M E M O R A N D U M
To: Interested Persons
From: ABA Commission on IOLTA
Re: Phillips v. Washington Legal Foundation
Date: June 23, 1998
On June 15, 1998, the U.S. Supreme Court rendered its opinion in the Texas IOLTA case, Phillips, et al. v. Washington Legal Foundation, et al. In a 5-4 vote, the majority opinion, authored by Chief Justice Rehnquist and joined by Justices O'Connor, Scalia, Kennedy and Thomas, ruled that, under Texas law, interest earned on client funds held in IOLTA accounts is the client's private property. The Court expressed no view as to whether Texas has "taken" client property, nor did it express an opinion as to the amount of "just compensation," if any, is due the respondents. It remanded those issues to the lower court for consideration.
In order to prove a violation of the Fifth Amendment Takings Clause, three questions must be answered in the affirmative:
1) Is there property?
2) Has the government taken that property? and
3) Is just compensation due for the taking of the property?
At this juncture, only the first question has been resolved in favor of the Washington Legal Foundation (WLF). Thus, it should be clear that the Court DID NOT find the Texas IOLTA program to be unconstitutional.
Justice Breyer authored a dissent, joined by Justices Stevens, Souter and Ginsburg, expressing the view that the interest generated by the Texas IOLTA program is not client property. In addition, Justice Souter authored a dissent joined by Justices Stevens, Ginsburg and Breyer. It asserts that the Court should have either decided all three Takings Clause issues together or returned the case to the Fifth Circuit Court of Appeals to do the same. Justice Souter wrote that this approach would reduce the risk of placing undue emphasis on the existence of a generalized property right that may turn out to be an entirely theoretical matter, especially when, in his estimation, the respondents (WLF) will have a difficult time prevailing on the other two issues.
We agree with Justice Souter's analysis that WLF is unlikely to prevail on the remaining issues. To find a "taking," the court must consider:
1) the nature of the government's action,
2) the economic impact of that action, and
3) the degree of any interference with the property owner's reasonable, investment-backed expectations.
See Penn Central Transp. Co. v. New York City, 438 US 104 (1978). As Justice Souter observed in this case:
1) there is no physical occupation or seizure of tangible property,
2) there is no apparent economic impact, since the client would have no net interest to go in his pocket (IOLTA or no IOLTA), and
3) the facts present neither anything resembling an investment nor any apparent basis for the client to reasonably expect to obtain net interest.
Even if the Court were to find that a taking had occurred, it is hard to imagine how the respondents could successfully argue that they are due "just compensation." By definition, only those funds that CANNOT generate net interest for the client are placed in the IOLTA account.
It will be several years before the courts resolve the remaining issues in this case. As for the present, the U.S. Supreme Court did not find the Texas IOLTA program to be in violation of the Fifth Amendment, and it did not enjoin the operation of the Texas or any other IOLTA program. As a result, the IOLTA rules in every state and the District of Columbia remain in effect. While the ABA cannot provide legal advice, it is the Commission on IOLTA's position that lawyers and banks should continue to adhere to the IOLTA rule in their state and that IOLTA programs should continue to collect interest on IOLTA accounts and disburse grants as before.
For those lawyers who have concerns regarding personal liability for damages if the IOLTA program were to ultimately be held unconstitutional, it must be remembered that a finding that a taking has occurred and just compensation is due is a finding against the state. To the extent that a lawyer is acting in accordance with a rule or law that has not been revoked or deemed unconstitutional, it seems highly unlikely that any claim against an individual attorney for damages could be sustained.
The American Bar Association, through its Commission on IOLTA and other entities, remains available to assist state and local bar associations and state IOLTA programs, their officers and staff. As then ABA President Jerome Shestack stated: "We are confident that, ultimately, the courts will uphold the constitutionality of this vital resource for the public good. We will continue to work to preserve this program, which provides tens of thousands of the most needy members of our society access to our civil justice system to enforce their rights and resolve their grievances."
