Amicus Curiae Brief — Phillips v. Washington Legal Foundation

No. 96-1578

7

IN THE — 1

Supreme Court of the United States

OCTOBER TERM, 1996

Hon. THOMAS R. PHILLIPS, et al.,

i Petitioners,

WASHINGTON LEGAL FOUNDATION, et al.,

Respondents.

On Writ of Certiorari to the

United States Court of Appeals

for the Fifth Circuit

BRIEF OF THE COUNCIL OF STATE GOVERNMENTS,

NATIONAL ASSOCIATION OF COUNTIES,

NATIONAL LEAGUE OF CITIES,

INTERNATIONAL CITY/COUNTY

MANAGEMENT ASSOCIATION,

INTERNATIONAL MUNICIPAL

LAWYERS ASSOCIATION AND

U.S. CONFERENCE OF MAYORS

AS AMICI CURIAE SUPPORTING PETITIONERS

DAVID B. ISBELL RICHARD RUDA *

ROBERT A. LONG, JR. Chief Counsel

CAROLINE M. BROWN STATE AND LOCAL

COVINGTON & BURLING LEGAL CENTER

P.O. Box 7566 Suite 345

1201 Pennsylvania Ave.,N.W. 444 North Capitol St., N.W.

Washington, D.C. 20044 Washington, D.C. 20001

(202) 662-6000 (202) 434-4850

* Counsel of Record for the

Amici Curiae

WILSON - Eres Printine Co.. Inc. - 789-0096 - WasHiINGTON. D.C. 20001

— — — 4

QUESTION PRESENTED

Is interest earned on client trust funds held by

in IOLTA accounts a compensable property

of the client or lawyer, cognizable under the

Amendment of the United States Constitution,

the fundamental precept of IOLTA that such

absent the IOLTA program, could not earn

for the client or lawyer?

— — —

TABLE OF CONTENTS

Page

QUESTION PRESENTED PB. i

e occ scircarescenscsesccereseeccensece iv

INTEREST OF THE AMICI CURA 2

EEE 2

SUMMARY OF ARGUMENT ee. 9

1 N * 11

THE TEXAS IOLTA PROGRAM DOES NOT

TAKE A COMPENSABLE PROPERTY IN-

A. Just Compensation Is Measured By The Prop-

erty Owner’s Loss, Not The Government’s Gain. 13

B. Just Compensation Does Not Include Compensa-

tion For Property Values That Are Enhanced

Because Of Revocable Government Action, Or

That Result From A “Combination” That The

Property Owner Could Not Effect hee 17

C. IOLTA Programs Do Not Take A Compensable

r 18

e f SI 21

(iii)

iv

TABLE OF AUTHORITIES

Cases

Almota Farmers Elevator & Warehouse Co. v.

United States, 409 U.S. 470 (1973

Boston Chamber of Commerce v. City of Boston,

nr

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

305 (Cal. Ct. App. 1984), cert. denied, 474 U.S.

%.. RN Reals oe had

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

Cir.), cert. denied, 484 U.S. 917 (1987)

First English Evangelical Lutheran Church of

Glendale v. County of Los Angeles, 482 U.S. 304

| SE 2 ae Re

In re Adoption of Amendments *» CPR. D. R. 9-102

IOLTA, 102 Wash. 2d 1101 (49843) —

In re Interest on Lawyers’ Trust Accounts, 675

ks fF 2 0

In re Interest on Lawyers’ Trust Accounts, 672

P.2d 406 (Utah 19833 — ane,

In re Interest on Trust Accounts, 402 So.2d 389

. A eee eee

In re New Hampshire Bar Association, 453 A.2d

1258 (N. H. 1982) .......... 0

In re Petition of Minnesota Bar Association, 332

rr

Kimball Laundry Co. v. United States, 338 U.S. 1

rr RSET EP cel FEM SB Oe CLE

Loretto v. Teleprompter Manhattan CATV Corp.,

pk RF RPT a EE ot

Marion & Rye Valley Ry. v. United States, 270

U.S. 280 (1926) ......... PRA Ee Sar Ee ie

Nortz v. United States, 294 U.S. 317 (1935) 14.

Olson v. United States, 292 U.S. 246 (19343)

Petition by Massachusetts Bar Association, 478

N.E.2d 715 (Mass. 1985) 1

Ruckelshaus v. Monsanto, 467 US. 986 0 1984)

United States ex rel. T. V. A. v. Powelson, 319 U. 8.

c ˙ .

United States v. 50 Acres of Land, 469 U.S. 24

r / p BE

Page

10, 21

15, 21

16

3. 6. 8

13

*

TABLE OF AUTHORITIES—Continued

Page

United States v. 564.54 Acres of Land, 441 U.S.

/ x x ·· * 15

United States v. Causby, 328 U.S. 256 (1946) 13

United States v. Cors, 337 U.S. 325 (19499 17

United States v. Fuller, 409 U.S. 488 (1973 16, 17, 18

United States v. Miller, 317 U.S. 369 (1943 15, 17

United States v. Petty Motor Co., 327 U.S. 372

1 ˙ ͤ SPE tee 16

United States v. Pewee Coal Co., 341 U.S. 114

. 0 13, 21

United States v. Reynolds, 397 U.S. 14 (1970) 16, 17

United States v. Virginia Elec. & Power Co., 365

U.S. 624 (1961) on 13, 16

Washington Legal Foundation | v. . Massachusetts

Bar Foundation, 993 F.2d 962 (Ist Cir. 1993). x

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

, 9, 19, 20

Williamson County Reg. Planning Comm'n v.

