Washington Legal Foundation v. Legal Foundation of Washington:

AuthorTara E. Montgomery

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The author dedicates this casenote to the late Senator A. Harold Montgomery, who would have beamed at the sight of his granddaughter's name in print. Also, the author extends her thanks to Professor Paul M. Baier for not only suggesting the topic, but also for advising the author during the writing process. Finally, the author thanks her family and friends for their constant encouragement and support throughout her law school career.

The Board of Editors of the Louisiana Law Review accepted this article for publication before the United States Supreme Court rendered its decision sustaining the IOLTA program. In light of the Court's rationale, without economic damage there is no taking, the title of the piece, "Much Ado About Nothing," is certainly prescient.

I Introduction

"[N]or shall private property be taken for public use, without just compensation."1 This simple declaration has been severely convoluted in the United States Supreme Court's struggle to develop a logical analysis of the ever-changing arena of property law. Illustrative of the Supreme Court's latest constitutional property law debate is the controversy surrounding the Interest On Lawyer's Trust Account (IOLTA) Programs. The American Bar Association (ABA) defines IOLTA as an "innovative funding source."2 It is a simple definition, but right on the money. More specifically, IOLTA is the brain child of federal banking regulations.3 In 1980, 12 U.S.C. 1832 provided a legal basis for IOLTA programs. IOLTA programs fund legal services for the poor by authorizing attorneys to pool together modest interest accruals from client funds that are too nominal or in trust too briefly to earn net interest. Without IOLTA, interest accruals from these funds would remain with the bank, creating a windfall for the bank. Thus, IOLTA achieves the same objectives of the fabled hero Robin Hood because it takes money out of the hands of the bank and gives it to the poor. Better yet, it does so at no cost to the client. Without the program no net interest would accrue.

Despite IOLTA's philanthropic purpose, plaintiffs in Washington are challenging as an unconstitutional taking the Washington IOLTA program in Washington Legal Foundation v. Legal Foundation of Washington, which will be decided by the United States Supreme Court in the upcoming term. IOLTA's opponents contend the automatic transfer of interest to IOLTA is unconstitutional and should be terminated. The plaintiffs, represented by the Page 486 Washington Legal Foundation,4 argue that though they realize no net interest, the interest is their property nonetheless. Though the validity of IOLTA was hotly debated in Phillips v. Washington Legal Foundation,5 the Supreme Court only held that the interest in IOLTA was property, refusing to decide whether the program effected an unconstitutional taking. Thus, the battle over IOLTA continues.

Washington Legal Foundation v. Legal Foundation of Washington requires the Court to answer the question it escaped in Phillips - whether IOLTA is an unconstitutional taking. To determine IOLTA's constitutionality, the court must first decide whether to apply a per se test, generally reserved for physical takings, or a multi-factor test, generally applied to regulatory takings. The Court has already cut a path for analyzing regulatory takings in Penn Central Transportation Co. v. City of New York6by establishing a multi-factor test. As this paper will demonstrate, the Court must now apply the Penn Central test to pave the way toward a logical analysis of takings of intangible property (i.e., the interest at stake in IOLTA). Washington Legal Foundation v. Legal Foundation of Washington provides the Court with the perfect opportunity to establish, once and for all, the proper analysis for assessing takings of intangible property, such as the interest at issue in the constitutional challenge against IOLTA.

The Court's failure to clearly assert the proper standard for analyzing takings of intangible property such as interest or money, as opposed to real property such as land or a building, has unnecessarily clouded the controversy. IOLTA is not a regulatory taking, but it is not a physical taking either. Physical takings have generally been restricted to takings of real property, whereas regulatory takings have been restricted to takings of rights incidental to real property.7 The interest placed in IOLTA falls within neither category.

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Nevertheless, as this paper will show, the fungible nature of interest requires an ad hoc consideration such as that which is normally applied to regulatory takings. All pertinent factors must be considered before a government program may be deemed to effect an unconstitutional taking. Interest should not be analyzed under the test used for physical takings, for such a test simply does not fit the fluid nature of interest. An ad hoc consideration of the facts reveals that IOLTA cannot be considered an unconstitutional taking. Efficiency and justice, the purposes of the Fifth Amendment's Takings Clause,8 cannot be achieved if government may not transfer meager amounts of interest to a program that benefits the public good without adversely affecting the client.9

Part II, Section A sets forth the facts of Washington Legal Foundation v. Legal Foundation of Washington. Part II, Section B analyzes the history and mechanics of the IOLTA program. Lastly, Part II, Section C summarizes the essence of the constitutional dilemma over IOLTA and the importance of Washington Legal Foundation v. Legal Foundation of Washington. Part III discusses scholarly interpretations of the Takings Clause by analyzing the theories of two nationally renowned constitutional law scholars, Frank Michelman and Richard Epstein, as well as the Supreme Court's interpretation of the Takings Clause as revealed by jurisprudence. Part IV, Section A addresses Phillips v. Washington Legal Foundation, wherein the Supreme Court first considered IOLTA and held the interest at issue was property. Finally, Part IV, Section B picks up where the Phillips Court left off and analyzes the constitutionality of IOLTA. This section argues that an ad hoc analysis, rather than a per se analysis, is the proper takings analysis for IOLTA. If the Court uses an ad hoc analysis, it should conclude that IOLTA does not effect a taking. However, even if the Court applies a per se analysis and concludes that IOLTA does effect a taking, it should ultimately decide that the proper compensation due is nil. Thus, regardless of the route it chooses to take, in deciding Washington Legal Foundation v. Legal Foundation of Washington, the Court should ultimately determine that IOLTA is a constitutional exercise of government power that does not require compensation.

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II Washington Legal Foundation V. Legal Foundation Of Washington
A Facts And Procedural History

In 1984, the Washington Supreme Court included an IOLTA program in its Rules of Professional Conduct.10 The Washington Supreme Court established the Legal Foundation of Washington in tandem with the IOLTA program to implement a grant application process by which IOLTA funds would be distributed.11 Washington Rule of Professional Conduct 1.14 requires lawyers to place "client funds that are nominal in amount or expected to be held for a short period of time" in a pooled interest-bearing trust account if the attorney determines that the funds cannot be used to obtain a net return for the client.12 The interest from this pooled account is paid to the Legal Foundation of Washington, a charitable organization dedicated to improving the availability and quality of legal representation for the poor. Under Washington's program, the client's attorney is given the sole discretion, unfettered by a need for client consent, to determine whether the client's principal can be managed in a way that will earn the client a positive net return.13 In making this determination, the lawyer should consider the potential interest accrual of the funds for the anticipated length of deposit, the cost of maintaining the account including any attorney or tax reporting costs, and the ability of the financial institutions to both calculate and allocate the interest to individual clients.14

In this case, four individuals who claimed their interest had been "taken" by IOLTA along with the Washington Legal Foundation, a public interest advocacy group, filed suit to challenge the program as an unconstitutional taking. The district court granted summary judgment for the Legal Foundation of Washington, holding no property right was at stake. The Ninth Circuit Court of Appeals reversed and held the appellants owned the interest, reasoning that IOLTA effected a per se taking that required compensation.15 On rehearing en banc the Ninth Circuit reached a different conclusion and affirmed the district court ruling on the takings issue.16 The United States Supreme Court granted certiorari.17

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B The Iolta Program

The Washington IOLTA program mirrors similar programs instituted in every other state. Washington's IOLTA program, like all others, transfers interest accruals, which would otherwise go to the bank, to programs that help provide legal assistance...

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