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The interest gained from lawyers’ trust accounts can be used to fund legal services for the needy, an en banc panel of the 9th U.S. Circuit Court of Appeals ruled Wednesday. The decision reverses an earlier three-judge panel and casts the 9th Circuit into conflict with the 5th Circuit. It’s likely to catch the attention of a Supreme Court that has already had a similar, but more limited, case before it. “[We] hold that with respect to the funds deposited into client trust accounts … there has been no taking of property without just compensation in violation of the Fifth Amendment,” wrote Judge Kim Wardlaw for the seven-judge majority. Judge Alex Kozinski, joined by the author of the original panel decision and two others, dissented. The case was brought by so-called limited practice officers — professionals with the right to prepare legal documents in connection with real estate transactions — who were included in Washington state’s IOLTA program in 1995. All 50 states employ similar programs. The decision is founded on the conclusion that the owners of the principal from which IOLTA funds are skimmed don’t lose anything from the taking of the money. The court ruled that the plaintiffs seek to recover not what they lost, but the value the IOLTA program created for them. “Here, [the plaintiffs] admit that, at most, IOLTA takes their right to let their principal lie fallow,” Wardlaw wrote. “We therefore hold that even if the IOLTA program constituted a taking of [their] private property, there would be no violation because their just compensation is nil.” Under ethical rules, lawyers are required to keep money that belongs to clients in separate accounts, even if it’s only for a few days. Two decades ago, states began to pool the money into interest-bearing accounts, using the proceeds to augment pro bono work. The conservative Washington Legal Foundation has challenged IOLTA programs on First and Fifth Amendment grounds in several states, including Texas, Massachusetts and Washington, which led to Wednesday’s decision in Washington Legal Foundation v. Legal Foundation of Washington, 01 C.D.O.S. 9663. Supporters of the programs have argued that it is only when the trust accounts are pooled that the interest becomes valuable. Otherwise, they say, it would be cancelled out by such things as bank fees or postage. But opponents say the money is theirs, and object to its diversion to litigation they don’t support. Last month, a divided 5th Circuit panel said Texas’ IOLTA program is a taking, adopting the same analysis Judge Andrew Kleinfeld used in the earlier 9th Circuit decision. The 5th Circuit case has been appealed, with IOLTA supporters urging a rehearing en banc. Wardlaw employed an ad hoc takings analysis under Penn Central Transportation Co. v. New York, 438 U.S. 104 (1978), usually applied to regulatory takings. Doing so triggers a broader analysis than the per se takings approach that Kleinfeld and the 5th Circuit adopted. Also, Wardlaw ruled that the Washington Legal Foundation did not have standing to pursue the case, though two other plaintiffs did, and said injunctive relief was an inappropriate remedy. “It’s actually a not insignificant part of the opinion,” said Heller Ehrman White & McAuliffe associate Thomas Brown, adding that it means each individual plaintiff must pursue his own case. Brown wrote an amicus brief on behalf of the bar associations of several Western states. The California State Bar’s IOLTA program funds more than $13 million in legal programs, making it one of the largest in the country. Judy Garlow, director of the Legal Services Trust Fund Program, was pleased with the decision. “It sounds like it confirms what we always believed to be the case — that because the clients didn’t lose money” the program is constitutional, Garlow said. In his dissent, Kozinski accused the majority of ignoring Supreme Court precedent. “Before today, no court has ever held that there are some kinds of ‘private property for which no compensation is due,’ ” Kozinski wrote. The case was remanded for the district court to decide whether the plaintiffs’ First Amendment rights were violated, a claim the 9th Circuit declined to reach.

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