Hamilton Bank, 473 U.S. 172 (1988) 9, 12,13

Statutes and Rules

Cal. Bus. & Prof. Code § 6211 (West 19900) 3

Cal. Bus. & Prof. Code § 6211(a) (West 1990) . 46

Conn. Gen. Stat. § 51-816 (1988) 3. 6

Md. Code Ann., Bus. Oce. & Prof. § 10-303 (b)

11 ͤͤ w ⁵⁰Ä I... ³Bm:nsʃ 0:2 3. 6

N.Y. Jud. Law § 497 (McKinney Supp. 1997) 2 3, 6

Ohio Rev. Code Ann. § 4705.09 (Anderson 1997) 3. 5

Okla. Stat. Ann. tit. 5, Ch. 1, App. 3-A, R. 1.15 (d)

r 5

Pa. Stat. Ann. tit. 62. § 4021 et seq. ( West 1996) 3-4

Pp. S 8 r 4

Alaska R. Prof. Conduct 1. 15 (dp) . 4

Ark. R. Prof. Conduct 1. 15 (d) () 6

Colo. R. Prof. Conduct 1. 15 (e) ()) wal 5

D.C. Ct. App. R. X. Appendix B (a) () . 5

Del. R. Prof. Conduct, Interpretative Guidelines

EE AD ee ee a 6

Ga. Code Prof. Responsibility DR 9-102(C) (. 5

vi

TABLE OF AUTHORITIES—Continued

Idaho R. Prof. Conduct 1. 15 (d))

Are

Iowa Code Prof. Responsibility DR 9-102 (C) (3)

La. R. Prof. Conduct 1.15, IOLTA R. 3 (d)

Me. Code Prof. Responsibility 3.6 (e) (3) & (7

Mich. R. Prof. Conduct 1. 15 (dd) if =

Minn. R. Prof. Conduct 1. 15 (f))

Miss. R. Prof. Conduct 1. 15 (e)

Mont. R. Prof. Conduct 1.15 (e) 3

N. C. R. Prof. Conduct Canon X, R. 10.8 (a) n

N. D. R. Prof. Conduct 1. 15 (d) (3)

N. M. R. Prof. Conduct 16-115 T

Neb. Code Prof. Responsibility DR 9-102 (Cc)

Or. Code Prof. Responsibility DR 9-101 (D) (4)

Pa. R. Disciplinary Enforcement R. 601 dp)

Pa. R. Prof. Conduct 1. 15 (d) (i

III ccciictteececccrctesccnsnensaccestnces

S. D. R. Prof. Conduct 1 15 (d) () bi

Tex. Disciplinary R. Prof. Conduct 1.14 000...

Va. Code Prof. Responsibility DR 9-102(E) ()

Vt. Code Prof. Responsibility DR 9-103 () a

Wash. R. Prof. Conduct 1.14(c) (3)

W. Va. R. Prof. Conduct 1.15(d) (I))

Wyo. R. Prof. Conduct 1.15, sec. II(a)

r eS eee ee

r i

Hawaii S.Ct. BR. 11(e) (2) ()

Kan. S. Ct. R. 226, R. Prof. Conduct 1.15 (d) (33

r . TS Ie, TD ar

Mass. Sup. Jud. Ct. R., Sec. E. Guidelines for Inter-

est on Lawyers’ Trust Accounts, A (2) ()

Mo. S. Ct. R. 4, R. Prof. Conduct 1.15(d) ()

e.. ee Pee eae

4 11 en

N. J. Court R. 1:28 A-2 (b) (())

S. C. App. Ct. R. 412 (a) SAW

Tenn. S.Ct. R. 8, Code Prof. ere DR

9-102(C) (22 rr

Wis. S. Ct. R. 20:1. 15 (e) (3) — = Mee

2

Sooaaw»nac

ene

Nennen enen

vii

TABLE OF AUTHORITIES—Continued

Other Authorities Page

ABA Comm'n on Interest on Lawyers’ Trust Ac-

counts, JOLTA Update (Feb. 199) 3,4

Julius L. Sackman, Nichols on Eminent Domain

(rev. 3d ed. 1997) .................... . 12

— — —

IN THE

Supreme Court of the United States

OCTOBER TERM, 1996

No. 96-1578

Hon. THOMAS R. PHILLIPS, et al.,

Petitioners,

V.

WASHINGTON LEGAL FOUNDATION, et al.,

Respondents.

On Writ of Certiorari to the

United States Court of Appeals

for the Fifth Circuit

BRIEF OF THE COUNCIL OF STATE GOVERNMENTS,

NATIONAL ASSOCIATION OF COUNTIES,

NATIONAL LEAGUE OF CITIES,

INTERNATIONAL CITY/COUNTY

MANAGEMENT ASSOCIATION,

Pursuant to Rule 37.6, amici state that no counsel for a | INTERNATIONAL MUNICIPAL

party has authored this brief in whole or in part, and that LAWYERS ASSOCIATION AND

no person or entity, other than the amici, their members, or U.S. CONFERENCE OF MAYORS

their counsel, has made a monetary contribution to the prepa- AS AMICI CURIAE SUPPORTING PETITIONERS

ration or submission of this brief.

2

INTEREST OF THE AMICI CURIAE

Amici, organizations whose members include state,

county, and municipal governments and officials

throughout the United States, have a compelling in-

terest in legal issues that affect state and local gov-

ernments. Amici have both a specific and general

interest in the issue presented in this case.

