Amicus Curiae Brief — Brown v. Legal Foundation of Wash.

No. 01-1325 '

UU

Supreme Court of the United States

WASHINGTON LEGAL FOUNDATION. ET AL..

Petitioners.

LEGAL FOUNDATION OF WASHINGTON, ET AL..

Respondents.

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

BRIEF FOR FORTY-NINE STATE BAR ASSOCIATIONS

AND THE NATIONAL ASSOCIATION OF IOLTA PROGRAMS

AS AMICI CURIAE IN SUPPORT OF RESPONDENTS

JOANNE M. GARVEY RICHARD A. CORDRAY

CHARLES N. FREIBERG Counsel of Record

THOMAS P. BROWN 4900 Grove City Road

HELLER EHRMAN WHITE Grove City, Ohio 43123

& MCAULIFFE LLP (614) 539-1661

333 Bush Street

San Francisco, CA 94104 -

(415) 772-6000

Attorneys for the Amici Curiae

i

QUESTION PRESENTED

Does the Just Compensation Clause of the Fifth

Amendment, as applied through the Fourteenth Amend-

ment, require the State of Washington to pay compen-

sation for an alleged “taking” of funds through its

IOLTA program, which does not result in any financial

loss to the owner of those funds?

il

TABLE OF CONTENTS

QUESTION PRESENTED ..................0005-

TABLE OF CONTENTS. ....ccccccccccccccscscess

TABLE OF AUTHORITIES ..................44.

INTEREST OF THE AMICI CURIAE............

SUMMARY OF ARGUMENT ...................

ARGUMENT....

I.

Il.

STATE IOLTA PROGRAMS ARE

BASED SOLELY ON FUNDS THAT

COULD NOT EARN INTEREST

ABSENT THE IOLTA PROGRAM

ITSELF .....

A. IOLTA Programs Supplement

Attorneys’ Longstanding Fiduciary

Duties To Keep Their Clients’ Funds

Safe and

SOPATAIS . oo coccvecsessetenvetas

B. The Mechanics of IOLTA Programs

Eliminate the Possibility of Any

Compensable Loss...............+se00+:

EVEN IF THE IOLTA PROGRAM

DID EFFECT A “TAKING” OF

PROPERTY, THERE IS NO LACK

OF “JUST COMPENSATION” AND

HENCE NO CONSTITUTIONAL

VIOLATION

PAGE

15

A. Any Takings Claim Requires

a Compensable Loss Under the

Just Compensation Clause..............

B. Having Lost Nothing of Any Value,

Monetary or Otherwise, Petitioners

Have No Valid Claim Under the Just

Compensation Clause...................

ti neanbesesecesececessccececcec:

PAGE

iv

TABLE OF AUTHORITIES

Cases: PAGE

Boston Chamber of Commerce v. Boston,

217 U.S. 189 (1910) ..........0 0c eee: 16, 17, 18, 19

City of New York v. Sage, 239 U.S. 57 (1915) ... 19, 22

First English Evangelical Lutheran Church

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

SOG CIGD ccc cccccccssccesesssccoccenccsesese 24

Kimball Laundry Co. v. United States,

GOB WD. ECIGGED occccecccccscecccccccceces: 16

McGovern v. City of New York,

BBD WB. FED CIGES) ccccccccccccccceccccccess 20, 21

Olson v. United States, 292 U.S. 246 (1934) .... 16, 19

Phillips v. Wash. Legal Found., 524 U.S. 156

CBGGED cccdeccccccvcsovcccesccccsccocesecesees 14

Ruckelshaus v. Monsanto Co.,

GBF UD. FSS CAFO vc ccccccccccceccccecccecs 16, 17

Tex. Equal Access to Justice Found. v. Wash.

Legal Found., U.S. No. 02-01 ............... 14

United States ex rel. TVA v. Powelson,

SID UB. BES CIDSS) .ccccccccccscccccecss 19, 20, 22

United States v. Chandler-Dunbar Water

Power Co., 229 U.S. 53 (1913)...........+.-- 16

United States v. Fuller, 409 U.S. 488 (1973).... 20

PAGE

Valley Forge Christian Coll. v. Ams. United

for Separation of Church and State,

GSS UB. GES (IBGE oc cccccccccccccccccccces 24

Wash. Legal Found. v. Tex. Equal Access to

Justice Found., 94 F.3d 996 (Sth Cir. 1996),

aff'd, Phillips v. Wash. Legal Found.,

Se SE en cdccenesdchondevdcecses 9

“‘Yesh. Legal Found. v. Tex. Equal Access

to Justice Found., 106 F.3d 640

DE nd cidcdcbsniendeddesedcoesns 21, 22, 25

Wash. Legal Found. v. Tex. Equal Access

to Justice Found., 270 F.3d 180

SE Se bbbnctdncncddsekbctotcentocene 14, 15

Statutes and Rules:

Rev. Rul. 81-209, 1981-2 C.B. 16 ............... 12

BN EEK Uk EE Sedbebnasecnsddnsedbsdeticweeastes |

Washington’s Rules of Professional Conduct

Pet Pecudendiventscteucsanstesesesssoescsenconecieses 8

Sue Panedbseousenspeecdenasuseesesescostacenstect 9

Sue Chddenbdcedencntscensocnesessorséndceseesies 8

Miscellaneous:

Canons of Prof’! and Judicial Ethics,

EDS EEE ee 6

Canons of Prof’! and Judicial Ethics,

ES a 6

Model of Code of Prof’! Responsibility

DR. De GB.. ccccccccccccccscccccsccccccscoses

D.R. 9-102(A) 1969 ........ccccccccccccceees

DR. DeAGBIBD) 2. cvccccccccccccccscccccccovess

ABA Comm. on Ethics and Prof’!

Responsibility, Formal Opinion

BOB (19B2)....cccccccccccccccccccccccccccccccsecoss

ABA Comm. on Ethics and Prof’!

