#19 Fall 1997


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TAFOL President Michael J. Mazzone, one of the plaintiffs who successfully challenged Texas' IOLTA program before the U.S. Court of Appeals for the Fifth Circuit last fall, will appear before the Supreme Court early in 1998 to defend the Fifth Circuit's decision, which dealt a potentially fatal setback to programs that siphon money from lawyers' bank accounts to fund liberal legal causes.

With the aid of contributions from supporters, TAFOL will continue to assist Mazzone's efforts to strike down these laws across the country.

IOLTA stands for "Interest on Lawyer Trust Accounts." Under these programs, lawyers place funds they hold for clients and which are "nominal in amount or are reasonably anticipated to be held for a short period of time" into interest-bearing bank accounts. The interest earned on these accounts is then paid to State organizations, such as the Texas Equal Access to Justice Foundation ("TEAJF"), which fund legal services to the poor in civil matters. Such programs exist not only in Texas but in virtually every other State. In some states they are voluntary, but in most, such as Texas, California, and Massachusetts, lawyers are required to participate in IOLTA.

All of these programs rest on one basic premise, which the Fifth Circuit ruling smashed to pieces---the premise that clients have no property rights in the interest payments earned by their money while it is temporarily held by the lawyer. In Washington Legal Foundation, et al. v. Texas Equal Access to Justice Foundation, et al., decided on September 12, 1996, the Fifth Circuit held that clients do have a property right in the interest earned by their principal. With one stroke, the Court cut the legs out from the Texas IOLTA program.

On its face, the idea that a money holder has no right to the interest on his money is preposterous. But for many years, the courts have held just that, placing great weight on the fact that the amount of interest accruing to any one client is normally so small as to be negligible. When the interest is pooled together, however, it totals in the millions. Texas IOLTA revenues have climbed as high as $9 million in a year, although failing interest rates have reduced this amount. Nationally, IOLTA programs collect over $100 million annually.

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The Fifth Circuit case began in 1994 when Mazzone, who is a Texas lawyer, and one of his clients, along with the Washington Legal Foundation, sued the Texas Supreme Court and the TEAJF claiming that Texas' mandatory IOLTA program violates the First and Fifth Amendments of the U.S. Constitution. The trial court upheld the constitutionality of the Texas IOLTA program, but the Fifth Circuit reversed that holding. The appellate court also remanded the case to the trial court for a determination of whether the clients' interest income was taken against their will.

The Fifth Circuit rejected the State's argument that IOLTA is "modern day alchemy," that property can be created from nothing. The court refused to base property rights on anomalies in banking regulations and the "fickle" tax code, which the State relied upon to support its arguments. "This short-sighted view of property renders it unacceptable," the Court said.

The Fifth Circuit's decision should end mandatory IOLTA in Texas and perhaps other states in the Fifth Circuit (Mississippi and Louisiana). However, the Court's decision conflicts with decisions of the First and Eleventh Circuits, both of which have held that clients have no property rights in the interest earned on their funds held in IOLTA accounts, that IOLTA interest belongs to no one, and that, therefore, the State can take the interest. It was this "conflict among the circuits" that convinced the Supreme
Court to hear the case.

In his brief to the trial court, after many pages of closely reasoned legal argument, Mazzone asserted that the only moral purpose of government is to protect individual rights. He then included the following quotation from Ayn Rand:

"It was the concept of individual rights that had given birth to a free society. It [is] with the destruction of individual rights that the destruction of freedom [has] to begin." A. Rand, "Man's Rights," The Virtue of Selfishness 95 (1964).

Mazzone has donated many hours of professional effort to the cause, while TAFOL has funded his expenses at the trial and appellate levels. TAFOL is preparing an amicus curiae brief in support of the IOLTA opponents. The Fifth Circuit's opinion can be found at 94 F.3d 996, on petition for rehearing at 106 F. 3d 640, or downloaded free of charge from the Internet at: [sorry, link no longer works]


TAFOL was planning to file an amicus brief with the U. S. Supreme Court in Hopwood v. Texas, 78 F.3d 943 (5th Cir. 1996), but the Court let stand the Fifth Circuit's decision, which had struck down the University of Texas Law School's affirmative action program. The Supreme Court also refused to reconsider the decision in a similar case from New Jersey, Taxman v. Board of Education, 91 F.3d 1547 (3rd Cir. 1996). This deprived TAFOL of the opportunity to submit an amicus brief. However, affirmative action in education is not dead, and the Fifth Circuit's decision applies only to states within that judicial circuit (Texas, Louisiana, and Mississippi). So, further court challenges are virtually certain.