Amici have a specific interest in defending the

constitutionality of Interest on Lawyers’ Trust Ac-

count (“IOLTA”) programs. These programs have

been adopted by all 50 States (with one not yet opera-

tional) and the District of Columbia in the belief that

such programs are constitutionally sound. IOLTA

programs have become a critical source of financial

support in providing legal services to the poor.

Amici also have a more general interest in the

Fifth Amendment jurisprudence governing the tak-

ing of private property for public use. State and local

governments are involved in eminent domain proceed-

ings and land-use regulations that provide the basis

for most “takings” claims. The question of what con-

stitutes “property” and whether “just compensation”

has been paid are thus important issues that affect the

daily process of governing at the state and local levels.

Because of the importance of these issues to amici

and their members, they submit this brief to assist

the Court in its resolution of the case.”

STATEMENT

1. In 1981, Florida became the first State to imple-

ment an IOLTA program, based on similar programs

Letters from all parties consenting to the filing of this

brief have been filed with the Clerk.

3

operating successfully in Canada, Australia, and else-

where. See In re Interest on Trust Accounts, 402

So.2d 389 (Fla. 1981) ; Petition by Massachusetts Bar

Ass’n, 478 N.E.2d 715, 716-17 (Mass. 1985). Since

1981, the remaining 49 States and the District of

Columbia have adopted such programs. IOLTA pro-

grams generally have been adopted by order of the

state supreme court, as an amendment to court rules

or to rules of professional conduct.* Five States have

implemented their program by statute.* The program

is mandatory in 26 States; in the remainder the pro-

gram is either voluntary or includes an opt-out pro-

vision. See ABA Comm’n on Interest on Lawyers’

Trust Accounts, JOLTA Update 5 (Feb. 1996).

The Indiana IOLTA program has been approved in princi-

ple but is not yet operational.

The IOLTA programs in the following States have been

adopted by order of the highest court in the State: Alabama,

Alaska, Arizona, Arkansas, Colorado, Delaware, Florida,

Georgia, Hawaii, Idaho, [llinois, Iowa, Kansas, Kentucky,

Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mis-

sissippi, Missouri, Montana, Nebraska, Nevada, New Hamp-

shire, New Jersey, New Mexico, North Carolina, North

Dakota, Oklahoma, Oregon, Pennsylvania, Rhode Island,

South Carolina, South Dakota, Tennessee, Texas, Utah, Ver-

mont, Virginia, Washington, West Virginia, Wisconsin, and

Wyoming. In addition, the IOLTA program in the District

of Columbia was promulgated by an order of the District of

Columbia Court of Appeals. In seven States, the order estab-

lishing the IOLTA program was accompanied by formal

opinion. See infra note 12.

*See Cal. Bus. & Prof. Code § 6211 (West 1990); Conn.

Gen. Stat. §51-8lc (1985); Md. Code Ann., Bus. Occ. &

Prof. § 10-303(b) (1995); N.Y. Jud. Law § 497 (McKinney

Supp. 1997); Ohio Rev. Code Ann. § 4705.09 (Anderson

1997). Pennsylvania’s IOLTA program previously operated

by statute, see Pa. Stat. Ann. tit. 62, § 4021 et seq. (West

4

While the details of these programs vary among

jurisdictions, the basic operation of each is the same.

The “fundamental precept” of the program (Pet. i)

is that certain funds of clients held in trust by a

lawyer cannot reasonably be expected to earn interest

sufficient to offset the transaction costs that would be

incurred in determining and disbursing the earned

interest attributable to each client’s funds. Under an

IOLTA program, these funds—which generally are

nominal in amount or held for a short period of time

—are deposited by the lawyer into a common, interest-

bearing demand account. The interest earned on the

account is then remitted to the state bar or to a fund

administered by the bar or other state entity, which

uses the funds so received to fund a variety of legally-

related public service programs.

Interest from IOLTA programs has become a criti-

cal source of funding for legal services to the poor.

See IOLTA Update at 4. In 1994, of the $91 million

in total grants made by IOLTA programs, over $85

million went to legal services. Id. Other general cate-

gories of grants include administration of justice,

publie legal education, law student scholarships and

service activities, and indigent defense. Id.

Virtually all States require that funds eligible for

IOLTA deposit be “nominal in amount” or held “for

a short period of time” before they can be eligible for

deposit in an IOLTA account. For some, this is the

only statutory requirement.“ Several States, however,

1996), but the statute has been supplanted by a bar rule,

see Pa. R. Prof. Conduct 1.15(d)(1); Pa. R. Disciplinary

Enforcement R. 601(d).

5 See, e.g., Ala. R. Prof. Conduct 1.15(f); Alaska R. Prof.

Conduct 1.15 (d); Cal. Bus. & Prof. Code §621l(a) (West

5

make explicit the assumption that such funds will not

generate interest in excess of fees and specify that

IOLTA-deposited funds cannot reasonably be expected

to earn a positive net return for the elient.“ Many

set out factors that a lawyer must consider in deter-

mining whether funds will generate sufficient interest

income to justify the expense of administering a

segregated account.’ Others set a minimum threshold

1990) ; Colo. R. Prof. Conduct 1.15(e) (2) ; D.C. Ct. App. R.X,

Appendix B (a)(1); Ga. Code Prof. Responsibility DR

9-102(C) (2); Idaho R. Prof. Conduct 1.15(d); Kan. Sup.

Ct. R. 226, R. Prof. Conduct 1.15 (d) (3); Miss. R. Prof.

