William H. Rehnquist: We'll hear argument next in Number 96-1578, Thomas R. Phillips, et al. v. Washington Legal Foundation. Mr. Jordan.
Darrell E. Jordan: Mr. Chief Justice and may it please the Court: The Texas IOLTA program is an extension of the ethical rules that have always been applicable to lawyers in connection with their maintenance of client funds. Lawyers have always been required to manage client funds as fiduciaries. The rules required this before IOLTA programs were adopted, they require it today under IOLTA, and they would require it tomorrow if IOLTA programs went away.
William H. Rehnquist: But they're required to manage it as fiduciaries for the benefit of the clients, are they not?
Darrell E. Jordan: That's correct, Your Honor, Mr. Chief Justice. Clients received no interest income on their nominal and short-term deposits before IOLTA. During IOLTA, they don't receive any interest income on their nominal and short-term deposits, and if--
Sandra Day O'Connor: Well, Mr. Jordan, by way of background, the IOLTA funds account also include deposits from corporations, do they not?
Darrell E. Jordan: --That's correct, Justice O'Connor.
Sandra Day O'Connor: And as to the corporate moneys that are deposited as opposed to the share that's the result of deposits by individuals, is there a correspondingly larger amount of interest earned? I mean, is there interest being earned in the accounts for the corporate funds that exceed the cost of maintenance of the funds?
Darrell E. Jordan: Justice O'Connor, we are not able to track what percentage of the IOLTA interest income that gets to the foundation comes from corporate or partnership deposits.
Sandra Day O'Connor: Do you know what percentage of the deposits are from corporate as opposed to individuals?
Darrell E. Jordan: I only have my opinion, and that would be, Justice O'Connor, that probably about 60 percent or so do come from corporate or partnership--
Sandra Day O'Connor: I was curious because the amounts of individuals that... of interest earned that wouldn't exceed the cost of establishment and maintenance of the fund nevertheless seem to be generating substantial amounts of money for these programs, and so it seemed to me very likely there were corporate deposits that were generating substantially more interest, and that's why so much was being earned.
Darrell E. Jordan: --One of the reasons, Your Honor, that IOLTA is able to earn interest for the foundation when it cannot for individual clients whose money is deposited, whose short-term and nominal funds are deposited in IOLTA accounts, is that it takes advantage of the changes in the banking law that occurred in 1980 where corporate and partnership accounts can be pooled with individual funds in an IOLTA account, and then, based on the tax ruling, there's no taxable transaction, the efficiency of the economy of scale where one pooled account and the recipient can be attributed to one foundation, all of this generates--
Sandra Day O'Connor: Are corporations making these deposits, or anyone, for that matter, given an option about whether to have their moneys go into an IOLTA account or not, or is it required that they go into an IOLTA account?
Darrell E. Jordan: --Justice O'Connor, the IOLTA program is mandatory for the lawyer.
Sandra Day O'Connor: Right.
Darrell E. Jordan: It's part of the disciplinary rules. If--
Speaker: How about for the client?
Darrell E. Jordan: --But if there's any way a client's deposit can earn net interest for that client, whether it's a corporate client, whether it's an individual client, the lawyer's ethical responsibility is to do that.
Sandra Day O'Connor: Well-- --But I thought for the corporate client they were prohibited from receiving the interest from the NOW account.
Darrell E. Jordan: Your Honor, they would not be able to have those funds placed in a NOW account, a demand account.
Sandra Day O'Connor: Right. Now, could the corporation doing business say, okay, I'm going to get legal services, but you put my deposit with an account that's not a NOW account and I'll take the interest, thank you.
Darrell E. Jordan: Under our rules, Your Honor, that may be permissible.
Sandra Day O'Connor: May?
Darrell E. Jordan: If the--
Sandra Day O'Connor: Is or is not, or you don't know?
Darrell E. Jordan: --Well, I know that it is, and the rule that the fund must be returned to the client on demand is satisfied as long as the account is placed in a bank. It could be a time... but as long as the client understands that, our rules permit it.
William H. Rehnquist: Mr. Jordan, one of your earlier statements makes me think that very likely times have changed since I practiced law long ago, but my... I'm familiar with a firm trust account, whereby a number of clients' moneys would be placed in the same account. I don't ever recall a situation where you opened up a separate account for each client whose money you had in trust. The firm put all of the money in the trust account. So it seems to me it's not entirely accurate to say that these moneys could never have earned interest. You treat it as if every single separate trust deposit would be a separate account. That was never true when I practiced.
Darrell E. Jordan: Mr. Chief Justice, before IOLTA, of course, the deposits from clients were put into a noninterest-bearing demand account, for the most part. With the advent of IOLTA, if the amount of the client deposit was small enough, or was going to be held for a short enough period of time, they went into the IOLTA account. IOLTA doesn't apply to any amounts of money that are going to be able to earn net interest for the client, so--
William H. Rehnquist: Well, how about if the amounts were pooled?
Darrell E. Jordan: --IOLTA enables, Mr. Chief Justice, the client funds of many clients to be pooled.
William H. Rehnquist: And why shouldn't that interest go to the clients?
Darrell E. Jordan: Because the client, Mr. Chief Justice, had no reasonable expectation to receive interest income, net interest income on small or short-term deposits before IOLTA, during IOLTA, and if IOLTA were to go away, that benefit would be retained by the banks. It would not change one thing for the client.
William H. Rehnquist: You mean that if a firm pooled its trust accounts and put them all in one account, called a trust account, the bank would not have to pay interest on it?
Darrell E. Jordan: Mr. Chief Justice--
William H. Rehnquist: Do you mean that?
Darrell E. Jordan: --A lawyer or a law firm is able now, Mr. Chief Justice, to pool eligible client funds, and if there can be any way that that account can yield a net benefit to the client, that's what the lawyer is supposed to do. That's the fiduciary responsibility of a lawyer to his or her client. It's only the funds that are incapable, whether using technology, subaccounting, pooling, or whatever, that cannot yield a net benefit to a client, that go into IOLTA.
William H. Rehnquist: So IOLTA accounts wouldn't cover a situation where the firm, say, has 20 trust deposits, and no one of those could earn interest worthwhile separately, but 20 of them pooled could? IOLTA does or does not cover that?
Darrell E. Jordan: It does cover those. If a separate--
William H. Rehnquist: I thought you just said it didn't.
