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Supreme Court rules IOLTA is constitutional

Staff Writer

In "very tough" fiscal times, California legal services providers got some good news recently when the U.S. Supreme Court narrowly rejected a challenge to the way in which state IOLTA programs collect and distribute millions of dollars in legal services funding each year for the nation's poor.

"It's a wonderful decision for us," said Gary Smith, executive director of Legal Services of Northern California, which provides legal aid in 23 counties with the help of an IOLTA grant. "The (IOLTA) program is extremely important to our ability to provide access to justice to the poorest folks in our service area."

In a 5-to-4 decision in Brown v. Legal Foundation of Washington, the Supreme Court recently ruled that the method of collecting funds for the IOLTA (Interest on Lawyers' Trust Accounts) program does not amount to an unconstitutional "taking" of clients' money. As in California and all other states, the Washington program pools funds held briefly in trust by attorneys for their clients and then distributes the earned interest in grants to legal services programs.

"This money is extremely important, particularly right now because programs are seeing their income from many sources decline," said Judy Garlow, director of California's Legal Services Trust Fund Program. "Foundations have less money to give, as do local governments. And the economy is affecting contributions."

Even the IOLTA grants - which fluctuate with interest rates — have shrunk in California from a high of $22 million in 1990 to $7.5 million this year. In the last two years alone, California's legislatively created IOLTA program — which has distributed some $250 million in two decades — has seen a 44 percent reduction in its grants.

In the recent Brown decision, the Supreme Court disagreed with claims that Washington's IOLTA program violates the Fifth Amendment by taking private property without "just compensation."

Justice John Paul Stevens
Justice Stevens

Writing for the majority, Justice John Paul Stevens noted that the Fifth Amendment confirms the state's authority to confiscate private property for a "public use" as long as "just compensation" is made to the owner. Even if "there may be occasional misuses of IOLTA funds," he wrote, "the overall, dramatic success of these programs in serving the compelling interest in providing legal services to literally millions of needy Americans" certainly qualifies as a "public use." And while "just compensation" might apply, Stevens concluded, none was due.

"Just compensation," he pointed out, "is measured by the property owner's loss rather than the government's gain" — and the net loss in this instance is zero. The transaction costs of depositing funds into individual accounts for brief periods would wipe out any benefits. Justices Sandra Day O’Connor, David H. Souter, Ruth Bader Ginsburg and Stephen G. Breyer agreed.

In a dissenting opinion, however, Justice Antonin Scalia characterized IOLTA program methods as a "Robin Hood taking" in which the government's "extraction of wealth" is so "cleverly achieved" and the object is "so highly favored by the courts (taking from the rich to give to indigent defendants) that the normal rules of the Constitution protecting private property are suspended."

And in a separate dissent, Justice Anthony M. Kennedy noted that the First Amendment consequences had not been addressed. But, he wrote, "the potential for serious violation is there."

The ruling capped a decade-long dispute in which a conservative legal group, the Washington Legal Foundation, has argued that IOLTA programs violate private property and other rights.

An earlier challenge to the IOLTA program in Texas reached the U.S. Supreme Court five years ago. In that case, the high court concluded that the interest generated from an IOLTA account is the clients' property. The court did not, however, rule on the constitutionality of channeling such funds into legal services programs.

Prior to the Brown decision — with the case looming as a potential threat to such funds - 50 chief justices, 36 attorneys general, on behalf of their states, and the American Bar Association all filed briefs in defense of the IOLTA program.

Last year alone, legal services programs across the country received some $160 million in IOLTA funding. And legal services providers in California, among others, say they depend on such funds to provide assistance to elderly victims of predatory lenders, battered women, families facing homelessness and others who have nowhere else to turn.

Just ask Bruce Iwasaki, executive director of the Legal Aid Foundation of Los Angeles. His program currently receives roughly $500,000 a year in IOLTA funding — the cost of 10 to 12 full-time advocates for the poor. "If we don't have those advocates, it means turning away more people," he said. "Hundreds, if not thousands, could lose out."

At Legal Services of Northern California, the loss of IOLTA grant money - currently $326,000 a year - would mean a "significant" cut in core legal services and attorney lay-offs in already under-staffed rural offices, Smith said.

And direct legal services are not all that could be lost, he suggested. "We have done a tremendous amount of innovative work in the past few years in economic and development work, which is lifting whole neighborhoods and communities out of poverty," he said, "and we are able to do that, in part, with IOLTA funding."

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