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$5 Dispute Could Decide Fate of Legal Aid Program

Supreme Court will decide whether escrow interest can be used for low-income people.

December 10, 2002|David G. Savage | Times Staff Writer

WASHINGTON — WASHINGTON--The Supreme Court took up a $5 dispute Monday to decide the fate of a little-known legal aid program that supplies $162 million a year to aid the poor, the elderly and the disabled.

The case centers on the interest held in escrow for a few days, or weeks, by law offices or real estate firms. The short-term depositors unwittingly -- and sometimes, unwillingly -- contribute a few dollars to a novel legal aid program begun in 1981.

The year before, Congress for the first time allowed banks to pay interest on checking accounts. Seeing an opportunity, the state high courts told lawyers and real estate firms to set up interest-bearing trust accounts with the money they were required to hold in escrow.

The tiny amounts of interest earned on millions of short-term deposits is now the nation's second-largest source of legal aid, second only to the federally funded Legal Services Corp. California's program was created by state law and yielded $8.3 million for legal aid this year, according to the state attorney general's office.

The money pays for legal aid lawyers who help low-income people with all manner of civil court problems, from divorces, domestic violence and child custody orders to disputes over medical care, housing and employment.

These lawyers are "at the core of our system of justice -- by enforcing federal and state laws against wrongdoers who violate them," said the AARP, the group that represents retired and older Americans.

But the legal aid program has a powerful enemy in the Washington Legal Foundation, a conservative group in the nation's capital. It has funded an 11-year legal attack on the program, known as IOLTA, for Interest on Lawyers Trust Accounts.

"We are finally in a position we've fought more than a decade to reach -- a position where we can deal a death blow to the single most important source of income for radical legal groups all across the country," Daniel Popeo, the foundation's general counsel, said in a fund-raising letter in September. "We're going to end this abominable program! We must!"

On Monday, two former Reagan administration lawyers, representing the foundation, urged the high court to rule the IOLTA program unconstitutional.

"This is private property. And it was taken," said Harvard law professor Charles Fried, who served as Reagan's solicitor general. "We are entitled to a declaration" that the entire program is unconstitutional, he said.

He was assisted by Donald Ayer, his deputy during the Reagan years.

But Justice Sandra Day O'Connor immediately challenged Fried where his case was at its weakest. Who has suffered a real loss here? she asked.

In its lawsuit, the foundation said it represented two Seattle men who may have lost as much as $7 because of the program.

Allen Brown deposited $90,000 for two days with a real estate firm and says he could have earned $5 in interest. The other plaintiff, Greg Hayes, said he deposited $7,000 for a few days and that he might have earned $2 in interest.

Defenders of the program argued that a bank would have charged more in fees to set up such an account than these short-term depositors could have earned in interest.

In her questioning, O'Connor asked: "How is it a taking if the compensation is zero?"

Fried responded that the interest is the private property of the owner and thus is worth something. "We don't concede it has no value," he said.

Four years ago, the high court gave the foundation a partial victory in a Texas case.

On a 5-4 vote, the court ruled that the interest in these short-term accounts was property. But it stopped short of deciding whether using the interest was a "taking" of private property.

The 5th Amendment says "private property [shall not] be taken for public use without just compensation."

The 1998 case split the court along conservative-liberal lines. The court's conservatives formed the majority: Chief Justice William H. Rehnquist and Justices O'Connor, Antonin Scalia, Anthony M. Kennedy and Clarence Thomas. Dissenting were the liberals, Justices John Paul Stevens, David H. Souter, Ruth Bader Ginsburg and Stephen G. Breyer.

The Washington state case heard Monday will decide whether diverting the interest to legal aid unconstitutionally "takes" the property of the depositors.

It pits two groups with similar names and opposite ideologies: Washington Legal Foundation vs. the Legal Foundation of Washington, based in Seattle.

Two Clinton administration lawyers, Walter Dellinger and Seth Waxman, joined in defending the program. Dellinger, a former solicitor general, said the government must compensate someone when it takes something of value.

"The amount of the 'just compensation' is your loss. If your loss is zero, you aren't entitled to compensation," he said.

Kennedy and Scalia spoke up for the challengers.

"So the government is free to take someone's property if it can't be valued?" Kennedy asked in a jab at one lawyer defending the program.

"It's not a whole lot of money, but it's their money," Scalia added.

Stevens, Souter and Ginsburg sided with the defenders. Where is there evidence of "a net loss"? Stevens asked, since the bank fees would exceed the interest earned. Last year, the issue split the U.S. 9th Circuit Court of Appeals. A three-judge panel struck down the Washington state program as unconstitutional, but the full court revived it in a 7-4 decision.

O'Connor figures to tip the outcome in the high court, which will rule in several months.

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