Amicus Curiae Brief — Phillips v. Washington Legal Foundation

No. 96-1578 |

—

— —

In the Supreme Court of the United States

OcTOBER TERM, 1996

Hon. THOMAS R. PHILLIPS, ET AL., PETITIONERS

WASHINGTON LEGAL FOUNDATION, ET AL.

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

BRIEF FOR THE

UNITED STATES AS AMICUS CURIAE

SUPPORTING PETITIONERS

WALTER DELLINGER

Acting Solicitor General

FRANK W. HUNGER

Lois J. SCHIFFER

Assistant Attorne ys General

EDWIN S. KNEEDLER

De puty Solicitor General

PATRICIA A. MILLETT

Assistant to the Solicitor

General

ROBERT KLARQUIS1

TIMOTHY DOWLING

JARED A. GOLDSTEIN

Attorne ys

De partment of Justice

Washington, D.C. 20580-0001

(202) 514-2217

QUESTION PRESENTED

Whether interest earned on client trust funds held by

lawyers in the Interest on Lawyers Trust Accounts

(IOLTA) program is a property interest of the client or

lawyer, cognizable under the Fifth Amendment to the

United States Constitution, despite the fundamental

precept of IOLTA that such funds, absent the IOLTA

program, could not earn interest for the client or lawyer.

TABLE OF CONTENTS

r ‘nists sindsensondncnastcanesoscessoonssceceeees

Argument:

Interest generated through the IOLTA program is

a government-created value and thus is not “private

property” within the meaning of the Fifth Amend-

We

B. Because respondents had no reasonable, invest-

ment- backed expectation that their funds would

generate interest, the proceeds of the IOLTA

account are not respondents’ property ............

C. As a government-created value, IOLTA in-

terest is not a component of private property

protected by the Fifth Amendment

D. Webb’s Fabulous Pharmacies, Inc. v. Beckwith

does not render IOLTA programs unconstitu-

SII iii diddatinaaintbbbpinetideeesnsiinéeeteccscecssensecosoceee

S rr

TABLE OF AUTHORITIES

Cases:

Agins v. City of Tiburon, 447 U.S. 255 (1980) ........

Andrus v. Allard, 444 U.S. 51 (1979) . .

Page

12

19

8

19

Board of Regents v. Roth, 408 U.S. 564 (1972). 10, 15, 27

Boston Chamber of Commerce v. City of Boston,

F id ddiealdmcundssctntuddtencsesceoesssesecese

Brushaber v. Union Pacific R. R., 240 U.S. 1

j re

Carroll v. State Bar of California, 213 Cal. Rptr.

305 (Cal. Ct. App.), cert. denied, 474 U.S. 848

rene .

(III)

IV V

Cases Continued: Page Cases Continued: Page

City of New York v. Sage, 239 U.S. 57 (1915) 21, 22 Minnesota State Bar Ass'n, In re, 332 N.W.2d 151

Colorado Springs Prod. Credit Ass'n v. Farm GE, TD — —ʒꝛx•ꝛ̃ĩ Zʃ-:(: 12

Credit Admin, 967 F.2d 648 (D.C. Cir. 1992) ....... 30 National Bank of the Commonwealth v. Mechanics’

Cone v. State Bar of Florida, 819 F.2d 1002 Nat'l Bank, 94 U.S. (4 Otto.) 437 (1876) ............... 15

(11th Cir.), cert. denied, 484 U.S. 917 (1987)... 11, 12, 28 New Hampshire Bar Ass'n, In re, 453 A.2d 1258

Connolly v. Pension Benefit Guaranty Corp., 4 . 6. 12

Gee ß tat 10, 19 Old Colony Trust Co. v. Commissioner, 279 U.S.

Dolan v. City of Tigard, 512 U.S. 374 (1994) ......... 27 — —— . 28

First English Evangelical Lutheran Church v. Olson v. United States, 292 U.S. 246 (1934). 20, 21, 23

County of Los Angeles, 482 U.S. 304 (1987) ......... 25, 26 Parkersburg Nat'l Bank v. Als, 5 W. Va. 50

Florida Bar v. Went For It, Inc., 515 U.S. 618 —K—K 16

— » 10-11 Penn Central Transp., Co. v. New York City,

Haswell v. Farmers & Mechanics’ Bank, 26 Vt. ae ae Se GT tcemnitetinntenenstctivetinitenntinnins 9, 13, 26, 27

—— ͤ ARE RESETS 16 Pennsylvania Coal Co. v. Mahon, 260 U.S. 393

Hillsboro Nat'l Bank v. Commissioner, 460 U.S. —— . —%%—— — 27

9 — —„—-— 28 Pittman v. Chicago Bd. of Educ., 64 F.3d 1098

Hooker. Burr, 194 U.S. 415 (1904) 27 (7th Cir. 1993), cert. denied, 116 S. Ct. 2497

Indiana State Bar Ass'n Petition, In re, 550 N.E.2d — — 10

ö ictal 6. 12 PruneYard Shopping Ctr. v. Robins, 447 U.S. 74

Interest on Lawyers’ Trust Accounts, In re: 1c 9, 12, 15, 25

675 S.W.2d 355 (1984), modified, 689 S.W.2d Ruckelshaus v. Monsanto Co., 467 U.S. 986

352 (1985), modified, 709 S.W.2d 400 (1986), — AA e eee 18

amended, 738 S. W. 2d 803 (Ark. 1987) 11. 12 Seaboard Air Line Ry. v. United States, 261 U.S.

ZL 6. 12 K . 25

Interest on Trust Accounts, In re, 402 So. 2d 389 Sellers v. Harris — 483 S. W.2d 242 (Tex.

. ů . 8 12. 14 —ů ——„— —T——— —. 15

IOLTA Adoption Order, 102 Wash.2d 1101 Suitum v. Tahoe Regional Planning Agency,

761—Sꝛr. ea. 12 117 S. Ct. 1659 (1997) .... ...... .. . . 25

Jacobs v. United States, 290 U.S. 13 (19333 26 Tellis v. Godinez, 5 F.3d 1314 (9th Cir. 1993), cert.

Jones v. Mallory, 22 Conn. 386 (1853) 16 Genied, 513 U.S. O45 (1904) . eee 19

Logan v. Zimmerman Brush Co., 455 U.S. 422 United States v. Causby, 328 U.S. 256 (1946) ....... 22

— T atta hacia 10 United States v. Chandler-Dunbar Water Power

Lucas v. South Carolina Coastal Council, 505 U.S. . wicthadiiccrtieelbinintecenaietccbsinens 20, 24

1 ital tie 10, 12, 27 United States v. Cors, 337 U.S. 325 (1949) ........... 22

Massachusetts Ber Ass'n, In re, 478 N.E.2d 715 United States v. 564.54 Acres of Land, 441 U.S.

RE AP a Se = 12 „ ————— centile teeth casi 26

Cases—Continued: Page

United States v. Fuller, 409 U.S. 488 (1973) ........ 21, 22

United States v. Kirby Lumber Co., 284 U.S. 1

. 28

United States v. Miller, 317 U.S. 369 (1943) ........ 23, 25

United States v. Philadelphia Nat! Bank,

II cetteencitieeetectentninctniniininitsniennd 16, 17

United States v. Powelson, 319 U.S. 266 (1943) .... 9, 21,

23, 26

United States v. Rands, 389 U.S. 121 (1967) ........ 26

United States v. Reynolds, 397 U.S. 14 (1970) ...... 27

United States v. Sperry Corp., 493 U.S. 52

——ͤͤͤ— K e 13, 19, 28, 30

United States v. Twin City Power Co., 350 U.S.

9 —— K 23, 26, 29

United States v. Willow River Power Co., 324 U.S.

— ̃ 10

Washington Legal Found. v. Massachusetts Bar

Found., 993 F.2d 962 (Ist Cir. 1993) . 3. 12, 25

Webb's Fabulous Pharmacies, Inc. v. Beckwith,

14 ccterccreetattinaninnnnsttiinies 8, 28, 29, 30

Williamson County Regional Planning Comm'n v.

Hamilton Bank of Johnson City, 473 U.S. 172

— mn 25

Yee v. City of Escondido, 503 U.S. 519 (1992) ....... 12, 27

Constitution, statutes, regulations and rules:

U.S. Const.:

II tea 28

22111 — 7

1 passim

Just Compensation Clause ......... 8, 9, 10, 19, 23, 25, 27

CTE GOT cinttailiinenionsiotinnaiiacintaitlenieenitiiaiiaies 7,9

rr. 10

% ² U ² 3 ˙ 28

Act of Sept. 21, 1966, Pub. L. No. 89-597, § 1,

NR eee AE OS 17

Vil

Statutes, regulations and rules—Continued:

Act of Aug. 16, 1973, Pub. L. No. 93-100, § 2,

1 ———K—L—.

Banking Act of 1933, ch. 89, 48 Stat. 162 .

