Do property rights cover interest earnings?

The court hears a case that may affect the options the government has to raise funds.

For nearly 20 years, bar association officials, state supreme-court judges, and state lawmakers have endorsed a program that uses lawyer trust-account and escrow monies to help finance legal services for the poor. The program, called Interest on Lawyers Trust Accounts (IOLTA), has grown to the point that last year it raised $162 million nationwide.

But the success of the program has prompted a thorny question: When interest is earned on money a client has deposited with a lawyer in an escrow account, does use of that interest to pay for a government program violate private-property protections under the US Constitution?

That is the central question confronting the justices of the US Supreme Court Monday, as they hear oral arguments in a case examining the constitutionality of the IOLTA program in Washington State.

What the ruling may mean

In broad terms, if the court strikes down the IOLTA program it could make it easier to successfully challenge other government regulations and programs that intrude on private-property rights. On the other hand, if the court upholds the program it could open up the possibility of using a broad array of mechanisms tied to the pooling of client funds - at a time when many state budgets are dripping in red ink.

At issue specifically in the case is whether the IOLTA program is merely a clever regulatory innovation, or an unconstitutional "taking" of private property for public use. The Fifth Amendment requires that the government provide "just compensation" when it appropriates private property.

What makes this case unusual is that the funds in question aren't the escrow monies themselves, but the interest earned after the escrow monies are pooled into aggregate accounts large enough to generate significant interest payments. Without this pooling of funds, mandated by the IOLTA regulations, bank fees and accounting costs would swallow the tiny amount of interest earned by a single client.

In effect, clients standing alone have no ability to earn any interest. It is only through the IOLTA regulations and the pooling of client funds that interest becomes a possibility.

Supporters of the program say that clients who deposit their funds in a lawyer's escrow account have surrendered their control over the funds. So any resulting interest does not amount to a "taking," they say, because nothing was taken. "No compensation is due clients who voluntarily relinquish their ability to invest money deposited in banks by their legal practitioners," writes David Burman, a Seattle lawyer, in his brief supporting Washington State's IOLTA program.

Lawyers with the Washington Legal Foundation, a conservative public-interest law firm in Washington, D.C., disagree. "The program is government confiscation of private property for public use," says Richard Samp, who since 1997 has challenged the constitutionality of IOLTA.

Mr. Samp says he has nothing against the provision of legal services to the poor. The lawsuit, he says, is aimed at reinforcing the principle that the government must respect private-property rights.

From the other point of view

But where is the harm when clients would earn no interest on their escrow accounts, but for the pooling of funds through IOLTA?, ask program supporters.

"Just compensation is the amount of the owner's loss, not the government's gain," Mr. Burman says in his brief.

"IOLTA exemplifies a creative regulatory program," says former solicitor general Seth Waxman in a friend-of-the-court brief on behalf of AARP. "[It] deprives clients who seek professional services of nothing, while creating tremendous value for persons with legal needs and without resources to pay for legal assistance."

Samp says rather than zero, a typical legal client loses from $5 to $30 in escrow-generated interest. He says the Fifth Amendment question would disappear if lawyers offered their clients the option of participating in the IOLTA program or an interest-free account. "Anything that is voluntary is fine," Samp says.

But others say this is unnecessary since the clients have no expectation of earning interest.

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