Responsibility, Informal Opinion

545 (1962).......-.cececeeeerererereceeeeeeeeerers

ABA Comm. on Ethics and Prof’!

Responsibility, Informal Opinion

G91 (1967 )..nccccccccccccccccccccccccccccccccccess

ABA, IOLTA Handbook (2002) ........--.+-00++:

David Hoffman, A Course of Legal Study

(2d ed. 1836) ........ cc cece ee ceceeeeeeeeneees

Model Rules of Prof’! Conduct, R. 1.15

CIGESD) oc ccccccccccccccsccccccscccccccsocesoos

Richard A. Brealey and Stewart C. Myers,

Principles of Corporate Finance

(Sth ed. 1996) ......... cece cece eee ee eeeeceee

= see — aT — ct

INTEREST OF THE AMICI CURIAE'

The Legal Foundation of Washington administers an

“Interest on Lawyers Trust Account” (“IOLTA”) pro-

gram. Essentially the same type of program has been

adopted in every other State, as well as in the District of

Columbia. Like all of the IOLTA programs, Washing-

ton’s program operates on the premise that sums of

money too small or held for too short a time to generate

a return for their owners should not be shunted into non-

interest-bearing trust accounts that benefit only the

financial institutions holding these deposits, as occurred

in the past. Rather, these otherwise unusable assets

should be utilized to help pay for legal services to the

poor. Petitioners’ takings claim is consciously designed

to extinguish such programs around the country.

With dramatic cutbacks in funding for the Legal Ser-

vices Corporation, IOLTA programs have become a very

important nationwide source for legal services to the poor.

IOLTA programs collect revenue on IOLTA accounts and

use this revenue to fund legal services to the poor. In

recent years, as the Federal government's financial sup-

port for these services has declined and become more

uncertain, legal aid societies have been able to draw upon

the resources provided by IOLTA programs to continue

their work. If petitioners succeed in disabling IOLTA

programs, then the continued activities of non-profit orga-

nizations like these legal aid societies will be jeopardized.

The consequent harm to those who lack the resources to

have meaningful access to our courts is obvious.

! This brief was not written in whole or part by counsel for any

party, and aside from amici curiae, their members, and their counsel,

no one made a monetary contribution to the preparation or submission

of this brief. See Sup. Ct. R. 37.6. Counsel for petitioners and respon-

dents have consented to the filing of this brief. Letters evidencing

such consent are on file in the Clerk's office.

2

The amici curiae that have joined this brief have a

particular interest in the continued existence of IOLTA

programs. The National Association of IOLTA Programs

(“NAIP”) is the coordinating umbrella organization for

all of the state IOLTA programs. Its members are the

fifty-one organizations that administer IOLTA programs

in each of the fifty states and the District of Columbia.

The forty-nine state bar associations, whose names are

set out in the Addendum to this Brief, were involved in

the creation of the IOLTA programs in their respective

States and have helped sustain those programs since

their inception.

The amici cur’+e represent, quite literally, the broad-

est possible cross-section of the American legal pro-

fession. Their participation here attests to the high

regard that attorneys and other legal professionals have

for the benefits and importance of IOLTA programs. For

all the reasons stated, the amici curiae have a direct

interest in the constitutional issues raised in this case, the

resolution of which will dictate whether IOLTA programs

will be able to continue to operate in every jurisdiction

where they have been approved and implemented.

SUMMARY OF ARGUMENT

The Washington Legal Foundation has embarked on a

longstanding and wide-ranging campaign against IOLTA

programs, premised on a misunderstanding of the Con-

stitution. The Just Compensation Clause of the Fifth

Amendment does not, as the Washington Legal Foun-

dation insists, prohibit all “takings” as a matter of law.

Rather, it guarantees “just compensation” to people from

whom the government takes private property. The clause

actually protects the government’s authority to take

property for public use, as long as it provides fair and

adequate compensation to the property owner.

3

All amounts deposited under the terms of the IOLTA

program are funds that cannot yield a return on their

own account. The program is expressly restricted to

amounts that are too insignificant, or deposits that are

too transitory, to yield any interest for the clients who

own them. It is important to understand how IOLTA pro-

grams succeed in generating income where the indivi-

dual deposits could not. This occurs, in the main, not

because of banking regulations, tax charges, and other

government provisions—as some ccurts have apparently

been led to believe. Instead, IOLTA accounts operate by

eliminating the considerable administrative charges

involved in calculating, identifying, tracking, and allo-

cating revenues to discrete individuals (whether in sep-

arate bank accounts for each client or pooled on a

firm-by-firm or attorney-by-attorney basis). When these

unavoidable costs are offset against the miniscule sums

generated by small or short-term accounts, they preclude

any actual return on an individual basis. Because of this

central fact, which is undisputed in this case, IOLTA

accounts generate income where there had been none

before, and the income thus generated could never ben-

efit any individual client.

Therefore, even assuming arguendo that the IOLTA

program did somehow effect a “taking” of property

within the meaning of the constitutional terms, that

result is not accomplished without “just compensation.”

Under the two tests that the Court has applied to deter-

mine the amount of “just compensation” in different cir-

cumstances—the “fair market value” test and the “value

to the owner” test—the amount of earnings on funds that

are eligible for state IOLTA programs is zero. The Court

has consistently rejected the application of a “value to

the taker” measure for just compensation. Such a mea-

sure would compensate what is acquired, not what is

taken, and thus v ould be directly inconsistent with the

4

text of the Takings Clause. Moreover, the Court has held

in various contexts that the government is not required

to provide compensation to the property owner for ele-

ments of the property’s value that the government itself

has created, which is obviously true of the IOLTA pro-

gram itself. In sum, because petitioners have never suf-

fered any compensable loss—i.e., no loss with any

monetary value—they have no valid constitutional claim

under the Just Compensation Clause.