BS De, GE ccnsactenccssntsntntgnenistnvenmmanmmnesnenssesces

Banking Act of 1935, ch. 614, § 101, 49 Stat. 702

1 !

Depository Institutions Deregulation Act of 1980,

Pub. L. No. 96-221, Tit. II. 94 Stat. 142 ...... . ...

12 U.S.C. 3501-3509 (1982) .... . .

Federal Deposit Insurance Corporation Improve-

ment Act of 1991, Pub. L. No. 102-242, 105 Stat.

3 —-—-— ——¼½4

Financial Institutions Regulatory and Interest Rate

Control Act of 1978, Pub. L. No. 95-630, 92 Stat.

. —

1... ü

1 e

. +

1... .

. L

1» .

r A

Cal. Bus. & Prof. Code § 6211(a) (West 19990) ...........

Md. Bus. Occ. & Prof. Code Ann. § 10-303 (1995) .....

N.Y. Jud. Law § 497 (McKinney Supp. 1997) ..........

Ohio Rev. Code Ann. § 4705.09(A)(1) (Anderson

—————ů ů ů —ͤ —W— 22 —

A Bill Against Usury, 37 Hen. 8, ch. 9 (1545) .........

12 C. F. R.:

K —

? —

„ ũ—

Ala. R. P. C. 1.15(g) (Michie 1996) . . . . . . . .

VIII

Rules —Continued:

Alaska R. P. C. I. 150d) (1997) .......... 1 — —

Ariz. Sup. Ct. R. 440% %) (West 1997) . ..

Ark. R. P. C. 1.15(d)(2) (Michie 1997) . . ...

Colo. R. P. C. I. 15e 2) (West 1997) .. . . ...

Conn. R. P. C. 1. 150d) (West 1996) ...

Del. R. P. C. 1.15(h) (Michie 1997) . ..

D.C. R. Ct. App. Bla) (West 1997) .. . . ..

Fla. Bar R. 5. 1-1 (West 1997) . . . ... . . e

Ga. C. P. R. DR 9-10 00) (Michie 1997) .

Haw. Sup. Ct. R. 11 (Michie 1997) ... .... . . . ..

Idaho R. P. C. I. 150d) (West 1997) . .

III. R. P. C. 1. 150d) (West 1997) . . . .

lowa C. P. R. DR 9-102 (West 1997) .

Kan. R. P. C. 1.15(d)(3) (West 1997) . .

Ky. Sup. Ct. R. 3. 130 (Michie 1997) . . . . . . .

eee

Me. C. P. R. 3. 60e 04) (West 1996) . . .

Mass. Sup. Ct. R. 3:07 (West 1997) . . . .

Mich. R. P. C. I. 180d) (West 1997 . . . . . .

Minn. R. P. C. I. 180d) (West 1997) . .

Mias. R. P. C. 1.15(d) (West 1996) .

Mo. R.P.C. 1.1G(e) (West 1987) ....cccscccrcscscevccssscesessees

Mont. R. P. C. 1.18(b) (West 1997) .

Neb. Sup. Ct. R. Trust Acct. (West 1997) . . ..

Nev. Sup. Ct. R. 217 (Michie 1996) .. . .. . . . .

N. J. R. Gen. App. 1:28 A-2 (West 1997) . . . ..

N. M. R. P. C. 16-115(D) (Michie 1995) . . .

Lee

N. D. R. P. C. 1.15(d)(1) (West 1997) ... .. . . .

Okla. R. P. C. I. 150d) (West 1997)

Ore. C. P. R. DR 9-101 D)“) (West 1997) . .

Mee eee

Pa. R. Disc. Enf. 601(d) (West 1997) .

S.C. App. Ct. R. 412 (Law. Co-op. 1988) . . . .. .

S. D. R. P. C. 1.15(d)(4) (Michie 1995) . .

Tenn. C. P. R. DR 9-102(C)(2) (West 1996) . . ..

2

AAAAAPAAAPAAAAAAAPAAAAAAAAAAAAAAAAAAAASH

i

Rules—Continued:

Tex. Bar R. (1997):

Art. X:

i |.) |

Re

Art. XI:

ww o

1ü» — 5, 14,

Va. Sup. Ct. R. Pt. 6, § 4. 1 20 (Michie 1997) ...........

Vt. C. P. R. DR 9-103 (West 1996) .. . . . . . . . .

Wash. R. P. C. 1.14(c)(1) (West 1997) . .. .

W. Va. R. P. C. I. 150d) (Michie 1997) ... . . .

Wis. Sup. Ct. R. (West 1997):

Beate 1—Kk»’ͤKͤK»

„„ U

Wyo. R. P. C. 1.15(11) (Michie 1997) . . . . .

Rules Governing the Operation of the Texas Equal

Access to Justice Program (1997):

11. ———

* S

Miscellaneous:

ABA/BNA, Lawyers’ Manual on Professional

„ 6

Annual Report of the Comptroller of the Currency,

H.R. Exec. Doc. No. 3, 43d Cong., Ist Sess.

8 ————— 16

Miscellaneous—Continued: Page

A. Cox, Regulation of Interest on Bank Deposits

—ͤͤ CAA. O0 16

Federal Reserve Bulletin, VI (Feb. 1920) 16

Formal Op. 348, 68 A. B. A. J. 1502 (July 1982) .. 13, 14, 25

T. Gonser, D. Almond & F. Ziegler, Financing

Public Services Activities with Interest- Bearing

Attorney Trust Accounts, 15 Idaho L. Rev. 319

1—ẽEͥ̈ded utes 6

H.R. 2323, 105th Cong., Ist Sess. (1997) . . 18

Letter from General Counsel Bradfield to D.

Middlebrooks (Oct. 15, 1981) . 3

D. Middlebrooks, The Interest on Trust Accounts

Program: Mechanics of its Operation, 56 Fla.

aie, RE GU TUNED Setnenencaccincibiasiatctubdantecseciemneuien 3

S. Perley, Principles of the Law of Interest

, ͤ ſMh—— . 15, 16

Priv. Ltr. Rul. 83-16-108, 1983 WL 198254 (Jan. 19,

—ñ̃ —„V-—— 24 b ö 5

Priv. Ltr. Nui. 84-28-087, 1984 WL 266482 (Apr. 11,

— ——.. A 5

Priv. Ltr. Rul. 85-27-058, 1985 WL 293058 (Apr. 9,

K . 5

1 F. Redlich, The Molding of American Banking:

r 16

Rev. Rul. 81-209, 1981-2 C. B. 16 . . 5, 28

erte ene 5

A. Scott & W. Fratcher, The Law of Trusts (4th ed.

1987):

WUT GUD —ññññ — 24

„„ e 14, 24, 25

— —̃— — 24

P. Siegel, Interest on Lawyers’ Trust Account

Programs: Do They “Take” “Property” of the

Client?, 36 U. Fla. L. Rev. 674 (1984) 16

In the Supreme Court of the United States

OCTOBER TERM, 1996

No. 96-1578

Hon. THOMAS R. PHILLIPS, ET AL., PETITIONERS

U.

WASHINGTON LEGAL FOUNDATION, ET AL.

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

BRIEF FOR THE

UNITED STATES AS AMICUS CURIAE

SUPPORTING PETITIONERS

INTEREST OF THE UNITED STATES

This case presents the issue of what type of interests

constitute “private property” protected by the Just Com-

pensation Clause of the Fifth Amendment to the United

States Constitution. Because that Clause applies directly

to the programs and operations of the federal government,

the United States has a vital interest in the Court’s con-

struction of that constitutional provision. Due to the size

and national scope of the federal government’s operations,

moreover, its programs can often employ property in a

manner that creates or enhances value that could not be

realized by individual owners. The determination whether

(1)

2

such government-created value constitutes “private prop-

erty” thus could affect significantly the federal govern-

ment’s responsibilities and liability under the Fifth

Amendment. In addition, this case will address the inter-

relationship of interest on deposit accounts, which the

federal government regulates, and the constitutional defi-

nition of “private property.” Finally, the United States

has an interest in equitable access to the justice system,

and in ensuring that IOLTA programs, which have been

developed in virtually all States, are not undermined by an

interpretation of the Just Compensation Clause that

departs from settled practices and understandings.

STATEMENT

1. In the course of their practice, attorneys are

frequently required to hold client funds for a certain

period of time. Like every other State, Texas has estab-

lished ethical rules of conduct that regulate how attorneys

must handle client funds. Texas Bar Rule 1.14(a) provides

that lawyers “shall hold funds and other property be-

longing in whole or in part to clients * * separate from

the lawyer’s own property.” Texas Bar Rules, Art. X, § 9

(1997). Funds must be kept in a distinct “‘trust’ or

‘escrow’ account.” Ibid. The account must permit with-

drawal on demand. Pet. App. 2a; Texas Bar Rules, Art. X,

§ 9, Rule 1.14(b).