Conduct 1.15 (e); Mont. R. Prof. Conduct 1.15(e) ; Neb. Code

Prof. Responsibility DR 9-102 (C); Nev. S. Ct. R. 217; N. H.

S. Ct. R. 50; N.C. R. Prof. Conduct Canon X. R. 10.3 (a);

Ohio Rev. Code Ann. 5 4705.09 (A) (2) (Anderson 1997);

Okla. Stat. Ann. tit. 5, Ch. 1, App. 3-A, R. 1.15 (d) (1996) ;

R. I. R. Prof. Conduct 1.15 (d); S.C. App. Ct. R. 412 (a); S.D.

R. Prof. Conduct 1.15 (d) (3); Tenn. S. Ct. R. 8, Code Prof.

Responsibility DR 9-102 (C) (2); Vt. Code Prof. Responsibil-

ity DR 9-103 (A); Wyo. R. Prof. Conduct 1.15, sec. II (a).

® See, e. g., Me. Code Prof. Responsibility 3.6 (e) (3) & (7);

Ky. S. Ct. R. 3.830 (2) (A); Pa. R. Prof. Conduct 1. 15 (d) (1) ;

Va. Code Prof. Responsibility DR 9-102 (E) (1); Wash.

R. Prof. Conduct 1.14 (e) (3); W. Va. R. Prof. Conduct

1.15 (d) (1); Wis. S. Ct. R. 20:1.15(c) (3); ef. Iowa Code

Prof. Responsibility DR 9-102 (C) (3) (funds not eligible for

IOLTA deposit if they wov'd produce a “significant positive

net return”).

For example, Massachusetts asks lawyers to consider “the

amount of interest likely to be earned during the period the

funds are expected to be deposited, as well as the estimated

cost of establishing and administering a separz e client fund

account, including reasonably imputed overhead costs, and

the estimated cost of preparing any tax or other reports re-

quired for interest accruing to a client’s benefit.” Mass. Sup.

Jud. Ct. R., Sec. E, Guidelines for Interest on Lawyers’ Trust

Accounts, A(2)(b). See also Ariz. Sup. Ct. R. 44(c) (4);

6

of interest that must be earned, on the assumption

that interest below such a threshold will not cover

transaction costs of establishing a separate account.“

Finally, several state courts have interpreted their

IOLTA rules against the background requirement

that a lawyer who reasonably expects that client funds

will yield enough interest to offset transaction costs

is ethically obligated to make the funds produce in-

come for the benefit of the «‘ient.®

2. The Texas IOLTA program at issue in this case

is typical of IOLTA programs generally. The Su-

preme Court of Texas approved implementation of

an IOLTA program after it found that „on eertain

client funds held by attorneys, interest income cannot

reasonably be earned to benefit individual clients for

Ark. R. Prof. Conduct 1.15 (d) (5); Del. R. Prof. Conduct,

Interpretative Guidelines No. 2(m) ; Fla. Bar R. 5-1.1 (e) (7);

Hawaii S. Ct. R. 11(C) (2) F); In. R. Prof. Conduct 1.15 (e);

Minn. R. Prof. Conduct 1.15 (f): Mo. S. Ct. R. 4, R. Prof.

Conduct 1.15 (d) (2); N. M. R. Prof. Conduct 16-115 (F);

N.Y. Jud. Law 8 497 (4) (b) (McKinney Supp. 1997); N. D.

R. Prof. Conduct 1. 15 (d) (3); Or. Code Prof. Responsibility

DR 9-101 D) (4).

See La. R. Prof. Conduct 1.15, IOLTA R. 30d) ($50

threshold); Md. Code Ann., Bus. Occ. & Prof. Code Ann.

§ 10-303(b) (1995) ($50 threshold); Mich. R. Prof. Conduct

1.15(d) ($50 threshold) ; N.J. Court R. 1 28 A-2 (b) (4) ($150

threshold). Connecticut requires that the funds be “less than

ten thousand dollars in amount or .. held for a period of not

— than sixty business days.“ Conn. Gen. Stat. 8 51-81c (a)

(1985).

See, e.g., Massachusetts Bar Ass’n, 478 N.E.2d at 718;

id. at 719 (Nolan, J., concurring) ; In re Interest on Lawyers’

Trust Accounts, 672 P.2d 406, 407 (Utah 1983) ; In re Petition

of Minnesota Bar Ass'n, 332 N.W.2d 151, 157-58 (Minn.

1982) ; In re New Hampshire Bar Ass’n, 453 A.2d 1258, 1261

(N.H. 1982).

7

whom the funds are held.“ Pet. App. 56a. As in most

States, these are defined as funds that are nominal

in amount or are reasonably anticipated to be held for

a short period of time.“ Id. at 57a.

In Texas, funds are considered nominal in amount

or held for a short period of time

if such funds, considered without regard to funds

of other clients which may be held by the attor-

ney... could rot reasonably be expected 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

maintaining the account, service charges, ac-

counting costs and tax reporting costs which

would be incurred in attempting to obtain inter-

est on such funds for the client.

Id. at 57a- 58a.“ If a lawyer determines in good faith

that he or she is holding funds that meet these cri-

teria, the lawyer is instructed to deposit the funds

in an IOLTA account, with interest to be transmitted

quarterly to the Texas Equal Access to Justice Foun-

dation. Id.