Darrell E. Jordan: --Mr. Chief Justice, I must have misunderstood your question, then, because what I'm saying is that when the lawyer receives the funds from the client, he or she makes an independent determination about whether they're able to be placed in an account that would benefit the client, using any means that are legal, subaccounting, pooling, whatever. If they determine, in good faith, that those funds cannot be placed so as to benefit the client, then they go into the IOLTA account, and if the--
William H. Rehnquist: Well, take my hypothesis. The firm has 20 separate trust deposits. Pooling them would result in interest that was useful to the various clients. Is there... does the lawyer have any option in a situation like that, under your rules?
Darrell E. Jordan: --No, Mr. Chief Justice. If the lawyer, in good faith, determines that there is no way that that client fund can earn net interest, interest over the cost of attributing it, then the money goes into an IOLTA account. That is required under our rules.
John Paul Stevens: I'm not sure you've answered the Chief Justice's question, if I might interrupt. I think his hypothesis is that no one of them could separately earn interest, but that pooled in the lawyer's office, they could earn such interest. What is done in that situation? In other words, we would... I had the same practice years ago. We would have one trust account in which we would deposit money. It was the property of several different clients. We wouldn't treat them each separately, but you have a separate trust account which was a pooled account and could earn interest, and what does the lawyer do in that situation? Under your rules, what must he do?
Darrell E. Jordan: Looked at independently--
John Paul Stevens: Well, what do you mean independently? But I'm saying--
Darrell E. Jordan: --These funds usually come in at different times.
John Paul Stevens: --I look at it independently. I say, yes, but if I put it with 19 other clients' accounts it will earn money. Am I looking at it independently or not?
Darrell E. Jordan: If you could, Justice Stevens, put them with 19 other eligible accounts into a pooled account in the name of the law firm--
Speaker: Right.
Darrell E. Jordan: --and if that process enables you to earn a net interest benefit for the client, then you are able to do that.
John Paul Stevens: Why isn't that always going to be the case if you have more than one client? You have a bunch of clients who deposit money, you put all their money in the trust account.
Darrell E. Jordan: Because--
John Paul Stevens: It would always earn interest.
Darrell E. Jordan: --Justice Stevens, it's only the amounts from clients that are unable to be placed in an account that would yield a net benefit to a client... you... it's the net--
David H. Souter: It's the net benefit that you're emphasizing.
Darrell E. Jordan: --It's the net benefit.
David H. Souter: If I understand you correctly, what you're saying is that if, after subtracting either the law firm's or the bank's accounting cost, so much as one penny could be earned for the client, it does not go into IOLTA and, in fact, it will be invested in a way that will get the penny to the client.
Darrell E. Jordan: That's correct.
David H. Souter: But in these pooled funds, even though the pooled funds earn interest, the cost of accounting for that interest separately to the client would be greater than the interest that would be attributable to the client. Is that correct?
Darrell E. Jordan: That is correct, Justice Souter, and one other thing that I think is important--
Sandra Day O'Connor: Except for the corporate deposits.
Darrell E. Jordan: --Except for the corporate deposits.
Sandra Day O'Connor: Now, let's not forget that, because they can be very substantial, but there's some provision in the law for NOW accounts that says you can't pay anything to a corporation.
Darrell E. Jordan: Justice O'Connor, one of the things that makes IOLTA possible, of course, is the IRS ruling that allows there to be no taxable transaction. If, in Justice Souter's question, you were attributing and tracking the interest to be paid to each client, then the bank, whether it's a sub account or whatever, would have to have a taxpayer ID number, the bank would have to send a 1099, the law firm would either... then have to figure out who gets what amount of interest, and there's an awful lot of additional administrative accounting expense that must be taken into account. But the fact remains, if a lawyer can find a legal way to create a benefit for a client using those funds, then they're supposed to do it. But as a practical matter--
Stephen G. Breyer: Why does it say... it says, considered without regard to funds of other clients. That's what's causing the confusion, I think, because if you think of three clients, A, B, and C, and they each give you 100,000 dollars to hold for a day, all right, and you'd think, well, there's no way at all that I can open up--
Darrell E. Jordan: --Justice Breyer--
Stephen G. Breyer: --three accounts, but if I have a regular account here and I put all 300,000 dollars in this account of the firm, maybe then it would earn interest, and then the words here, it says, such funds could not reasonably expected to earn interest, but it says, considered without regard to other funds. That's what's mixing me up.
Darrell E. Jordan: --Justice Breyer, in a situation where there are many lawyers in a firm, as Chief Justice Rehnquist posed, you have to make... the lawyer has to make that decision about whether the client funds are--
Stephen G. Breyer: Do you consider it without regard to other funds or not?
Darrell E. Jordan: --Yes, you do. Yes, you do.
Stephen G. Breyer: So that means, in the example that's being given... I'm sorry to give this, but its... everyone has, and I think it's not totally clear yet, that what we have is a circumstance where there are three clients. They each give you some money, if you have to open up three accounts it's just not going to be worthwhile because the administrative expenses are too great. But the banker comes to you and says, give me all three together. There is no IOLTA fund in the State I'm talking about. He gives me all three together, and I will generate interest for you that exceeds administrative costs. Now, in that circumstance, do you put that money in that fund, which is private, or do you give it to IOLTA?
Darrell E. Jordan: If, Justice Breyer, there's any way that, using the banking accounts that are available to you as a lawyer, you can create a net benefit to a client, then you're supposed to do it.
Stephen G. Breyer: So you... my answer is--
Darrell E. Jordan: Your answer is yes.
Stephen G. Breyer: --you do consider-- --Then what's... what--
Darrell E. Jordan: You look at it... you look at it independently, and--
William H. Rehnquist: --What's the meaning of considered without regard to others?
