The Supreme Court on March 26 upheld the viability of a program that generates between $150 and $200 million annually for equal justice programs—or roughly 15 percent of total funding for legal aid nationwide.
The long-awaited 5-4 ruling, written by Justice John Paul Stevens, put to rest nearly a decade of ideological wrangling over the Constitutionality of the Interest on Lawyers Trust Account
(IOLTA) program. Justice Sandra Day O’Connor cast the swing vote, finding that no “just compensation” was owed client depositors under the 5th Amendment.
First created by the Florida Supreme Court in 1979, IOLTA is “an innovative way to supply a cost-free public good,” according to the American Bar Association. Others have put it more plainly: IOLTA is a perfectly legitimate way to get something out of nothing.
Consider: When a client walks into an attorney’s office and puts down a retainer, the lawyer must do something with the check. It’s illegal for the counselor to put it in his or her own checking account. Stashing cash under the mattress went out with the
Edsel. Big checks qualify for their own bank accounts, but what about the little ones? Law offices have special trust accounts for small and short-term deposits. These accounts couldn’t earn interest until the creation of
IOLTA—America’s way of saying: “Add up the pennies for justice.”
Today, every state and the District of Columbia supports an IOLTA program mandated either by state statute or state supreme court rules. When interest from so many small deposits is added up—America is a very litigious society, remember?—the result is millions of dollars for initiatives dedicated to ensuring that “Equal Justice Under Law” is more than a majestically carved billboard on the Supreme Court facade.
But the plaintiff in Washington Legal Foundation v. Legal Foundation of Washington argued that IOLTA violates the Fifth Amendment. The confusingly similar names of the two parties arguing on Dec. 10 before eight Justices (Chief Justice Rehnquist was still recovering from knee surgery) belied their dramatically different takes on the program’s propriety. Many court-watchers felt Washington Legal Foundation, a conservative policy group based in the capital, had an ideological objection to
IOLTA, not a truly constitutional one (info box).
Yet here was their constitutional argument against the program: Since the Court ruled in 1998 that IOLTA interest is the clients’ property, it violates the Fifth Amendment to “take” the nominal IOLTA interest away without offering compensation. Writing in The American Lawyer, Tony Mauro called it “the Seinfeld of Supreme Court arguments—a case about nothing, even though the impact may be tremendous.”
Thomas F. Smegal, Jr., who has served on the LSC Board of Directors for 18 of the federal entity’s 29 years of existence, was in the chamber for oral arguments and found the plaintiff’s argument unpersuasive: “Under a normal ‘taking’ situation, you have a piece of property, and the government takes it from someone to, say, build a highway or use it for some other purpose. But in all instances, it’s a piece of physical property being taken away from the owner, which is why just compensation is due. But that isn’t what we have here. The person who made the escrow deposit voluntarily relinquished any way to use the IOLTA money so it’s not really being taken away.”
Fortunately, nor is the $150 million-plus that IOLTA brings home for legal aid.
Washington Legal Foundation
v.
Legal Foundation of Washington
COURT’S RULING
In a 5-4 decision written by Justice John Paul Stevens, the Court held that IOLTA programs do not represent an unconstitutional 5th Amendment “taking” that warrants just compensation for client
depositors.
KEY CONCEPT
Interest on Lawyers Trust Accounts (IOLTA), utilizing short-term and nominal client deposits, pool tiny amounts of interest generated by these special escrow funds to support civil justice for all.
WHAT WAS AT STAKE
More than $150 million annually for equal justice programs serving America’s poor—and the long-term viability of legal aid’s No. 2 funding source (second only to Congress’ annual investment).
PRECEDENT
In the 1998 Phillips case, the Supreme Court ruled 5-4 that IOLTA interest income is the property of the client depositor, but it left open the question of whether IOLTA represents an impermissible taking warranting just compensation.
BETWEEN THE LINES
In a September fundraising letter last year, Washington Legal Foundation Chairman Daniel Popeo wrote, “We are finally in a position we’ve fought more than a decade to reach—a position where we can deal a death blow to the single most important source of income for radical legal groups all across the country. It’s an abomination that IOLTA can take money that is rightly the property of Americans like you and me and use that money to support programs we oppose, that stand in direct opposition to everything we believe in.” IOLTA supporters, according to
Popeo, are “dedicated to the homeless, to minorities, to gay and lesbian causes, and any other group that has drawn money from hardworking Americans…”