ARGUMENT

Attorneys receive money from their clients to escrow,

or hold in trust, for all sorts of reasons. Attorneys put

only some of this money in IOLTA accounts. Before

depositing a particular client’s fund in an IOLTA

account, an attorney must go through a process to deter-

mine whether that deposit could either be deposited on

its own or be pooled with other funds to earn an amount

of interest sufficient to offset the expenses necessary to

generate and distribute that interest to the client. The

possibility of earning any net return—once the unavoid-

able costs of calculating, identifying, tracking, and

allocating individual funds is taken into consideration—

obviously depends on the projected time that funds will

be held and available interest rates. An attorney may put

into an IOLTA account only those funds that are not

capable of generating any net interest for the clients who

own them once the unavoidable costs of administering

discrete revenue flows are offset against the interest they

would be able to generate.

Therefore, none of the individual deposits placed in

IOLTA accounts could generate interest on its own for an

individual client, in view of applicable administrative

charges, service charges, accounting costs, tax reporting

costs, and banking restrictions. Because these funds are

5

either nominal in amount or held only for a short term

(or both), there is simply no possibility that these funds

would be able to earn any interest income that could

benefit the individual clients for whom the funds are

held. Once again, it bears emphasis that this central fact

is undisputed in this case.

I. STATE IOLTA PROGRAMS ARE BASED

SOLELY ON FUNDS THAT COULD NOT EARN

INTEREST ABSENT THE IOLTA PROGRAM

ITSELF.

A. IOLTA. Programs Supplement Attorneys’

Longstanding Fiduciary Duties To Keep

Their Clients’ Funds Safe and Separate.

Clients frequently ask attorneys (and, in Washington,

LPOs), to hold their money in escrow or trust. Attor-

neys, as fiduciaries for their clients, have long been

obliged to keep those funds safe and separate from their

own funds. Washington, like every other State and the

District of Columbia, has developed rules that regulate

how attorneys handle their clients’ funds. Washington’s

IOLTA program, like those adopted by each of the other

forty-nine States and the District of Columbia, makes up

but a small part of the regulatory framework that gov-

erns the treatment and disposition of client funds.

A lawyer is, in every sense of the word, her client’s

fiduciary. In this capacity, attorneys in this country have,

for nearly two centuries, been understood to have three

obligations when given money by a client: to keep their

clients’ money safe; to keep it separate from their own;

and to provide an accounting of their clients’ funds.

David Hoffman in his early statement of rules for the

legal profession discussed all three obligations. One of

Hoffman's “fifty resolutions” stated: “I will retain no

client’s funds beyond the period in which I can, with

6

safety and ease, put him in possession of them.” David

Hoffman, A Course of Legal Study 762 (2d ed. 1836).

Another stated: “I will on no occasion blend with my

own, my client’s money: if kept distinctly as his, it will

be less liable to be considered as my own.” Jd.

These obligations have had a place in the canons, now

rules, of professional ethics adopted by the American

Bar Association (“ABA”) since their first introduction

nearly a century ago. The original Canons of Profes-

sional Ethics modified Hoffman’s statement only

slightly: “Money of the client or other trust property

coming into the possession of the lawyer should be

reported promptly, and except with the client’s knowl-

edg» and consent should not be commingled with his pri-

vate property or be used by him.” Canons of Prof’! and

Judicial Ethics, Canon 11 (1908). The American Bar

Association later refined this provision to bring it com-

pletely in line with Hoffman’s original instruction:

“Money of the client . . . should not under any cir-

cumstances be commingled with [the lawyer’s] own or

be used by him.” Canons of Prof’! and Judicial Ethics,

Canon 11 (1933).

These somewhat generally stated obligations became

more specific in response to a directive from then-Pres-

ident of the ABA, Lewis F. Powell, Jr., to consider fur-

ther amendments to the Canons. Disciplinary Rule 9-102

of the resulting Model of Code of Professional Respon-

sibility (“ABA Code”) preserved the prohibition on com-

mingling. See D.R. 9-102(A) (1969). The Code added

additional detail to the obligation to keep clients’ funds

safe. The Code required lawyers to deposit money

received from a client in an identifiable bank account,

maintained in the lawyer’s name, at an in-state bank. See

D.R. 9-102(A). The Code further demanded that lawyers

notify their clients when they received funds from third

7

parties on their clients’ behalf and to keep records relat-

ing to attorney trust accounts. See D.R. 9-102(B). When

the ABA later replaced the Code with the Model Rules

of Professional Conduct (“ABA Rules”), it preserved the

requirements that attorneys place their clients’ funds in

bank accounts separate from their own, notify clients

upon receipt of money from a third party, and preserve

records related to attorney trust accounts for some period

of years following termination of representation. See

Model Rules of Prof.’1. Conduct, Rule 1.15 (1983).

Through these many iterations, these precepts were

generally understood to require attorneys to generate

interest for their clients whenever the deposits they held

were able to do so. In 1962, the ABA’s Standing Com-

mittee on Ethics and Professional Responsibility (charged

with interpreting the ABA’s Canon’s of Professional

Ethics) was asked whether attorneys could keep interest

earned on commingled clients’ funds when it was “quite

difficult to allocate” the interest to particular clients. See

ABA Comm. on Ethics and Prof’| Responsibility, Infor-

mal Opinion 545 (1962). The committee answered that

keeping the interest generated by the commingled sum

would violate Canon 11. Jd. The Standing Committee

reiterated this point five years later when asked whether

an attorney could use the interest generated on a com-

mingled sum to defray the costs of setting up the

account. See ABA Comm. on Ethics and Prof’! Respon-

sibility, Informal Opinion 991 (1967). The Standing

Committee concluded that this arrangement would also

violate Canon 11. Id. The Committee revisited these

issues in 1982 in a formal opinion devoted to the issue

of placing clients’ funds at interest. See ABA Comm. on

Ethics and Prof’! Responsibility, Formal Opinion 348

(1982). There, the Committee explained that an attorney,

as a trustee for his or her clients funds, “may be liable

for lost earnings on funds left with [the attorney] for

8

investment and kept uninvested for an unreasonably long

time.” Jd. at 149 (citing 2 A.W. Scott, The Law of Trusts

§§ 180.3, 181 (3d ed. 1967 and Supp. 1981)). The Com-

mittee added that “an extreme violation of the lawyer’s

fiduciary duty to invest a client’s funds. . . would pro-

vide a basis for professional discipline.” Jd.

