Court Ruling Threatens a Major Funding Source for Legal Aid

A large source of funding for legal assistance for the poor in California could be jeopardized by an appellate court decision that advocates say undermines a program in place in all 50 states.

At issue is a program that takes interest earned on money temporarily held by lawyers for their clients, and distributes it for legal services for the poor. In California, that amounts to $11 million this year, the second-largest funding source for legal aid in the state.

“We’re alarmed,” said Neal Dudovitz, executive director of the Pacoima-based Neighborhood Legal Services of Los Angeles County, which received about $320,000 in such funding last year, about 8% of its budget. “That’s a lot of money we don’t want to lose.”

In Los Angeles County, the program has helped pay for everything from legal help for battered women to assisting senior citizens victimized by scam artists, from helping families battle slumlords to helping poor patients obtain better medical care.

“These are basic necessities of life,” said David Lash, executive director of Bet Tzedek, a legal aid group with offices in Los Angeles and North Hollywood. The court ruling, Lash said, is “potentially very harmful to poor people.”

Opponents say the program is unconstitutional and the Jan. 10 U.S. 9th Circuit Court of Appeals ruling on the case, which originated in Washington state, is proper.

The court ruled that interest belongs to lawyers’ clients, and that giving that money to anyone else, even for “a very worthy purpose” such as legal aid, is wrong unless compensation is provided.

“If the clients’ money is to be taken by the state of Washington for the worthy public purpose of funding legal services for indigents or anything else, then the state of Washington has to pay just compensation for the taking,” the appellate judges ruled.

The amount of compensation should be determined by the federal court in Washington state, according to the appellate opinion.

Richard A. Samp, chief counsel for the Washington, D.C.-based Washington Legal Foundation, the conservative public interest law firm that won the 9th Circuit case, called the ruling “a death knell” for the programs in California, Oregon, Washington, Arizona, Montana, Idaho, Nevada, Alaska and Hawaii.

The 9th Circuit’s action follows a 1998 U.S. Supreme Court decision that laid the legal groundwork for constitutional challenges to the state programs. The Supreme Court also said that interest is the property of individual clients.

Hailed as an ingenious fund-raising tool by legal aid advocates but decried as an abuse of property rights by opponents, the program began in Florida about two decades ago as a way to make better use of money, such as advance payments or legal settlements, that lawyers hold temporarily for their clients.

For years, such money often languished in non-interest-bearing bank accounts. Or, in many cases, the small interest earned on the short-term deposits was less than the cost of maintaining the account.

“The money was just sort of sitting there,” Dudovitz said. “It’s not like we’re taking money out of clients’ pockets. They weren’t getting the money [anyway].”

But pooled together, the nickels, dimes and dollars added up to a lot.

Nationwide in 1999, the latest year for which statistics are available, the interest on the lawyers’ trust accounts generated $139 million for legal aid and education, according to the American Bar Assn. Among legal aid funding sources, only the federal government provided more money to California and the rest of the country.

“If the 9th Circuit stands, California would have no authority but to dismantle the program,” said Samp of the Washington Legal Foundation.

“Our organization has been fighting [the program] for 10 years,” Samp said. “We don’t oppose funding to legal services programs. These cases have to do with taking money from people whose money may be used for causes they may not support. We think it’s a serious violation of property rights.”

Legal aid advocates have a different view.

“The real agenda of [some interest groups] is, they don’t like poor people getting into the courthouse doors like well-off people and businesspeople are,” said Bruce Iwasaki, executive director of the Legal Aid Foundation of Los Angeles.

The 9th Circuit did not order Washington state to shut down its program, as the Washington Legal Foundation had sought, said David Burman, an attorney defending the state’s program.