Analysis of IOLTA Victory in the United States Supreme Court
On March 26, 2003, the U.S. Supreme Court issued its decision in Brown v. Legal Foundation of Washington 538 U.S. ___ (2003), upholding the constitutionality of IOLTA under the Just Compensation Clause of the Fifth Amendment. Justice Stevens authored the 5-4 majority decision, which Justices O'Connor, Souter, Ginsburg and Breyer joined. In its ruling, the Court held that even assuming that a law requiring that the interest generated on IOLTA accounts be transferred to a different owner amounted to a per se taking, such a taking was for a valid public use and the amount of just compensation due was zero. As a result, the Court found that the operation of the IOLTA program in Washington does not violate the Fifth Amendment.
Analysis of Decision
The Court's analysis began by establishing that the text of the Fifth Amendment "confirms the state's authority to
confiscate private property", so long as two conditions are met: "the taking must be for a 'public use' and 'just
compensation' must be paid to the owner." The Court disposed of the "public use" question by stating that "..
the overall, dramatic success of these programs in serving the compelling interest in providing legal services to
literally millions of needy Americans certainly qualifies the Foundation's distribution of these funds as a 'public
use' within the meaning of the Fifth Amendment."
The Court then discussed the type of taking, if any, involved in the case. The petitioners alleged two takings claims based on (1) the requirement that certain types of client funds be placed in an IOLTA account and (2) the transfer of interest from an IOLTA account to the Washington IOLTA program. Applying a regulatory taking analysis, the Court concluded that the placement of funds in an IOLTA account was not a taking "because the transaction had no adverse economic impact on petitioners and did not interfere with any investment-backed expectations." As to the alleged taking of interest, the Court indicated that the per se analysis was appropriate to the facts of this case and consistent with its previous holding in Phillips v. Washington Legal Foundation that the interest is the property of the clients. The majority assumed that the petitioners' "interest was taken for a public use when it was ultimately turned over to the Foundation." This assumption, however, did not end the Court's inquiry.
The Court held that, in any event, there was no constitutional violation because no just compensation was due. In essence, the Court found that the plaintiffs in the case lost nothing of value given the fact that transaction costs would have outweighed the small amount of gross interest their individual accounts would have earned. In reaching its conclusion, the Court applied a long line of Fifth Amendment cases on just compensation, stating: "[J]ust compensation required by the Fifth Amendment is measured by the property owner's loss rather than the government's gain."
Finally, the Court addressed the plaintiffs' argument that funds could have mistakenly been deposited in an IOLTA account when the interest generated would actually have exceeded the transaction costs involved, contrary to the law establishing the IOLTA program in Washington State. While recognizing that mistakes might occur, the Court pointed out that the responsibility of ensuring that only qualifying funds are deposited in IOLTA accounts rests with the entity making the deposits (in this case the Limited Practice Officers handling real estate escrows). While the property owner might have a claim against the entity making a faulty deposit, that faulty deposit would not involve any state action subject to Fifth Amendment protection.
The Dissents
Justice Scalia authored a spirited dissent, which was joined by Chief Justice Rehnquist and Justices Kennedy and Thomas.
In it, IOLTA was likened to a "Robin Hood Taking, in which the government's extraction of wealth from those who own it
is so cleverly achieved, and the object of the government's larcenous beneficence is so highly favored by the courts
(taking from the rich to give to indigent defendants) that the normal rules of the Constitution protecting private
property are suspended." Justice Scalia argued that the fair market value of the interest earned by the clients'
principal should be the test of just compensation, rather than the net interest approach used by the majority.
Justice Kennedy also issued a brief additional dissent in which he raised First Amendment concerns regarding IOLTA. Kennedy wrote: "The First Amendment consequences of the State's action have not been addressed in this case, but the potential for a serious violation is there. . . One constitutional violation (the taking of property) likely will lead to another (compelled speech)."
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