Washington’s Rules of Professional Conduct

(“WRPC”) mirror the ABA Rules. Attorneys have three

primary obligations: they must hold their clients’ funds

separate from their own, keep those funds safe, and pro-

vide an accounting. See WRPC 1.14; Pet. App. 101a.

Like the ABA Rules and the antecedent ABA Code,

WRPC provide attorneys with a specific set of instruc-

tions about how to keep client funds safe and separate

from their own. Attorneys must put client funds in one

or more trust accounts. See WRPC 1.14; Pet. App. 101a.

These trust accounts must provide for withdrawal on

demand. See id. They must be held by “banks, savings

and loans or depositary institutions insured by the Fed-

eral Deposit Insurance Corporation, the National Credit

Union Share Insurance Fund, the Washington Credit

Union Share Guaranty Association, or the Federai Sav-

ings and Loan Insurance Corporation.” Id.

Washington’s IOLTA program supplements these basic

obligations. Under WRPC, an attorney who is given

money by a client must determine whether that money

can be used to generate net interest for the client. See

WRPC 1.14(3); Pet. App. 101la (“In determining [where

to put client funds], a lawyer shall consider only whether

the funds to be invested could be utilized to provide a

positive net return to the client, as determined by taking

into consideration the following factors . . .”). If the

funds are able to generate interest, then the attorney

must put that sum into a trust account established specif-

ically for that client or into a trust account that pools

9

money belonging to many clients with the lawyer or law

firm calculating and paying interest to each client sep-

arately based on each client’s activity in the account.

WRPC 1.14(2); Pet. App. 101a.

If a particular sum cannot yield a return for the client

through either of these means, then the attorney must

place that sum into an IOLTA account. Jd. The typical

reason that a particular deposit cannot generate a return

for the client, either in an account of its own or pooled

with other sums of money given to that lawyer, is that

the amount is too small, or the déposit is held for too

short a time, to offset the administrative costs that are

unavoidably necessary to calculate, identify, track, and

allocate whatever miniscule amount of interest could be

derived. Although IOLTA programs vary considerably

from state to state, it is generally understood that attor-

neys who receive money from a client must, whenever

possible, use that money to generate interest revenues for

the client. Only funds that cannot yield a return for their

individual client-owners may be put in IOLTA accounts.

B. The Mechanics of IOLTA Programs Elimi-

nate the Possibility of Any Compensable

Loss.

Outside observers, including some of the courts that

have considered the challenges to IOLTA programs, have

suggested that these programs annually generate millions

of dollars through financial legerdemain or a “modern

day attempt at alchemy.” See, e.g., Wash. Legal Found.

v. Tex. Equal Access to Justice Found., 94 F.3d 996, 1000

(Sth Cir. 1996), aff'd, Phillips v. Wash. Legal Found.,

524 U.S. 156 (1998) (“TEAJF I’). This is simply not the

case. Some amounts of money are simply too small or

are held for too short a time to generate a return, once

they are offset against the unavoidable administrative

costs of calculating, identifying, tracking, and allocating

10

revenues to discrete sources of individual funds. Just as

banks have historically combined the deposits of thou-

sands of checking account depositors and earned much

more on the combined sum than could possibly be earned

on any individual deposit, IOLTA accounts combine,

quite literally, millions of insignificant amounts of money

and manage to generate millions of dollars when no

return could be generated from any individual deposit.”

IOLTA programs work principally by eliminating the

costs incurred to administer funds for each individual

client and return discrete revenues to each such indi-

vidual. The nature of this process is widely misunder-

stood, and this misunderstanding has generated much

unfounded judicial skepticism. A more accurate and

complete understanding of the mechanics of the IOLTA

program is thus essential in order to resolve correctly the

constitutional issues presented in this case.

IOLTA programs are not, as has often been suggested,

mere beneficiaries of Depression-era banking regula-

tions. Although federal law prevents corporations and

partnerships from earning interest on money in checking

accounts and bars them from putting money in NOW

accounts, as petitioners observe, see_Petitioner’s Brief

(“Pet. Br.”) at 23-24, financial institutions have devised

ways to pay corporations and partnerships interest on

their demand deposits.* IOLTA programs do not gener-

2 To take just one of many examples, in 2001, the Texas IOLTA

program generated more than $5.6 million in interest on 17,890

accounts that pooled deposits from nearly 40,000 attorneys. See ABA,

IOLTA Handbook at 88, 189 (2002). If each participating attorney

averaged 25 IOLTA deposits in 2001, the Texas IOLTA program

pooled just shy of 1,000,000 discrete deposits.

3 Bank of America, for example, allows firms to sweep “excess

funds” from a checking account into a money market account. By tak-

ing advantage of sweep accounts, corporations and firms can “earn

competitive market returns.” See Overnight Automated Sweeps, avail-

—

ll

ate revenue because corporate and other deposits have

no other interest-bearing vehicle available to them.

Instead, IOLTA accounts create revenue by eliminating

considerable, but often overlooked, transaction costs that

prevent any net value from being returned to the owners

of individual deposits.

The nub of the explanation is that it costs money to

make money. Accounts must be opened. Deposits must

be made. If funds are-pooled and interest is to be allo-

cated to each of the accounts making up a pool, trans-

actions on each pooled deposit must be tracked, and the

interest generated by the combined sum and the bank

charges assessed against the account must be accurately

allocated to each individual element according to its spe-

cific contribution to the total pool. The clients that earn

interest must receive federal 1099 forms. Each of these

unavoidable tasks must be performed in light of a par-

ticular bank’s policies on deposit availability, check

clearing and collection, minimum and tiered balance

requirements, and interest compounding. Due to

advances in information technology, these tasks take less

time and effort than in the lead-pencil and paper-ledger

past, but they still take some time and some effort.

