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CRC Op-eds and Letters to the Editor

No Loss, No Foul
Timothy J. Dowling and Douglas T. Kendall
January 20, 2003


Consider this Zen riddle pending before the Supreme Court in Washington Legal Foundation v. Legal Foundation of Washington: If government programs "take" interest income, but cause no economic harm, do they violate the just compensation clause of the Fifth Amendment?

As a matter of law, the answer is actually straightforward because the text of the just compensation clause, and a century of precedent, dictate that the programs should continue. But a significant jurisprudential conundrum remains: Will the justices embrace the political outcome desired by conservative legal activists or the result compelled by an equally conservative commitment to textualism, federalism, and judicial restraint?

The Washington Legal Foundation (WLF) seeks to deal a devastating blow to legal aid providers, who rely heavily on the money generated by IOLTA programs -- the term stands for Interest on Lawyers' Trust Accounts -- to provide legal services to our neediest citizens. Although this case challenges only Washington state's program, hanging in the balance are similar programs in the other 49 states and the District of Columbia that generated more than $148 million in legal aid last year.


IOLTA programs pool small amounts of money held by lawyers for clients for short periods of time, and use the interest generated by these pooled accounts to fund legal services for the poor. Joining the WLF as claimants in the case are two people whose money was used to generate interest for the IOLTA program. The critical fact of the case is that funds are included in IOLTA only if they are so small and held for so short a time that they cannot generate net interest outside the program, due to bank fees and other transaction costs. In other words, if the Washington IOLTA program didn't exist, the claimants would not have been able to earn a penny of net interest.

The WLF does not seriously contest this fact. Rather, it seeks relief based on the government's benefit (less than $7 from the claimants here) and for the non-economic, ideological harm the claimants allegedly suffered when the interest was used for legal services for the poor. They do not seek reimbursement of the interest, but instead ask the Court to shut down the program altogether through an injunction.

The text, purpose, and history of the just compensation clause show why the WLF's arguments must fail. The clause -- "nor shall private property be taken for public use, without just compensation" -- does two things. It recognizes the sovereign power to take property through eminent domain, and then conditions that power upon the payment of just compensation for any taking.

The recognition of the power of eminent domain is as important as the condition, for it protects the public from being held hostage by holdouts. Without the power to condemn property, owners could extort windfall profits from the taxpayers when they happen to hold key property necessary to complete a proposed road, park, or other public project. Or they could stop needed community initiatives by refusing to sell.

In construing the just compensation clause, the Supreme Court avoids the holdout problem by measuring compensation for any taking based on the claimant's loss, not by the public's gain. For example, when the government requisitioned private ships for use during World War II, just compensation did not include any increase in value due to the government's urgent need of the vessels. Instead, long-standing case law makes clear that just compensation should simply return the claimant to the same position monetarily but for the taking. The claimant is made whole for any direct monetary loss, but is not allowed to extract an unfair profit by exploiting a pressing public need for the property. It follows that where the claimant suffers no economic injury, just compensation for any taking is zero.

The Court's 1926 ruling in Marion & Rye Valley Railway Co. v. United States illustrates these principles. There, the Court addressed a takings claim premised upon a presidential proclamation authorizing the government to take control of the claimant's railroad. Despite the proclamation, the government never interfered with the railroad's operations, and the company suffered no economic loss. Writing for a unanimous court, Justice Louis Brandeis concluded that even assuming that the proclamation effected a taking, no economic harm resulted, so no compensation or relief was due.

Applying these principles to IOLTA, it becomes clear that even if a taking has occurred (a hotly contested issue), the claimants have suffered no economic harm and, thus, just compensation for any taking is zero. True, the IOLTA program benefits legal aid providers. But the measure of just compensation is the claimants' loss, not IOLTA's gain. Indeed, an award of compensation would result in an unfair windfall to the claimants, who would not have earned any net interest on their money absent the IOLTA program.

The WLF's request for injunctive relief makes the case especially incongruous. As former Acting Solicitor General Walter Dellinger observed at oral argument in December, if the government takes property worth $10, it is undisputed that just compensation for the taking is $10. If the property drops in value from $10 to zero prior to the taking, the owner gets nothing. The WLF, however, contends that it is entitled to equitable relief preventing the taking from occurring altogether. Adopting the WLF's position would give owners of valueless property the unique power to prevent eminent domain, a nonsensical result.

Justice Anthony Kennedy asked counsel for the government whether "it may take property for free whenever it is too difficult to calculate just compensation." But it is not difficult to calculate just compensation here. We know precisely what just compensation is for the loss suffered by the claimants: zero. An award of zero dollars would place the claimants in precisely the same position they would be in but for the IOLTA program.

Justice Sandra O'Connor steered the dialogue toward the heart of the case, asking: "If it is shown that no compensation is due, how is it a taking?" Her inquiry actually raises two issues: whether the claimants' property had been taken, and whether (assuming a taking had occurred) they had been denied just compensation. Under the plain constitutional text, a taking of property does not alone establish a violation of the just compensation clause. Because those challenging IOLTA have not suffered a denial of just compensation, they deserve no relief.


Aside from the law, the case also involves politics. Anti-government groups such as the WLF have spent the last two decades trying to establish the just compensation clause as a license for courts to engage in free-ranging inquiries into the wisdom of public programs. This reading of the clause would present profound difficulties to the unelected judiciary. In a recent fund-raising letter, the WLF portrays IOLTA programs as a scam that provides funding for "radical legal groups."

On the other hand, every state in the union has adopted IOLTA programs, uniformly viewing these programs as an essential source of desperately needed funding for legal services for the poor. The states emphasize that IOLTA funding helps domestic violence victims, seniors swindled by con artists, patients denied life-saving treatment because of bureaucratic snafus, and many others unable to afford critical legal services. In making the decision whether to keep IOLTA, we have a pure policy call that appropriately falls outside the realm of constitutional adjudication.

As Justice Kennedy wisely opined in 1998 in the face of a similar attempt to expand the application of the just compensation clause, the clause is the wrong lens through which to view constitutional challenges that turn on the wisdom of government programs. If challenged at all, the reasonableness of IOLTA should be evaluated under the Constitution's due process clause. At oral argument, Justice
O'Connor and others on the Court made similar suggestions.

At the end of the day, the case will turn on whether the Court pays proper respect to the language of the constitutional text and to the conclusion by state officials across the country that IOLTA programs comport with our basic charter. As noted by the Conference of Chief Justices in its amicus brief, there are few areas in which the states have stronger interests than in the administration of their own judicial systems. In the absence of economic harm to the claimants, the plain text of the just compensation clause provides no warrant for intruding upon these significant state interests.

Timothy J. Dowling and Douglas T. Kendall are, respectively, chief counsel and executive director of the Community Rights Counsel, in Washington, D.C. The Community Rights Counsel filed an amicus brief in the IOLTA case in support of the state of Washington on behalf of the National League of Cities and others.


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