Texas, like 48 other States and the District of Columbia,
In the course of their legal practice, attorneys are frequently required to hold client funds for various lengths of time. Before 1980, an attorney generally held such funds in noninterest-bearing, federally insured checking accounts in which all client trust funds of an individual attorney were pooled. These accounts provided administrative convenience and ready access to funds. They were noninterest bearing because federal law prohibited federally insured banks and savings and loans from paying interest on checking accounts. See 12 U. S. C. §§ 371a, 1464(b)(1)(B), 1828(g). When a lawyer held a large sum in trust for his client, such funds were generally placed in an interestbearing savings account because the interest generated
In 1980, Congress authorized the creation of Negotiable Order of Withdrawal (NOW) accounts, which for the first time permitted federally insured banks to pay interest on demand deposits. § 303, 94 Stat. 146, as amended, 12 U. S. C. § 1832. NOW accounts are permitted only for deposits that "consist solely of funds in which the entire beneficial interest is held by one or more individuals or by an organization which is operated primarily for religious, philanthropic, charitable, educational, political, or other similar purposes and which is not operated for profit." § 1832(a)(2). For-profit corporations and partnerships are thus prohibited from earning interest on demand deposits. See ibid. However, interpreting § 1832(a), the Federal Reserve Board has concluded that corporate funds may be held in NOW accounts if the funds are held in trust pursuant to a program under which charitable organizations have "the exclusive right to the interest." Letter from Federal Reserve Board General Counsel Michael Bradfield to Donald Middlebrooks (Oct. 15, 1981), reprinted in Middlebrooks, The Interest on Trust Accounts Program: Mechanics of its Operation, 56 Fla. B. J. 115, 117 (Feb. 1982) (hereinafter Federal Reserve's IOLTA Letter).
Beginning with Florida in 1981, a number of States moved quickly to capitalize on this change in the banking regulations by establishing IOLTA programs. Texas followed suit in 1984. Its Supreme Court issued an order, now codified as Article XI of the State Bar Rules, providing that an attorney who receives client funds that are "nominal in amount or are reasonably anticipated to be held for a short period of time" must place such funds in a separate, interest-bearing NOW account (an IOLTA account). Tex. State Bar Rule, Art. XI,
Interest earned by the funds deposited in an IOLTA account is to be paid to the Texas Equal Access to Justice Foundation (TEAJF), a nonprofit corporation established by the Supreme Court of Texas. Tex. State Bar Rule, Art. XI, §§ 3, 4; Texas IOLTA Rule 9(a). TEAJF distributes the funds to nonprofit organizations that "have as a primary purpose the delivery of legal services to low income persons." Texas IOLTA Rule 10. The Internal Revenue Service does not attribute the interest generated by an IOLTA account to the individual clients for federal income tax purposes so long as the client has no control over the decision whether to place the funds in the IOLTA account and does not designate who will receive the interest generated by the account. See Rev. Rul. 81-209, 1981-2 Cum. Bull. 16; Rev. Rul. 87-2, 1987-1 Cum. Bull. 18.
Respondents are the Washington Legal Foundation (WLF), Michael Mazzone, and William Summers. WLF is a publicinterest law and policy center with members in the State of Texas who are opposed to the Texas IOLTA program. App. 26. Mazzone is an attorney admitted to practice in
The District Court granted summary judgment to petitioners, reasoning that respondents had no property interest in the interest proceeds generated by the funds held in IOLTA accounts. Washington Legal Foundation v. Texas Equal Access to Justice Foundation, 873 F.Supp. 1 (WD Tex. 1995). The Court of Appeals for the Fifth Circuit reversed, concluding that "any interest that accrues belongs to the owner of the principal." Washington Legal Foundation v. Texas Equal Access to Justice Foundation, 94 F.3d 996, 1004 (1996). Because of a split over whether the interest income generated by funds held in IOLTA accounts is private property for purposes of the Fifth Amendment's Takings Clause,
The Fifth Amendment, made applicable to the States through the Fourteenth Amendment, Chicago, B. & Q. R. Co.
All agree that under Texas law the principal held in IOLTA trust accounts is the "private property" of the client. Texas IOLTA Rule 4 (discussing circumstances under which "client funds" must be deposited in an IOLTA account); Texas Bar Rule 1.14(a) (lawyers "shall hold funds . . . belonging in whole or in part to clients . . . separate from the lawyer's own property"); see also Brief for United States as Amicus Curiae 10 ("There can be no doubt that the client funds underlying the IOLTA program are the property of respondents"). When deposited in an IOLTA account, these funds remain in the control of a private attorney and are freely available to the client upon demand. As to the principal, then, the IOLTA rules at most "regulate the use of [the] property." Yee v. Escondido, 503 U.S. 519, 522 (1992). Respondents do not contend that the State's regulation of the manner in which attorneys hold and manage client funds amounts to a taking of private property. The question in this case is whether the interest on an IOLTA account is "private property" of the client for whom the principal is being held.