Accordingly, it costs a client money to have her attorney,

someone working for her attorney, or the bank perform

these tasks. For any given amount of money invested and

interest rate earne’ there is a period of time that is sim-

ply too short to generate enough revenue to cover the

able at <<http://corp.bankofamerica.com/portal/portal/controller/con-

troller.jsp?path=wcm/invst_sol/auto_ovngt_swps/content.xml>> (last

visited October 1, 2002). Such services are not, of course, free.

Charges to cover the administrative costs of such services typically

run $150 per month or more. The case before the Court does not, of

course, raise the issue because the client-plaintiffs in this case are

both individuals, not corporations.

12

administrative costs necessarily incurred to generate that

revenue for any individual client.*

IOLTA accounts eliminate many of the transaction

costs that make it impossible for a particular amount of

money to generate any net return for an individual.

Because the sums deposited into IOLTA accounts cannot

generate revenue for the individu) «lient, attorneys need

not incur the costs of calculating, identifying, tracking,

and allocating the interest generated by a pooled account

to each of the constituent parts. Moreover, the IRS does

not attribute the interest generated by IOLTA accounts to

individual clients whose funds are deposited in such

accounts, precisely because these revenues will not con-

stitute income to the client. See Rev. Rul. 81-209, 1981-

2 C.B. 16. This eliminates the additional expenses that

would otherwise be associated with generating and dis-

tributing Federal tax forms.

Petitioners never even attempt to suggest otherwise. In

a departure from the typical case raising a claim under

the Just Compensation Clause, petitioners do not com-

plain that Washington has wreaked on them any concrete

financial loss by taking their property. Indeed, neither of

the petitioners who can assert that his money ended up

in an IOLTA account has shown any financial loss at all.

Petitioner Allen Brown predicates his claim on a

deposit of $90,521.29 that he gave to Land Title Com-

4 For example, at an annual interest rate of 2%, which is higher

than the rate currently prevailing on money market or NOW accounts,

see, e.g., Latest Interest Rates, Bankrate.com, available at <<http:

//www.bankrate.com/brm/ rate/dep_home.asp>> (last visited Oct. 10,

2002), a $2,000 deposit will generate 77 cents in gross interest in 7

days. By contrast, the average fee for an interest-bearing checking

account in the United States is $10.59 per month. See Key findings

from Bankrate’'s checking study, Bankrate.com available at <<http:

//www.bankrate.com/brm/news/chk/ chkstudy/20020926b.asp>> (last

visited Oct. 10, 2002).

13

pany in 1997. See J.A. 53, 130. Land Title Company

apparently placed that deposit in an IOLTA account

earning 1% interest, where it remained for only two

days. Mr. Brown has not, however, presented any evi-

dence that—with or without IOLTA—Land Title could

have done anything to generate any interest income for

him on his two-day deposit. When questioned on this

topic at his deposition, he conceded as much, admitting

that “without IOLTA in place, [he] may not have earned

anything.” J.A. 130. What this testimony fails to eluci-

date is that even with IOLTA or some other pooling

mechanism in place, such a brief deposit as this one

could not earn any revenue after the additional costs that

would have to be incurred to segregate and track the

individual revenues generated were offset against the

minuscule amount of interest accrued.

Petitioner Gregory Hayes has likewise presented no

plausible evidence of any compensable loss. Mr. Hayes

bases his claim on a $1,000 deposit of earnest money

that he gave to Fidelity National Title Company on

August 14, 1996, along with an additional $6,396.66 that

he gave to Fidelity on August 28—two days before his

transaction closed on August 30. See J.A. 54. He has

presented no evidence that, even absent IOLTA, Fidelity

could have done anything with his individual deposits to

generate any return for him, once the various adminis-

trative costs that would have to be incurred on his indi-

vidual holdings were taken into account.

Notwithstanding the actual record in this case, the

original panel of the Ninth Circuit baldly asserted that

“it is not quite correct to say that IOLTA as structured

does not deprive clients of any money.” Pet. App. 77a.

The panel did not cite any evidence to support this

utterly erroneous conclusion. Instead, it assumed that

attorneys, in the face of the very specific fiduciary duty

14

that they owe their clients, either botch the calculation

of whether any given client deposit could be used to

generate interest for the client or shirk the responsibil-

ity to make that decision altogether. See id. 78a. Without

any support in the record, the panel surmised that

“client[s] may lose an economically significant amount

of interest . . . where the funds ‘are expected to be’

deposited for a much shorter period than they actually

are.” Id. The panel also assumed, again without any evi-

dentiary support, that “[a]s a practical matter, [attorneys]

have a substantial incentive not to be bothered with

crediting clients with their interest,” id., even though

such conduct would subject the attorneys to punishment

under the disciplinary rules currently in effect in all of

the States and the District of Columbia. The pane! deci-

sion thus merely perpetuated petitioners’ myth, without

any factual basis, that IOLTA programs generate revenue

through some mysterious and perhaps illicit means.°

The facts of the actual story are precisely the same, if

somewhat better developed, in the parallel case of Tex.

Equal Access to Justice Found. v. Wash. Legal Found.,

U.S. No. 02-01, which is currently pending on petition

for certiorari. As those petitioners have pointed out, the

Texas case went to trial following remand from this

Court’s opinion in Phillips v. Wash. Legal Found., 524

U.S. 156 (1998). After a two-day bench trial, the district

court found as a factual matter “that the only plaintiff

with funds in a Texas IOLTA account. . . suffered no

5 Even if there were a record to support the panel's conclusion

on this point, any “taking” would result not from state action but from

the decisions of private parties. See Brief for Respondents Legal

Foundation of Washington and Its President at 32. In any event,

IOLTA programs generally give refunds to clients whose money is

deposited into IOLTA accounts in such situations. See Tex. Equal

Access to Justice Found. v. Wash. Legal Found., Trial Transcript at

224.

