Brown v. Legal Foundation of Wash.
538 U.S. 216 (2003)

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No. 01-1325. Argued December 9, 2002-Decided March 26, 2003

Every State uses interest on lawyers' trust accounts (IOLTA) to pay for legal services for the needy. In promulgating Rules establishing Washington's program, the State Supreme Court required that: (a) all client funds be deposited in interest-bearing trust accounts, (b) funds that cannot earn net interest for the client be deposited in an IOLTA account, (c) lawyers direct banks to pay the net interest on the IOLTA accounts to the Legal Foundation of Washington (Foundation), and (d) the Foundation use all such funds for tax-exempt law-related charitable and educational purposes. It seems apparent from the court's explanation of its IOLTA Rules that a lawyer who mistakenly uses an IOLTA account for money that could earn interest for the client would violate the Rule. That court subsequently made its IOLTA Rules applicable to Limited Practice Officers (LPOs), nonlawyers who are licensed to act as escrowees in real estate closings. Petitioners, who have funds that are deposited by LPOs in IOLTA accounts, and others sought to enjoin respondent state official from continuing this requirement, alleging, among other things, that the taking of the interest earned on their funds in IOLTA accounts violates the Just Compensation Clause of the Fifth Amendment, and that the requirement that client funds be placed in such accounts is an illegal taking of the beneficial use of those funds. The record suggests that petitioners' funds generated some interest that was paid to the Foundation, but that without IOLTA they would have produced no net interest for either petitioner. The District Court granted respondents summary judgment, concluding, as a factual matter, that petitioners could not make any net returns on the interest accrued in the accounts and, if they could, the funds would not be subject to the IOLTA program; and that, as a legal matter, the constitutional issue focused on what an owner has lost, not what the taker has gained, and that petitioners had lost nothing. While the case was on appeal, this Court decided in Phillips v. Washington Legal Foundation, 524 U. S. 156, 172, that interest generated by funds held in IOLTA accounts is the private property of the owner of the principal. Relying on that case, a Ninth Circuit panel held that Washington's program caused an unconstitutional taking of petitioners' property and remanded


the case for a determination whether they are entitled to just compensation. On reconsideration, the en banc Ninth Circuit affirmed the District Court's judgment, reasoning that, under the ad hoc approach applied in Penn Central Transp. Co. v. New York City, 438 U. S. 104, there was no taking because petitioners had suffered neither an actual loss nor an interference with any investment-backed expectations, and that if there were such a taking, the just compensation due was zero.


1. A state law requiring that client funds that could not otherwise generate net earnings for the client be deposited in an IOLTA account is not a "regulatory taking," but a law requiring that the interest on those funds be transferred to a different owner for a legitimate public use could be a per se taking requiring the payment of "just compensation" to the client. Pp.231-235.

(a) The Fifth Amendment imposes two conditions on the State's authority to confiscate private property: the taking must be for a "public use" and "just compensation" must be paid to the owner. In this case, the overall, dramatic success of IOLTA programs in serving the compelling interest in providing legal services to literally millions of needy Americans qualifies the Foundation's distribution of the funds as a "public use." Pp.231-232.

(b) The Court first addresses the type of taking that this case involves. The Court's jurisprudence concerning condemnations and physical takings involves the straightforward application of per se rules, while its regulatory takings jurisprudence is characterized by essentially ad hoc, factual inquiries designed to allow careful examination and weighing of all relevant circumstances. Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency, 535 U. S. 302, 322. Petitioners separately challenged (1) the requirement that their funds must be placed in an IOLTA account and (2) the later transfers of interest to the Foundation. The former is merely a transfer of principal and therefore does not effect a confiscation of any interest. Even if viewed as the first step in a regulatory taking which should be analyzed under the Penn Central factors, it is clear that there would be no taking because the transaction had no adverse economic impact on petitioners and did not interfere with any investment-backed expectation. 438 U. S., at 124. A per se approach is more consistent with the Court's reasoning in Phillips than Penn Central's ad hoc analysis. Because interest earned in IOLTA accounts "is the 'private property' of the owner of the principal," Phillips, 524 U. S., at 172, the transfer of the interest to the Foundation here seems more akin to the occupation of a small amount of rooftop space in Loretto v. Teleprompter Manhattan CATV Corp.,

Full Text of Opinion

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