In Webb's, we addressed a Florida statute providing that interest accruing on an inter pleader fund deposited in the registry of the court "`shall be deemed income of the office of the clerk of the circuit court.' " Id., at 156, n. 1 (quoting Fla. Stat. § 28.33 (1977)) (emphasis deleted). The appellant in that case filed an inter pleader action in Florida state court and tendered the sum at issue, nearly $2 million, into court. In addition to deducting $9,228.74 from the inter pleader fund as a fee "for services rendered," the clerk of court also retained the more than $100,000 in interest income generated
Petitioners nevertheless contend that Webb's does not control because Texas does not, in fact, adhere to the "interest follows principal" rule, "at least if elevated to the level of an absolute legal rule." Brief for Petitioners 22. They point to several examples, such as income-only trusts and marital community property rules, where under Texas law interest does not follow principal. According to petitioners, the IOLTA program is simply another exception to the general rule.
We find these examples insufficient to dispel the presumption of deference given the views of a federal court as to the law of a State within its jurisdiction. Bernhardt v. Polygraphic Co. of America, 350 U.S. 198, 204 (1956). Petitioners' examples miss the point of our decision in Webb's. Texas' exception of income-only trusts and certain marital property from the general rule that "interest follows principal" has a firm basis in traditional property law principles. Permitting the owner of a sum of money to distribute to a designated beneficiary the interest income generated by his principal is entirely consistent with the fundamental maxim of property law that the owner of a property interest may dispose of all or part of that interest as he sees fit. United
Petitioners further contend that "interest follows principal" is an incomplete explication of the Texas rule. Reply Brief for Petitioners 11. Petitioners explain that interest follows principal in Texas only if the interest is "allowed by law or fixed by the parties." Cavnar v. Quality Control Parking, Inc., 696 S.W.2d 549, 552 (Tex. 1985). We fail to see how this assists petitioners' cause. We agree that the government has great latitude in regulating the circumstances under which interest may be earned. As we explained in Andrus v. Allard, 444 U.S. 51, 66 (1979), "anticipated gains ha[ve] traditionally been viewed as less compelling than other property-related interests." But petitioners do not argue that the payment of interest on client funds deposited in an attorney trust account is not "allowed by law" in Texas. Rather, they argue that interest actually "earned" by funds held in IOLTA accounts, Texas IOLTA Rule 9, is not the private property of the owner of the principal. However, regardless of whether the owner of the principal has a constitutionally cognizable interest in the anticipated generation of interest by his funds, any interest that does accrue attaches as a property right incident to the ownership of the underlying principal.
Whether client funds held in IOLTA accounts could generate net interest is a matter of some dispute. As written, the Texas IOLTA program requires the calculation as to net interest to be made "without regard to funds of other clients which may be held by the attorney." Texas IOLTA Rule 6. This provision would deny to an attorney the traditional practice of pooling funds of several clients in one account, a practice which might produce net interest when opening an account for each client would not. But in the District Court, petitioners agreed that this portion of the rule was not to be enforced, and that an attorney could make the necessary calculation on the basis of pooled accounts. Petitioners made a similar concession during oral argument here. Tr. of Oral Arg. 13-16. We accept this concession but find that it does not avail petitioners.
We have never held that a physical item is not "property" simply because it lacks a positive economic or market value. For example, in Loretto v. Teleprompter Manhattan CATV
The United States, as amicus curiae, additionally argues that "private property" is not implicated by the IOLTA program because the interest income generated by funds held in IOLTA accounts is "government-created value." Brief for United States as Amicus Curiae 20. We disagree. As an initial matter, this argument is factually erroneous. The interest income transferred to the TEAJF is not the product of increased efficiency, economies of scale, or pooling of funds by the government. Indeed, as noted above, the State has conceded at oral argument that if an attorney could in any way (such as pooling of client funds) earn interest for a client, he is ethically obligated to do so rather than place the funds in an IOLTA account. Interest income is economically realizable by IOLTA primarily because: (1) the Federal Government imposes tax reporting costs only on those who attempt to exercise control over the interest their funds generate, see Rev. Rul. 81-209, 1981-2 Cum. Bull. 16; Rev. Rul. 87-2,
In any event, we rejected a similar "government-created value" argument in Webb's. There, the State of Florida argued that since the clerk's authority to invest deposited funds was a statutorily created right, any interest income generated by the funds was not private property. 449 U. S., at 163. We rejected this argument, explaining that "the State's having mandated the accrual of interest does not mean the State or its designate is entitled to assume ownership of the interest." Id., at 162.