15

loss—zero. Indeed, Mr. Summers himself testified can-

didly and unequivocally to that fact.” Wash. Legal Found.

v. Tex. Equal Access to Justice Found., 270 F.3d 180, 198

(Sth Cir. 2001) (Wiener, J. dissenting). Although a split

panel of the Fifth Circuit reversed the decision of the

district court to uphold the Texas IOLTA program in the

face of claims under the First and Fifth Amendments, the

panel majority did not disturb this finding on appeal,

incorrectly deeming this critical fact to be irrelevant. See

id. at 199 n.17.

Il. EVEN IF THE IOLTA PROGRAM DID EFFECT

A “TAKING” OF PROPERTY, THERE IS

NO LACK OF “JUST COMPENSATION” AND

HENCE NO CONSTITUTIONAL VIOLATION.

A. Any Takings Claim Requires a Compensable

Loss Under the Just Compensation Clause.

IOLTA accounts do not deprive clients whose funds

are placed in them of the opportunity to earn a return on

those funds. As discussed above, with or without IOLTA,

some amounts of money are simply too small or are held

for too short a time to earn interest sufficient to pay for

the unavoidable costs necessary to generate the interest

for an individual client. Thus, even if the Court were to

find that IOLTA programs did somehow effect a “taking”

of property within the meaning of the constitutional

terms, that result is not accomplished without “just com-

pensation.” The Court has consistently rejected the

application of a “value to the taker” measure for just

compensation, and under the two tests that the Court has

applied to determine the amount of “just compensation”

in different circumstances—the “fair market value” test

and the “value to the owner” test—the amount of earn-

ings on funds that are eligible for state IOLTA programs

is zero. Moreover, applying Fifth Amendment protec-

16

tions to an asserted property interest that does not have

any compensable value is not consistent with the pur-

poses that underlie the Takings Clause—i.e., to authorize

the government to take property for public use in return

for compensating the property owner for the value of

property that was taken.

This Court has repeatedly held that the amount due a

plaintiff under the Just Compensation clause is “what

. . . the owner lost, and not what. . . the taker gained.”

United States v. Chandler-Dunbar Water Power Co., 229

U.S. 53, 76 (1913). Accordingly, the Fifth Amendment

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

pecuniarily as if his property had not been taken. He

must be made whole but is not entitled to more.” Olson

v. United States, 292 U.S. 246, 255 (1934). Because peti-

tioners have not lost anything of any monetary value

here, they have no valid claim under the Just Compen-

sation Clause.

This conclusion is consistent with a long line of deci-

sions by the Court that have explored and delineated the

meaning of the “just compensation” requirement. Jus-

tice Holmes long ago summarized the proper test under

this component of the Takings Clause as a determination

of “what has the owner lost? not, what has the taker

gained?” Boston Chamber of Commerce v. Boston, 217

U.S. 189, 195 (1910). The Court has linked this princi-

ple to the definition of the term “compensation,” noting,

for example, that “[b]ecause gain to the taker” may be

“wholly unrelated to the deprivation imposed upon the

owner, it must also be rejected as a measure of public

obligation to requite for that deprivation.” Kimball

Laundry Co. v. United States, 338 U.S. 1, 5 (1949). The

same principle inheres (to the owner’s benefit) in the

Court’s determination of when a taking occurs, for it is

“the deprivation of the former owner rather than the

17

accretion of a right or interest to the sovereign [that]

constitutes the taking.” Ruckelshaus v. Monsanto Co.,

467 U.S. 986, 1004-05 (1984).

Indeed, the facts of the Boston Chamber of Commerce

case, in particular, bear a careful comparison to the facts

underlying the IOLTA program. There the City of Boston

exercised its power of eminent domain to lay out a pub-

lic street upon a parcel of land. The ownership rights in

this parcel were divided among several different par-

ties—the Boston Chamber of Commerce owned the fee

of the land; a wharf company had an easement of way,

light, and air over the land; and a bank held a mortgage

on the land, subject to the easement. See 217 U.S. at

193. These parties agreed to take the position in the

resulting litigation that the value of the land taken

should be assessed as an unrestricted fee. The City

refused to assent to this claim, and noted that the ease-

ment considerably lessened the value of the underlying

fee interest. It was ultimately stipulated by the parties

that_if the City prevailed in its view of the matter, the

amount of just compensation for the parcel would be

$5,000, whereas if the consortium of interests were to

prevail, the price would be $60,000. Jd.

The Massachusetts state courts held for the City, and

this Court affirmed. It began by stating that the “only

question to be considered is whether when a man’s land

is taken, he is entitled, by the Fourteenth Amendment, to

recover more than the value of it as it stood at the time.”

217 U.S. at 194. It noted that the complaining parties

were seeking to have their property valued in a manner

that presupposed the uniting of their distinct interests,

even though it was highly unlikely and in any event not

at all certain that this would ever have occurred without

the government’s exercise of its eminent domain author-

ity. In a striking summary of the issue, therefore, the

18

Court observed that the real question was whether, “by

a simple joinder of parties after the taking, the city

could be made to pay for a loss of theoretical creation,

suffered by no one in fact.” Id. (emphasis added). The

Court found this question to be easily answered in favor

of the City, commenting that this “statement of the con-

tention seems to us to be enough.” Jd.

The Court went on, however, to articulate more fully

the rationale for this conclusion:

[T]he Constitution does not require a disregard of

the mode of ownership,—of the state of the title. It

does not require a parcel of land to be valued as an

unencumbered whole when it is not held as an unen-

cumbered whole. It merely requires that an owner of

property should be paid for what is taken from him.

It deals with persons, not with tracts of land. And

the question is, what has the owner lost? not, what

has the taker gained? We regard it as entirely plain

that the petitioners were not entitled, as a matter of

law, to have the damages estimated as if the land

was the sole property of one owner, and therefore

are not entitled to $60,000 under their agreement.