Occasionally, client funds provided to a lawyer are so

nominal in amount or are held for so short a period of time

that either they cannot be expected to earn interest or any

interest earned would be offset by the administrative

expense of opening and maintaining a separate account.

See Pet. App. 3a. Traditionally, attorneys deposited such

Examples of such client funds include real estate -escrow funds,

advance payments of costs and filing fees, retainers, and settlement

funds.

3

funds into a single, pooled, non-interest bearing account.

Washington Legal Found. v. Massachusetts Bar Found.,

993 F.2d 962, 968 (Ist Cir. 1993) (citing additional cases).

The depository institution thus retained for itself what-

ever interest value the deposited funds generated. /bid.

In 1980, Congress authorized the creation of Negotiable

Order of Withdrawal (NOW) accounts, which both bear

interest and leave the funds available for immediate with-

drawal. 12 U.S.C. 1832. NOW accounts are permitted only

for deposits that “consist solely of funds in which the

entire beneficial interest is held by one or more individu-

als or by an organization which is operated primarily for

religious, philanthropic, charitable, educational, political,

or other similar purposes and which is not operated for

profit.“ 12 U.S.C. 1832(a)(2); see also 12 C. F. R. 204.130.

For-profit corporations and partnerships are thus prohib-

ited from receiving interest on demand deposits.

In 1984, Texas adopted an Interest on Lawyers Trust

Account (IOLTA) program. Pet. App. 3a. Under the

IOLTA program, attorneys continue to pool into a single

deposit account those client funds that “are nominal in

amount or are reasonably anticipated to be held for a short

period of time.” Texas Bar Rules, Art. XI, § 5(A); Rules

Governing the Operation of the Texas Equal Access to

Justice Program (IOLTA Rule) 4 (1997). The Texas

IOLTA rules require, however, that attorneys deposit

their pooled funds into an interest-bearing NOW account,

rather than into a non-interest-bearing, demand account.

Ibid.” The interest generated by each attorney’s IOLTA

2 In an opinion letter issued in 1981, the General Counsel of the Fed-

eral Reserve Board concluded that NOW accounts could be employed

by Florida’s IOLTA program. Letter from General Counsel Bradfield

to D. Middlebrooks (Oct. 15, 1981), reprinted in D. Middlebrooks, The

interest on Trust Accounts Program: Mechanics of its Operation, 56

Fla. B.J. 115, 117 (Feb. 1982). The Board has provided similar letters

4

account is paid to the Texas Equal Access to Justice Pro-

gram, a non-profit corporation established by the Texas

Supreme Court. Texas Bar Rules, Art. XI, S 3,4; IOLTA

Rules 1,2. The Texas Equal Access to Justice Program

distributes the funds to non-profit organizations that

“have as a primary purpose the delivery of legal services

to low income persons.” IOLTA Rule 10; see also Texas

Bar Rules, Art. XI, § 2(B); Pet. App. 4a.

The Texas program requires that client funds be

deposited in IOLTA accounts only if, due to their small

amount or to the short duration of time for which they are

held, the attorney determines that

such funds, considered without regard to funds of other

clients which may be held by the attorney, law firm or

professional corporation, could not reasonably be ex-

pected to earn interest for the client or if the interest

which might be earned on such funds is not likely to be

sufficient to offset the cost of establishing and main-

taining the account, service charges, accounting costs

and tax reporting costs which would be incurred in

attempting to obtain interest on such funds for the

client.

IOLTA Rule 6.“ If an attorney initially determines that

client funds should be deposited in an IOLTA account, the

to virtually every jurisdiction operating an IOLTA program. Texas

received letters from the Board and the Federal Deposit Insurance

Corporation in August 1985 advising that its IOLTA funds were

eligible for deposit in a NOW account. (We have lodged copies of the

Texas letters with the Clerk of the Court.)

% IOLTA Rule 6 provides that the decision whether client funds are

incapable of generating interest should be made “without regard to

funds of other clients which may be held by the attorney.” That

restriction prevents an attorney from using the funds of multiple clients

to generate interest for a single client or using other clients’ funds to

pay the administrative costs incurred in earning interest for a single

5

attorney thereafter “should review at reasonable intervals

whether changed circumstances” (such as a delay in liti-

gation) will permit the client funds to generate realizable

interest; if so, the attorney is expected to transfer the

funds to an account that earns interest for the client.

Ibid.*

The Internal Revenue Service does not attribute the

interest generated by an IOLTA account to the individual

clients or lawyers for federal income tax purposes,

because they do not have control over the decision whether

to place the funds in the IOLTA account and they do not

designate who will receive the interest from the account.

Rev. Rul. 81-209, 1981-2 C.B. 16; see also Rev. Rul. 87-2,

1987-1 C.B. 18.°

client. Where, however, an attorney can pool nominal or short-term

client funds and generate sufficient interest to offset the administrative

costs of sub-accounting and apportioning the interest among all clients

in the pool, the attorney must create an interest-bearing account for the

clients, rather than deposit the funds in an IOLTA account. Pet. App.

24a n.2; Reply Br. Pet. Stage 2 n.1; Texas Bar Rules, Art. XI, § 5(B); ef.

IOLTA Rule 22 (nothing in IOLTA can require an attorney to take any

action that violates the Texas Code of Professional Responsibility,

Texas Bar Rules, Art. X. § 9). Because of the limitations on NOW

accounts, however, only the funds of individual or non-profit clients can

be included in such a pool.

4 If the attorney does not have access to a depository institution

that will pay interest on such pooled, demand accounts, then the

attorney “is required to maintain a non-interest bearing client trust

account for such funds.” IOLTA Rule 4B.

5 Since the 1981 Revenue Ruling, the Internal Revenue Service has

provided private letter rulings to numerous jurisdictions with IOLTA

programs advising that the interest created by their programs will not

be attributed to the clients or lawyers as taxable income. E.g., Priv.

Ltr. Rul. 85-27-058, 1985 WL 293058 (Apr. 9, 1985); Priv. Ltr. Rul. 84-

28-087, 1984 WL 266482 (Apr. 11, 1984); Priv. Ltr. Rul. 83-16-108, 1983

WL 198254 (Jan. 19, 1983).

6

Currently, 48 States and the District of Columbia have

adopted analogous IOLTA programs.“ In addition to

Texas, twenty-six States make attorneys’ participation in

® See Ala. R.P.C. 1.15(g) (Michie 1996); Alaska R.P.C. 1. 150d)

(1997); Ariz. Sup. Ct. R. 44% 2) (West 1997); Ark. R. P. C. 1.15(d)(2)

(Michie 1997); Cal. Bus. & Prof. Code § 6211(a) (West 1990); Colo.

R. P. C. 1.15(e)(2) (West 1997); Conn. R.P.C. 1.15(d) (West 1996); Del.

R. P. C. 1.15(h) (Michie 1997); D.C. R. Ct. App. Bla) (West 1997); Fla.

Bar R. 5.1-1 (West 1997); Ga. C.P.R. DR 9-102(C) (Michie 1997); Haw.

Sup. Ct. R. 11 (Michie 1997); Idaho R.P.C. 1.15(d) (West 1997); III.

R. P. C. 1.15(d) (West 1997); lowa C.P.R. DR 9-102 (West 1997); Kan.

R. P. C. 1,15(d)(3) (West 1997); Ky. Sup. Ct. R. 3.130 (Michie 1997); La.

R. P. C. 1.15(d) (West 1997); Me. C.P.R. 3.6(e)(4) (West 1996); Md. Bus.

Occ. & Prof. Code Ann. § 10-303 (1995); Mass. Sup. Ct. R. 3:07 (West

1997); Mich. R. P. C. 1.15(d) (West 1997); Minn. R.P.C. 1.15(d) (West

1997); Miss. R. P. C. 1.15(d) (West 1996); Mo. R.P.C. 1.15(e) (West 1997);

Mont. R. P. C. 1.18(b) (West 1997); Neb. Sup. Ct. R. Trust Acct. (West

1997); Nev. Sup. Ct. R. 217 (Michie 1996); In re New Hampshire Bar

Ass'n, 453 A.2d 1258 (N. H. 1982); N.J. R. Gen. App. 1:28A-2 (West 1997);

N. M. R. P. C. 16-115(D) (Michie 1995); N.Y. Jud. Law § 497 (McKinney

Supp. 1997); N.C. R.P.C. 10.3 (West 1997); N.D. R.P.C. 1.15(d)(1) (West

1997); Ohio Rev. Code Ann. § 4705.0%A)(1) (Anderson 1997); Okla.