Darrell E. Jordan: --Because, Mr. Chief Justice, the fact is that you have to look at the amount of money that comes from a client and the approximate length, in your good faith judgment, that it's going to be held in your account, without... you won't know, as a lawyer, what else is in that trust account. If you're in a firm, for instance, that it... that has several lawyers, each of whom handle, during the course of their practice, client funds, you may not know, and usually it's an accounting person that's going to decide and give you guidance about whether or not there's some opportunity there that can benefit a client, so... but as a lawyer, you're the one under the court's... the supreme court of Texas is, anyways, supervision, and told to determine whether in good faith you think it can be earned some benefit for a client, so that's the reason. The practical approach--
William H. Rehnquist: It doesn't mean, then, that in Justice Breyer's hypothesis, you would consider only whether one of the 100,000 dollars deposits could earn--
Darrell E. Jordan: --No. Mr. Chief Justice, generally speaking, if you had 100,000 dollars client fund there's probably some way you're going to be able to place it in a way that benefits a client. You... these amounts are usually smaller. They're usually held for only as long as it takes a check to clear. If you take into account, let's say a 50,000 dollars settlement in a tort case, and let's assume that in your State the maximum rate in a NOW account is 2-1/2 percent. 2-1/2 percent, 50,000 dollars, earns about 2.05 dollars a day. If it's going to be held for the 5 days that it takes the check to clear, that's 10 dollars and, what, 25 cents. There's no practical way that you can create an account and capture that net interest benefit for the client.
Ruth Bader Ginsburg: --Okay, but in-- --Mr. Jordan, there was a reference in the American Bar Association brief... it's page 9, footnote 10... that says that there is a mechanism in Texas to reimburse a client if it turns out that the funds could have generated interest and instead--
Darrell E. Jordan: Yes, Justice Ginsburg. If the... at the foundation they believe that somebody has erred, there's precedent for calling the lawyer and saying what are the facts here, and at least four times there have been reimbursements made through the bank.
Ruth Bader Ginsburg: --How does that mechanism work, because it's just a very quick footnote. It doesn't--
Darrell E. Jordan: The person at the foundation realizes that this is an abnormal amount of interest that has come from an account that historically has not generated that kind of activity. They call the lawyer, find out what the facts are with regard to the account, if the mistake has been made in good faith, well then the interest is returned to the bank, and the transaction between the bank and the lawyer is straightened out. That's what we do. In Texas, Justice Ginsburg, we've got about 60,000 lawyers. 30,000 of those say they have occasion during their practices to handle client funds, and they answered our compliance request affirmatively. Of those 30,000, there are about 16,000 active IOLTA accounts. We get about five and a half million dollars a year, which means that each active IOLTA account of the 16,000 generates less than 1 dollar a day. It's a little bit of money coming in from a lot of accounts that makes this whole program possible.
Sandra Day O'Connor: --Mr. Jordan, let me ask you something before your time is up. The court below found there's a property interest, a cognizable property interest here. It didn't go on and determine whether there had been a taking, is that right?
Darrell E. Jordan: Yes, Justice O'Connor. That's... they incorrectly, we feel, determined that a--
Speaker: Okay.
Darrell E. Jordan: --property interest was there. We don't agree with them.
Sandra Day O'Connor: Well, I guess it's possible that there might be a property interest, but nonetheless it might turn out at the end of the day there's no taking. No damages, no loss, no taking.
Darrell E. Jordan: Yes, Your Honor. We don't believe there's a property interest that these respondents have raised. If this Court disagrees with us, we still believe that it's a regulatory taking and there's... on something that's worth nothing, the just compensation is nothing, and therefore we're back to where we were.
Anthony M. Kennedy: Are you familiar with any case in which there is a regulation but the State is enriched as a result?
Darrell E. Jordan: No, Justice Kennedy, I'm not.
Stephen G. Breyer: There are a lot.
Darrell E. Jordan: But I believe that the principal tenets of the IOLTA programs in Texas and across the country are entirely consistent with this Court's jurisprudence in the Lucas case, where we're talking about economic reality, not abstract economic theory, where we're talking about the historic understandings of our citizens regarding their rights and reasonable investment-backed expectations. That's what clients before IOLTA did not have with regard to any interest opportunities--
Stephen G. Breyer: Did you ever overpay your income tax? You know, you have to pay so much a quarter? You ever pay more than, the first quarter than you actually owed proportionately? Did they give you a refund check back at the end of the year? I haven't gotten mine. [Laughter]
Darrell E. Jordan: --No, Your Honor. Thank you very much.
William H. Rehnquist: Thank you, Mr. Jordan. Mr. Kneedler, we'll hear from you. Mr. Kneedler, is there any requirement that you overpay your installments of income tax? [Laughter]
Edwin S. Kneedler: No, there's not, but there's also no requirement, State-imposed requirement that a client turn over money to the lawyer. That is a matter of private contractual--
Antonin Scalia: What about federally imposed requirements? Can the Federal and the State Governments collude to establish a system in which it is impossible for a private individual to earn any interest by reason of the way the banking laws are written, and then the State come in and say, well, since you can't make any interest privately, we're going to take your... we're going to take the interest that's earned and use it in this governmental scheme. Doesn't something strike you wrong about that?
Edwin S. Kneedler: --I don't--
Antonin Scalia: I mean, this whole thing works only because... because corporate money can't receive interest--
Edwin S. Kneedler: --Well--
Antonin Scalia: --in immediate payment accounts, right?
Edwin S. Kneedler: --Right.
Antonin Scalia: That rule is adopted, but if you allow those corporate funds to be used for something else, some good thing that the State wants to do, then it's okay.
Edwin S. Kneedler: Well, I think the basic point here is that the... whether the Federal Constitution requires the State of Texas to conclude that the interest generated by an IOLTA account, which State law declares to be the property of the Texas Equal Access to Justice Foundation, instead to be the property of the individual client, and it's important to remember that the question of whether a property right arises takes place in a... in two heavily regulated areas. One is the practice of law, and the other is the banking industry, which this Court has recognized is perhaps the most... the classic example of a heavily federally regulated area.
William H. Rehnquist: Well, but it's been... this isn't any regulation of banks. It's a regulation of clients.
Edwin S. Kneedler: No, but whether... the question of whether a client has a legitimate or a reasonable investment-back expectation in earning net interest necessarily arises against the background of the banking--
William H. Rehnquist: Well--
Edwin S. Kneedler: --banking regulations and economic reality.
William H. Rehnquist: --Well, you could have said the same thing in Webb's Fabulous Pharmacies, that the person had no expectation under State law because there was a State rule that said you didn't get it.
Edwin S. Kneedler: Well--
William H. Rehnquist: But that didn't control the result in that case.