3. Alleging that the Texas IOLTA program vio-

lated their rights under the First and Fifth Amend-

ments, respondents brought suit in U.S. District

Court. The District Court granted summary judg-

ment for petitioners on the ground that respondents

had no constitutionally cognizable property interest at

Also to be considered are “the nature of the proceeding or

transaction involved and the likelihood of delay in the need

for such funds in such proceeding or transaction.” Pet. App.

58a. Moreover, attorneys are instructed to review placement

of the funds at reasonable intervals to determine whether

changed circumstances would merit moving the funds to a

separate account. Id.

stake because, in the absence of the IOLTA program,

they could not earn interest on funds in IOLTA ac-

counts. Pet. App. 20a-40a. The decision was con-

sistent with decisions from the First and Eleventh

Circuits’ and the highest appellate courts of seven

States.”

The Fifth Circuit reversed. Pet. App. la-19a. The

court found a property interest despite the District

Court’s findings, which it did not dispute, that “the

only funds eligible for deposit in an IOLTA account

are those that have no reasonable possibility of legally

generating net interest income benefiting the client”

and that “under the IOLTA Rules, the principal

amounts at issue cannot be reasonably expected to

earn net interest on their own.” Id. at 23a-24a, 27a

n. 7.

The Fifth Circuit reasoned that whether the in-

terest on IOLTA funds constitutes “property” for

purposes of the Fifth Amendment does not depend on

the value of the interest to the owner of the principal

See Washington Legal Found. v. Massachusetts Bar

Found., 993 F.2d 962, 975-76 (ist Cir. 1993); Cone v. State

Bar of Florida, 819 F.2d 1002, 1007 (11th Cir.), cert. denied,

484 U.S. 917 (1987).

See Massachusetts Bar Ass’n, 478 N.E.2d at 717-18; In

re Adoption of Amendments to C.P.R.D.R. 9-102 IOLTA, 102

Wash. 2d 1101 (1984); In re Interest on Lawyers’ Trust

Accounts, 675 S.W.2d 355, 356-58 (Ark. 1984): In re

Interest on Lawyers’ Trust Accounts, 672 P.2d 406 (Utah

1983) ; New Hampshire Bar Ass’n, 453 A.2d at 1261: Minne-

sota Bar Ass'n, 332 N.W.2d at 159; Interest on Trust Ac-

counts, 402 So.2d at 396; see also Carroll v. State Bar of

California, 213 Cal. Rptr. 305, 312 (Ct. App, 1984) (inter-

mediate California appellate court decision upholding IOLTA

program), cert. denied, 474 U.S. 848 (1985).

9

once transaction fees are deducted. Pet. App. 13a-

14a. According to the Fifth Circuit, the courts that

have upheld these programs have erroneously de-

fined “property” as “an interest that must neces-

sarily benefit its owner.” Jd. at 12a. The court found

no such requirement in this Court’s takings juris-

prudence. In particular, the Fifth Circuit understood

this Court’s decision in Webb’s Fabulous Pharmacies,

Ine. v. Beckwith, 449 U.S. 155, 164 (1980), as having

created a “rule” for defining property “that is in-

dependent of the amount or value of interest at issue.”

Id.

Thus, the court concluded, the fact that the interest

earned on IOLTA accounts is valueless to the client

(once fees are deducted) is irrelevant, because a

Fifth Amendment property interest “attaches the

moment that the interest accrues.” Id. at 13a. Hav-

ing reversed the District Court’s determination that

clients did not have a valid property interest in the

interest proceeds on funds in IOLTA accounts, the

Fifth Circuit remanded the case for reconsideration.

Id. at 19a.

SUMMARY OF ARGUMENT

Amici agree with petitioners and their other sup-

porting amici that interest generated from IOLTA

funds is not “property” protected by the Fifth Amend-

ment. Amici focus on an additional argument, based

on just compensation principles, in support of peti-

tioners. The Fifth Amendment does not proscribe

the taking of private property for public use; it pro-

scribes taking private property for public use “with-

out just compensation.” Williamson County Reg.

Planning Comm'n v. Hamilton Bank, 473 U.S. 172,

194 (1985). Applying well-established principles, the

10

“just compensation” for a taking of the interest on

IOLTA trust accounts is zero. For purposes of the

Fifth Amendment, the value of property is deter-

mined by what “the downer [has] lost,” not what

“the taker [has] gained.” Boston Chamber of Com-

merce v. City of Boston, 217 U.S. 189, 195 (1910).

In the case of IOLTA programs, the “owner” of the

putative “property” taken (i. e., the interest earned

on the owned funds) has lost nothing, because the

funds by definition are not reasonably expected to

generate interest in excess of the transaction costs

that would be incurred in determining and distribut-

ing the interest generated. Absent an IOLTA pre-

gram, clients could not realize the “use value” of

such funds, and banks and other financial institutions

in which client funds are deposited would enjoy use

of the funds. IOLTA programs transfer the use value

of those client funds from financial institutions

(which clearly lack a constitutionally-protected inter-

est in the use value of the funds) to the government.

That transfer is not compensable under the Fifth

Amendment.

Where “nothing of value was taken,” Inlothing

[is] recoverable as just compensation.” Marion &

Rye Valley Ry. v. United States, 270 U.S. 280, 282

(1926). To say that an interest is not compensable

under the Fifth Amendment is another way of saying

that it is not a constitutionally-protected property

interest. In the case of interest earned on IOLTA

funds, nothing of value is taken from the property

owner. Consequently, interest on IOLTA accounts

is not a compensable property interest under the

Fifth Amendment.