217 U.S. at 195.

Applying this same analysis to this IOLTA program, it

is clear that even if a “taking” were to be found, the

amount of “just compensation” required to be paid to

parties such as the petitioners here is zero. Under the

rules governing the program, the funds deposited in the

IOLTA accounts are either too small or are held for too

brief a period to generate any interest income standing

on their own. It is only the aggregation of these funds

pursuant to the IOLTA program itself, and the conse-

quent elimination of the costs necessary to attribute each

increment of revenue to distinct individual sources, that

19

makes it possible to generate any income at all. As in the

Boston Chamber of Commerce case, however, the com-

plaining parties here are demanding that the courts

assess their property interests in a manner that “disre-

gard[s] the mode of ownership” and treats each distinct

account as though it were part of an unencumbered

whole when it has never been held, and would never be

held, in this fashion apart from the IOLTA program

itself. See id. at 195. Thus the real question here too is

whether, “by a simple joinder of parties after the

[assumed] taking, the [government] could be made to

pay for a loss of theoretical creation, suffered by no one

in fact.” Id. at 194. Once again, the mere “statement of

the contention” is more than enough to refute it. Id.

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.” Jd. at 61. Rather, the owner’s loss must be

measured by the property’s value distinct from the power

of the government to make plots more valuable by com-

bining them with others: “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.” IJd.; see also United

States ex rel. TVA v. Powelson, 319 U.S. 266, 274, 280-

85 (1943) (refusing to compensate landowner for value

of his property when combined with other properties to

facilitate 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.”).

20

The same basic principles can also be gleaned from

yet another series of decisions that are applicable here.

The Court has long held that when the government

effects a taking of property, basic fairness dictates that

the government is not required to compensate the prop-

erty owner for elements of the property’s value that the

government itself has created. In United States v. F uller,

409 U.S. 488 (1973), for example, the federal govern-

ment took a ranch from an owner who leased nearby

land under the Taylor Grazing Act. The owner claimed

that his ranch should be valued based on its potential use

“in conjunction with” the grazing areas, but the Court

rejected this claim. Id. at 489; see also id. at 499 (Pow-

ell, J., dissenting) (“compensation need not be afforded

for an increase in market value stemming from the very

Government undertaking which led to the condemna-

tion”); Powelson, 319 U.S. at 266 (value created was

business opportunity dependent on owner’s privilege to

use the state’s power of eminent domain; no compensa-

tion required).

This longstanding principle extends at least as far

back as McGovern v. City of New York, 229 U.S. 363

(1913). In that case, the City took title to various parcels

of land in order to incorporate them as part of a reser-

voir. The complaining parties sought to recover as “just

compensation” the enhanced value of the land when used

for that purpose; in response, the City sought to limit

compensation to the fair market value of each parcel at

the time it was purchased. Id. at 371-72. This Court

sided with the City. Again, a central tenet of its analysis

was that there were “hundreds of titles to different

parcels of that land,” which were only “brought together

by a taking under eminent domain.” /d. at 372. The like-

lihood that this could have occurred by any other means

“might be regarded as too remote and speculative to

have any legitimate effect upon the valuation.” Jd. As a

21

result, the complaining party “was entitled to be paid

only for what was taken from him as the titles stood, and

could not add to the value by the hypothetical possibil-

ity of a change unless that possibility was considerable

enough to be practical consideration and actually to

influence prices.” Id. (citing Boston Chamber of Com-

merce, 217 U.S. at 195).

If those same bounds are applied to the operation of

the IOLTA program here, then any alleged “taking” of

property would not be compensable because the indi-

vidual client’s funds are, by ~trict definition, incapable

of generating income to any individual client net of

administrative expenses, and any value derived from the

funds is created solely by the operation of the IOLTA

program itself, which eliminates the considerable admin-

istrative charges involved in calculating, identifying,

tracking, and allocating miniscule sums generated by

discrete funds. The likelihood that each individual client

fund would be able to generate interest income, absent

the implementation of the IOLTA program, is nil. The

complaining parties thus are not entitled to claim the

value of that “hypothetical possibility,” whose manifes-

tation in concrete form is solely attributable to the gov-

ernment’s unilateral action. McGovern, 229 U.S. at 372.

Indeed, the problem goes even further in this case

because, as explained above, even if individual client

funds were aggregated ~ith other funds, they could not

generate income attributable to individual sources

because of the transaction costs that must be incurred to

calculate, allocate, identify, and track individual funds.

“Because the fair market value of the earnings of

IOLTA-eligible funds is $0, the client would be entitled

to nothing.” Wash. Legal Found. v. Tex. Equal Access to

Justice Found., 106 F.3d 640, 644 (Sth Cir. 1996) (deny-

ing rehearing and rehearing en banc) (Benavides, J., dis-

22

senting). Because these client funds would be unable to

earn interest on their own, and the only “profit” previ-

ously derived from them had redounded to the sole ben-

efit of someone other than the client (i.e., financial

institutions), both the value to the owner and the fair

market value of these accounts is zero.

B. Having Lost Nothing of Any Value, Mone-

tary or Otherwise, Petitioners Have No Valid

Claim Under the Just Compensation Clause.

Petitioners have not shown that they have lost any-

thing of value as a result of Washington’s IOLTA pro-

gram. Therefore, they do not have a valid claim under

the Just Compensation Clause. Petitioners cannot resus-

citate their claim by pointing out that IOLTA accounts in

Washington succeed in generating revenue for the Legal

Foundation of Washington or by claiming that they have

valuable “non-economic” rights at stake.

As discussed above, a property owner with a claim

under the Just Compensation clause is not completely

forbidden to base her claim of compensation on the value

that is created when her land is combined with the land of

another. Such a claim is permitted, however, only “if the

union of properties necessary is so practicable that the

possibility would affect the market price.” Sage, 239 U.S.

at 61. Put slightly differently, in order to establish com-

pensable value based on the combination of one’s own

property with another’s property, the complaining party

must show “a reasonable probability of the [property] in

question being combined with other[s]. . . in the rea-

sonably near future.” Powelson, 319 U.S. at 275-76.