Edwin S. Kneedler: --No, but there are several important distinctions between this case and Webb's, if I may highlight them, because I do think they're... they illustrate what's so different about this case. First of all, in Webb's the premise of the Court's opinion was that the interest earned was not tied to reimbursing the State for its costs. In other words, the premise was that there was net interest earned. There was a separate exaction by the State calculated on a percentage of the amount deposited to reimburse the State for its costs, so that was a case where there was net interest. Here, the fundamental precept of IOLTA is that the individual client's accounts would not be able to earn net interest.
Sandra Day O'Connor: Well, would this be a different case, do you think, if each person giving a lawyer money that might go into an IOLTA account were given a choice and asked to decide whether to agree with the IOLTA scheme or not?
Edwin S. Kneedler: The difficulty with that option, Justice O'Connor, is that one of the important considerations in the IRS' approval of this and the revenue ruling 81-209 that we cite in our brief was that the client did not have control, because if the client has control as to... over whether the lawyer will deposit the money in the IOLTA account, then the income generated by that account, which goes to a charitable contribution, might be an assignment of income by the individual taxpayer, individual client, because the client would be exercising control over the disposition, so--
David H. Souter: Oh, but you said a moment ago, and I thought correctly, that the client does, in fact, have that option. In answering Justice Scalia's question you said the client doesn't have to leave any money in a lawyer's trust account.
Edwin S. Kneedler: --Right. Now, I--
David H. Souter: Oh, as opposed to assigning it to a--
Edwin S. Kneedler: --Right. There are two separate... the client doesn't have to give money to the lawyer. That's a matter of private contractual--
David H. Souter: --So under the IRS there's no problem in the client having a choice as to whether or not to take the money back as opposed to leaving it in in a way that will earn interest for this charitable organization. That doesn't offend the IRS reg.
Edwin S. Kneedler: --Right. Right.
Speaker: Okay.
Edwin S. Kneedler: It's the fact of whether the... and after all, it's... again, looking at the overall--
Antonin Scalia: The client doesn't have the option if the lawyer is not willing to proceed without some funds.
Edwin S. Kneedler: --But... but--
Antonin Scalia: I mean, this is a rather unrealistic option, isn't it?
Edwin S. Kneedler: --But that's not a--
Antonin Scalia: You've got to find a lawyer who's willing to go ahead without any deposit.
Edwin S. Kneedler: --That's not a State-imposed requirement. That's a matter of private contractual relationship, and it's... I think it would be the rare client who would have the sort of substantial objection that the client has in this case.
William H. Rehnquist: Well, but this, as I understand it, was a retainer, which ordinarily wouldn't go into any lawyer's trust account. You get a retainer to... for your own income.
Edwin S. Kneedler: For the lawyer's own income, but it is protection for the lawyer's income, and the retainer is regarded as the client's property.
William H. Rehnquist: Well, since when? I mean, I never regard a retainer as a client's property.
Edwin S. Kneedler: Once the matter is over with-- [Laughter] It's security for the lawyer, but once the matter is over with the money is returned to the client--
Speaker: Well--
Edwin S. Kneedler: --if the client is separately billed. If the lawyer draws down on the retainer, then obviously when the--
Speaker: --Well--
Edwin S. Kneedler: --when the money is paid out that belongs to the--
William H. Rehnquist: --Well, agreements may differ.
Edwin S. Kneedler: --Right.
William H. Rehnquist: But I think it's a mistake to think that you would generally categorize what someone calls a retainer as something that belongs in a trust account.
Edwin S. Kneedler: Right. I think that's right, but it's important... this is not real property, as in Lucas. This is personal property, and as the Court said in the Lucas case, that questions of property arise looking at background principles of State and Federal law, and here it couldn't be clearer, looking at the background of State law, that the client has no established entitlement to the interest generated by the IOLTA account.
Stephen G. Breyer: How can we reach this question? This is just... there is some property. I have 1,000 dollars. You're my lawyer. I give it to you. The State of Texas is taking my 1,000 dollars and using it to make money for other people. I can imagine somebody arguing that they don't have the power to use my money to make money for somebody else, but somehow that isn't being argued. That is to say, we're in this question of a property interest, and... so how in your opinion would we reach that question, whether Texas does or does not have the power to take my money and use it to generate some money for another person.
Edwin S. Kneedler: Well, let me answer it this way. Typically, when a person deposits money in a bank... I realize this... the client is not directly depositing it in the bank, the lawyer is. But when a person deposits money in a bank, what the depositor gets in return is, it's really a debt owed by the bank. When you write a check the bank has promised to pay you to allow you to withdraw funds. But once the funds are deposited in the bank, the bank uses them. The bank earns money on them. So at a time when there were no... there was no interest on demand deposits, and that's still true for corporations, it's not as if no one is benefiting from that money. The bank--
Antonin Scalia: They're doing it with my money. Suppose, Mr. Kneedler, I have a piece of land that has no economic value. It simply is not rentable, it's not usable for anything. Does that mean the Government can come in and take it?
Edwin S. Kneedler: --No. I... that's because I think real property... real property is different. There's no question that you--
Antonin Scalia: Real property is different? I just... it doesn't seem to me the Government has the right to take something away from me just because it says, hey, it's no use to you.
Edwin S. Kneedler: --The question here is--
Antonin Scalia: And that's what's going on here.
Edwin S. Kneedler: --The question is just the interest, and it... the history of our country shows that there is no constitutional entitlement to earn interest. The background of our banking laws--
David H. Souter: But Mr. Kneedler, I thought the answer was simpler than that. I thought the answer was the one you mentioned earlier. The client is not being forced to devote his property to someone else's benefit. The client can say, give me the retainer back. I won't give you the money. Pay me the closing costs in cash immediately. He may have trouble finding a lawyer who wants to do that, but that's not a requirement of the State. Isn't that the reason--
Edwin S. Kneedler: --Right. That--
David H. Souter: --that we don't have in this case the question, how can you make me, in effect, devote my property to someone else's benefit?
Edwin S. Kneedler: --That is a sufficient reason, but I did want to answer Justice Breyer's question, because in the banking situation someone else is clearly earning money on the deposit. If what Texas did was, instead of setting up this program in the way that it did, required every bank to pay 2 percent, or the equivalent demand deposit amount to the State for all... measured by the amount of IOLTA accounts in the bank without setting up a separate account, but simply all clients' funds in the bank of a certain minimal amount, the bank has to pay an exaction measured by that--
Sandra Day O'Connor: Well, I guess--
Edwin S. Kneedler: --there would be no question that the clients' property--
Sandra Day O'Connor: --Mr. Kneedler, though, in the case of a corporation it's the Federal Government that's saying a corporation can't have any interest earned on its money.