11

ARGUMENT

THE TEXAS IOLTA PROGRAM DOES NOT TAKE A

COMPENSABLE PROPERTY INTEREST

Amici agree with petitioners that the interest gen-

erated from IOLTA funds is not a constitutionally

cognizable property interest. The fundamental pre-

cept of IOLTA is that the client’s funds, absent the

IOLTA program, could not earn interest for the

client-owner in excess of the transaction costs of

determining and disbursing earned interest, including

any overhead and tax reporting costs. Prior to the

adoption of IOLTA programs, clients entrusting their

lawyers with funds to be held for a short period of

time or funds nominal in amount received nothing

back in excess of the initial principal. Following the

adoption of IOLTA programs, the clients’ financial

position is unchanged. Respondents’ argument that

IOLTA simultaneously creates and takes away a

constitutionally-protected property interest must be

rejected.

Without disputing that the only funds eligible for

deposit in an IOLTA account are those that have no

reasonable possibility of generating net interest in-

come benefitting the client, the Fifth Circuit found

a property interest by applying a “two-part process”

theory of accrued interest. Pet. App. 13a. The court

held that a bank first pays interest on the account

and then deducts fees, and that the “property interest

attaches the moment that the interest accrues.” Id.

Petitioners, and other amici supporting them, have

demonstrated that this two-step approach is invalid,

because there would be no first step absent IOLTA.

Rather than repeat those arguments here, amici sug-

gest an additional reason that the decision below

12

must be reversed. “The Fifth Amendment does not

proscribe the taking of property; it proscribes taking

without just compensation.” Williamson County Reg.

Planning Comm'n v. Hamilton Bank, 473 U.S. 172,

194 (1985) (citations omitted). In the case of

IOLTA programs, “just compensation” means no

compensation at all, because the programs are struc-

tured in such a way that nothing of monetary value

to the owner is taken. Because IOLTA programs

do not take a compensable interest in property, they

do not violate the Fifth Amendment.

In some cases, the Court has found it possible to

separate the question whether government action takes

a compensable property interest from the amount of

compensation that is constitutionally required. See,

e.g., Loretto v. Teleprompter Manhattan CATV Corp.,

458 U.S. 419, 441 (1982) (holding that a permanent

physical occupation of real property is a taking, and

remanding for a determination of the amount of com-

pensation due). In this case, however, the two ques-

tions are not analytically distinct. “In the sense

used in the Fifth Amendment, property refers to any

interest recognized as property in the law and which

requires compensation if acquired by the government

through eminent domain.” 2 Julius L. Sackman,

Nichols on Eminent Domain § 5.01[2][b][i], at 5-9

(rev. 3d ed. 1997) (emphasis added). See also id.

§ 5.01[5][e], at 5-34 to 5-35 (interest is not “prop-

erty” within the meaning of the Fifth Amendment

unless it is “practicable to place a money value” on

the interest) (footnote omitted). In Williamson, this

Court recognized the connection between just compen-

sation and the definition of compensable property

interests by reaffirming that there is no violation of

the Fifth Amendment until the government has de-

13

nied just compensation. 473 U.S. at 194-95 & n.13.

See also First English Evangelical Lutheran Church

of Glendale v. County of Los Angeles, 482 U.S. 304,

314 (1987); Ruckelshaus v. Monsanto, 467 U.S. 986,

1018 n.21 (1984).

As explained below, the structure of IOLTA pro-

grams is such that the interest earned and paid on

IOLTA accounts has no monetary value to any indi-

vidual owner of the pooled principal on which the

interest is earned, and thus is not, as to any such

owner, a compensable property interest cognizable

under the Fifth Amendment. Accordingly, the Court’s

just compensation cases bear directly on whether in-

terest on IOLTA accounts is a cognizable property

interest under the Fifth Amendment.

A. Just Compensation Is Measured By The Property

Owner’s Loss, Not The Government’s Gain

In 1910, Justice Oliver Wendell Holmes, speaking

for a unanimous Court, said that in valuing property

that has been taken by the government “the question

is what has the owner lost, not what has the taker

gained.” Boston Chamber of Commerce v. City of

Boston, 217 U.S. 189, 195 (1910). See also id. at 194

(government is not obligated to compensate a property

owner “for a loss of theoretical creation, suffered by

no one in fact”). Since that time, this Court has

consistently upheld the rule that just compensation

is determined by the loss to the property owner, not

the gain to the government. See, e. g., United States

v. Virginia Elec. & Power Co., 365 U.S. 624, 633-36

(1961); United States v. Pewee Coal Co., 341 U.S.

114, 121 (1951) (Reed, J., concurring); Kimball

Laundry Co. v. United States, 338 U.S. 1, 13 (1949) ;

United States v. Causby, 328 U.S. 256, 261 (1946).

14

In Kimball Laundry, the Court explained why just

compensation must be based on the loss to the owner

rather than the benefit to the taker: If farmland is

taken by the government to be used as a firing range,

the farmer loses his business as well as his land. By

contrast, if the same farmer owned swamp land that

was taken by the government to be used as a firing

range, the farmer would have lost only his land. See

338 U.S. at 13. In both cases, the gain to the govern-

ment—the firing range—is the same. The loss to the

owner, however, differs dramatically. As the Court

stated, “[i]f benefit to the taker were made the

measure of compensation, it would be difficult to

justify higher compensation for farm land taken as

a firing range than for swamp or sandy waste equally

suited to the purpose.” Id.

