Ruling Threatens Legal Aid Funding

The Supreme Court cast doubt Monday on the future of a little-known program that skims interest money from law office accounts and uses it to provide legal aid for the poor.

Siding with conservative activists, the court ruled, 5 to 4, that interest earned on such accounts is the property of individual clients, not the lawyers or the government.

“Interest follows principal,” said Chief Justice William H. Rehnquist, citing the old maxim of English law. Therefore, interest accumulated in trust accounts held by lawyers belongs to “the client for whom the principal is being held,” he said.

The programs operate by law or court regulation in 49 states. And though the interest amounts are tiny--just a few dollars per person for typical law office clients--the money pooled nationwide supplies $100 million per year to legal aid groups.

It is the second-largest source of funding for legal services, next to the federal government.

In California, more than $10 million per year from the program helps provide lawyers to represent low-income people, whether they are victims of consumer scams, mothers seeking child support or elderly people in disputes with landlords, hospitals or public agencies.

Although the court stopped short of saying that these programs are unconstitutional, its ruling has the potential to unravel the state-by-state efforts. The justices sent the case back to Texas, where it originated, for lower courts to decide whether the clients’ money is being taken unconstitutionally by the government.

The Washington Legal Foundation, which led the challenge to the Texas Equal Access to Justice Foundation, hailed the ruling as a victory for private property rights. A lawyer who worked on the case predicted that Monday’s decision will lead to trust fund programs being struck down in most states.

“We believe we will prevail in the lower courts,” said David Young, a lawyer for the Washington foundation. “This does not mean the death of legal aid. The state legislatures and Congress can fund these programs, but that way, the people have a voice in how the money is spent. We don’t think the clients should be forced to fund things they disagree with.”

He cited examples in which Texas aid money was used to support appeals for death row inmates and to represent illegal immigrants. Two plaintiffs in the original lawsuit said they objected to having their interest money used for such causes.

Leaders of the American Bar Assn., which has championed the program, said they were disappointed by the ruling but that they remain confident it will survive. It is known among lawyers by the acronym IOLTA, for Interest on Lawyers’ Trust Accounts.

“I don’t think this scuttles IOLTA. I think it means we need to go back and fix it up,” said ABA President Jerome J. Shestack. He said states may need to devise refund procedures for those clients who object to having their interest income used for legal aid.

Before 1980, lawyers were required to hold their clients’ money in special trust funds that were available on demand.

For example, a home buyer may deposit real estate closing costs with a lawyer a few days before the closing. The interest on this account would be tiny, surely too small to justify opening a separate account.

In 1980, however, Congress changed the banking laws and allowed the creation of interest-bearing checking accounts. Lawyers realized that they could pool their many trust accounts and earn a substantial amount of interest.

The next year, the California Legislature, following other states, authorized the diversion of this pooled interest money into a state fund for legal aid. Every state but Indiana has such a program and in most, including California, lawyers are required to participate.

“The program is completely self-funded. There is no state money,” said Judy Garlow, director of the Legal Services Trust Fund for the State Bar of California.

Since 1996, federal law has dictated that federal legal aid funds can be used only in civil actions, not criminal appeals, and cannot be used to finance legal representation of illegal immigrants. Since most legal aid groups receive federal as well as state funds, they abide by the federal rules.

Bruce Iwasaki, executive director of Legal Aid Foundation of Los Angeles, said that his group serves an area with 1 million low-income people and receives $750,000 a year from the lawyers’ trust fund accounts.

Another recipient of the state funds is Public Counsel, the nation’s largest pro bono group. A joint project of the Los Angeles County and Beverly Hills bar associations, Public Counsel said that it supplied 2,400 volunteer advocates for low-income people last year. For every dollar contributed to the group, it says, it provides $14 in free legal aid.

*

Those special funds for legal aid have grown partly in response to the steady attacks on the federal Legal Services Corp. Some Republican leaders in Congress have sought to end the federal aid entirely.

The agency’s funding was reduced last year to $283 million, down from $415 million in 1995.

In its lawsuit, the Washington Legal Foundation said that the states were trying to force lawyers and their unwitting clients to fund a public program without their knowledge or approval.

The case (Phillips vs. Washington Legal Foundation, 96-1578) split the nine justices along conservative and liberal lines. Joining Rehnquist in the conservative majority were Justices Sandra Day O’Connor, Antonin Scalia, Anthony M. Kennedy and Clarence Thomas.

The dissenters were Justices John Paul Stevens, David H. Souter, Ruth Bader Ginsburg and Stephen G. Breyer.