WA. Legal Foundation v. Legal Foundation of WA.

Decision Date09 May 2001
Citation271 F.3d 835
CourtU.S. Court of Appeals — Ninth Circuit

James J. Purcell, Esq., Seattle, Washington, for the plaintiffs-appellants; Daniel J. Popeo, Esq., Washington, Dc, for the plaintiffs-appellants; Richard Samp, Esq., Washington, Dc, for the plaintiffs-appellants.

David J. Burman, Esq., Perkins Coie, LLP, Seattle, Washington, for the defendants-appellees, Legal Foundation of Washington and Kevin F. Kelly; Todd E. Pettys, Esq., Perkins Coie, LLP, Seattle, Washington, for the Defendants-Appellees, Legal Foundation of Washington and Kevin F. Kelly; Maureen A. Hart, Esq., Assistant Attorney General, Olympia, Washington, for the defendants-appellees, Washington State Supreme Court Justices.

Stephen M. Rummage, Esq., Chicago, Illinois, for the amicus curiae the American Bar Association; Thomas P. Brown, Esq., Heller Ehrman White & Mcauliffe, San Francisco, California, for the amici curiae Alaska Bar Foundation, Arizona Bar Foundation, Oregon Law Foundation; Peter M. Siegel, Esq., Florida Justice Institute, Inc., Miami, Florida, for the amici curiae National Association of Iolta Programs and 64 State Iolta Programs, State Bar Associations and other organizations concerned with the availability of legal aid to the poor; Robert Dean Welden, Esq., Seattle, Washington, for the amicus curiae Washington State Bar Association.

Appeal from the United States District Court for the Western District of Washington; John C. Coughenour, District Judge Presiding. D.C. No. CV-97-00146-JCC.

Before: Schroeder, Chief Judge, Pregerson, Kozinski, Trott, Kleinfeld, Tashima, Silverman, Wardlaw, Fisher, Berzon, and Rawlinson, Circuit Judges.

Wardlaw, Circuit Judge:

Four individuals, Allen Brown, Greg Hayes, Dennis Daugs, and Dian Maxwell, and the Washington Legal Foundation (collectively "Appellants") challenge the legality of Washington State's Interest on Lawyers' Trust Account ("IOLTA") program on First and Fifth Amendment grounds. Beginning where the Supreme Court left off in Phillips v. Washington Legal Foundation, 524 U.S. 156, 160 (1998), Appellants contend that the Washington State IOLTA program unconstitutionally takes the interest generated by their monies placed in IOLTA trust accounts and compels speech. We review this case en banc to consider whether there has been an unconstitutional taking, i.e., a taking without just compensation, of property belonging to Appellants. In doing so, we reject the analytical approach that "trifurcates" the Fifth Amendment issues, previously taken of procedural necessity or otherwise by other courts. Believing the better approach to be consideration of the Fifth Amendment question as a whole, we must decide whether the State of Washington, by establishing its IOLTA program and applying it to Limited Practice Officers, took property belonging to any of the five Appellants without providing just compensation therefor. We analyze this issue in accordance with the dictates of Penn Central Transportation Co. v. City of New York, 438 U.S. 104, 124 (1978), and hold that with respect to the funds deposited into client trust accounts by the Limited Practice Officers in this case, there has been no taking of property without just compensation in violation of the Fifth Amendment. U.S. Const. amend. V. We have jurisdiction pursuant to 28 U.S.C. § 1291, and we affirm the district court with respect to Appellants' Fifth Amendment claim. Because the district court did not have the opportunity to consider Appellants' First Amendment claim in light of Phillips, however, we vacate the judgment on that claim and remand for further proceedings.