This valuation principle applies with equal force

when the gain to the government is of greater value

than the loss to the property owner, as would be the

case here if interest on IOLTA funds were deemed

protectable property. Nortz v. United States, 294

U.S. 317 (1935), is illustrative. Nortz involved gold

certificates that had been issued by the federal gov-

ernment to individuals. The gold certificates operated

like today’s savings bonds except that the certificates

were redeemable for gold coin. The plaintiff, Nortz,

owned gold certificates worth $106,300 in currency,

and $170,634 in gold. See 294 U.S. at 323. Subse-

quent to Nortz’s purchase of the certificates, Con-

gress enacted the Emergency Banking Act, requiring

all holders of gold coin, gold bullion and gold cer-

tificates to deliver them to the Treasurer of the

United States. Jd. at 327. Nortz delivered his gold

certificates and received $106,300 in currency. Nortz

filed suit, arguing that he did not receive just com-

15

pensation for the gold certificates taken by the gov-

ernment. He argued that had he been paid in gold

coin, he would have received the cash equivalent of

$170,634 because of the increase in value of gold. Id.

at 323-24, 329. The Court rejected Nortz’s argument,

explaining that there was no free market for gold

as a result of the Emergency Banking Act and other

legislative measures prohibiting the trade and export

of gold by anyone other than an authorized gold

dealer. Id. at 329-30. Because Nortz was not an

authorized dealer, the Court reasoned that he was

entitled only to the value of the certificates in cash

3 he could not sell the gold on the open market.

Applying these valuation principles, the value of

interest on IOLTA account funds must be determined

from the point of view of the owners of the pooled

principal—the clients—and not the government.”

This involves ascertaining the fair market value of

the property in the hands of each owner.

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

this Court reaffirmed the rule that just compensation

is established as the market value of the owner’s

interest at the time of the taking. Id. at 374. Market

value is usually defined as that which “a willing buyer

would pay in cash to a willing seller.” Id.; accord

United States v. 564.54 Acres of Land, 441 US.

506, 511 (1979); Almota Farmers Elevator & Ware-

house Co. v. United States, 409 U.S. 470, 474 (1973):

Lawyers clearly lack a compensable property interest in

interest earned on client trust funds. In Texas, as elsewhere,

ethical rules prohibit lawyers from pooling client funds for

the lawyer’s benefit. See Tex. Disciplinary R. Prof. Con-

duct 1.14.

16

Virginia Elec. & Power Co., 365 U.S. at 633; United

States v. Petty Motor Co., 327 U.S. 372, 377-78

(1946). Under the market value standard, “(t]he

owner is to be put in the same position monetarily as

he would have occupied if his property had not been

taken.” United States v. Reynolds, 397 U.S. 14, 16

(1970). See also Olson v. United States, 292 U.S. 246,

255 (1934) (owner “is entitled to be put in as good a

position pecuniarily as if his property had not been

taken,” but “is not entitled to more”).

The market value standard “is not an absolute

standard nor an exclusive method of valuation.” Vir-

ginia Elec. & Power Co., 365 U.S. at 633; accord

United States v. Fuller, 409 U.S. 488, 490 (1973).

Courts have deviated from the market value standard

in cases involving the loss of profits, damage to good

will, expense of relocation, and other such conse-

quential losses. But “[dJeviation from [the market

value] measure of just compensation has been re-

quired only ‘when the market value has been too

difficult to find, or when its application would result

in manifest injustice to owner or public.’” United

States v. 50 Acres of Land, 469 U.S. 24, 29 (1984)

(quoting United States v. Commodities Trading Corp.,

339 U.S. 121, 123 (1950)).

There is no reason to deviate from the market value

standard in this case. Financial institutions engaged

in the business of paying interest for the use of

funds establish a market value for the use of money.

Applying the market value standard works no in-

justice on clients, who could not realize any interest

on the funds in the absence of an IOLTA program.

Indeed, awarding compensation under a non-market

value standard would amount to awarding clients a

windfall.

17

B. Just Compensation Does Not Include Compensation

For Property Values That Are Enhanced Because Of

Revocable Government Action, Or That Result From

A “Combination” That The Property Owner Could Not

Effect

It is well-established that the government does not

have to compensate the owner for property values that

are enhanced because of the use to which the govern-

ment intends to put the property. See Fuller, 409

U.S. at 492; Reynolds, 397 U.S. at 16; United States

v. Cors, 337 U.S. 325, 334 (1949); Miller, 317 U.S.

at 377. Cors, for example, involved a government

taking during World War II of a steam tug owned by

a private individual. The government’s demand for

steam tugs to be used during the war greatly in-

creased the value of these vessels. See 337 U.S. at

328-29. The owner of the tug argued that just com-

pensation should be measured by the value of the

steam tugs after the government announced its intent

to institute a wartime ship requisition. Jd. at 327.

The Court rejected this argument, holding that “[i]t

is not fair that the government be required to ay

the enhanced price which its demand alone has e-

ated.” Id. at 333.

In Fuller, a cattle farmer had obtained a permit

from the federal government to graze his cattle on

neighboring lands owned by the federal government.

See 409 U.S. at 488-89. The government later con-

demned a portion of the farmer’s land adjacent to the

grazing land. Id. at 489. The farmer argued that the

grazing permit greatly increased the value of the con-

demned land and the government should pay for the

increased value. Jd. The Court reaffirmed the princi-

ple that the government “need not compensate for

value which it could remove,” id. at 492, and held that

18

the value of the farmer’s property was to be assessed

on its own and not in combination with property used

by permit from the government. Id. at 492-93.

