Published on Tuesday, December 10, 2002 by the New York Times
Method of Funding Legal Services Is Challenged Before Supreme Court
by Linda Greenhouse
WASHINGTON, Dec. 9 An argument at the Supreme Court was conducted today in the dry and arcane language of "takings law," the jurisprudence governing the appropriation of private property for public use. But beneath the jargon was an ideologically charged and highly consequential debate about the financing of legal services for the poor.
Under the justices' microscope was a program that all 50 states use to pool the tiny amounts of interest generated on the money that lawyers hold for clients for short periods in escrow accounts and other very short-term deposits.
The interest, which would be eaten up by transaction costs and taxes if held in individual accounts, is instead aggregated and channeled to organizations that provide legal services. Last year, these programs, known as Interest on Lawyers Trust Accounts, or Iolta, generated more than $160 million, or about 15 percent of the money spent on legal services for the poor from all public and private sources.
The Washington Legal Foundation, a conservative policy group here, has for years made the programs its target and has sponsored litigation against them. Four years ago, in a case challenging the trust account program in Texas, the Supreme Court agreed with the group that the interest generated by the client money was the property of the clients. But the court in that case stopped short of declaring that the public use of the money amounted to a "taking" under the Fifth Amendment, which provides that private property shall not be "taken for public use without just compensation."
That ultimate question was the issue before the court today in the Washington Legal Foundation's challenge to the trust account program in the State of Washington. Put in place by the Washington Supreme Court in 1984, the program generates $2.5 million to $4 million a year.
One of the foundation's clients would have earned a gross amount of $5 on a two-day escrow deposit of $90,500, while the other would have earned $2 on a smaller deposit.
Charles Fried, a Harvard Law School professor arguing for the Washington Legal Foundation, said the two had suffered a taking of the full $7, even if, as several justices suggested, they would have earned no net interest at all had their money been deposited in individual accounts.
"Private property is valued even though there is no realizable economic value," Mr. Fried, who served as solicitor general during the administration of President Ronald Reagan, told the court.
In not conceding that the interest had no calculable value, Mr. Fried said, "It is a taking even if the `just compensation' is zero."
The remedy for the constitutional violation, he said, was to "shut down the program."
David J. Burman, a Seattle lawyer defending the Washington program on behalf of the nonprofit foundation that administers it, told the justices that the plaintiffs' "real complaint is a subjective, ideological one." That was not a proper complaint to bring under the Fifth Amendment, Mr. Burman said, adding, "If there is no value lost, there is no taking."
The program was also defended by Walter Dellinger, who represented the justices of the Washington Supreme Court. Mr. Dellinger, who was acting solicitor general during the Clinton administration, said the state court, "in so far as the English language would permit," had been precise in making clear that any client deposits large enough to have the potential to earn net interest for the clients were to be placed in an account for the client's personal benefit and not put in the Iolta program.
If not for the transaction costs of maintaining small individual accounts, many clients might earn net interest, Mr. Dellinger said, but "a world without transaction costs doesn't exist in the Milky Way."
The justices, who split 5 to 4 in the 1998 decision that found the interest to be property, have clearly not reconciled their differences, and were considerably more open than usual in carrying on a debate among themselves. Justice Antonin Scalia, whose support of the Washington Legal Foundation was manifest, challenged Mr. Dellinger by asking, "Whose money earned the interest?" Justice David H. Souter, whose opposite sympathies were equally apparent, instantly shot back: "There was no interest!"
Justice Stephen G. Breyer, who like Justice Souter was a dissenter from the earlier decision, had this question for Mr. Dellinger: "Suppose a robber had come to the depositor and said, `Your money or your life.' What would the depositor have done? He'd be dead. This money didn't exist. There is a sense in which the program took the money, but who from?"
Mr. Dellinger said: "It's not money that could have been paid to an individual client. We don't agree that it's a taking."
The vote in the case, Washington Legal Foundation v. Legal Foundation of Washington, No. 01-1325, is likely to be close. The outcome may depend on Justice Sandra Day O'Connor, who sided with the majority four years ago in finding the interest to be the clients' property. Justice O'Connor seemed skeptical today about the further step of declaring that an unconstitutional taking had occurred.
"How is it a taking if the compensation is zero?" she asked Mr. Fried.
To Mr. Burman, the program's lawyer, she suggested that any constitutional problem might be solved by explaining the situation to clients and giving them a choice not to participate.
The takings issue is part of a multipronged attack on the trust account programs by the Washington Legal Foundation, which has also raised a challenge under the First Amendment to the programs in Texas and Washington. Under this argument, the program amounts to compelled speech, because clients have no choice about the causes their money supports. The First Amendment arguments have not been resolved in the lower courts. In this case, the United States Court of Appeals for the Ninth Circuit, in San Francisco, addressed only the takings issue and rejected it.
In a fund-raising letter mailed to its supporters in September, the Washington Legal Foundation said its goal was to "deal a death blow to the single most important source of income for radical legal groups all across the country." The letter continued: "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."
The fund-raising letter was submitted to the court in a brief filed by AARP and other groups that support the trust account programs and said they wanted to call the court's attention to the foundation's broader political agenda.
Briefs were also filed in support of the programs by the American Bar Association; the Conference of Chief Justices, representing 50 state high courts; and by 36 states, including New York, New Jersey and Connecticut. The bar association said the trust account programs paid for one-quarter of the pro bono programs run by the organized bar.
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