This would be a different case if the interest income generated by IOLTA accounts was transferred to the State as payment "for services rendered" by the State. Id., at 157. Our holding does not prohibit a State from imposing reasonable fees it incurs in generating and allocating interest income. See id., at 162; cf. United States v. Sperry Corp., 493 U.S. 52, 60 (1989) (upholding the imposition of a "reasonable `user fee' " on those utilizing the Iran-United States Claims Tribunal). But here the State does not, indeed cannot, argue that its confiscation of respondents' interest income amounts to a fee for services performed. Unlike in Webb's, where the State safeguarded and invested the deposited funds, funds held in IOLTA accounts are managed entirely by banks and private attorneys.
In sum, we hold that the interest income generated by funds held in IOLTA accounts is the "private property" of the owner of the principal. We express no view as to whether these funds have been "taken" by the State; nor do we express an opinion as to the amount of "just compensation," if any, due respondents. We leave these issues to be addressed on remand. The judgment of the Court of Appeals is
The Court holds that "interest income generated by funds held in IOLTA accounts is the `private property' of the owner of the principal." Ante this page. I do not join in today's ruling because the Court's limited enquiry has led it to announce an essentially abstract proposition; even assuming that the proposition correctly states the law, it may ultimately turn out to have no significance in resolving the real issue raised in this case, which is whether the Interest on Lawyers Trust Account (IOLTA) scheme violates the Takings Clause of the Fifth Amendment. Since the sounder course would be to vacate the similarly limited judgment of the Court of Appeals for the Fifth Circuit and remand for the broader enquiry outlined below, I respectfully dissent.
The Court recognizes three distinct issues implicated by a takings claim: whether the interest asserted by the plaintiff is property, whether the government has taken that property, and whether the plaintiff has been denied just compensation for the taking. Ibid. The Court is careful to address only the first of these questions, ibid., which is the only one on which the Fifth Circuit ruled. See Washington Legal Foundation v. Texas Equal Access to Justice Foundation, 94 F.3d 996, 1004 (1996).
In addressing only the issue of the property interest, leaving the questions of taking and compensation for a later day in the litigation of respondents' action, the Court and the Court of Appeals have, however, postponed consideration of the most salient fact relied upon by petitioners in contesting respondents' Fifth Amendment claim: that the respondent client would effectively be barred from receiving any net interest on his funds subject to the state IOLTA rule by the combination of an unchallenged federal banking statute and regulation, 12 U. S. C. § 1832(a); 12 CFR § 204.130 (1997); a separate, unchallenged Texas rule of attorney discipline, Texas Bar Rules, Art. 10, § 9, Rule 1.14(b); and unchallenged Internal Revenue Service interpretations of the Tax Code, Rev. Rul. 81-209, 1981-2 Cum. Bull. 16; Rev. Rul. 87-2, 1987-1 Cum. Bull. 18. The argument for the view contrary to the one taken by the Court would emphasize that salient fact right now. The view that the client has no cognizable property right in the IOLTA interest is said to rest not only on a different understanding of the scope of the general principle
Approaching the property issue in conjunction with the two others would, in fact, be entirely faithful to the Fifth Amendment, for as we have repeatedly said its Takings Clause does nothing to bar the government from taking property, but only from taking it without just compensation, see, e. g., First English Evangelical Lutheran Church of Glendale v. County of Los Angeles, 482 U.S. 304, 315 (1987); Williamson County Regional Planning Comm'n v. Hamilton Bank of Johnson City, 473 U.S. 172, 194 (1985). It thus makes good sense to consider what is property only in connection with what is a compensable taking, an approach to Fifth Amendment analysis that not only would avoid spending time on what might turn out to be an entirely theoretical matter, but would also reduce the risk of placing such undue emphasis on the existence of a generalized property right as to distort the taking and compensation analyses that necessarily follow before the Fifth Amendment's significance can be known.
