Opinion ID: 775593
Heading Depth: 4
Heading Rank: 2

Heading: Application of Ad Hoc Analysis

Text: 54 In conducting the factual inquiry required by Penn Central's ad hoc analysis, we may conclude a taking has occurred only if a particular regulation goes so far that it force[s] `some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.'  Wash. Legal Found. v. Mass. Bar Found., 993 F.2d at 974 (quoting Armstrong v. United States, 364 U.S. 40, 49 (1960)). Although the ad hoc analysis provides no `set formula' for determining when `justice and fairness' require that economic injuries caused by public action be compensated by the government, rather than remain disproportionately concentrated on a few persons, the Supreme Court has principally relied on three factors: (1) [t]he economic impact of the regulation on the claimant; (2) the extent to which the regulation has interfered with distinct investment-backed expectations; and (3) the character of the governmental action.  Penn Central, 438 U.S. at 124; Phillips, 524 U.S. at 176 (Attention should be paid to the nature of the government's action, its economic impact, and the degree of any interference with reasonable investment-backed expectations) (Souter, J., dissenting) (citation omitted). Although we proceed to consider these factors in the context of the LPO-deposited funds here at issue, the Penn Central analysis-as opposed to the per se analysis-applies with the same force of logic to lawyer-deposited client funds. 55
56 Before Rule 12.1 was enacted, escrow and title companies deposited customer trust funds into non-interest bearing checking accounts despite Congress's authorization of interest-bearing NOW accounts in 1980. Even today, those escrow and title companies that do not employ LPOs generally do not use NOW accounts because of the expense and difficulty involved in crediting the proper amount of interest to each affected person and because many of these clients are for-profit organizations prohibited from using NOW accounts. Thus, because no interest would be earned on client funds deposited by escrow and title companies absent the IOLTA program, requiring those companies to place client trust funds in IOLTA accounts has no economic impact on the owners of the principal. Indeed, if there be any economic impact, it is a positive one. Before their enactment, client trust funds were not placed in interest-bearing trust accounts. Following their enactment, however, client trust funds must be placed in interest-bearing accounts if they are not placed in IOLTA accounts. Thus, the IOLTA program, at worst, maintains the status quo and, at best, provides clients with interest they otherwise would not have earned. 57 Furthermore, the IOLTA regulations themselves provide that only those funds that would not earn a net interest--either on their own or when pooled with subaccounting-are to be deposited in IOLTA accounts. If for some reason, funds are placed in an IOLTA account which, due to miscalculation on the part of the LPO or some unforeseen delay, could have earned a net positive interest, the taking of that generated interest would be the direct result of the LPO's violation of the Admission to Practice Rules. Because such a violation cannot be attributable to the State, it cannot implicate the Takings Clause. Although Appellant Hayes believes that his choice to receive the interest from my withholdings was taken and Appellant Brown objects to hav[ing ] no control over where the interest goes, absent the IOLTA program, neither would have earned a positive net interest to receive or control. Brown concedes this fact. In response to being asked whether he was arguing that without IOLTA he would have earned $4.96, the amount calculated as the interest earned on the deposit at issue, Brown acknowledged that [w]ithout IOLTA in place I may not have earned anything. Thus, because neither Brown nor Hayes would have earned net interest on their principal deposits, placing their funds in IOLTA accounts had no direct economic impact on them. 58 Nonetheless, Brown and Hayes maintain that they suffered a direct economic impact because, once escrow and title companies employing LPOs were required to place client funds in interest bearing IOLTA accounts, some banks decided to stop offering earnings credits due to the cost of simultaneously paying interest on IOLTA accounts and providing earnings credits. Brown and Hayes claim that, because some escrow and title companies charge IOLTA fees to make up for the lost earnings credits, the cost of their real estate transactions increased. This assertion does not affect our economic impact analysis, for two reasons. First, neither Brown nor Hayes has established either that they were charged an IOLTA fee or that the banks used by their escrow companies have stopped offering earnings credits. Second, the earnings credits were incentive payments to the escrow companies, not their customers, and, as such, the indirect economic impact on the escrow company customers of the companies' loss of credits cannot be considered as part of a takings analysis. 59 To the contrary, Skagit Bank, the bank holding Brown's principal, is among those that continue to give earnings credits for IOLTA accounts. Brown, however, argues that it's on a really reduced scale since IOLTA came into effect.  Thus, Brown claims that although he would not receive a direct payment of interest without IOLTA, he lost the equivalent, which would have been earned in the sense of earnings credits and have kept his costs down. He, however, fails to establish how much the additional costs were or whether they even existed. 60 Hayes's principal was deposited in an IOLTA account, Fidelity National Title Company of Washington (Fidelity), held with Seafirst Bank. Although Seafirst stopped offering earnings credits on IOLTA accounts some time after Rule 12.1 was adopted, the record does not allow us to determine whether Fidelity passed the loss of earnings credits onto its customers by imposing an IOLTA fee. Hayes's escrow closing statement does not appear to include an IOLTA fee, and Hayes does not assert that such a fee was charged. As support for his claim, Hayes relies solely on his unsupported belief that escrow compan[ies] in order to close the property . . . have to increase their fees and I have to pay them an increased fee to cover the cost of IOLTA. 