Thursday, November 15, 2001
IOLTA Does Not Violate Takings Clause, En Banc Ninth Circuit Rules
By KENNETH OFGANG, Staff Writer/Appellate Courts
A state program that uses interest on funds held short-term in lawyers’ trust accounts to fund legal assistance for the poor doesn’t violate the Fifth Amendment ban on taking property without “just compensation,” the Ninth U.S. Circuit Court of Appeals ruled yesterday.
In a 7-4 en banc decision, the court overturned a contrary ruling handed down in January by a three-judge panel.
“The availability of interest through the establishment of [interest-bearing] NOW accounts,” Judge Kim Wardlaw wrote, “provided a unique opportunity for the legal profession to further two of its most important ethical obligations—ensuring that all individuals, regardless of their financial circumstances, have access to the judicial system and segregating client trust funds from the lawyers’ own accounts—without imposing additional societal costs.”
Because the money that goes to funding legal services wouldn’t go to the client if IOLTA didn’t exist, but to the bank, the judge went on to conclude, the state owes the clients nothing in “compensation.”
Wardlaw was joined by Chief Judge Mary M. Schroeder and Judges Harry Pregerson, A. Wallace Tashima, Raymond C. Fisher, Marsha S. Berzon and Johnnie B. Rawlinson. Judge Alex Kozinski was joined in dissent by Judges Stephen S. Trott, Andrew J. Kleinfeld and Barry G. Silverman.
The en banc majority agreed with U.S. District Judge John C. Coghenhour of the Western District of Washington, who ruled in 1998 that the Washington Supreme Court’s Interest on Lawyers Trust Account program didn’t violate the Takings Clause.
The appellate judges sent the case back to the District Court, however, so that the judge could reconsider, in light of an intervening Supreme Court decision, whether the program violates the First Amendment rights of clients who may have ideological objections to the program.
The case has been closely watched by IOLTA officials in other states, including California. IOLTA programs raise about $140 million for legal services nationwide.
Judy Garlow, director of the State Bar of California’s Legal Services Trust Fund, said the decision was a good one in that “it does endorse the idea that clients don’t lose money from IOLTA, which is what we’ve been saying all along.”
James J. Purcell, the Seattle lawyer who argued the case for the objectors, along with lawyers from the Washington Legal Foundation, a conservative advocacy group based in the nation’s capital, said he had not yet read the decision and didn’t know what action his clients will take next. Attorneys at the WLF couldn’t be reached for comment.
Yesterday’s ruling is at odds with an Oct. 15 ruling of the Fifth Circuit, which said that IOLTA violates the Fifth Amendment. The foundation that oversees IOLTA spending in Texas has asked for rehearing in that case.
Wardlaw said the Washington IOLTA program doesn’t violate the Supreme Court’s decision in Phillips v. Washington Legal Foundation, 524 U.S. 156 (1998). A 5-4 majority in that case held that Texas had taken clients’ money, but remanded for reconsideration of what “just compensation” would be.
The answer to that question, Wardlaw said yesterday, is nothing.
In the absence of IOLTA, the judge explained, the plaintiff clients “at most would have had the right to keep their principal from earning interest.” That right cannot be enforced under the Takings Clause, Wardlaw said, because it “has no economic value.”
Kozinski, dissenting, said the decision “will doubtless be greeted with a rousing cheer by government officials who will eagerly look to bank accounts and other places where money is kept, with an eye to snatching a few dollars here and there.”
The dissenters also adopted Kleinfeld’s decision for the three-judge panel.
Kleinfeld agreed with the challengers that a client “might want interest on his money to go to his or her preferred charity, perhaps a church, a school, Mothers Against Drunk Driving, or the local Rescue Mission, rather than the Legal Foundation’s preferred charity, legal services for indigents, even if that interest could not be realized by the real estate purchaser.”
The case is Washington Legal Foundation v. Legal Foundation of Washington, 98-35154.
Copyright 2001, Metropolitan News Company