Funding Mechanism for Legal Aid Upheld

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.