California Bar Journal
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Appeals court finds IOLTA constitutional
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A federal appeals court upheld a key source of funding for legal services programs last month when it rejected claims that the programs are unconstitutional.

By a 7-4 vote, the U.S. 9th Circuit Court of Appeals ruled in favor of Interest on Lawyer Trust Account (IOLTA) programs, which collect interest earned on money held temporarily by lawyers for their clients and give it to programs which provide legal assistance to poor people. The court reversed a three-judge panel of the 9th circuit, which ruled earlier this year that the interest belongs to clients and cannot be given to someone else without compensation.

"This is a crucial victory for poor people, particularly at a time when their circumstances have been made worse by the current economic situation," said Judy Garlow, director of the State Bar of California's trust fund program. "It's nice for legal services programs to get some good news for a change."

California's IOLTA program awards $12 million a year to 102 programs, Garlow said. That's about 10 percent of the state's legal aid budget and the second-largest source of funding. Every state legislature has created such a program, and nationwide they generate $149 million for legal aid to the poor.

The Washington state program was the source of the challenge, brought by a conservative public interest law group.

Writing for the majority, Judge Kim M. Wardlaw said the government action of taking 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.

Wardlaw also said 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 therefore there is no unconstitutional taking of private property, she added.

Judge Alex Kozinski disagreed and accused the majority of diminishing one of the protections offered by the Bill of Rights - "the right not to have the government take away private property without just compensation."

Legal experts said the case is likely headed to the Supreme Court. The U.S. 5th Circuit Court of Appeals in New Orleans differed from the 9th Circuit in a Texas case last year.