This possibility does not revive petitioners’ claim here.

IOLTA programs do not create value simply by pooling

small amounts of money together. With or without the

pooling of accounts, the sums of money placed in IOLTA

23

accounts simply could not generate any return for their

owners, once the costs associated with calculating, iden-

tifying, tracking, and allocating those individual revenues

to discrete sources are introduced into the equation.

IOLTA accounts generate a return for their beneficiaries

by eliminating the substantial transaction costs that

would be incurred to calculate, identify, track, and allo-

cate each constituent fragment of interest revenue to its

original source in the funds of one or another individual.

Put differently, with or without the aggregation accom-

plished by the IOLTA program, there remains absolutely

no probability that individual clients could earn a return

from the money that is placed in an IOLTA account.

Having no claim to have lost anything of value, mon-

etary or otherwise, petitioners fall back to the proposi-

tion that they can invoke the Just Compensation clause

to protect valuable “non-economic interests” in the inter-

est income generated by IOLTA accounts. Although it is

far from clear that these supposed “non-economic inter-

ests” can ever support a valid constitutional claim under

the Just Compensation Clause, there is certainly no such

thing as an alleged “non-economic interest” in pure

money.

Money is simply a means of exchange. It has nota-

tional value, rather than intrinsic or sentimental value.

The bundle of rights that an owner exercises over a par-

ticular sum of money—possession, use and disposition—

has a precise economic value. The economic value of

these rights is captured by the cost of the lost opportu-

nity to invest that sum of money for any particular period

of time. See Richard A. Brealey and Stewart C. Myers,

Principles of Corporate Finance 11-12 (5th ed. 1996)

(explaining that opportunity cost is calculated by “dis-

count[ing] expected future payoffs by the rate of return

offered by comparable investment alternatives”). In this

24

case, the value of the various sticks in the ownership

bundle is worth precisely nothing. The amounts of money

placed in IOLTA accounts cannot be used to generate

any return for their client owners, and they thus lose

nothing in having them taken away. Put simply, the right

to possess, control, or dispose of $0 is worth exactly $0.

At bottom, petitioners have nothing more than an ide-

ological objection to the continued existence of Wash-

ington’s IOLTA program. Cf. Valley Forge Christian

Coll. v. Ams. United for Separation of Church and State,

454 U.S. 464, 465 (1982) (“the psychological conse-

quence presumably produced by observation of conduct

with which one disagrees” is an insufficient basis to

challenge conveyance of property). The Just Compen-

sation Clause does not provide a legitimate vehicle for

would-be conscientious objectors to government pro-

grams to vent their spleen. The animating purpose

behind the Just Compensation Clause is not, as the Court

has noted on many occasions, to limit government inter-

ference with private 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). It is apparent that the just

compensation for a putative “loss” with no value is, and

can only be, $0.

* * * * *

Finally, amici believe that this case cannot be decided

in a vacuum, divorced from its important practical con-

sequences. Over the past two decades, IOLTA programs

have been implemented in every jurisdiction nationwide,

at the behest of thousands of thoughtful attorneys,

judges and legislators who have shaped and then blessed

their implementation. Their operation is of increasing

importance to assure the continued availability of legal

25

services to many deserving individuals and families who

cannot afford to hire a lawyer on their own.

As Judge Benavides pointed out in a prior round of

these IOLTA litigations, petitioners’ claim threatens the

very survival of these programs, which are “a primary

source of funding for public interest legal organizations”

at a time “when these organizations are already strug-

gling for their lives financially.” Texas Equal Access,

106 F.3d at 641-42 (Benavides, J., dissenting). Surely

the public interest does not require the Court to sacrifice

the substantial benefits of these innovative programs

merely for the sake of extending doctrines of property

law that were designed to apply in very different cir-

cumstances, and went only so far as to ensure that just

compensation would be afforded for any monetary losses

incurred. None of the core principles of the Court’s tak-

ings jurisprudence would be threatened in the least by

upholding the constitutional validity of the unique pro-

grams at issue in this case.

26

CONCLUSION

For the foregoing reasons, as well as those stated by

respondents, the judgment below should be affirmed.

Respectfully submitted,

JOANNE M. GARVEY RICHARD A. CORDRAY

CHARLES N. FREIBERG Counsel of Record

THOMAS P. BROWN 4900 Grove City Road

HELLER EHRMAN WHITE Grove City, Ohio 43123

& MCAULIFFE LLP (614) 539-1661

333 Bush Street

San Francisco, CA 94104

(415) 772-6000

Attorneys for the Amici Curiae

October 2002

la

List of Amici State Bar Associations

Alabama State Bar

Alaska Bar Association

The State Bar of Arizona

The Arkansas Bar Association

The State Bar of California

The Chicago Bar Association

The Colorado Bar Association

Connecticut Bar Association

Delaware State Bar Association

The Florida Bar

The State Bar of Georgia

Hawaii State Bar Association

Idaho State Bar

Illinois State Bar Association

Indiana State Bar Association

The Iowa State Bar Association

Kansas Bar Association

Kentucky Bar Association

Maine State Bar Association

Maryland State Bar Association

Massachusetts Bar Association

The State Bar of Michigan

Minnesota State Bar Association

The Mississippi Bar

The Missouri Bar ‘

State Bar of Montana

Nebraska State Bar Association

The State Bar of Nevada

New Hampshire Bar Association

New Jersey State Bar Association

State Bar of New Mexico

New York State Bar Association

The North Carolina State Bar

State Bar Association of North Dakota

2a

State Bar Association of South Dakota

Ohio State Bar Association

Oklahoma Bar Association

Oregon State Bar

Pennsylvania Bar Association

Rhode Island Bar Association

South Carolina Bar Association

Tennessee Bar Association

State Bar of Texas

The Utah State Bar

Vermont Bar Association

Virginia Bar Association

Washington State Bar Association

West Virginia Bar Association

State Bar of Wisconsin