Edwin S. Kneedler: --Right, and petitioners concede at page 35 of their brief that there is no constitutional entitlement that interest is... interest is only allowed when provided for by statute or agreement of the parties.
Anthony M. Kennedy: Well, suppose we have a client who does have a huge trust deposit, and the State of Texas says, you know, this IOLTA's working pretty well. We're going to take the interest from everybody. We're going to take the interest on the million dollar trust account, and we're going to use it for State programs. That's a taking, isn't it?
Edwin S. Kneedler: Well, the... that's a very different situation.
Anthony M. Kennedy: Is that a taking?
Edwin S. Kneedler: I'm... I think... I'm not certain that it would be. It depends... it depends--
Anthony M. Kennedy: What about-- --Why is isn't it a taking? --Webb's Fabulous Pharmacies?
Edwin S. Kneedler: --In Webb's... it would depend upon whether there was any reasonable relation between the exaction and the interest, but here the background rule is that the money could not earn any interest for the client to begin with, and therefore putting it into the account, from one noninterest-bearing account to another from the perspective of the client does not affect the client's--
William H. Rehnquist: Thank you, Mr. Kneedler.
Edwin S. Kneedler: --Thank you.
William H. Rehnquist: Mr. Samp, we'll hear from you.
Richard A. Samp: Mr. Chief Justice, and may it please the Court: Respondents wish at the outset to take issue with some of the confusing language in the question presented by the petitioners. Petitioners contend that it is a fundamental precept of the IOLTA program that only those funds which could not on their own generate what they call net interest go to an account which generates IOLTA. That simply is not the rule in the State of Texas. There are many--
John Paul Stevens: Isn't that the premise on which the court of appeals decided the case?
Richard A. Samp: --The court of appeals said, even if that is the case, that is correct.
John Paul Stevens: They assume that, and we're asked to pass on whether their decision was correct on that assumption, and that's why the question was phrased the way it was. We've rephrased the question, as I remember it.
Richard A. Samp: That is correct, and we believe that the Court should uphold the Fifth Circuit's decision. We believe that an alternative basis for upholding the decision is that the fundamental precept as stated by the petitioners is simply wrong.
David H. Souter: We don't have a factual record developed to support that, do we?
Richard A. Samp: We do not have a factual record, and that was why--
David H. Souter: Then I don't know why we would decide the case on that assumption. I mean, you may have a different... you may have a very different case to bring, and anything based upon the premise of this case might be quite irrelevant to the one that you are now telling us exists, but I don't see how we can decide your other case on a--
Richard A. Samp: --The--
David H. Souter: --factual premise that we don't have before us.
Richard A. Samp: --The court of appeals reversed the grant of summary judgment to the petitioners. We believe that that was the correct decision under any of the two theories that we are here. The court of appeals said that it was not proper to grant summary judgment, and if we are correct that there was a factual dispute in the district court as to whether or not this fundamental precept really exists, then that would be a correct reason for reversing the grant of summary judgment.
David H. Souter: It might be a correct reason for digging this case, too. Well, so you're saying... you're arguing for affirmance on an alternate ground as well as on the ground that the court of appeals took?
Richard A. Samp: That is correct, and certainly that would be an option to dig the case, if Your Honor so chose. We do believe, however, as we pointed out in our response to the cert petition, that the issue on which the Fifth Circuit ruled was directly in conflict with that of two other circuits, and so long as the Court is... has agreed to hear the case, we think it ought to decide that issue.
Ruth Bader Ginsburg: Mr. Samp-- --And also, isn't it clear that if you lose on the question that is presented, you can still make that argument in the court of appeals?
Richard A. Samp: That is correct, yes.
John Paul Stevens: You're still protected in that regard. In this case, which is not a class action, there's a vague reference to what is at stake for... is it Mr. Summers?
Richard A. Samp: Yes.
Ruth Bader Ginsburg: I believe the complaint says a small amount of his money has been in an IOLTA account since May 1993.
Richard A. Samp: That is correct.
Ruth Bader Ginsburg: We know there's no economic stake for the lawyer or for the organization. What is the pocketbook interest for Mr. Summer? What is the small amount?
Richard A. Samp: The small amount is 1,000 dollars that has been in this account since 1993. The financial stake of his lawyer is that his lawyer holds the legal title to these trust funds. The beneficial or equitable title is held by Mr. Summers, so they both have a financial interest in these particular funds. And under this Court's decision in Webb's Fabulous Pharmacy, the Court said very explicitly the earnings of the fund are incidents of ownership of the fund itself and are property, just as the fund itself is property.
Anthony M. Kennedy: But can we argue the case on the assumption that no net interest can be attributed to this client? Can we argue the case on that assumption?
Richard A. Samp: If you so choose. There is an alternate basis for upholding the--
Anthony M. Kennedy: On that assumption, why should you still prevail?
Richard A. Samp: --Because it has been the common law rule for 250 years that if, in fact, interest is generated, that interest belongs to the client.
Stephen G. Breyer: Well, if that's so, why... this is exactly the problem I'm having. It's very easy for me to see arguments both ways if we look at the property as the deposit, because then the issue becomes, can the Government take this piece of property and use it to earn money for another person? Now, we know the Government can take real property and can insist you put up an antipollution thing. And they do it just to earn money for a downstream business, say a tourist business. They perhaps could force my water over a dam, which would generate electricity that would go to another person, and maybe even they take my advance payment on my taxes and they use that payment to make money for the Government, and they never pay me anything. In any of those cases it seems to me the issue is the correct use, constitutional or not, of the property I own, not the electricity, not the money that's earned in the tourist attraction, and not the money that the Government happens to use my money to get for itself.
Richard A. Samp: Justice--
Stephen G. Breyer: So on any of those analogies, the answer is there is no property interest in what's used, what's gained, but the question is whether we can use the basic fund for that purpose. Now, I put that quite squarely because I want to hear your response to the point, why is there a property interest in that electricity that my water is used to make, or the interest here?