When a lawyer takes the oath of a state bar, he receives the great privilege of admission to the practice of law in that state and pledges to conduct himself in accordance with the code of professional responsibility that accompanies such an honor. Of the many ethical requirements placed upon lawyers, one of the most significant is loyalty to the client. In addition to representing their clients zealously and protecting their legal rights, lawyers must protect the integrity of their clients' property and avoid using their position as the property's temporary guardian to their own benefit. To this end, lawyers have long been required to place their clients' money in bank accounts separate from their own. As early as 1908, professional ethical guidelines required that "money of the client or collected for the client . . . should be reported and accounted for promptly, and should not under any circumstances be commingled with his own or be used by him." Canons of Professional Ethics Canon 11 (1908) (amended 1933). Today, almost one hundred years later, lawyers in all fifty states are held to that same high standard of professional conduct. According to the Model Rules of Professional Conduct, "[a] lawyer shall hold property of clients or third persons that is in a lawyer's possession in connection with a representation separate from the lawyer's own property. Funds shall be kept in a separate account maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person." Model Rules of Prof'l Conduct R. 1.15(a) (1999).

In compliance with these ethical obligations, before 1980, clients' funds were generally pooled in noninterest-bearing, federally insured checking accounts. Phillips , 524 U.S. at 160. Even though, at that time, federal law prohibited federally insured banks from paying interest on checking accounts, such accounts were used to ensure that the funds were available on demand. See 12 U.S.C. § § 371a, 146(b)(1)(B), 1828(g). The holding bank received a great windfall from these accounts. Not only did the holding banks use the funds as an interest-free loan, keeping all the derived income, but they also charged the account holder-the lawyer-a fee for services rendered. Only if a sum was very large or was to be held for a long period of time would it be placed in an interest-bearing savings account, because, at that point, the loss of the checking account convenience was outweighed by the value of the interest gained. See Phillips , 524 U.S. at 160-61; see also ABA Comm. on Ethics and Prof'l Responsibility, Formal Op. 348 (1982). When such an account was set up, the client bore the additional costs for any services rendered by the bank and the lawyer in accounting for the interest, remitting it to the client, and generating tax forms for both the client and the Internal Revenue Service.

Client trust accounts, however, would not remain interest-free for long. In 1980, Congress passed the Consumer Checking Account Equity Act, codified at 12 U.S.C. § 1832, which allowed federally insured banks to pay interest on certain demand accounts, called "Negotiable Order of Withdrawal" ("NOW") accounts. NOW accounts are strictly regulated; they must "consist solely of funds in which the entire beneficial interest is held by one or more individuals or by an organization which is operated primarily for religious, philanthropic, charitable, educational, political, or other similar purposes and which is not operated for profit. " Phillips, 524 U.S. at 161 (quoting 12 U.S.C. § 1832(a)(2)). Although for-profit organizations, such as corporations, partnerships, associations, and insurance companies, are precluded from establishing NOW accounts for their own benefit, the Federal Reserve Board has determined that they may do so if the funds "are held in trust pursuant to a program under which charitable organizations have `the exclusive right to the interest.' " Id. at 161 (citation omitted).

Congress could not have better timed its authorization of interest-bearing NOW accounts. Not only had interest rates reached unprecedented levels in the 1970s, but the States were in need of a new source of legal aid funding. An ethical tradition of the legal profession is the provision of legal services to those who cannot afford to pay for them. See Model Rules of Prof'l Conduct R. 6.1 (Legal Background); Geoffrey C. Hazard, Jr., After Professional Virtue, 6 Sup. Ct. Rev. 213, 215 (1989) ("[A] lawyer's obligation to represent the poor . . . is a classic canon of the legal profession."). Providing legal services to the poor is a complex undertaking, but at a minimum, all attorneys bear the ethical responsibility at some point in their career to represent indigent clients or in some manner work to make the legal system accessible to those who could not otherwise afford it. To that end, bar associations recommend that their members designate a certain number of hours each year to pro bono services. See Model Rules of Professional Conduct Rule 6.1 (recommending at least fifty hours of pro bono work a year). They also help secure funding to support individuals and organizations that provide indigent legal services. From 1974 to 1981, a large percentage of this funding came from the Legal Services Corporation, a federally funded corporation, which awarded direct grants to local attorneys providing legal services to the poor. See James D. Anderson, The Future of IOLTA: Solutions to Fifth Amendment Takings Challenges Against IOLTA Programs, 1999 U. Ill. L. Rev. 717, 720. In 1981, however, Congress severely limited the scope and budget of the ...

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