In United States ex rel. T.V.A. v. Powelson, 319

U.S. 266 (1943), the federal government condemned

12,000 acres of land in North Carolina on behalf of

the Tennessee Valley Authority. The landowner ar-

gued that the value of the land should be assessed

by reference to its value if used in combination with

other lands that he could have acquired, but did not,

by power of eminent domain previously granted to

him by the State. Powelson, 319 U.S. at 274. The

Court cited previous cases in which it had denied

recovery “for a value dependent upon a combination

which [the landowner] could not reasonably expect

to effect.” Id. at 276 (citing McGovern v. New York,

229 U.S. 363 (1913)). The fact that the landowner

had been given the power of eminent domain—and

thus might reasonably have expected to bring about

the combination of land parcels that would have in-

creased the value of all—was irrelevant, the Court

held, because just compensation” should not include

the enhanced value resulting from a privilege con-

ferred by the State. Id. at 276-77."

C. IOLTA Programs Do Not Take a Compensable Inter-

est In Property

The analysis in Cors, Fuller and Powelson applies

to this case. In the case of IOLTA programs, the

fair market value of the owner’s property interest is

what he or she would have earned in the absence

14 The Court did not find it significant that the federal gov-

ernment had “taken” the property whereas the State had

conferred the privilege artificially enhancing its value. Powel-

son, 319 U.S. at 278-79.

19

of the program. Absent an IOLTA program, a client

entrusting to a lawyer funds that are nominal in

amount or to be held for a short term could not expect

to earn a return on the funds so entrusted. Nor could

the client “effect [a] combination,” Powelson, 319

USS. at 276, by pooling funds with others similarly

situated, that would make the use value of that

client’s funds realizable by the client. Absent an

IOLTA program created by a State, the use value

of such client trust funds would inure solely to the

financial institutions holding the funds. It is the

government’s power to require that such funds be

— to a point where the collective use value

realizable as interest paid, and then to requi

the interest be used for publie purposes — —

inure to the banks, that results in any interest at all

being paid on the funds in trust. As in Cors, Fuller

and Powelson, this enhancement created bv govern-

ment action should not be taken into account in deter-

mining the fair market value of the

been taken.“ R

The Court’s judgment in Webb’s Fabulous Phar-

macies, Inc. v. Beckwith, 449 U.S. 155 (1980), is not

inconsistent with this approach. In that case, having

found a constitutionally-protected property interest

in the interest generated on an interpleader fund, the

Court found that the money to be refunded to the

petitioning party was the amount in the fund less

*® IOLTA funds would have a “use value” in t

IOLTA programs, but that use value would be ———

by banks and other financial institutions that receive deposits

without paying interest on them. IOLTA programs transfer

the use value of IOLTA funds from banks (which clearly

lack any constitutionally-protected property interest) to

governments.

20

charges attributable to maintenance of the account.

See 449 U.S. at 161. The Court rejected the State of

Florida’s argument that “having mandated the accrual

of interest,” the State was “entitled to assume owner-

ship of the interest.” Jd. at 162. In the case of IOLTA

programs, the States do more than simply mandate the

accrual of the interest. They make the accrual of

interest possible by aggregating funds for which a

net positive return would otherwise not reasonably

be expected. Therefore, unlike the situation in

Webb’s, the government puts the property owner's

funds to a use which the owner could not replicate

in the absence of the state program.

Conirary to the court of appeals’ suggestion ( Pet.

App. 12a), Webb’s does not recognize a “rule” for

defining property “that is independent of the amount

or value of interest at issue.” In Webb’s, the Court

had no difficulty in determining that the value of the

interest at issue was more than $100,000, after deduc-

tion of a statutory fee. 449 U.S. at 158. Absent the

Florida law at issue in Webb’s, the owner of the

funds (which amounted to more than $1.8 million)

clearly could have realized the use value of those

funds. Thus, Wehb's does not stand for the proposi-

tion that courts decide whether an asserted property

interest is cognizable under the Fifth Amendment

without reference to whether the interest has any

economic value to the party asserting it.

In sum, only those client funds that would not

otherwise earn interest for the client may be depos-

ited into IOLTA accounts. Without the benefit of

aggregation of funds provided by the IOLTA pro-

gram, the individual deposits would have no realiza-

ble value to the owners of the funds beyond the princi-

pal amounts. Because the interest earned on IOLTA

21

funds results from the government program, the fair

market value to the elient is what it would be in the

absence of the government program: zero. Client-

owners thus have no entitlement under the Fifth

Amendment to compensation for interest on IOLTA

funds. See generally Marion & Rye Valley Ry., 270

U.S. at 282 (“nothing [is] recoverable as just com-

pensation, because nothing of value was taken”);

see also Pewee Coal Co., 341 U.S. at 121 (Reed, J.,

concurring) ; Nortz, 294 U.S. at 327-30. An interest

that is not compensable under the Fifth Amendment

is not a constitutionally protected property interest.

CONCLUSION

The judgment of the court of appeals should be

reversed.

Respectfully submitted,

DAvip B. ISBELL RICHARD RuDA *

ROBERT A. LONG, JR. Chief Counsel

CAROLINE M. BROWN STATE AND LOCAL

COVINGTON & BURLING LEGAL CENTER

P.O. Box 7566 Suite 345

1201 Pennsylvania Ave.,N.W. 444 North Capitol St., N.W.

Washington, D.C. 20044 Washington, D.C. 20001

(202) 662-6000 (202) 434-4850

* Counsel of Record for the

August 25, 1997 Amici Curiae