Richard A. Samp: --Justice Breyer, the Court in its Webb's Fabulous Pharmacy case saw these two issues that you're presenting as really the flip side of each other, that really the reason that interest follows principal is because in effect the use of the principal is what generates the interest, and therefore the Government's temporary taking or use of the original principal is the same thing as the taking of the interest. Now, in some of the examples you have given, there are many things that distinguish them. For example, in the case of the Government taking a tax, it has always been thought that a properly constituted tax that does not violate either equal protection or due process does not constitute a taking. The same would be true of any sort of user fee. The... I'm not sure I understand the case of the water. Generally, the water--
Stephen G. Breyer: They take my water and they say, run it over the TVA dam, and as a result it makes electricity which otherwise couldn't be produced. The Government takes that electricity, sells it, keeps the money. It's just like the interest here. They take your money and they use it to make some other thing that's worth something.
Richard A. Samp: --In all respect, the navigable... the water in navigable streams has never been though to be private property. The riverbeds can be private property but not the water, so I'm not sure that any of those analogies prove your point.
Anthony M. Kennedy: It seems to me this case is something like an escheat. All States escheat bank accounts after different periods of time, some 7 years. Can a property owner come and say, well, you know, you really should give me 10 years. In 10 years I would have got this. This is really mine? The State uses it for escheats and uses it for... it takes the money and uses it for any purpose it wants.
Richard A. Samp: In the case of abandoned property, that is correct, and the rules of escheat--
Anthony M. Kennedy: Well, isn't this something like abandoned property, because under the assumption... and I know you have an alternate base, but under the assumption that we... on which we're considering the case, you simply cannot trace and pay the interest, so it seems to me very much like an escheat.
Richard A. Samp: --Well, let me distinguish what... within the question presented from what all the facts of this case are. The petitioners say that you cannot earn interest. Yes, you can earn interest. Interest is what a willing borrower is willing to pay for the use of money. Interest is generated.
Anthony M. Kennedy: I thought that we made it very clear that interest is earned, but that it's not net interest in the sense that the administrative cost of tracing it and paying it to the client will exceed the interest itself. I thought that's the basis we're arguing the case on.
Richard A. Samp: And let me add, Justice Kennedy, that the underlying premise of IOLTA is that there will be these costs, yet those costs will exist in any event. If I operate a trust account, I am going to have certain bank charges. I am going to have certain overhead costs in my office, including the cost of entering the names on a daily basis into the account. I am going to have the cost of reconciling the account at the end of the month. Those costs will exist no matter whether I put my funds into an account that earns interest for IOLTA or earns interest for my client.
David H. Souter: No, but the... when IOLTA talks about the offset it's talking about offsets beyond that. It's talking about offsets necessary, not only to account for the funds, but to account for them separately to each source, to file the appropriate tax information for each source, to pay the interest out to each source, and so on, and those, in fact, are separate costs which are not incurred in a pooled fund. So sure, you're right, no matter how you hold it there's going to be some accounting cost, but the premise of IOLTA is, there are going to be more accounting and reporting costs if you're going to account for them separately to the client and, in fact, when you do so that's going to wipe out any benefit to the client. There will be a net of zero or less.
Richard A. Samp: Justice Souter, I'd like to call your attention both to Rule 6--
David H. Souter: No, but isn't that the premise?
Richard A. Samp: --No, that is not. The premise is that if the net interest to the client is less than zero, that the money does not go at all to the client. The... however, a net interest of less than zero will almost always be a, still a net benefit for the client. If you look at IOLTA Rule 6, if you look at page 43 of our brief in which we lay out in footnote 16 all of the overhead cost that the State of Texas tells lawyers should be taken into account before the... it is determined whether there can be net interest, you will see that only one out of seven items mentioned is the cost of producing a 1099 form. The cost of computing interest separately--
Sandra Day O'Connor: What is the Texas State law about interest following principal? Is it the law in the State of Texas that net interest follows principal, only the net?
Richard A. Samp: --The--
Sandra Day O'Connor: The Sellers case sort of sounds like that.
Richard A. Samp: --The Sellers case indicates that if a fund of interest is generated, the person responsible for generating the interest is entitled to take a reasonable fee for their expenses before paying on the interest.
Sandra Day O'Connor: I mean, if Texas law is to the effect that only net interest goes with the property, and if we take this case on the assumption that there isn't any net interest, then where does that leave us?
Richard A. Samp: Texas law does not say only net interest. Texas law says a reasonable fee can be deducted. It says nothing about other costs that someone other than the State might be incurring, so that, for example, in this particular case there will be costs that the attorney incurs for overhead, for setting up of the account, for all of these other things, yet the State of Texas does nothing to generate any of those funds. This is not a case where somehow the State has pooled money. This is pooling by the lawyer that, as Chief Justice Rehnquist indicated before, has always been going on.
Antonin Scalia: Mr. Samp, can I... coming back to Justice Kennedy's escheat example, I was thinking that that differs from this in that the owner of a bank account that would be escheated has voluntarily let it go. He's abandoned it, in effect. But then, maybe that's not true, because the contention has been made here that these people have an option, too, that they don't have to let the lawyer hold onto their money. What is your response to that argument?
Richard A. Samp: There is nothing voluntary about the IOLTA program. First of all, it says explicitly in the IOLTA rules that the attorney is not required to tell the clients about the existence of the IOLTA program. Indeed, virtually no clients know that their money is going in here, so they really don't have that option. In the case of Mr. Summers, he was never told that his funds were going into an IOLTA account. When he finally did learn, his case was already 18 months down the road, so that to say that there was any sort of realistic option at that point to--
William H. Rehnquist: Well, I thought that the statements made here say that it was just ordinarily funds kept for a very short time while a check cleared. His funds were kept for 18 months?
Richard A. Samp: --They are still in the fund. He was sued in a civil action in 1993... or, excuse me, 1992. The... he was... this was a retainer of a different sort than the one you were describing. This was not an advance payment. Rather, this was 1,000 dollars that was put into a trust account. It was to be used to ensure payment of regular bills. So long as regular bills were paid, and they have been in all the years since then, then the money remains in the trust account.
David H. Souter: Does the State require him to pay the 1,000 dollars to the lawyer? That's a matter of his contract between him and the lawyer. I don't see how that's attributable to the State.
Richard A. Samp: The State has stated that any money in a trust account must go--
David H. Souter: Yes, but the State doesn't say that this 1,000 dollars has got to be paid to the lawyer and put in... to be put in a trust account. The State doesn't tell him he's got to pay the lawyer 1,000 dollars.
