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524US1

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156

OCTOBER TERM, 1997

Syllabus

PHILLIPS et al. v. WASHINGTON LEGAL
FOUNDATION et al.

certiorari to the united states court of appeals for
the fifth circuit

No. 96–1578. Argued January 13, 1998—Decided June 15, 1998

Under Texas’ Interest on Lawyers Trust Account (IOLTA) program, an
attorney who receives client funds must place them in a separate,
interest-bearing, federally authorized “NOW” account upon determin-
ing that the funds “could not reasonably be expected to earn interest
for the client or [that] the interest which might be earned . . . is not
likely to be sufﬁcient to offset the cost of establishing and maintaining
the account, service charges, accounting costs and tax reporting costs
which would be incurred in attempting to obtain the interest.”
IOLTA
interest income is paid to the Texas Equal Access to Justice Foundation
(TEAJF), which ﬁnances legal services for low-income persons. The
Internal Revenue Service does not attribute such interest to the indi-
vidual clients for federal income tax purposes if they have no control
over the decision whether to place the funds in the IOLTA account
and do not designate who will receive the interest. Respondents—a
public-interest organization having Texas members opposed to the
IOLTA program, a Texas attorney who regularly deposits client funds
in an IOLTA account, and a Texas businessman whose attorney retainer
has been so deposited—ﬁled this suit against TEAJF and the other peti-
tioners, alleging, inter alia, that the Texas IOLTA program violated
their rights under the Fifth Amendment, which provides that “private
property” shall not “be taken for public use, without just compensation.”
The District Court granted petitioners summary judgment, reasoning
that respondents had no property interest in the IOLTA interest pro-
ceeds. The Fifth Circuit reversed, concluding that such interest be-
longs to the owner of the principal.

Held:

1. Interest earned on client funds held in IOLTA accounts is the “pri-
vate property” of the client for Takings Clause purposes. The exist-
ence of a property interest is determined by reference to existing rules
or understandings stemming from an independent source such as state
law. Board of Regents of State Colleges v. Roth, 408 U. S. 564, 577.
All agree that under Texas law the principal held in IOLTA accounts is
the client’s “private property.” Moreover, the general rule that “inter-
est follows principal” applies in Texas. See Webb’s Fabulous Pharma-
cies, Inc. v. Beckwith, 449 U. S. 155, 162. Petitioners’ contention that