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The 5th U.S. Circuit Court of Appeals recently refused to sit as a full court to rehear a panel’s 2-1 decision that the Texas Interest on Lawyers’ Trust Accounts program is unconstitutional, increasing pressure for the U.S. Supreme Court to take the case. On May 31, the court denied the petition for a rehearing en banc in Washington Legal Foundation, et al. v. Texas Equal Access to Justice Foundation, et al. with a 7-7 vote; Judge Patrick Higginbotham did not participate. The decision, announced in an unsigned opinion, creates a conflict on the IOLTA issue between the 5th and 9th Circuits. Through the IOLTA program, the TEAJF takes the interest on clients’ funds held for short periods in lawyers’ trust accounts. The program usually generates about $5 million a year to help provide civil legal services to the poor, although the total this year may be closer to $4 million, says Betty Balli Torres, TEAJF’s executive director. “Two judges on the 5th Circuit have been able to attempt to thwart the program,” alleges TEAJF Chairman Richard L. “Dick” Tate, of Richmond, Texas’ Tate & Associates. Judge Jacques Wiener Jr. said in a strongly worded dissent that the 2-1 panel holding “dismantles IOLTA programs that have found favor in all 50 states as a means of funding legal services for the underprivileged” while fulfilling lawyers’ ethical obligations to help provide those services. Chief Judge Carolyn King and Judges E. Grady Jolly Jr., Fortunato Benavides, Carl Stewart, Robert Parker and James Dennis joined Wiener in the dissent, which urged the U.S. Supreme Court to take another look at the case. In 1998, the high court held 5-4 in Phillips v. Washington Legal Foundation that interest on funds deposited in lawyers’ trust accounts is the “property” of their clients but failed to address whether the funds were “taken” by the state or the amount of “just compensation,” if any, that was owed. The Fifth Amendment to the U.S. Constitution guarantees that private property won’t be taken for use without just compensation. “While the interest at issue here may have no economically realizable value to its owner, possession, control and disposition are nonetheless valuable rights that inhere in property,” the Supreme Court majority said in an opinion written by Chief Justice William H. Rehnquist. Wiener called Rehnquist’s statement perplexing. “With the utmost respect (and at the risk of revealing my own intellectual shortcomings), I read the court’s opinion in Phillips as begging the question of what other ‘valuable rights’ inhere with the ownership of money, which, axiomatically, can only be defined by its face value,” Wiener wrote for the 5th Circuit dissent. SHOWDOWN The IOLTA issue is back before the Supreme Court, which was considering Thursday whether to hear a similar case from the state of Washington. In November 2001, the 9th U.S. Circuit Court of Appeals, sitting en banc, held in Washington Legal Foundation v. Legal Foundation of Washington that the IOLTA program in that state is constitutional. In a 7-4 decision, the 9th Circuit held that, although interest in IOLTA accounts is property, no taking occurred in violation of the Fifth Amendment and no compensation was due. A month earlier, the 5th Circuit panel held 2-1 in the Texas case that there is a per se taking when the interest is swept from IOLTA accounts because the state permanently has appropriated plaintiff William Sumners’ interest income against his will. Clients have no choice about whether the interest from their funds goes to IOLTA because Texas lawyers are required to participate in the program, Judge Rhesa Hawkins Barksdale said in the panel’s Oct. 15, 2001, majority opinion. The panel’s decision reversed a 2000 ruling by U.S. District Judge James Nowlin of Austin, Texas, who found the program constitutional. “Our victory stands,” Richard Samp, chief counsel for the Washington Legal Foundation, says of the 5th Circuit’s decision not to hear the case en banc. But Samp says he thinks the Supreme Court will have to decide the case because of the split in the circuits. Basing its decision on an “ad hoc” analysis, the 9th Circuit held that the state of Washington may adjust the rights of a few individuals for the benefit of the public so long as its actions are reasonably necessary to achieve a substantial public purpose. The 5th Circuit panel reached its conclusion through a per se analysis, an approach that, according to the 9th Circuit’s opinion, is inappropriate when the property is money. “The 5th Circuit [panel] forged new and uncharted territory on Fifth Amendment jurisprudence,” says TEAJF Chairman Tate. Darrell Jordan, TEAJF’s attorney and a Hughes & Luce partner in Dallas, says he expects a petition for a writ of certiorari to be filed with the Supreme Court this week. “We’re pleased with the posture of our case as it came out of the 5th Circuit,” Jordan says. The 7-7 vote and Wiener’s dissenting opinion help, he says. Torres, TEAJF’s executive director, says the group filed a motion to stay the mandate with the 5th Circuit on Wednesday. “We will continue to operate business as usual until we exhaust all appeal remedies,” she says. James Paulsen, a South Texas College of Law professor who has been involved in a legal battle over IOLTA in the state courts since 1998, says the 5th Circuit’s decision not to hear the case en banc adds to lawyers’ confusion over what to do with regard to their accounts. “If there was widespread confusion before, there should be widespread consternation now,” he says. On Thursday, the Texas Supreme Court declined to hear Paulsen v. State Bar of Texas, in which Paulsen had asked the court to clarify state property law. Paulsen had argued that the U.S. Supreme Court misstated state law in Phillips. The State Bar agreed with Paulsen on that point in a brief filed in the Texas Supreme Court. Jordan says he had not counted on Paulsen’s argument in the state court system for relief on the IOLTA issue. The courts have focused on the Washington Legal Foundation’s argument that IOLTA violates the Fifth Amendment’s taking provision. Samp says that if the plaintiffs lose on that argument, they will argue that the program violates the First Amendment rights of lawyers’ clients by forcing them to contribute to programs that assert positions with which they disagree.

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