Governments have traditionally forced consumers of certain kinds of service (electricity, natural gas, telephone. etc.) to patronize particular companies providing service in a local or regional area. Over the past decade, deregulation of the telecommunications and natural gas industries has permitted customers to choose their service providers freely.
Recently, wholesale purchasers of electricity have also been allowed to select

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their vendors, and large retail consumers have begun to demand the same prerogative, with mixed results. The deregulation of electric services is proceeding slowly, as bureaucrats and the business interests they protect show reluctance to give up their powers and privileges.

Alabama's bureaucrats and the franchised utilities they regulate are a particularly egregious example of this reluctance. Last year, the Alabama legislature enacted a bill to protect current providers of electricity from new competition. Under this law, a customer must notify his present electric company of any intention to change electricity providers. His present provider can then petition the Public Service Commission or a court for review of the contract. After a cumbersome legal procedure, the government agency determines "whether the contract is consistent with the public interest by determining whether the private contract for electric service will materially impair the ability of [the present provider] to provide efficient and reliable service at a reasonable cost to and for the public which it continues to serve." If the contract is "consistent with the public interest," the customer must pay "stranded costs" to the company it was formerly forced to deal with. "Stranded costs" means "all verifiable costs or obligations incurred by a utility in order to provide service to electric customers in the area served by the utility that cannot actually be recovered through mitigation upon the transfer of the existing electric customer to another supplier."

This law was drafted by Alabama Power, the most prominent previously protected monopoly company. Its claimed justification is to compensate the protected companies for investments they had been required to make to serve those customers who now want to buy elsewhere.

A lawsuit, American Energy Solutions v. Alabama Power Company, has been filed in a federal court attacking this law as unconstitutional. It is presently bogged down in procedural disputes. TAFOL is watching this case to determine whether an amicus curiae brief would be appropriate.


In a letter dated December 20, 1996, President Michael Mazzone informed each person on our mailing list that TAFOL could no longer rely on sporadic contributions. If you wish to continue receiving this Bulletin and to support TAFOL, and you have not already sent a contribution, please send your donation of (at least) $25 to the address shown at the bottom of the first page. All contributions are tax deductible.

The out-of-pocket costs associated with preparation of TAFOL's amicus brief to the Supreme Court in the IOLTA case are estimated at $1,000. Your help is needed to cover these expenses; the lawyers involved are donating their professional time and effort to the cause.


New members of TAFOL's Board of Directors are Michael Conger, Dee Tagliavia, and James McCrory. Conger, a pension lawyer in Kansas City, Missouri, has given many years of faithful service as TAFOL's treasurer. Tagliavia, who was one of TAFOL's founders and previously served on the Board of Directors, was most recently Vice President of Regulatory Affairs and Assistant General Counsel for American Energy Services, Inc. McCrory, who is a member of the New Mexico bar, is a real estate manager and solo practitioner. The incumbent Board members, Stephen Plafker and Robert Getman, welcome all three new members. Michael Mazzone and Thomas Bowden are leaving the Board, with the expectation of returning to serve again in the future.


The winner of TAFOL's Third Annual Essay Contest is Geoffrey Wilson, who is starting his third year

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at the University of Southern California Law Center. Mr. Wilson was introduced to Objectivism through the Campus Club at the University of Michigan. He would like to practice real estate or land use law when he graduates.

The winner of the second prize, Jon Andrew Bierman, read Atlas Shrugged and some of Ayn Rand's essays as an undergraduate but does not describe himself as an Objectivist. A 26-year-old second year student at St. Louis University Law School, Mr. Bierman hopes to practice corporate law with an emphasis on appellate work.

Nirupa Netram, who is starting her third year at Southern University College of Law in St. Petersburg, Florida, won third prize in this year's contest. She became acquainted with Ayn Rand's work briefly in high school. She plans to practice family law upon graduation.

The winning essay will be printed in a future edition of this Bulletin.

Copyright © 1997 The Association for Objective Law. All rights reserved. The Association for Objective Law is a Missouri non-profit corporation whose purpose is to advance Objectivism, the philosophy of Ayn Rand, as the basis of a proper legal system.