Richard A. Samp: --Similarly, in the Webb's Fabulous Pharmacy case, there was no requirement that anybody make a claim against the--
David H. Souter: No, but there was a difference in Webb's, and the difference was in effect that there was a background of practice in dealing with money, and given that background of practice with dealing with money, it was the standard, the norm that the interest went to the person whose principal was earning it. There isn't that kind of a background of practice here. Maybe we should say that there should be a legal requirement that the two be treated the same, but we are certainly going to go beyond Webb's if we hold your way.
Richard A. Samp: --In all due respect, in Webb's there was no such history. The history in Webb was that in general, when money had been put into the court registry, it sat there and no interest was earned. At some point--
David H. Souter: But there was a general background principle that sums of money capable of earning interest at commercial rates in substantial amounts, as a general rule, went to the... as a general rule under those circumstances the interest went to the person who owned the principal. That was the background.
Richard A. Samp: --The background in Florida is precisely the same in Texas, and that is a general rule that interest follows principal. I have not seen anything in the--
David H. Souter: No, but there is a--
Richard A. Samp: --background principle that adds the caveats that you have suggested.
David H. Souter: --But the question, I think, is whether we should say that the, I guess consistently different background treatment in commercial and legal practice here is not entitled to some constitutional significance, and we can't make that determination simply by saying this is like Webb's, because the question in this case is whether it is like Webb's. Do you agree at least with that?
Richard A. Samp: Webb's did not directly address the issue here. The general background principles in Webb's apply equally here, and I think perhaps an effective way of looking at this is to look at it really perhaps in the way that Justice Breyer was suggesting before, which is that we have the right to exclude others from the use of our property. Presumably--
Ruth Bader Ginsburg: Mr. Samp, I'd like to ask you... your time is running out. I take it that on the theory you're presenting, this would go for what the Justice's brief brought up. That is, the prisoners who want to buy things at the commissary have to put a deposit, and they don't get any interest on it, but the interest is used to make... do things to administer the prison, so I take it, if you prevail here, the same would follow for the prisoners.
Richard A. Samp: --Precisely, and in fact that is the unanimous view of the court of appeals right now, is that prison accounts, when they are set up and they actually earn interest, the prison is entitled to take a reasonable administrative fee off of the top, but any interest that remains is the property of the clients, and they... generally courts of appeals have said that prisons may not take that money and use them as they see fit for the general benefit of the prison.
John Paul Stevens: Is there any... please. No, go-- --Let me ask you a question if they're hesitating, then. [Laughter] Do you think Texas could pass a statute repealing the rule that interest follows principal at least in a limited category of cases, including deposits by clients with their lawyers?
Richard A. Samp: Well, that's what they have done in this case.
John Paul Stevens: Do you think they--
Richard A. Samp: They have announced a rule repealing it, and the question is--
John Paul Stevens: --The question is, as a matter of State... if they did it as a matter of State statutory law, say, you say they... the Constitution would permit or prohibit that?
Richard A. Samp: --They have done that, and it prohibits it, because this Court said in Webb's--
John Paul Stevens: But they do it by defining property in a way that doesn't include this category of interest.
Richard A. Samp: --Yes, and this Court in Webb's said that when you simply announce by ipse dixit that some piece of property that used to be protected by State law no longer is, that that is precisely what the Takings Clause was intended to prevent. Now, the State is permitted to redefine property, but it may not do so in a way that defines one category of property totally different from similarly situated property and, for example, in our brief we point out that the State of Texas itself right now is litigating in the Ninth Circuit the right to have its trust funds, any interest earned on those trust funds, have the interest go to the State of Texas even though in that particular case Texas had no right in the first instance to insist that interest be generated. So that if Texas is going to be taking... making that argument, right now in court in that case, it should not be allowed to change property law for similarly situated property--
John Paul Stevens: Let me ask you this. If it were not for the Webb's case... you rely very heavily and very properly on it... would you have any authority for your position, your response to my question, except Webb's?
Richard A. Samp: --Yes. In the Lucas case, this Court generally talked about the ability of the State to change property law and nuisance law, and what the Court said was that if you are going to declare something a nuisance, that really has to be consistent with background principles of property and nuisance law. You can't just simply, by ipse dixit, declare that something is a nuisance and therefore say that no compensation is due when you pass a regulation stopping a particular activity.
Antonin Scalia: Well, is-- --Mr. Samp, can I ask you, is this case necessarily over, have you gotten over the hill if we agree with you on this aspect of the case? As I understand it, the only thing before us is whether your client has a property interest in the interest.
Richard A. Samp: That's correct.
Antonin Scalia: It's conceivable that he has a property interest but that there hasn't been a taking.
Richard A. Samp: That is correct.
Antonin Scalia: Because since he could not harvest that property interest, so to speak, it was worthless to him, the holding below on remand could be there's been no taking of that property interest.
Richard A. Samp: While we would argue against that result, that is a possible result after a favorable decision to us today.
Antonin Scalia: Okay, but you acknowledge that they are two separate questions, and all we're talking about here is whether there is a property interest.
Richard A. Samp: That is correct.
David H. Souter: Do you think they are necessarily two separate questions for us here? It's one thing, I suppose, to ask abstractly whether there is a property right in the interest, but it seems to me equally legitimate to ask the question, should we recognize a property right in the interest for Fifth Amendment purposes if, in fact, the result on the premise of the case would be that there was no just compensation due at the end of the road because the client, in... because... yes, the client in fact had lost nothing that the client would otherwise have had? In other words, wouldn't it be legitimate for us to consider what will happen at stage... or what ought to happen at stage 2 in deciding whether in the first instance to recognize a property right at stage 1?
Richard A. Samp: I think it would be a preferable course for the Court to have a full record as to whether or not there was a loss to the client prior to making that determination. The initial decision the court of... the district court will have to face is whether or not the per se taking rules apply and then, if they do not, then the question is, each of the various factors that the Court has enunciated for whether a taking exists, and those sorts of questions perhaps could best be decided on a fuller record.
William H. Rehnquist: The court of appeals made no effort to decide the second question, did it?
Richard A. Samp: That is correct, yes.
David H. Souter: It expressly reserved it, as I recall. Yes.