R. P. C. 1.15(d) (West 1997); Ore. C.P.R. DR 9-101(D)(2) (West 1997); Pa.

R. P. C. 1.15(d) (West 1997) & Pa. R. Disc. Enf. 601(d) (West 1997); S.C.

App. Ct. R. 412 (Law. Co-op. 1988); S.D. R. P. C. 1.15(d)(4) (Michie 1995);

Tenn. C.P.R. DR 9-102(C\(2) (West 1996); In re Interest on Lawyers’

Trust Accounts, 672 P.2d 406 (Utah 1983); Va. Sup. Ct. R. Pt. 6, § 4,

q 20 (Michie 1997); Vt. C.P.R. DR 9-103 (West 1996); Wash. R.P.C.

L. Ie) (West 1997); W. Va. R.P.C. 1.15(d) (Michie 1997); Wis. Sup.

Ct. R. 13.04, 20:1.15 (West 1997); Wyo. R.P.C. 1.15(I1) (Michie 1997); see

also ABA/BNA, Lawyers’ Manual on Professional Conduct § 45:201

(1997). Indiana is the only State that has not implemented an IOLTA

program. See Jn re Indiana State Bar Ass'n Petition, 550 N.E.2d 311

(Ind. 1990). IOLTA programs also operate in every Canadian province,

South Africa, Namibia, Zimbabwe, and five Australian states. T.

Gonser, D. Almond & F. Ziegler, Financing Public Services Activities

with Interest-Bearing Attorney Trust Accounts, 15 Idaho L. Rev. 219,

221 & n.6 (1979).

7

the program mandatory.’ The remaining jurisdictions op-

erate IOLTA programs in which participation by attor-

neys is voluntary.“

2. The respondents in this Court are the Washington

Legal Foundation; Michael Mazzone, a Texas attorney;

and William Summers, a Texas client with funds deposited

in an IOLTA account. They filed suit in the United States

District Court for the Western District of Texas against

petitioners, the Texas Equal Access to Justice Founda-

tion; W. Frank Newton, chair of the Foundation; and the

nine individual Justices of the Texas Supreme Court,

alleging that the Texas IOLTA program violates the Fifth

and Fourteenth Amendments because it unconstitution-

ally takes private property—the interest generated on

IOLTA accounts—without just compensation. J.A. 2-17.

The district court granted summary judgment in favor

of petitioners. Pet. App. 20a-40a. The court of appeals

reversed, relying in large part on this Court’s decision in

Those additional States are Arizona, Arkansas, California, Colo-

rado, Connecticut, Florida, Georgia, Hawaii, Illinois, lowa, Louisiana,

Maryland, Massachusetts, Michigan, Minnesota, Montana, New Jersey,

New York, North Dakota, Ohio,. Oregon, Pennsylvania, Vermont,

Washington, West Virginia, and Wisconsin.

In some of those jurisdictions, participation is expressly made

voluntary (New Mexico, Oklahoma, and South Dakota), while others

contain opt-out provisions (Alabama, Alaska, Delaware, District of

Columbia, Idaho, Kansas, Kentucky, Maine, Mississippi, Missouri,

Nebraska, Nevada, New Hampshire, North Carolina, Rhode Island,

South Carolina, Tennessee, Utah, Virginia, and Wyoming). Because

respondents challenge only the mandatory aspect of Texas’s IOLTA

program (see J.A. 16), this case presents no occasion for the Court to

address whether voluntary IOLTA programs create “private property”

within the meaning of the Fifth Amendment.

® The complaint also asserts a violation of respondents’ speech and

associational rights under the First Amendment. J.A. 14.

8

Webb's Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S.

155 (1980). Pet. App. la-19a.

A divided court of appeals denied petitioners’ suggestion

of rehearing en banc. Pet. App. 4la-52a. Four of the six

dissenting judges emphasized that, to rise to the level of

“property” under the Just Compensation Clause, the in-

terest at issue must “have some actual or potential

compensable value that could accrue to the benefit of its

owner.” Id. at 48a. The just compensation prong of the

Clause, however, would afford respondents “nothing,” be-

cause the “fair market value of the earnings of IOLTA-

eligible funds is $0.” Id. at 49a. The dissent further found

“both ironie and fatal to [respondents’] claim that in order

to have a property interest in this case, they must rely on

the existence of the program they seek to eliminate.” Id.

at 48a.

SUMMARY OF ARGUMENT

The IOLTA program, by generating interest that could

not otherwise be realized, does not take the individual

clients’ “private property,” within the meaning of the

Fifth Amendment. There is no question that the underly-

ing funds are, and at all times remain, the property of the

client. The issue is whether the government’s temporary

regulation of how those funds are managed while in the

custody of the client’s attorneys deprives the client of any

recognized property right. It does not. The client has no

reasonable expectation that the funds given over to the

attorney will generate interest during that time. Because

the individual client cannot control how the attorney

handles other clients’ money, moreover, the client has no

reasonable prospect of enhancing the interest-earning

capacity of his funds by pooling his money with others.

Respondents thus seek to claim as their personal

property a value that a client’s individual funds simply are

incapable of generating. IOLTA interest is realized only

9

through the application of governmental capabilities and

resources. This Court’s Fifth Amendment jurisprudence

focuses, however, on what the owner has lost, not on what

the government has gained. Individuals may not claim as a

property loss, entitled to just compensation, value that the

government has created. Indeed, respondents’ claimed

property right to IOLTA interest, if recognized, would

create an unworkable incongruity between the property

that the Just Compensation Clause protects and the

property values that the Clause reimburses.

ARGUMENT

INTEREST GENERATED THROUGH THE IOLTA

PROGRAM IS A GOVERNMENT-CREATED VALUE

AND THUS IS NOT “PRIVATE PROPERTY” WITH-

IN THE MEANING OF THE FIFTH AMENDMENT

A. Introduction

The term “private property” in the Just Compensation

Clause of the Fifth Amendment denotes “the group of

rights inhering in the citizen’s relation to the physical

thing, as the right to possess, use and dispose of it.”

PruneYard Shopping Ctr. v. Robins, 447 U.S. 74, 82 n.6

(1980).“ The question whether interest earned on an

IOLTA account qualifies as a rightl] inhering in“ re-

spondents’ relation to their individual funds is ultimately a

question of federal constitutional law. United States v.

Powelson, 319 U.S. 266, 279 (1943). This Court has rec-

ognized, however, that the Constitution does not create

property rights. Rather, property rights “are created and

their dimensions are defined by existing rules or under-

standings that stem from an independent source such as

10 The Fifth Amendment’s Just Compensation Clause applies to the

States through the Fourteenth Amendment. Penn Central Transp. Co.

v. New York City, 438 U.S. 104, 122 (1978).

10

state law—rules or understandings that secure certain

benefits and that support claims of entitlement to those

benefits.” Board of Regents v. Roth, 408 U.S. 564, 577

(1972);" see also Lucas v. South Carolina Coastal Coun-

cil, 505 U.S. 1008, 1030 (1992); United States v. Willow

River Power Co., 324 U.S. 499, 502 (1945) (“not all

economic interests are ‘property rights’; only those

economic advantages are ‘rights’ which have the law back

of them”). For that reason, respondents’ property claim

must be evaluated in light of the specific regulatory

framework and factual context in which it arises.

There can be no doubt that the client funds underlying

the IOLTA program are the property of respondents.

Nothing in IOLTA affects that property interest. Those

funds remain at all times fully and freely available to

respondents upon demand. Funds are regulated under the

IOLTA program only after a client has made an inde-

pendent decision to segregate and dedicate his funds to a

specified legal activity or service. IOLTA thus does not

implicate funds that a client could otherwise employ to

earn interest by, for example, depositing in a bank account

or pooling with other personal assets.

When clients choose to deposit money with their

attorneys, they create a relationship that is subject to the

States’ “compelling interest in the practice of professions

within their boundaries, and * * * broad power to

establish standards for * * * regulating the practice of

professions.” Florida Bar v. Went For It, Inc., 515 U.S.

" Roth interpreted the scope of “property” under the Due Process

Clause, which may not be coterminous with the “private property”

protected by the Just Compensation Clause. See Pittman v. Chicago

Bd. of Educ., 64 F.3d 1098, 1104 (7th Cir. 1995), cert. denied, 116 S. Ct.

2497 (1996); ef. Connolly v. Pension Benefit Guaranty Corp., 475 U.S.

211, 224 (1986); Logan v. Zimmerman Brush Co., 455 U.S. 422, 430-431

(1982).

11

618, 625 (1995). The client is charged with knowledge that

the State will regulate the handling of his funds for the

protection of the integrity of the legal system. With

respect to IOLTA programs, then, governmental regula-

tion of private property commences, not with the collec-

tion of interest, but with the imposition of ethical stric-

tures that require counsel to deposit the funds in a

banking institution and compel counsel, as a matter of

financial practicality, to pool short-term and nominal

client funds in a single account.

