionals. It operates in the same
way as to both those groups."
IOLTA programs exist in all 50 states and the District of
Columbia. According to the American Bar Association, IOLTA
programs represent the second-largest funding source of civil
legal services in this country. Under federal banking rules,
not all client deposits are eligible to be put into an IOLTA
account. Any client funds that can earn more interest in a
non-IOLTA account than would be consumed by bank administrative
costs may not be placed in IOLTA accounts.
In the Washington case, a 9th Circuit panel said the challengers
were actually seeking compensation for the value added to
their property by Washington's IOLTA program.
"In other words, Brown and Hayes (plaintiffs) are seeking
compensation not for the value of what they lost, but for
the value of what the Legal Foundation of Washington has created,"
said the panel. "In the context of real property, it
is clear that the owner of condemned land need not be compensated
for the value created by the government's exercise of the
power of eminent domain."
Although the high court will hear the Washington challenge
next term, a cert petition will be filed in the Texas case
shortly, said Robert Long of D.C.'s Covington & Burling,
counsel for the Texas program. Washington Legal Foundation
v. Texas Equal Access To Justice Foundation, No. 00-50139.
The Supreme Court has faced the Texas challenge once already,
ruling in 1998 that the interest earned on client funds is
the property of the client for the purpose of a takings analysis.
Phillips v. Washington Legal Foundation, 521 U.S. 1117. But
the justices left the takings question for another day that
is now approaching.
CLASS ACTIONS
The Supreme Court on June 10 resolved a split among the federal
circuits over the role of non-named class members who seek
to appeal the approval of a settlement. The 5th, 6th, 7th,
8th, 10th and 11th Circuits have ruled that before non-named
members can appeal, they must formally intervene in the litigation
after appearing to present their objections to a proposed
settlement. In contrast, the 2nd, 3rd and 9th Circuits permit
appeals without requiring prior formal intervention.
Justice Sandra Day O'Connor, writing for a 6-3 majority,
chose the informal path, saying, "What is most important
to this case is that nonnamed class members are parties to
the proceedings in the sense of being bound by the settlement.
It is this feature of class action litigation that requires
that class members be allowed to appeal the approval of a
settlement when they have objected at the fairness hearing.
To hold otherwise would deprive nonnamed class members of
the power to preserve their own interests in a settlement
that will ultimately bind them, despite their expressed objections
before the trial court." Devlin v. Scardelletti, No.
01-417.
Class action litigator Katherine Yunker of Yunker & Associates
in Lexington, Ky., who filed an amicus brief for the objectors,
said, "I think that having this openness to objections
and to having them reviewed can only ultimately help the legitimacy
of class dispositions."
Yunker agrees with critics that it upsets the finality of
settlements, but added, "It is intended to. I think it
is ultimately arrogant for people who say they represent the
class but who are faced with objections by class members to
say those folks shouldn't be allowed to appeal because we
represent all of the class. Their voices should be heard."
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