Richard A. Samp: That's correct, and they also, while they reinstated our First Amendment claim, they really had... had virtually no discussion of the First Amendment issue, so that regardless of how the Court rules today on the Fifth Amendment issue, we would hope that that issue would be... would still be open on remand.
Stephen G. Breyer: There's a lot of law that concerns contracts and trusts, and misuse of trusts, and I take it it's common law in most States that if a trustee misuses your money and makes money out of it he's going to have to pay that to you, and that seems to help you.
Richard A. Samp: That is correct.
Stephen G. Breyer: All right. But what's worrying me here is that we're talking about, not your loss, but the misperforming trustee's gain, let's say, assuming everything in your favor, the misperforming trustee's gain over and above your loss, and I'm... have you found anything... I'm nervous about, or would worry about the consequences of constitutionalizing that amount, of suddenly we invade trust law and contract law by saying there is a property interest in... let's take a misperforming trustee, who makes some money out of your money in an amount greater than you could have ever made. And now, what happens, once we say there's a constitutional interest in that? Is there suddenly going to be an implication for bankruptcy proceedings, or for State laws that decide for some reason not to give that extra amount back to the person who put the money into the trust? What happens in a... I'm... I can't quite foresee, the terrible word, ERISA cases. [Laughter] I can't quite foresee that, and I'd like to get your reaction.
Richard A. Samp: I am not sure that a decision in our favor in this case would constitutionalize the entire law of trusts. A trustee, for example, could be found to have failed to properly invest the money, but that would not be a subject for the Takings Clause. However, it has long been the case that if a trustee earns interest, that even though he had no obligation to do so in the first place, it has been considered that the Takings Clause requires that interest to be paid over, and--
Antonin Scalia: Not the Taking Clause, just normal property law.
Richard A. Samp: --Yes. In the--
Antonin Scalia: My worry was just the opposite of Justice Breyer's. I worry that if we hold that there is no property interest here, that where this kind of a plan did not exist, the lawyer himself would be able to merge all clients' funds that could not individually make a profit and keep whatever interest comes. I'm sure that that's not what the common law would normally provide, that that interest would be considered the property of the individual clients who ponied up the money.
Richard A. Samp: --I--
Antonin Scalia: But if there's no property interest, there would be no basis for such a rule, I assume.
Richard A. Samp: --I agree with you completely, and it seems to me that--
Ruth Bader Ginsburg: But Mr. Samp, I thought that the... once I... tell me if this is a wrong fix on the case, that it was a question between who was going to get this money, the Texas fund or the bank, that in no event was it going to enrich the lawyer or the client, so there were two choices. If IOLTA is no good, the bank gets the money. If IOLTA's okay, the fund gets the money, but not the lawyer and not the client in any event. I thought that was the basic premise of this whole thing.
Richard A. Samp: --Perhaps that was a premise back in 1976, at a time when interest could not effectively be earned on accounts. However, there is a difference between a bank having free use of money and a bank paying interest and then deciding who gets that money. Interest is an actual payment of money for the use of funds. That has been this Court's definition--
Anthony M. Kennedy: But that's-- --Well, assume that's still the premise of this case. Yes. Assume that's still the premise of this case. As Justice Ginsburg outlined it, why does the client have a reasonable investment-backed expectation of interest when we stipulate that he could never get that interest?
Richard A. Samp: --I don't believe he has an investment-backed expectation, and that goes to the issue of whether there is a taking. He has not invested anything here. He does have a very legitimate expectation that any interest that is earned will be his, and that's why this should be considered to be his property. But once that issue is reached, then, of course, we have to consider whether the per se taking rule applies. If not, then the issue of whether or not there is a reasonable investment-backed expectation would be one of a number of factors that would be taken into account in determining whether there is a taking, but I don't believe that we need to show that there was any kind of reasonable investment-backed expectation in order to prevail on the issue today, which is whether or not this is property in the first place.
David H. Souter: Well, why wouldn't your case be basically the same even if there were no IOLTA and the banks were simply getting the benefit of the deposit? It's true, the banks would not be going through the formality of paying itself interest, but you would have, it seems to me, exactly the same property claim that you've got here.
Richard A. Samp: The banking industry has always been subject to regulation, and if they are prohibited from paying interest, we don't claim that we would have any sort of claim. However, banks are ready, willing, and able to pay interest. They compete actively for the money of depositors. They want to have this money in order to be able to lend it out to others.
David H. Souter: So interest follows principal only if there is a background practice of paying interest.
Richard A. Samp: Any interest that is paid follows principal. That is the rule. If it is not paid, then there is no right to accrued interest for the use of one's money, and we don't claim that that's any kind of constitutional right. Going back to your question, Justice Scalia, it seems to me that it's very easy to foresee many examples where the Government, for example, might come in and say that you're not gardening in your backyard, why don't we come in and grow a vegetable garden there. And I'd say, well, I want to exclude you, and they say, well, it would cost you too much to buy the fertilizer for the backyard, so you can't do it profitably, but we buy our fertilizer in bulk, so we can do it more profitably, let us use it since you're not doing it otherwise, and it would seem to me that a decision that this is not property would--
Stephen G. Breyer: No, no. No. That's a misuse of the yard. That's right. That's what I think is the question in the case. Can they or can they not use the 1,000 dollars in this way?
Richard A. Samp: --And I--
Stephen G. Breyer: I mean, whether the vegetables if they do use it, who they happen to belong to, I mean, I don't know. I guess that's a question of State restitution law. If it was a misused garden, I don't know that the Constitution says who the vegetables have to belong to, but the Constitution might say whether you can use the garden that way.
Richard A. Samp: --The... it's not the Constitution, it is common law and State law that has always said that the earnings of a fund, the earnings of property are the property of those who own the fund that generate it. Just as, because I own the garden, I own the vegetables that are produced from it, so, too, because I own the fund, I own the interest that is generated by my fund.
Stephen G. Breyer: Yes, but because you can tell the Government to get out of your yard you're in the same position, it seems to me, that you're in here, when you can say to the lawyer, give me the 1,000 dollars. The Government isn't stopping you from doing that.
Richard A. Samp: The Government hasn't even... the Government has said to the lawyers, you don't even have to tell me, so I don't even know that you're in my backyard. I've gone off on vacation, and I come back, and all of a sudden-- [Laughter] --the yard is occupied. Thank you very much.
William H. Rehnquist: Thank you, Mr. Samp. The case is submitted.