Justices uphold legal-aid financing method

States pool escrow funds of clients, use interest for services for poor

March 27, 2003|By NEW YORK TIMES NEWS SERVICE

WASHINGTON - The Supreme Court narrowly upheld yesterday a nationwide program that channels millions of dollars every year to legal services for poor people by pooling the interest earned on short-term deposits that lawyers hold in trust for their clients.

The 5-4 decision rejected the argument of a conservative legal group here that the program amounted to an unconstitutional "taking" of the clients' property. The group, the Washington Legal Foundation, has conducted a decadelong litigation campaign against the program, arguing that it violated private property rights and that law firm clients should not be forced to provide financial support to causes with which they might disagree.

The majority said yesterday that even assuming that the government did appropriate money that was technically the property of the clients, the action did not violate the Fifth Amendment's prohibition against taking private property without "just compensation." That was because transaction costs would otherwise have wiped out whatever interest an individual account would have earned, Justice John Paul Stevens said.

"Just compensation" under the Fifth Amendment "is measured by the property owner's loss rather than the government's gain," and the depositors suffered no actual loss, he said.

While on the surface the case might have appeared to be an excursion into the arcane details of banking law, it was an ideologically charged dispute that has been closely monitored for years across the legal profession. The American Bar Association, the chief justices of the 50 states, the National League of Cities and 36 states were among those filing briefs in defense of the program, known as Interest on Lawyers Trust Accounts, or Iolta.

The program began in Florida in 1981 and has spread nationwide, either by state legislation or by rules issued by state supreme courts.

Lawyers are often required to hold their clients' money, such as escrow for a real estate closing, for example, for short periods of time and are forbidden by legal ethics codes from commingling this money with their own accounts. Lawyers usually deposited the money in trust accounts on which no interest was earned.

Banks began paying interest on some checking accounts in 1980, but this offered little benefit to law firm clients because the costs of opening and closing the short-term accounts, which exist for a few days or weeks, would exceed the amount of interest earned in almost every case.

The idea grew of pooling the trust accounts so that net interest could be generated and then diverting that interest to help support legal services programs. With the American Bar Association's strong support, every state adopted this approach.

The accounts generate about $160 million a year nationwide, about 15 percent of all money from public and private sources spent on legal services for the poor.

Justices Sandra Day O'Connor, David H. Souter, Ruth Bader Ginsburg, and Stephen G. Breyer joined the majority.

In a dissenting opinion, Justice Antonin Scalia complained that the court had endorsed a "Robin Hood taking," which he described as "taking from the rich to give to indigent defendants."

Yesterday's ruling elicited a sigh of relief from legal services groups in Maryland.

"I think it's a wonderful victory for justice in the sense that it averts a catastrophe," said Wilhelm H. Joseph Jr., executive director of the Maryland Legal Aid Bureau. But, he warned, "it does not end the crisis."

Close to half of the Maryland Legal Services Corp.'s $7 million budget comes from interest on lawyer escrow accounts. But interest rates have plummeted, leading the state's judiciary to ask the General Assembly to close a $1.2 million shortfall for the group and the 28 programs it funds.

Robert J. Rhudy, executive director of the Maryland Legal Services Corp., said the Supreme Court ruling means he is not confronting losing half the agency's funding, but without a General Assembly appropriation, cuts and fewer services can be expected.

Sun staff writer Andrea F. Siegel contributed to this article.

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