A sharply divided Supreme Court yesterday heard a former solicitor general of the United States describe a mechanism that all 50 states and the District rely on to fund legal aid for the poor as a massive, unconstitutional seizure of private property.
Harvard Law School professor Charles Fried, who served as solicitor general during the Reagan administration, said that so-called Interest on Lawyers' Trust Accounts (IOLTA) programs, which gather up the interest earned on certain client funds that lawyers deposit in banks, amount to an uncompensated government "taking" of the clients' money.
"If the government wants our money, it should get it the old-fashioned way -- it should tax," Fried said.
Before a court that was once again sitting for oral arguments without Chief Justice William H. Rehnquist, who is still recovering from knee surgery, Fried seemed to elicit the most sympathy from conservative justices Antonin Scalia and Anthony M. Kennedy. But he ran into skeptical questioning from the court's four most liberal members and from swing voter Justice Sandra Day O'Connor.
Fried was asking the court to shut down Washington state's IOLTA program, which is typical of what state regulators across the country view as a creative solution to a chronic problem: insufficient government financial support for lawyers who help poor people handle evictions, wrangle with health insurance or manage domestic violence.
Basically, Washington's IOLTA plan makes the Legal Foundation of Washington, a tax-exempt entity that funds legal aid, the beneficiary of economies of scale.
As a routine matter, lawyers deposit clients' escrow, jury awards and the like for what are often relatively brief periods before passing them on to the client after the necessary paperwork is done. In the past, lawyers put those funds in individual non-interest-bearing accounts, because bank fees would have eaten up client interest anyway.
Under IOLTA, however, all lawyers are directed to put "nominal" amounts held for short periods in a state-supervised interest-bearing account. Thus pooled, the funds generate substantial net interest -- a harvest of cash for legal aid.
Any larger amounts that would earn net interest for an individual client need not be placed in the IOLTA program. States also say that IOLTA programs help avoid the ethical conflicts that might result if lawyers were free to steer client cash to particular banks.
Last year, IOLTA programs produced a total of $147 million in legal aid grants, second only to the federal Legal Services Corp., which supplied $310 million. "IOLTA programs are critical to the states in ensuring equal access to the courts," 36 states and Puerto Rico told the justices in a friend-of-the-court brief supporting the Washington program.
Two of the clients Fried represents would have been entitled to $5 and $2 worth of interest, respectively -- before any corresponding bank fees.
"If it is shown that no compensation is due, then how is it a taking?" O'Connor asked Fried.
Fried argued, in effect, that it's not the money, it's the principle of the thing. Even if the actual compensation owed any one person might be tiny or difficult to calculate, the taking of private property is real and the court should order an injunction halting the program.
"It may be that at the end of the day they have no money, but that's not any of the government's business," he said later.
Justice Kennedy seemed to agree, remarking, "I know of no precedent for the proposition that if you can't calculate just compensation, then the government can take it for himself."
But David J. Burman, a lawyer representing the state of Washington's IOLTA program, said Fried's arguments were "radical" and "startling."
Justice Ruth Bader Ginsburg sounded a similar theme, noting that Fried's request for an injunction was "not a position that any [lower-court] judge has held so far." She said only the banks would be "the big gainer" if IOLTA plans were stopped, because lawyers would go back to using non-interest-bearing accounts.
Burman said the case against Washington state's program was driven by the "subjective ideological" agenda of the Washington Legal Foundation, a conservative public interest organization that has spearheaded the drive against IOLTA plans nationwide.
WLF believes that IOLTA singles out a group of property owners and makes them pay for a legal aid program they may or may not agree with.
Though WLF's brief to the Supreme Court said it objected to IOLTA, not to legal services as such, the organization mailed out a fundraising letter three months ago urging supporters to donate as much as $500 to support its fight to "deal a death blow to the single most important source of income for radical legal groups all across the country."
WLF portrayed its opponents in the case as including not only legal aid organizations, but also "groups dedicated to the homeless, to minorities, to gay and lesbian causes and any other group that has drawn money from hard-working Americans like you and me to support its radical cause!"
However, WLF has already won a key preliminary round in this fight. In 1998, the Supreme Court ruled that the interest generated in IOLTA plans is indeed the property of the clients.
It left open the question that defenders of the program were trying to get the court to answer in the negative yesterday -- whether the use of that property to fund legal services violated the Fifth Amendment to the Constitution, which says that "private property [may not] be taken for public use without just compensation."
The case is Washington Legal Foundation v. Legal Foundation of Washington, No. 01-1325. A decision is expected by July.