WASHINGTON -- Putting into jeopardy a program that has raised millions of dollars for legal aid to the poor, a deeply divided Supreme Court ruled yesterday that clients are entitled to any interest earned on money left in their lawyers' hands.
If lawyers pool their clients' money and then invest it to earn interest, as lawyers in every state but Indiana now do, the resulting income belongs to the client, the court declared by a 5-4 vote.
The ruling came in a test case from Texas. But its potential effect is likely to reach state-run programs across the nation that have raised more than $100 million a year to cover legal services for the poor.
At a minimum, the ruling will mean that clients could gain veto power over any use of the interest their money earns. At a maximum, it could lead state bar associations to drop the legal aid programs financed with clients' interest because determining and following their clients' wishes could become too difficult.
The actual consequences of the decision may not be known until lower courts decide some of the constitutional issues left undecided by the court yesterday. Among those is whether clients are entitled to be compensated if the interest on their money is diverted into state government programs for the poor.
The Washington Legal Foundation, which challenged the program in Texas, praised the decision and said it "calls into serious question the constitutionality" of programs that are known formally as IOLTA -- "interest on lawyers' trust accounts."
"Governments at all levels, as well as lawyers handling client money, are now on notice that private property rights must be respected," said Richard Samp, the foundation's chief counsel.
But Jerome J. Shestack, president of the American Bar Association, noting that the ruling left open "critical issues," said, "We are confident that, ultimately, the courts will uphold the constitutionality of this vital resource for the public good. We will continue to preserve this program."
The state programs grow out of a routine facet of law practice: Clients often leave money with their attorneys to cover costs or contingencies in representing them. Before 1980, attorneys kept that money in bank checking accounts that earned no interest.
But after Congress in 1980 allowed the creation of "NOW" accounts -- with interest paid on certain checking accounts -- states began allowing lawyers to pool their clients' money to earn interest.
Beginning in Florida in 1981, lawyers could take individual clients' money, pool it and place the money in banks to earn interest.
As IOLTA programs spread, states took the interest to pay for legal services for the needy. Clients who objected to that use of their interest earnings pursued the test case in Texas, claiming that the interest belonged to them. They won yesterday.
Chief Justice William H. Rehnquist, writing for the majority, said it is the 200-year-old legal view that "interest follows principal." Because no one doubts that the money left with lawyers does belong to the clients, it follows that any interest earned on the principal does, too, Rehnquist wrote.
Though an individual client's money may not be enough to generate interest beyond the cost of administering the pooled account, clients still have a "property interest" in controlling how their interest is spent, the majority said.
Joining Rehnquist were Justices Anthony M. Kennedy, Sandra Day O'Connor, Antonin Scalia, and Clarence Thomas. Dissenting were Justices Stephen G. Breyer, Ruth Bader Ginsburg, David H. Souter and John Paul Stevens.
The dissenters argued that clients' pooled interest should not be treated as private property and that, in any event, government use of the money does not amount to an unconstitutional seizure of private property for public use.
In other action yesterday, the court:
Agreed to decide at its next term, starting in October, whether a convicted criminal has a right to remain silent at a sentencing hearing out of fear of saying something that will lead to a longer sentence. The issue arises in a Pennsylvania cocaine trafficking case.
Left intact a federal appeals court ruling that Amtrak is entitled to bar political, non-commercial messages from a billboard inside New York's Penn Station. That policy was challenged unsuccessfully by a New York City artist, Michael Lebron.
Refused to review a case involving police in Richmond, Va., testing whether white men have a right under federal civil rights law to challenge on-the-job discrimination against fellow black and female workers. A federal appeals court ruled that they do not.
Pub Date: 6/16/98