Brown v. Legal Foundation of Washington (01-1325)

March 26, 2003 Supreme Court Update

Greetings Court fans!
One decision today, and wouldn't you know, it undermines my picks from yesterday! Although I predicted that the IOLTA case would be decided 5-4, I didn't predict the opinion by Stevens. Sorry. Ok, on to the opinion.
If the government "takes" property from an individual, but the taking results in no net loss to the individual, does the government action violate the Takings Clause? Today, in Brown v. Legal Foundation of Washington (01-1325), the Court (Stevens for himself, Breyer, Ginsburg, Souter, and O'Connor) said no. The State of Washington, like every other state (and the District of Columbia), partially funds legal services for the needy through an "IOLTA" (interest on lawyer trust account) program. Under Washington's rules, when a lawyer holds client funds for any period of time, those funds must be segregated from the lawyer's funds and held in an interest-bearing account. (Until the 1980s, client funds were deposited in non-interest bearing accounts, thus generating a benefit only for the bank. Changes in banking rules allowed the development of IOLTA accounts.) If the deposit is sufficiently large or lengthy (or both) that it generates interest net of any transaction costs, the lawyer must maintain that money in an account that pays the interest to the client. If however, the deposit will not be large enough or lengthy enough to earn interest for the client net of transaction costs, the money must be deposited in an IOLTA account, a pooled account of all client funds falling into this category. Any interest from the IOLTA account is then paid to a designated agency that provides legal services to the poor. In other words, while the sums deposited in an IOLTA account would not generate a net gain to any individual client (i.e., interest less transaction costs associated with paying the interest), the combined deposits to that account generate funds that support legal aid agencies. Although the interest from funds deposited in an IOLTA account is not paid to individual clients, the Supreme Court held five years ago that any such interest is the property of the owner of the principal. Phillips v. Washington. At that time, however, the Court reserved judgment on whether the income had been taken and whether any such taking violated the Takings Clause.
In this case, two individuals claimed that the taking of the interest earned on their funds deposited in an IOLTA account violated the Takings Clause. An en banc 9th Circuit ultimately rejected their argument, and the Supreme Court affirmed. Stevens began by noting that the Takings Clause authorizes government confiscation of private property so long as it is for a "public use" and so long as "just compensation" is paid to the owner. In this case, Stevens found the first condition easily satisfied; the state's interest in providing legal services to needy citizens qualifies as a public use. Before addressing the just-compensation issue, Stevens considered whether the "taking" at issue was a physical taking (subject to per se rules) or a regulatory taking (subject to a balancing test). Here, the mere placement of funds in an IOLTA account does not confiscate any property and so is not a taking. The transfer of interest from those funds to a legal aid agency, however, is a taking of private property akin to a physical occupation of property and thus is subject to per se rules.
This does not end the inquiry, however, because the Takings Clause only prohibits government confiscation of property without just compensation. Under longstanding precedent, "just compensation" is measured by the property owner's loss, not the government's gain. Therefore, any pecuniary compensation to petitioners must be measured by their net losses rather than the value of the public's gain. If the net loss is zero, the compensation due is zero. Although lawyers might occasionally deposit funds in an IOLTA account that should be deposited in an account that generates interest payable to the client, Stevens did not see any need for further proceedings to determine whether any of petitioners' funds fell into that category. If petitioners' funds were mistakenly deposited in IOLTA accounts, this violated the IOLTA program rules and thus any loss to petitioners was due to the lawyers, and not the state action. In other words, whenever the program rules are followed, the taking of interest for legal aid agencies generates a net loss for the clients involved and thus no just compensation is due. There is no violation of the Takings Clause.
Scalia (joined by the Chief, Kennedy and Thomas) dissented. According to Scalia, the majority opinion completely ignores settled Takings Clause jurisprudence, and effectively creates a new class of cases, the "Robin Hood Taking": the taking from the rich to give to indigent defendants. (That's his characterization, not mine.) As he reads the majority, it adopts two contradictory and flawed theories. First, the majority seems to assume that there was no net loss to petitioners because in the absence of the IOLTA program, they wouldn't have received any interest. But Scalia claims this makes no sense because however the property is created -- even if created through a government program such as IOLTA -- it is still property protected by the Takings Clause. Second, the majority claims that just compensation is zero because just compensation is the value of the interest that was actually earned by petitioners, i.e., the interest less administrative fees. As Scalia reads the Court's cases, however, property owners are entitled to compensation for the market value of their property on the date of confiscation, and there is no basis for reducing that compensation for administrative fees. Moreover, Scalia sees no reason why these petitioners should not be allowed to prove that their funds should have been placed in non-IOLTA accounts. The fact that some lawyer placed the money in an IOLTA account erroneously should not relieve the state of liability for the taking.
Kennedy penned a separate 2-page dissent to suggest that there were other problems with the IOLTA programs, namely First Amendment problems. As with his "in-chambers" opinion from last week, he suggested that this was an issue ripe for further consideration.
That's all for today. Next week, the Court will issue an order list (Monday) and possibly some opinions (Tuesday or Wednesday). Until then, thanks for reading.
Sandy
From the Appellate Practice Group at Wiggin & Dana.
For more information, contact Mark Kravitz, Jeff Babbin, or Sandy Glover
at 203-498-4400, or visit our website at www.wiggin.com.