This is how the List View Works. LayoutTemplate will be replaced with GroupTemplate(If it is used).
you can see the following link
http://msdn.microsoft.com/en-us/library/bb398790.aspx[
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To have your cellpadding and all the css, add it in the Table under the Group Template or remove the table under the Group Template
You can do any of the following
<GroupTemplate>
<table cellpadding="2" width="640px" border="2" runat="server" id="Table1"><tr id="tableRow" runat="server">
<td id="itemPlaceholder" runat="server">
</td></tr></table>
</GroupTemplate>
or
<GroupTemplate>
<tr id="tableRow" runat="server">
<td id="itemPlaceholder" runat="server">
</td></tr>
</GroupTemplate>