Court strikes down Texas IOTA program Court strikes down Texas IOTA program Mark D. Killian Managing Editor In a decision that has national implications, the U.S. Fifth Circuit Court of Appeals ruled October 15 that Texas’ interest on lawyers’ trust accounts program is unconstitutional. A three-judge panel of the New Orleans-based U.S. Fifth Circuit held that using pooled interest from lawyers’ trust accounts for legal aid amounted to an unconstitutional taking without just compensation, in violation of the Fifth Amendment. Washington Legal Foundation v. Texas Equal Access to Justice Foundation, case no. 00-50139. Darryl Bloodworth, president of The Florida Bar Foundation, said the decision will not immediately affect the operations of Florida’s IOTA program, and there is no need for Florida lawyers to make any changes or do anything differently with their IOTA accounts. “Of course, I was disappointed,” Bloodworth said, adding, however, that he was “not terribly surprised” because the Fifth Circuit had ruled against IOTA before. “As far as the immediate impact, though, I don’t think there is any because there is an 11th Circuit opinion from a number of years ago stating that our program is constitutional. And until this issue is ultimately decided in the U.S. Supreme Court, it seems to me the program should continue here in Florida.” Richard A. Samp, chief counsel for the group challenging the Texas program, however, said the ruling calls into serious question the constitutionality of all the nation’s mandatory IOTA programs. Every state except Indiana has similar programs, which raise more than $150 million a year for providers of legal aid to the poor. “Clearly this is the end of the IOTA programs in the Fifth Circuit, which includes not only Texas, but also Louisiana and Mississippi,” Samp said, adding he hopes bar authorities across the country read the court’s decision “very carefully.” Bar President Terry Russell said the ruling is “extremely harmful to what I consider to be the greatest innovative program in this country’s history in terms of getting civil legal services to the poor. “There is a fight ahead of us and a real possibility, I hope not a probability, but a real possibility that we could lose the IOTA program,” Russell said. “If we do, we will be called on to fill in the void.” Samp said the Washington Legal Foundation’s victory was “foreordained” by the 1998 U.S. Supreme Court’s finding in Philips v. WLF, case no. 96-1578, that clients have a protected property interest in funds created by pooled IOTA accounts. The Supreme Court, however, took no view as to whether the funds had been “taken” by the state or if any “just compensation” was due the respondent. Those questions were left to the federal district court in Austin, Texas, on remand. U.S. District Judge James R. Nowlin, of the Western District of Texas, subsequently dismissed a challenge to the Texas IOTA program, saying without IOTA the interest generated by the plaintiff’s principal would possess no economically realizable value, and without an identifiable, compensable loss, there has been no taking without compensation. The Fifth U.S. Circuit Court of Appeals, however, rejected that reasoning. “Appellants have met their burden of demonstrating the existence of a property interest,” the court said. “And there is no dispute that ‘private property’ has been allocated ‘for public use.’” The Fifth Circuit said Philips made clear that a client’s right to possess, control, and dispose of the interest earned on his funds are valuable rights, regardless of whether the interest has economic value. Writing for the 2-1 panel, Judge Rhesa Hawkins Barksdale said: “In reality, the linchpin for this case has already been inserted by the Supreme Court: Interest income generated by funds held in IOTA accounts is the ‘private property’ of the owner of the principal. And, because the state has permanently appropriated [the appellant’s] interest income against his will, instead of merely regulating its use, there is a per se taking.” Judge Barksdale said because the purpose of IOTA is to take the interest generated from client funds and use it to fund legal services for the indigent, “it is obvious that the program makes no provision for payment of just compensation.” “If the interest earned on client funds were available as just compensation for the clients, the very purpose of the program would be thwarted; therefore, it would defy logic, to say the least, to presume the availability of a just compensation remedy,” said Judge Barksdale, who was joined by Judge Emilio Garza. Judge Jacques Weiner dissented. In Washington state, the Washington Legal Foundation also is litigating a similar case now pending before the Ninth Circuit Court of Appeals in San Francisco. In January, a three-judge Ninth Circuit panel held that the interest earned on IOTA accounts belongs to the clients whose funds generated the interest, and that government confiscation of that interest violates the Fifth Amendment taking clause. In May, the Ninth Circuit voted to rehear the case en banc, and heard oral arguments in June. WLF v. Legal Foundation of Washington, 236 F.3d 1097. The court remanded the case to the district court on the issue of whether any just compensation is due. The court did not find the IOTA program to be unconstitutional or enjoin it from operating. Randall C. Berg, Jr., of Miami, who represents more than 60 IOTA programs and bar associations across the country — and is active in the Washington case — said while the Fifth Circuit ruling is not good news, “it is not the end of the world and it is certainly not the end of the IOTA program.” “If the Fifth Circuit decision stands either en banc or as a panel decision, I think the U.S. Supreme Court will grant cert to hear it,” Berg said, noting that four of the justices dissented in the Philips case and it only takes four justices willing to hear a case for cert to be granted. Samp said the WLF challenge to mandatory IOTA programs across the country has nothing to do with the merits of legal services to the poor. “Nothing about this decision should be seen as a threat for legal services for the poor,” Samp said. “Hundreds of millions of dollars are appropriated each year by both the federal government and by the state governments to provide services for legal aid. If supporters of legal aid feel they are not getting enough money appropriated, the correct solution in a democratic government is to apply to the legislature for more money, not to try to grab someone else’s money through subterfuge.” Bloodworth said he also expects the constitutionality of mandatory IOTA programs to ultimately be decided by the U.S. Supreme Court, and if that court rules the way the Fifth Circuit did, Florida may have to revert to some kind of voluntary program. “Am I concerned? Yes, I am concerned because I think the IOTA program has been a wonderful program for provision of legal services to the poor, and at the current time in Florida there are not good alternate sources of money for that,” Bloodworth said. Longtime IOTA critic Harvey M. Alper of Altamonte Springs said with the Fifth Circuit’s ruling, the days of mandatory IOTA are numbered and he would like the Florida Supreme Court to immediately make the state’s IOTA program voluntary — or at least appoint a commission to “salvage the good in what we are doing here.” “I really want to know what the anxiety is with regard to making it a voluntary program,” Alper said. “Is it that the courts think lawyers won’t ask? Is it the courts think the clients will say no? “We can fix this whole problem by making this a voluntary program and asking lawyers to get their clients to volunteer to do this,” Alper said. “I’d do it. I’d ask every client to volunteer to do this. This is a good thing. This is the right thing to do, provided, of course, the money was being used appropriately.” Alper also said he thinks it unlikely the U.S. Supreme Court will take up the IOTA issue until “all the circuits are heard from, and it will only enter the fray again if there is a diversity in the opinions of the several federal circuits after they have all had a chance to look at it a couple of times.” Kent Spuhler, director of Florida Legal Services, said the decision is disappointing “since it adds more uncertainty and concern about the future health of legal assistance to the poor in Florida and the entire nation.” Spuhler said if IOTA should be lost as a source of funding legal assistance to the poor, The Florida Bar, state government, and the general public will be challenged to decide “whether we will have equal justice in Florida or not.” “Our delivery system is currently under funded, and the loss of IOTA funding would be devastating,” Sphuler said. “Those who have dedicated their careers to serve others will feel great pain. But for many of those who have nowhere else to turn — our most vulnerable residents — there will be the loss of the protection of the law.” Spuhler said the decision should remind everyone that any particular funding source for justice work is always vulnerable, “but we cannot let the reality of equal justice be similarly vulnerable.” November 1, 2001 Managing Editor Regular News read more