Respondents do not question Texas’s authority to

impose ethical regulations on how attorneys handle client

funds. Nor do they challenge the requirement that their

funds be deposited in a banking institution or the practical

necessity for counsel to pool short-term and nominal

client funds into a single account. Finally, respondents do

not contend that the pre-IOLTA regulatory scheme, under

which nominal and short-term client funds were deposited

into a non-interest bearing account, took their private

property, even though the consequence of that legal re-

gime was that their funds generated interest value for the

exclusive enjoyment of the depository institution. See

Cone v. State Bar of Florida, 819 F.2d 1002, 1005 (11th

Cir.) (“Before the initiation of the [IOLTA program], the

only beneficiaries of the old regime were the banks, who

were treated to ‘free’ use of trust account deposits.”), cert.

denied, 484 U.S. 917 (1987); In re Interest on Lawyers’

Trust Accounts, 675 S.W.2d 355, 357 (1984) (“At present,

the earnings of funds held in trust accounts can benefit

neither the attorney nor the client, but simply redound to

the benefit of the depository institution.”), modified, 689

S.W.2d 352 (1985), modified, 709 S.W.2d 400 (1986), amended,

738 S.W.2d 803 (Ark. 1987); J.A. 74-75. The question

presented in this case therefore is whether, simply by

requiring that the interest earned on the pooled funds be

12

provided to the Texas Equal Access to Justice Foundation

rather than to the depository institution, IOLTA gave

birth to a private property claim to the interest.”

B. Because Respondents Had No Reasonable, Invest-

ment-Backed Expectation That Their Funds Would

Generate Interest, The Proceeds Of The IOLTA

Account Are Not Respondents’ Property

IOLTA does not physically appropriate client funds, nor

does it deprive client funds of any—let alone all—economi-

cally beneficial or productive use of their money. See

Lucas, 505 U.S. at 1014-1015; see also PruneYard Shop-

ping Ctr., 447 U.S. at 84. It is, moreover, the client's

decision to set the nominal or short-term funds aside for

legal services that prevents them, temporarily, from gen-

erating interest or being put to other productive use.

IOLTA simply regulates the interest-bearing capacity of

funds while in the custody of state-licensed attorneys and

governmentally regulated banks. See Yee v. City of

Escondido, 503 U.S. 519, 522-523, 527-528 (1992) (distin-

guishing, for purposes of Fifth Amendment analysis, be-

tween per se takings of property and governmental regu-

2 Almost every court that has addressed the question has held that

an IOLTA program does not result in a taking of private property in

violation of the Fifth Amendment. Massachusetts Bar Found., 998

F.2d at 973-974; Cone, 819 F.2d at 1004-1007; In re Massachusetts Bar

Ass'n, 478 N.E.2d 715, 718 (Mass. 1985); JOLTA Adoption Order, 102

Wash.2d 1101, 1101-1109 (1984); In re Minnesota State Bar Ass'n, 332

N.W.2d 151, 158 (Minn. 1982); In re New Hampshire Bar Ass'n, 453

A.2d 1258, 1261 (N.H. 1982); In re Interest on Trust Accounts, 402 So.

2d 389, 395-396 (Fla. 1981); Carroll v. State Bar of California, 213 Cal.

Rptr. 305, 311-312 (Cal. Ct. App.), cert. denied, 474 U.S. 848 (1985); see

also In re Interest on Lawyers’ Trust Accounts, 672 P.2d 406, 408 (Utah

1983); In re Interest on Lawyers’ Trust Accounts, 675 S.W.2d at 356-

358. But see /n re Indiana State Bar Ass'n Petition, 550 N.E.2d at 312;

In re Interest on Trust Accounts, 402 So. 2d at 399 (Boyd, J.,

dissenting).

13

lation of how property is used); ef. United States v. Sperry

Corp., 493 U.S. 52, 62 & n.9 (1989) (retention of a percent-

age of monetary award roughly equivalent to administra-

tive costs does not effect a permanent physical occupation

of property and thus is not a per se taking).

1. In challenging IOLTA’s regulatory program as a

taking of private property, respondents must show that

the program deprives them of “interests that were suf-

ficiently bound up with the reasonable expectations of

[respondents] to constitute ‘property’ for Fifth Amend-

ment purposes.” Penn Central Transp. Co. v. New York

City, 438 U.S. 104, 125 (1978). Respondents, in other

words, must demonstrate that they had a concrete and

justifiable expectation of earning interest on funds while

in their attorneys’ custody, if they wish to claim IOLTA

interest as their own. They can make no such showing.

In the complaint, as well as in an affidavit filed in

support of respondents’ motion for summary judgment,

respondent Mazzone acknowledged that the nominal and

short-term funds he holds for clients “cannot practicably

be placed into separate interest-bearing accounts, because

the additional costs of establishing and maintaining such

accounts usually would exceed any interest I could earn

for my clients.” J. A. 83; see also J.A. 10. Respondent Sum-

mers, a client, likewise characterized the creation of an

independent account for his funds to be “an unfeasible

option because the cost of establishing and administering a

separate account for my funds most likely would exceed

any interest that could be earned on those funds.” J.A. 86;

see also J.A. 12. Respondents thus concede that they had

no reasonable expectation that the funds the clients

deposited with their lawyers would generate interest for

their benefit.”

See also Formal Op. 348, 68 A. B. A. J. 1502, 1506 (July 1982) (“The

client has no right under the circumstances to require the payment of

14

Respondents also could not reasonably expect that

interest would be realized for them by pooling their funds

with the money of other clients. First, Texas’s IOLTA

program, by definition, does not apply if the attorney can

pool nominal or short-term client funds and generate suf-

ficient interest to offset the administrative costs of sub-

accounting and apportioning the interest among all clients

in the pool. IOLTA Rule 6; Texas Bar Rules, Art. XI,

_ $ 5(B); see also Pet. App. 24a n.2: Pet. Reply 2 n.1.

Second, individual clients have no right inhering in the

traditional attorney-client relationship to require counsel

to pool their funds with the money of other clients.

Rather, the focus of an attorney’s ethical duty in

managing client funds is “on safekeeping, accounting, and

delivery, and not on investment of the funds.” Formal Op.

348, 68 A.B.A. J. 1502, 1503 (July 1982); see also In

re Interest on Trust Accounts, 402 So. 2d 389, 394 (Fla.

1981); ITA A. Scott & W. Fratcher, The Law of Trusts § 180

(deposit of trust fund into bank account “is usually not a

form of investment but is a method of safekeeping”), § 181

(where purpose of trust is to safeguard funds, trustee

bears no duty to make the trust productive) (4th ed. 1987).

Nor have respondents demonstrated a reasonable expecta-

tion that other clients would wish to pool their funds with

them.“ Respondents thus can make no argument that the

IOLTA program diminishes the economic value of their

any interest on the funds to himself or herself because the amount of

interest which the funds could earn is likely to be less than the

appropriate charges for administering the earnings.”).

„ For those same reasons, the court of appeals’ speculation that a

single attorney’s clients might agree to pool their funds for the benefit

ofa single charity (Pet. App. 15a) does not provide a sound basis for

recognizing a property right in individual clients in the interest earned

on an IOLTA account.

15

funds or deprives them of any independent capacity to

dedicate their money to more fruitful endeavors.

2. Nothing in the law, either preceding adoption of the

IOLTA program or presently, “secured” respondents’

“claim of entitlement to” IOLTA interest. Roth, 408 U.S.

at 577. As they concede, nothing in prior banking laws or

regulations permitted a client’s limited funds to realize

interest while on deposit in a demand account. Texas law

guaranteed that interest would accrue to the benefit of the

principal’s owner when (i) interest was actually realized

by the individual property, (ii) the amount of the interest

exceeded the reasonable costs of managing the account,

and (iii) the claimant owned the entire fund generating the

interest. See Sellers v. Harris County, 483 S.W2d 242,

243-244 (Tex. 1972). The client moneys at issue in this

case satisfy none of those conditions.

Nor can respondents claim that the right to accrue

interest on deposits is a property value traditionally re-

cognized as “inhering in the citizen’s relation to” money.

PruneYard Shopping Ctr., 447 U.S. at 2 n.6. To the con-

trary, government has historically regulated the capacity

of money to earn interest, by Setting the terms and con-

ditions under which interest will be paid on bank deposits

in order to promote the public good.

Under the common law, “interest could in no case be

recovered,” and, indeed, the concept of paying interest

“was held in detestation.” National Bank of the Com-

monwealth v. Mechanics’ Nat“ Bank, 94 U.S. (4 Otto.)

437, 438 (1876); see also S. Perley, Principles of the Law of

Interest 1 (1893) (“In early times, in conformity to the

canons of the church, all interest whatever upon money

loaned was prohibited. To take linterest] was, also, in foro

conscientiae, punished as a crime next to that of murder.”)

16

(footnote omitted). As a result, the ability to obtain in-

terest has never been understood as an entitlement or a

right. Until the latter half of the nineteenth century, the

purpose ‘of depositing money in a bank was generally for

safekeeping, not to generate interest. 1 F. Redlich, The

Molding of American Banking: Men and Ideas 7, 13-14 &

n.99 (1968). A depositor could claim interest only if it was

specified by contract. Parkersburg Nat Bank v. Als, 5 W.

