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IOLTA Dissent

The Supreme Court’s March 26, 2003 decision, Brown v. Legal Foundation of Washington, addresses the constitutionality of state IOLTA (interest on lawyers’ trust accounts) programs. In these programs, attorneys are required by their state bar rules to deposit client funds that are too small to earn a “positive net return” into a pooled interest-bearing IOLTA account with the interest paid to groups that provide legal services for the indigent.

Certain clients whose funds were put into IOLTA accounts sued, claiming the Washington IOLTA program resulted in an unconstitutional “taking” of their property (namely, the interest on the IOLTA account) without just compensation, in violation of the Fifth Amendment. The Fifth Amendment requires (a) that any governmental taking of private property must be for a “public use,” and (b) that “just compensation” must be paid to the owner. (IMO, the Fifth Amendment should not even apply to state laws, but due to the bogus incorporation doctrine (link2, link3) built up around the Fourteenth Amendment, it does.)

In a 1998 decision, Phillips v. Washington Legal Foundation, the very same Justices held that any interest earned on client funds held in IOLTA accounts belongs to the owner of the principal, not the State or the State’s designated recipient of the interest. Despite this ruling, the court in Brown held that there is no unconstitutional taking (Justice O’Connor, in the majority in Phillips along with the four dissenters in the current case, apparently flip-flopped). The majority reasoned (sic) that there was no failure to pay just compensation, since the amount of just compensation was zero because without the mandatory pooling arrangements of IOLTA, the petitioners’ funds could not have generated any interest in the first place.

In a powerful dissent, Justice Scalia (joined by Chief Justice Rehnquist and Justices Kennedy and Thomas) shows how nonsensical and poorly reasoned the majority’s opinion is (i.e., how inexplicable it is that O’Connor joined the majority opinion in Brown, despite its clear inconsistency with Phillips). He concludes,

Perhaps we are witnessing today the emergence of a whole new concept in Compensation Clause jurisprudence: the Robin Hood Taking, in which the government’s extraction of wealth from those who own it is so cleverly achieved, and the object of the government’s larcenous beneficence is so highly favored by the courts (taking from the rich to give to indigent defendants) that the normal rules of the Constitution protecting private property are suspended. One must hope that that is the case. For to extend to the entire run of Compensation Clause cases the rationale supporting today’s judgment–what the government hath given, the government may freely take away–would be disastrous.

The Court’s judgment that petitioners are not entitled to the market value of their confiscated property has no basis in law. I respectfully dissent.

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