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Use of attorney trust account interest to fund legal aid services does not violate the U.S. Constitution’s takings clause, the 9th U.S. Circuit Court of Appeals held on Nov. 14. Washington Legal Foundation v. Legal Foundation of Washington, No. 98-35154. The 7-4 decision reversed an earlier ruling that Washington state’s Interest on Lawyers’ Trust Account (IOLTA) program did effect a taking. The case was filed by five plaintiffs, including two businessmen who regularly bought and sold real estate. Money for their transactions was handled by escrow companies that used “limited practice officers” (LPOs) — state-licensed nonlawyers who prepare closing papers. In 1995, IOLTA rules for lawyers became applicable to LPOs. With few exceptions, LPOs must now put client funds into IOLTA accounts. Interest generated by IOLTA accounts goes to the Legal Foundation of Washington, a nonprofit organization that distributes grants used for legal representation of the poor. The businessmen charged that this process violates their First and Fifth Amendment rights. In a 1998 case, Phillips v. Washington Legal Foundation, the U.S. Supreme Court decided that the owner of principal held in a Texas IOLTA program had a property interest in the accrued interest. But it left open the second issue of whether the IOLTA program actually effected a taking without just compensation, remanding the matter to the 5th Circuit. In October, that circuit ruled there was a taking. Developing its own analysis, the 9th Circuit rejected the Supreme Court’s 1982 per se takings test created in Loretto v. Teleprompter Manhattan CATV Corp., and applied the ad hoc analysis the high court used in Penn Central Transp. Co. v. City of New York (1978). Circuit Judge Kim M. Wardlaw’s majority opinion said the per se test had not “typically been employed outside the context of real property,” and was “particularly inapt” when the property in question is fungible money. Under ad hoc analysis, a taking occurs when a regulation forces some people to bear burdens alone that should be borne by the public as a whole. Here, the 9th Circuit ruled, the regulation did not have an economic impact on the businessmen because escrow companies traditionally deposited client funds into noninterest bearing accounts, if not into IOLTA accounts. The court added that even if there was a taking, the compensation due would be “nil.” The court did not reach the plaintiffs’ free speech issue, which was remanded for further proceedings. Dissenting, Judge Alex Kozinski said the majority opinion was not supported by any case authority except Justice Stephen G. Breyer’s dissent in Phillips. “Although Justice Breyer was in distinguished company in Phillips, his opinion lacked one important ingredient: a fifth vote,” Kozinski wrote. James J. Purcell of Seattle, lead counsel for the plaintiffs, said they plan to appeal in light of the new circuit split. But David J. Burman, a partner at Seattle’s Perkins Coie and counsel for the Legal Foundation of Washington, thought there would be enough votes in the Supreme Court now to uphold the 9th Circuit’s position.

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