First, as to a taking, we start with Penn Central Transp. Co. v. New York City, 438 U.S. 104 (1978), and its guidance about certain sorts of facts that are of particular importance in what is supposed to be an "ad hoc, factual" enquiry, id., at 124, into whether the government has "go[ne] too far." Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 415 (1922). Attention should be paid to the nature of the government's action, its economic impact, and the degree of any interference with reasonable, investment-backed expectations. Penn Central, supra, at 124. Here it is enough to note the possible significance of the facts that there is no physical occupation or seizure of tangible property, cf. Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 426 (1982) (noting that physical intrusion is "unusually serious" in the takings context); that there is no apparent economic impact (since the client would have no net interest to go in his pocket, IOLTA or no IOLTA); and that the facts present neither anything resembling an investment nor (for the reason just given) any apparent basis for reasonably expecting to obtain net interest. While a court would certainly consider any proposal that respondents might make for a departure from the Penn Central approach to vindicating the Fifth Amendment in these circumstances, application of Penn Central would not bode well for claimants like respondents.
Second, as to the just compensation requirement, the client's inability to earn net interest outside IOLTA, due to
Thus, in deciding what award would be needed to place the client respondent in as good a position as he would have enjoyed without a taking, a court presumably would look to the claimant's putative property interest as it was or would have been enjoyed in the absence of IOLTA, cf. Boston Chamber of Commerce v. Boston, 217 U.S. 189, 195 (1910), and consequently would measure any required compensation by the claimant's loss, not by the government's (or the public's) gain, ibid. This rule would not obviously produce much benefit to respondents. While it has been suggested in their favor that a cognizable taking may occur even when value has been enhanced, on the supposed authority of Loretto, supra, at 437, n. 15, that case dealt only with physical occupation, it rested on no finding that value had actually been enhanced, and it held nothing about the legal consequences of an actual finding that enhancement had occurred. The Court today makes a further suggestion of a way in which respondents might deflect the objection that they have lost nothing, when it observes that the notion of property is not limited by the concept of value, ante, at 170. But the Court makes the point by equating the government's seizure
But, however these issues of taking and compensation may someday be adjudicated, two things are clear now: the issues are serious and they might be resolved against respondents. If that should happen, today's holding would stand as an abstract proposition without significance for the application of the Fifth Amendment.
If abstraction were guaranteed to be harmless, of course, an abstract ruling now and again would not matter much, beyond the time spent reaching it. But our law has been wary of abstract legal propositions not only because the common-law tradition is a practical one, but because abstractions pose their own peculiar risks. As The Chief Justice noted in a different but related context, there is a danger in "cutting loose the notion of `just compensation' from the notion of `private property.' " Almota Farmers Elevator & Warehouse Co. v. United States, 409 U.S. 470, 486 (1973) (Rehnquist, J., dissenting); see also id., at 482-483 ("While the inquiry as to what property interest is taken by the condemnor and the inquiry as to how that property interest shall be valued are not identical ones, they cannot be divorced without seriously undermining a number of rules dealing with the law of eminent domain").
One may wonder here not only whether the theoretical property analysis may skew the resolution of the taking and compensation issues that will follow, but also how far today's holding may unsettle accepted governmental practice elsewhere. By recognizing an abstract property right to interest "actually `earned' " by a party's principal, ante, at 168, does the Court not raise the possibility of takings challenges whenever the government holds and makes use of the principal of private parties, as it frequently does? When, for
To avoid the dangers of abstraction, I would therefore vacate the judgment of the Court of Appeals and remand for plenary Fifth Amendment consideration. If, however, the property interest question is to be considered in the abstract, I would recast it and answer it as Justice Breyer has done in his own dissenting opinion, which I join.
Justice Breyer, with whom Justice Stevens, Justice Souter, and Justice Ginsburg join, dissenting.
The question presented is whether "interest earned on client trust funds," which would "not earn interest" in the absence of a special "IOLTA program," amounts to a "property interest of the client or lawyer" for purposes of the Fifth Amendment's Takings Clause. Brief for Petitioners i; Brief for Respondents i; see U. S. Const., Amdt. 5 ("nor shall private property be taken for public use, without just compensation").
The question presented is premised on four assumptions: First, that lawyers sometimes hold small amounts of clients' funds for short periods of time; second, that because of federal tax and banking rules and regulations, such funds normally could not earn interest during that time; third, that state Interest on Lawyers Trust Account (IOLTA) rules require lawyers to place such funds in a special account where, mixed with other funds, they will earn interest; and fourth, that IOLTA rules require that interest earned on these funds
Insofar as factual circumstances such as these raise a Fifth Amendment question, I agree with Justice Souter that the question is whether Texas, by requiring the placing of the funds in special IOLTA accounts and depriving the funds' owners of the subsequently earned interest has temporarily "taken" what is undoubtedly "private property," namely, the client's funds, i. e., the principal, without "just compensation." To answer this (appropriately framed) question, the parties and the lower courts would have to consider whether the use of the principal in the fashion dictated by the IOLTA rules amounts to a deprivation of a property right, and, if so, whether the government's "taking" required compensating the owner of the funds, where it did not deprive the funds' owners of interest they might have otherwise received. But the Court of Appeals did not address this latter question. See ante, at 179 (Souter, J., dissenting).