Va. 50, 55-56 (1871); Haswell v. Farmers & Mechanics’

Bank, 26 Vt. 100, 103-104 (1853); Jones v. Mallory, 22

Conn. 386 (1853); Perley, supra, at 5."

During this century, “governmental controls of Ameri-

can banking [became] manifold.” United States v. Phila-

delphia Nat] Bank, 374 U.S. 321, 327 (1963). Indeed, this

Court has described federal banking regulations as “the

outstanding example in the federal government of regula-

tion of an entire industry through methods of supervi-

In 1545, the outright prohibition on paying interest of any sort

was repealed by statute. A Bill Against Usury, 37 Hen. 8, ch. 9 (1545),

cited in P. Siegel, Interest on Lawyers’ Trust Account Programs: Do

They “Take” “Property” of the Client?, 36 U. Fla. L. Rev. 674, 683 n.43

(1984).

© In the mid-nineteenth century, competition by banks for deposits

led to the payment of ever-increasing interest rates, and the excessive

interest paid on deposits was seen as a leading cause of the bank

failures of 1857, 1873, and 1885. A. Cox, Regulation of Interest Rates

on Bank Deposits 3-5 (1966). The Comptroller of the Currency con-

cluded that the payment of interest on deposits “has done more than

any other to demoralize the business of banking.” Annual Report of the

Comptroller of the Currency, H.R. Exec. Doc. No. 3, 43d Cong., Ist

Sess. 31 (1873). The Comptroller accordingly endorsed self-regulation

by the banking industry to limit or eliminate interest on deposits. Ibid.

Well into the 1920s, the federal government continued to pressure

banks to limit the interest they paid on deposits. See Federal Reserve

Bulletin, VI. at 157 (Feb. 1920) (“[W]Je recommend to the banks and

trust companies in the various Federal Reserve districts that no rate in

excess of 2 1/4 per cent be paid.”); Cox, supra, at 8.

17

sion.” Jd. at 330. Of particular relevance to this case, in

response to the bank failures of the 1920s and 1930s,

Congress enacted the Banking Act of 1933, ch. 89, 48 Stat.

162, which prohibited Federal Reserve member banks from

paying any interest on demand deposits. 12 U.S.C. 37la.

In 1935, Congress similarly directed the FDIC to prohibit

insured, non-member banks from paying interest on

demand deposits. Banking Act of 1935, ch. 614, § 101, 49

Stat. 702 (codified at 12 U.S.C. 1828(g)). Congress later

directed the Secretary of the Treasury, the Federal

Reserve Board, the Federal Deposit Insurance Corpora-

tion (FDIC), and the Federal Home Loan Bank Board to

implement their respective powers “to bring about the

reduction of interest rates to the maximum extent feasible

in the light of prevailing money market and general

economic conditions.” Act of Sept. 21, 1966, Pub. L. No. 89-

597, § 1, 80 Stat. 823. In 1973, Congress extended to all

depository institutions the prohibition on paying interest

on demand deposits. Act of Aug. 16, 1973, Pub. L. No. 93-

100, § 2, 87 Stat. 342; see also 12 U.S.C. 1464(b)(1)(B). In

addition, the Federal Reserve Board and the FDIC capped

the interest rate that banks could pay on all other types of

accounts. 12 C.F.R. 217.7 (Federal Reserve Board Regula-

tion Q), 329.6 (FDIC regulation) (1974).

Beginning in 1978, with the enactment of the Financial

Institutions Regulatory and Interest Rate Control Act,

Pub. L. No. 95-630, 92 Stat. 3641, Congress eased its inter-

est rate regrlation. The Depository Institutions Dereg-

ulation Act of 1980, Pub. L. No. 96-221, Tit. II, 94 Stat. 142

(codified at 12 U.S.C. 3501-3509 (1982)), largely withdrew,

over a six-year period, the direct regulation of interest

rates on time deposits. That Act both eliminated the

interest rate ceilings on all in: erest-bearing deposit ac-

counts, which had been enforced by Federal Reserve Board

Regulation Q and the FDIC, and permitted banks to pay

18

interest on checking deposits (NOW accounts) maintained

by individuals or charitable organizations. 12 U.S.C. 1832;

12 C. F. R. 204.130.

Federal regulation of interest continues in several

forms. First, federal law still prohibits the payment of in-

terest on demand deposits maintained by businesses. 12

U.S.C. 371a, 1464(b)(1)(B), 1828(g)."" Second, a bank offer-

ing depositors above-market rates may be engaging in an

unsafe banking practice, making it subject to a cease-and-

desist ort er pursuant to the federal banking regulators’

enforcement authority. 12 U.S.C. 1818(a) and (b). Third,

the Federal Deposit Insurance Corporation Improvement

Act of 1991, Pub. L. No. 102-242, 105 Stat. 2236, prohibits

banks with capital below a designated level from paying

above-market rates on pooled, brokered deposits. 12 U.S.C.

1831f(e).

The federal government has thus frequently regulated

and limited the payment of interest to promote important

public policy goals. In many of those instances, moreover,

restrictions on the payment of interest have inured to the

economic benefit of others, such as the depository institu-

tion that is permitted to enjoy the interest-generating

capacity of funds in its accounts.

Given this overall framework, when respondents chose

to provide money to their attorneys and to have it injected

into the highly regulated banking system, they could have

had no reasonable expectation either that they would

receive interest on their nominal or short-term funds, or

that statutes and regulations might not result in others

benefitting economically from the presence of their funds

in the banking system. Cf. Ruckelshaus v. Monsanto Co.,

467 U.S. 986, 1006-1007 (1984) (Because “Monsanto chose

7 A bill was recently introduced in Congress that would allow

interest to be paid on the demand accounts of businesses. H.R. 2323,

105th Cong., Ist Sess. (July 31, 1997).

19

to submit the requisite data in order to receive a registra-

tion, it can hardly argue that its reasonable investment-

backed expectations are disturbed when [the agency] acts

to use or disclose the data in a manner that was authorized

by law at the time.”); Andrus v. Allard, 444 U.S. 51, 66

(1979) (Plerhaps because of its very uncertainty, the

interest in anticipated gains has traditionally been viewed

as less compelling than other property-related inter-

ests.”)." Respondents could reasonably expect only to

have their principal available to them upon demand and, at

most, to retain any interest their individual funds actually

generated, under existing law, in excess of administrative

costs. IOLTA does not affect those interests. Cf. Sperry,

493 U.S. at 62 (governmental retention of percentage of

monetary award that bears reasonable relationship to

administrative costs is not a taking).

In sum, Ain the course of regulating commercial and

other human affairs, Congress routinely creates burdens

for some that directly benefit others.” Connolly v. Pen-

sion Benefit Guaranty Corp., 475 U.S. 211, 223 (1986).

But, Igliven the propriety of the governmental power to

regulate, it cannot be said that the Taking Clause is

violated whenever legislation requires one person to use

his or her assets for the benefit of another.” Ibid.; see also

id. at 228 (O’Connor, J., concurring).

C. As A Government-Created Value, IOLTA Interest Is

Not A Component Of Private Property Protected By

The Fifth Amendment

The “private property” that is protected by the Just

Compensation Clause does not include every potentially

18 See also Tellis v. Godinez, 5 F.3d 1314, 1317 (9th Cir. 1993)

(Farris, J., dissenting) (“I would welcome a constitutional right to in-

terest, as would others in the marketplace, but there is none.”), cert.

denied, 513 U.S. 945 (1994).

20

valuable use of property. In particular, the Fifth Amend-

ment does not require compensation for value that the

government creates through the application of its own

resources or a consolidation of interests, especially if the

individual owner could not reasonably develop that value

on his own. Because IOLTA interest is the product of the

government’s pooling of funds, rather than of the earning

capacity of the money in the hands of its individual owners,

the interest that IOLTA generates is government-created

value and thus is not “private property” within the mean-

ing of the Fifth Amendment.

1. At its core, respondents’ position claims as property

the interest-generating power of all the clients’ combined

funds, rather than the interest-generating capacity of

each individual client’s holdings. In effect, respondents

argue that the whole is greater than its parts: that while

no right to accrue interest was taken from the individual

clients, once combined into a pool, the property interests

of the individual owners expanded and that combined power

to accrue interest is what petitioners have taken. This

Court’s Fifth Amendment jurisprudence forecloses that

argument.

Where a taking has occurred, the proper inquiry in

ascertaining the amount of compensation due under the

Fifth Amendment is “what has the owner lost, and not

what has the taker gained.” United States v. Chandler-

Dunbar Water Power Co., 229 U.S. 53, 76 (1913); see aso

Olson v. United States, 292 U.S. 246, 255 (1934) (The Fifth

Amendment entitles a property owner to be “put in as good

a position pecuniarily as if his property hac not been

taken. He must be made whole but is ne entitled to

more.”). Here, respondents have lost nothing.

