by Reginald Luster
Over the past seven years, there has been a quiet, constitutional challenge to state charitable programs that provide legal services to the poor. If the opponents of the legal programs had been successful, the method used to fund legal services for the poor would have changed in every state of our Union. Most lawyers in Jacksonville, and perhaps many in Florida, were not aware of this legal challenge to the primary funding source for The Florida Bar Foundation and local charitable organizations such as the Jacksonville Area Legal Aid, Inc. Here is the history behind the quiet constitutional challenge.
After a change in federal banking laws, in 1981, the State of Florida adopted the first Interest on Trust Accounts (“IOTA”) program in the nation. The program authorizes lawyers to use interest-bearing accounts for the deposit of clients’ funds. The program also provided that all interest on such accounts must be used for law- related charitable purposes. In Florida, banks are directed to pay the interest to the Florida Bar Foundation which uses the funds to support legal aid for the poor and children. Every state in the union, including the District of Columbia, followed Florida’s lead by adopting similar IOTA programs. These programs are the primary funding source for charitable organizations providing legal services to the poor.
In 1996, two plaintiffs, who regularly purchased and sold real estate, challenged the State of Washington’s Interest on Lawyer Trust Accounts (‘IOLTA’) program in federal district court. These plaintiffs objected to having the interest on their deposits being used to finance the activities of the State of Washington’s legal charitable organization, the Legal Foundation of Washington. The plaintiffs argued that the ‘taking’ of the interest earned on the funds in the IOLTA violated the Just Compensation Clause of the Fifth Amendment to the United States Constitution. During discovery, it became clear that without the IOLTA program the deposits would not produce any ‘net interest’ to the depositors. At the conclusion of discovery, the district court granted summary judgment for the defendants. The district court reasoned that the constitutional issue focused on what the owner had lost, not what the ‘taker’ had gained. On appeal, the Ninth Circuit Court of Appeals, sitting en banc, confirmed the ruling of the district court. However, several judges dissented.
The Plaintiffs petitioned the United States Supreme Court to review the decisions of the lower courts. On March 26, 2003, the quiet constitutional challenge to state IOTA programs came to an end with the Justices rendering a 5-4 decision. The Supreme Court found that the transfer of the interest to the Legal Foundation of Washington was a physical taking. However, that finding did not conclude the Court’s analysis. Next, the Court had to determine whether the plaintiffs were entitled to just compensation. The Court ruled that neither plaintiff was entitled to compensation for the non-pecuniary losses of the taking of the interest on the deposited funds. In other words, as pointed out during discovery, without the IOTA program the deposits would not produce any net interest to the depositors. The Court reasoned that the ‘just compensation’ is measured by the owner’s pecuniary loss-which, in that case, was zero. The decision can be found by searching for Brown et al. v. Legal Foundation of Washington (March 26, 2003).
While the supporters of state IOTA programs can breathe with some relief, the 5-4 decision does not provide much comfort. Surely, there will be other challenges before a Supreme Court that may consist of a different majority. The 5-4 decision was entirely too close. One additional adverse vote would have dismantled most, if not all, of fifty-one states’ charitable programs used to provide legal services to the poor. Every lawyer in the union, and especially those in Florida, should celebrate the majority’s decision because very few of us were prepared to take on the financial responsibility of funding the charitable organizations that provide legal services to the poor. While the decision was close, the Supreme Court’s decision amounts to a victory for those state programs that provide legal services to the poor. I will accept this victory even if it is by the slimmest margin.