Although I believe it wrong to separate Takings Clause analysis of the property rights at stake from analysis of the alleged deprivation, I have considered the question presented on its own terms. And, on the majority's assumptions, I believe that its answer is not the right one. The majority's answer rests upon the use of a legal truism, namely, "interest follows principal," and its application of a particular case, namely, Webb's Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155 (1980). See ante, at 166, 171. In my view, neither truism nor case can answer the hypothetical question the Court addresses.
The truism does not help because the question presented assumes circumstances that differ dramatically from those in which interest is ordinarily at issue. Ordinarily, principal is capable of generating interest for whoever holds it. Here, by the very terms of the question, we must assume
The most that Texas law here could have taken from the client is not a right to use his principal to create a benefit (for he had no such right), but the client's right to keep the client's principal sterile, a right to prevent the principal from being put to productive use by others. Cf. National Bd. of YMCA v. United States, 395 U.S. 85, 92-93 (1969) (noting that government deprivation of property requiring compensation normally takes from an owner use that the owner may otherwise make of the property). And whatever this Court's cases may have said about the constitutional status of such a right, they have not said that the Constitution forces a State to confer, upon the owner of property that cannot produce anything of value for him, ownership of the fruits of that property should that property be rendered fertile through the government's lawful intervention. Cf., e. g., United States ex rel. TVA v. Powelson, 319 U.S. 266, 276 (1943) (no need to pay for value that the "power of eminent domain" itself creates); City of New York v. Sage, 239 U.S. 57, 61 (1915) (city need not pay for value added by unifying parcels where unification impracticable absent eminent domain); United States v. Twin City Power Co., 350 U.S. 222, 228 (1956) (to require payment for value created by government "would be to create private claims in the public domain"). Thus the question is whether "interest," earned only as a result of IOLTA rules and earned upon otherwise barren client principal, "follows principal." The slogan "interest follows principal" no more answers that question than
Nor can Webb's Fabulous Pharmacies answer the question presented. But for state intervention the principal in that case could have, and would have, earned interest. See 449 U. S., at 156-157, and nn. 1, 2 (state law required party to deposit funds with court, authorized court to hold the funds in an interest-bearing account, and allowed the court to claim the interest as well as a fee). Here, federal law ensured that, in the absence of IOLTA intervention, the client's principal would earn nothing. Webb's Fabulous Pharmacies holds that a state law which places that ordinary kind of principal in an interest-bearing account (which interest the State unjustifiably keeps) takes "private property . . . for public use without just compensation." That holding says little about this kind of principal, principal that otherwise is barren. Nor do cases that find a private interest in property with virtually no economic value tell us to whom the fruits of that property belong when that property bears fruit through the intervention of another. Ante, at 169-170 (citing Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982); Hodel v. Irving, 481 U.S. 704, 715 (1987)).
If necessary, I should find an answer to the question presented in other analogies that this Court's precedents provide. Land valuation cases, for example, make clear that the value of what is taken is bounded by that which is "lost," not that which the "taker gained." Boston Chamber of Commerce v. Boston, 217 U.S. 189, 195 (1910) (opinion of Holmes, J.); see also United State s v. Miller, 317 U.S. 369, 375 (1943) ("[S]pecial value to the condemnor . . . must be excluded as an element of market value"); United States
These legal analogies more directly address the key assumption raised by the question presented, namely, that "absent the IOLTA program," no "interest" could have been earned. I consequently believe that the interest earned is not the client's "private property."
I respectfully dissent.
Briefs of amici curiae urging affirmance were filed for the Association for Objective Law by Stephen Plafker; for the Attorneys' Bar Association of Florida by Ronald D. Maines and Harvey M. Alper; for Defenders of Property Rights et al. by Nancie G. Marzulla; for the National Right to Work Legal Defense Foundation, Inc., by John C. Scully; for the Pacific Legal Foundation by James S. Burling, R. S. Radford, and Stephen E. Abraham; for the Mountain States Legal Foundation by William Perry Pendley; for the Texas Justice Foundation by David L. Wilkinson and Allan E. Parker, Jr.; and for Robert E. Talton et al. by Stephen R. McAllister and Mark W. Smith.