In Boston Chamber of Commerce v. (ity of Boston, 217

U.S. 189 (1910), the owners of three separate property

interests (the fee, a mortgage on tke fee, and an easement)

21

brought suit seeking compensation for the laying of a

public street over their property. Rather than requesting

payment for the value of their individual property losses,

the owners sought compensation for the combined value of

the property, which greatly exceeded the value of the

distinct interests. Id. at 193. This Court held that the

Fifth Amendment does not evaluate property interests as

a whole when they are not held as a whole. Id. at 195 (“But

the Constitution does not require a disregard of the mode

of ownership * . It does not require a parcel of land to

be valued as an unencumbered whole when it is not held as

an unencumbered whole.”). Rather, the Fifth Amendment

“merely requires that an owner of property taken should

be paid for what is taken from him.” Fhid. (emphasis

added).

Likewise, in City of New York v. Sage, 239 U.S. 57

(1915), the Court held that the compensation due for a lot

taken to build a reservoir did not include the enhanced

value of the property “due to its union with other lots.“ Id.

at 61. Rather, the owner's loss must be measured by the

property’s value distinct from the power of the govern-

ment to enhance value by combining properties: “The City

is not to be made to pay for any part of what it has added to

the land by thus uniting it with other lots, if that union

would not have been practicable or have been attempted

except by the intervention of eminent domain.” lbid.; see

also Powelson, 319 U.S. at 274, 280-281, 285 (claimant not

entitled to have value of his property increased by the

possibility of its combination with other properties to

create a hydroelectric project); Olson, 292 U.S. at 256

(“Value to the taker of a piece of land combined with other

parcels for public use is not the measure of or a guide to

the compensation to which the owner is entitled.”),

Again, in United States v. Fuller, 409 U.S. 488 ( 1973),

the owner of property taken by the government, which was

22

near federal land the owner leased under the Taylor

Grazing Act, claimed that the value of his land should be

measured by its potential use “in conjunction with” the

grazing areas. Id. at 490. This Court held, however, that

the government may not be charged under the Fifth

Amendment “for elements of value that the Government

has created.” Id. at 492; see also id. at 499 (Powell, J.,

dissenting) (agreeing that “compensation need not be

afforded for an increase in market value stemming from

the very Government undertaking which led to the con-

demnation”); United States v. Cors, 337 U.S. 325, 334 (1949)

(“That is a value which the government itself created and

hence in fairness should not be required to pay.”); United

States v. Causby , 328 U.S. 256, 262 n.7 (1946) (“The courts

have held that the deprivation of the former owner rather

than the accretion of a right or interest to the sovereign

constitutes the taking.”).”

This is not to say that a property owner may never

claim as a compensable property interest the value of his

land combined with other properties. But he may do so

only “if the union of properties necessary is so practicable

that the possibility would affect the market price.” Sage,

239 U.S. at 61. The claimant must show, in other words, “a

reasonable probability of the [property] in question being

'9 Federal regulation of interest payments scmetimes has turned

upon the amount of money deposited. See, e.g., 12 C.F.R. 217.7 (1979).

Respondents’ argument would seem to claim as their private property

the dollar amount of the difference between what the government

permitted the bank to pay on accounts with higher principals and what

the government permitted the bank to pay on their individual funds,

because their funds, while individually incapable of generating such in-

terest, could have earned it when pooled with the funds of others. Such

convoluted claims are foreclosed because, under the logic of this Court’s

jurisprudence, the Fifth Amendment's definition of “private property”

turns upon the presently practicable uses of property by the owner,

rather than upon the anticipated use of property by others.

23

combined with other{s}] * * * in the reasonably near

future.” Powelson, 319 U.S. at 275-276; see also Olson, 292

U.S. at 256.

Respondents cannot show that the property value they

claim—the ability to combine with other clients’ money to

generate interest—could have been brought to fruition

through their private efforts in the near future. To the

contrary, Texas’s I[OLTA program is triggered only if the

attorney concludes that pooling his or her clients’ funds to

earn interest for them is not economically feasible.

IOLTA Rule 6; Texas Bar Rules, Art. XI, S 5(B); see also

Pet. App. 24a n.2; Pet. Reply 2n.1. Further, respondents

have not shewn that their attorneys or the attorneys’

other clients wish to join them in this endeavor. “Ele-

ments affecting value that depend upon events or com-

binations of occurrences which, while within the realm of

possibility, are not fairly shown to be reasonably prob-

able,” provide no basis for relief under the Just Com-

pensation Clause, “for that would be to allow mere

speculation and conjecture to become a guide for the

ascertainment of value—a thing to be condemned in

business transactions as well as in judicial ascertainment

of truth.” Olson, 292 U.S. at 257. Because the pooling of

short-term and nominal client funds to generate interest

is practicable only through an exercise of governmental

power, respondents may not claim as their private

property the economic value created by the IOLTA pro-

gram. United States v. Twin City Power Co., 350 U.S.

222, 228 (1956) (“What the Government can grant or with-

hold and exploit for its own benefit has a value that is

peculiar to it and that no other user enjoys,” and the

government’s generation of such value triggers no com-

pensable property right in individuals.).”

See also United States v. Miller, 317 U.S. 369, 375 (1943) (Fifth

Amendment does not recognize as a compensable property interest the

24

In sum, respondents’ claim of a property right to

interest created through the IOLTA program must fail be-

cause it focuses on the interest-generating value gained

by the government through the IOLTA program, rather

than on any interest-generating capacity lost by the

clients. Because it hhese additional values represent

* * * no actual loss“ to respondents, there “would be no

justice in paying for a loss suffered by no one in fact.”

Chandler-Dunbar, 229 U.S. at 76.”

“special value” of property to the government); Chandler-Dunbar, 229

U.S. at 80 (“That the property may have to the public a greater value

than its fair market value affords no just criterion for estimating what

the owner should receive.”).

21 Respondents’ alternative characterization of their property claim

as a right to the equitable or beneficial interest in the trust account

created by the lawyer, J.A. 11, 15, adds nothing to the case. The

beneficial or equitable interest created by the individual clients’ trust

is zero. There are, of course, no proceeds from the trust at the time

of its creation. See IA A. Scott & W. Fratcher, The Law of Trusts § 86

(“The mere fact that he hopes and expects to acquire the property in the

future does not give him any interest of which he can be trustee, or of

which he can make another trustee, before he acquires it.”), § 86.4 (“An

interest that has not come into existence cannot be held in trust.”) (4th

ed. 1987). Nor do respondents have any legitimate expectation that

costs reasonably commensurate with the administrative expense of

managing their money will not be withheld. IIA Scott & Fratcher,

supra, § 182 (trustee is under a duty only to pay “net income, after

deducting from the gross income the expenses properly incurred in the

administration of the trust”); III Scott & Fratcher, supra, § 188.5. As

with their interest claim, respondents are attempting to claim as their

own “private property” the proceeds of a pool of funds created by the

government. Those proceeds are made possible only by the additional

presence of other people’s money, over which principles of trust law

give respondents no right of control. IA Scott & Fratcher, supra,

§ 86.4; see also id. § 75. Furthermore, respondents have not claimed

that they have an ordinary trust relationship with their attorney re-

garding their funds. Instead, the relationship on which they rely is

established and defined by the States ethical rules governing members

25

2. While the foregoing cases primarily concerned the

compensation prong of the Just Compensation Clause,

their delineation of the types of property values protected

by the Fifth Amendment against being taken applies with

equal force to the Clause’s definition of “private property.”

Indeed, it would make little sense to read “private

property” as embracing an entire class of constitutionally

protected interests (i.e., value separately created or en-

joyed by the government) for which the Just Compensation

Clause will supply no remedy in the event of a deprivation.

The animating purpose of the Just Compensation Clause,

after all, is not to limit governmental interference with

property, “but rather to secure compensation” when a

taking occurs. First English Evangelical Lutheran

Church v. County of Los Angeles, 482 U.S. 304, 315 (1987);

see also Suitum v. Tahoe Regional Planning Agency, 117

S. Ct. 1659, 1665 (1997); Williamson County Regional

Planning Comm 'n v. Hamilton Bank of Johnson City,

473 U.S. 172, 194 n.13 (1985) (“no constitutional violation

occurs until just compensation has been denied”). The

remedy provided by the Just Compensation Clause, more-

over, is intended to provide the owner “the full and perfect

equivalent” for the property taken. United States v.

Miller, 317 U.S. 369, 373 (1943); Seaboard Air Line Ry. v.

United States, 261 U.S. 299, 304 (1923) (same); see also

PruneYard Shopping Ctr., 447 U.S. at 2 n6. The

concept of just compensation “is comprehensive and in-

of the bar. Nothing in that regulatory framework empowers individual

clients to control the proceeds of the IOLTA pool of funds. See

Massachusetts Bar Found., 993 F.2d at 974. And the focus of the

attorney's ethical obligation is on safeguarding the money, not

investing it. Formal Op. 348, 68 A. B. A. J. at 1503; see also IIA Scott &

Fratcher, supra, §§ 180, 181.

26

cludes all elements” of property value taken. Jacobs v.

United States, 290 U.S. 13, 17 (1933).”

This Court, in fact, has previously recognized the nexus

between the Clause’s definitions of “property” and of “just

compensation.” In First English Evangelical, the Court

held that a taking of property rights “necessarily impli-

cates the constitutional obligation to pay just compensa-

tion.” 482 U.S. at 315 (internal quotation marks omitted).

Further, in Powelson, the Court expressly intertwined its

analyses of the existence of a property right and the scope

of compensation required by the Fifth Amendment. 319

US. at 279-283, 285; see also United States v. Rands, 389

U.S. 121, 126 (1967); Twin City Power, 350 U.S. at 227-228.

Moreover, the very concept of “reasonable expectations”

that this Court employs to identify property rights (see,

e.g., Penn Central, 438 U.S. at 125) precludes recognition

of property values that the individual owners cannot prac-

tieably or reasonably realize themselves. Accordingly, the

definition of “private property” adopted in this case must

take account of the limitations on value recognized in this

Court’s compensation precedents, and therefore should not

extend to interest that government alone can extract from

funds within the banking system.

3. In holding that interest on an IOLTA account is

private property, the court of appeals found significant the

sequence in which bank fees and interest happened to be

recorded. Pet. App. 13a. Because the interest was as-

2 Just compensation, however, is calculated in objective, rather

than subjective, terms. United States v. 564.54 Acres of Land, 441 US.

506, 511 (1979). For that reason, respondents’ philosophical objections

to the purposes served by the governmental regulation have no bearing

on the scope of the Constitution's protection. Id. at 511-512. Given the

fungible character of money, this principle should apply with particular

force to funds that, through deposit in a bank, have been injected by

the owner into the national economic stream.

27

signed before the bank fees were deducted, the court of

appeals concluded that “a property interest attaches the

moment that the interest accrues,” ibid., even if the

service fees deducted the next moment equaled or ex-

ceeded the interest gained.

The court of appeals’ focus on the fleeting attachment of

unattainable interest conflicts with this Court’s repeated

admonitions that the Just Compensation Clause is con-

cerned with economically viable and productive uses of

property, rather than with hypothesized or impalpable

interests. See Roth, 408 U.S. at 577 (“To have a property

interest in « benefit, a person clearly must have more than

an abstract need or desire for it. He must have more than

a unilateral expectation of it.“); ef. Hooker v. Burr, 194

U.S. 415, 419 (1904) (“If not injured to the extent of a penny

thereby, his abstract rights are unimportant.”).

In Lucas, this Court characterized as a taking of private

property a regulation that deprived the owner of all “eco-

nomically beneficial or productive use of [the property].”

505 U.S. at 1015. Similarly, in Dolan v. City of Tigard, 512

U.S. 374 (1994), the Court reaffirmed that a regulation

does not effect a taking if it does not deny an owner

“economically viable use” of his or her property. Id. at 385

(quoting Agins v. City of Tiburon, 447 U.S. 255, 260

(1980)); see also Yee, 503 U.S. at 523 (taking analyzed in

terms of whether the government deprives the owner of

“the economic use of the property”); United States v.

Reynolds, 397 U.S. 14, 16 (1970) (“In enforcing the con-

stitutional mandate, the Court at an early date adopted the

concept of market value.“); Pennsylvania Coal Co. v.

Mahon, 260 U.S. 393, 414 (1922) (“What makes the right to

mine coal valuable is that it can be exercised with profit.”).

Indeed, it is only “reasonable expectations” that may give

rise to a property claim under the Fifth Amendment.

Penn Central, 438 U.S. at 125. Recognizing a property

28

right in interest that can never actually be realized, as the

court of appeals did, would take the “reasonable” out of

“reasonable expectations.“

D. Webb’s Fabulous Pharmacies, Inc. v. Beckwith Does

Not Render IOLTA Programs Unconstitutional

The determination that interest earned on IOLTA

accounts is not the private property of respondents is fully

consistent with Webb's Fabulous Pharmacies, Inc. v.

Beckwith, 449 U.S. 155 (1980). In Webbd’s, this Court held

that the more than $100,000 in interest earned on an

interpleaded fund belonged to the owners of the principal,

and could not be diverted to the county treasury. Id. at

164. This Court explained that “(t]he earnings of a fund

are incidents of ownership of the fund itself and are

The court of appeals’ discussion of the import of the Internal

Revenue Service’s Revenue Ruling 81-209 (Pet. App. 14a-l5a) mis-

understands the limited purpose of that ruling. The ruling discusses

only whether IOLTA interest could be considered taxable income of the

clients. Rev. Rul. 81-209, 1981-2 C.B. 16. It does not purport to address

whether the interest is property, within the meaning of the Fifth

Amendment. Furthermore, the income tax is imposed on “income from

whatever source derived,” not property. 26 U.S.C. 61(a); see also U.S.

Const. Amend XVI. If it were a property tax, it would have to be

apportioned among the States. U.S. Const. Art. I, §9, Cl. 4; see also

Brushaber v. Union Pacific R. R., 240 U.S. 1, 12-19 (1916). The

definitions of “income” and “property” are not coextensive, moreover.

A taxpayer may derive income from a transaction in which he receives

no property. E.., 26 U.S.C. 132(f2)(B); Hillsboro Nat'l Bank v.

Commissioner, 460 U.S. 370, 377-385 (1983); United States v. Kirby

Lumber Co., 284 U.S. 1, 3 (1981); Old Colony Trust Co. v. Com-

missioner, 279 U.S. 716, 729-731 (1929). See also Cone, 819 F.2d at 1007

n. S. The court’s focus on the particular order in which the banking

transactions occurred is also in tension with this Court’s recognition in

Sperry that “money is fungible“ and that In lo special constitutional

importance attaches to the fact that the Government deducted its

charge directly from the award rather than requiring Sperry to pay it

separately.” 493 U.S. at 62 n.9.

29

property just as the fund itself is property.” bid.

Because the interest earned in that case far exceeded the

administrative costs and fees associated with its genera-

tion, id. at 159-160, this Court did not address or question

the State’s power to retain interest reasonably commensu-

rate to the cost of servicing the account. Id. at 160, 165.

Rather, the Court carefully confined its holding to

the narrow circumstances of this case—where there is

a separate and distinct state statute authorizing a

clerk’s fee “for services rendered” based upon the

amount of principal deposited: where the deposited fund

itself concededly is private; and where the deposit in

the court's registry is required by state statute in

order for the depositor to avail itself of statutory

protection from claims of creditors and others.

Id. at 164.

The present case differs from Webb's in three signifi-

cant respects. First, Webb’s did not involve government-

created value. The Webb’s claimants’ principal was capa-

ble, under existing interest rules, of generating realizable

interest without any government intervention or altera-

tion of the underlying condition of the property. The

interest-generating principal was “concededly * * *

private.” 449 U.S. at 164. Here, by contrast, the fund that

actually generates realizable interest is a public creation

In the absence of the governmental program pooling th

funds, no interest could or would be realized. See Twin

City Power, 350 U.S. at 228 (no compensable property

right exists where At he right has value or is an empty

one dependent solely on the Government”).

Second, any interest actually earned by respondents’

funds would not, by definition, exceed the administrative

costs of servicing the account and allocating the interest

to them individually. Webb's did not suggest that accrued

interest that falls below a reasonable estimation of the

30

costs and fees associated with managing an account must,

as a matter of constitutional law, be regarded as the

private property of the beneficial owners of the principal.

Webb's dealt only with interest that was actually

realizable under state law, separate and apart from

appropriate service charges. 449 U.S. at 161, 162, 164; see

also Sperry, 493 U.S. at 62 & n.8; ef. Colorado Springs

Prod. Credit Ass'n v. Farm Credit Admin., 967 F.2d 648,

657-658 (D.C. Cir. 1992).

Third, while state law governs what happens to the

funds when a client provides money to an attorney, no

client is “required by state statute” to give money to his

attorney as a precondition for availing himself of the

protections of the legal system. Webbs, 449 U.S. at 164.

Whether or not funds will come into the possession of an

attorney is generally a matter of contractual agreement

between client and counsel.

CONCLUSION

The judgment of the court of appeals should be reversed.

Respectfully submitted.

WALTER DELLINGER

Acting Solicitor General

FRANK W. HUNGER

LOIS J. SCHIFFER

Assistant Attorneys General

EDWIN S. KNEEDLER

Deputy Solicitor General

PATRICIA A. MILLETT

Assistant to the Solicitor

General

ROBERT KLARQUIST

TIMOTHY DOWLING

JARED A. GOLDSTEIN

Attorneys

AUGUST 1997