61 The record also fails to establish whether, as a general matter, those escrow companies that deal with banks that have stopped giving earnings credits in fact charge an additional fee to cover the loss. It seems, for example, that Daugs's company does not impose additional costs to make up for the loss of earnings credits. On the other hand, Maxwell testified that Pacific Northwest Title Company charged a flat rate trust accounting fee after the enactment of Rule 12.1 during the time that it still employed LPOs. Attached to the declaration of Gerald Wheeler, a C.P.A. who does computerized escrow accounting for banks, is an escrow settlement statement from an unrelated land transaction. Both the buyer and the seller were charged $5.40 as an IOLTA/Accounting Fee  and a tax on the IOLTA/Accounting Fee. Yet Keith Leffler, an associate professor of Economics at the University of Washington, argues that IOLTA fees are really an example of sellers testing whether they can profitably raise prices. According to Leffler, [i]t is very likely that the IOLTA program has had no effect on the prices paid by the users of escrow services. He believes that only an economic analysis could determine whether IOLTA has had an adverse impact on escrow fees, but no such analysis has been done. Furthermore, because those companies that impose IOLTA fees charge both the buyer and seller, Leffler argues that the amount[bears] no relationship to any change in earnings credits from . . . earnest money deposit[s] . . . . [E]ven if one could show that as a result of [a loss of earning credits] there was an average increase in the prices paid by users of these services, there would be no reason to believe that the impact on any particular client would bear any relationship to any loss of earnings credit on the funds of that client, much less any relationship to the interest paid to the IOLTA program on that client's funds. 62 Moreover, as Professor Leffler's economic analysis demonstrates, even if there were an economic impact on escrow companies' customers such as Brown and Hayes, that impact would have been the result of discrete, discretionary pricing decisions by the affected escrow companies in response to the bank's decision to discontinue or decrease the availability of discounts on the companies' banking charges. While the dissent focuses on the fact that the payment of the earnings credits demonstrates that the deposits had economic value to the bank, one hardly needs that evidence to understand that the entire basis for the profitability of the banking industry is the value to the bank of the temporary use of other people's money. Much more important for present purposes is the recognition that under the commercial arrangement between the escrow companies, the banks, and the escrow companies' customers as it existed before IOLTA, the value of that use was split between the banks and the escrow companies. The customers had no property interest in that value, and, although the escrow companies could choose to pass on the lower overhead resulting from their lower banking costs to their customers, that pricing decision did not create any property interest in the earnings credits. It is true, of course, that because of the IOLTA program the value to the bank of the temporary use of the escrow funds is less (although not zero -banks do not distribute as interest the full value of deposited money, or they would have no earnings). But that does not change the fact that the earnings credits were nothing but incentive payments to repeat customers, the escrow companies, to use one bank rather than another, and were never the property of the escrow companies' customers. 63 Because the earnings credits did not belong to the customers in the first place, but rather were incentives provided to the escrow companies to use as they pleased for any covered banking charges, any impact on the customers is no different than many caused by economic regulation of someone else. Any price increase to customers due to increased banking costs would be just the indirect result of a decrease over time in the escrow companies' ability to acquire a certain kind of property for themselves. Moreover, any price increase would be the direct result of a private, discretionary pricing decision in no way mandated by the government. As such, those price increases should no more count as part of a takings analysis regarding the customers' property than any other economic decision adverse to customers a retailer makes because of the economic impact on it of regulatory changes affecting one of its suppliers. Assume, for example, that changes in banking regulations meant that a supermarket would have to pay higher fees when depositing its daily sales receipts, and consequently the supermarket raised the price of milk. Neither past nor future purchasers of milk, we presume, could validly claim that the price increase was a taking of their property by the government. 64 Neither Brown nor Hayes can show that the cost of their individual real estate transactions increased as a result of the IOLTA rules. Therefore, we conclude that the alleged loss of the escrow and title companies' earnings credits had no economic impact on them. 65
Investment-Backed Expectations 66 Governmental action through regulation of the use of private property does not cause a taking unless the interference is significant. Wash. Legal Found. v. Mass. Bar Found., 993 F.2d at 976 (citing Andrus, 444 U.S. at 66-67). Under Washington State's IOLTA rules, by definition, Appellants Hayes's and Brown's funds would not have been placed in an IOLTA account if they were capable of generating a net interest either on their own or in a pooled interest-bearing trust account with subaccounting that will provide for computation of interest earned by each client's funds and the payment thereof to the respective party. Wash. Admission to Practice R. 12.1(c)(2). Brown recognized that fact when he testified that [w]ithout IOLTA in place I may not have earned anything. Furthermore, because escrow and land title companies, as a general practice, never placed client trust funds in interest-bearing NOW accounts, neither Brown nor Hayes could have expected their funds to have earned interest while in the hands of their respective escrow and title companies. 67 Due to the structure of the IOLTA program and the general practices of escrow and title companies, neither Brown nor Hayes could have expected his principal to earn a net interest, and thus, the IOLTA program could not have interfered with their investment-backed expectations. 68
69 Brown and Hayes concede that they would have no interest without IOLTA, but they argue that, once interest is created, they have the right to determine what -if anything-is done with the interest. Viewing the accrued interest as its own entity, divorced from the principal, for the purpose of characterizing the extent of the property taken, Brown and Hayes assert that because the IOLTA rules dictate that all the interest earned on IOLTA accounts must go to the Legal Foundation of Washington, the IOLTA program is the equivalent of a 100 percent physical invasion of their property. We disagree. 70 The IOLTA rules are better viewed as a regulation of the uses of Brown's and Hayes's property, consisting of the principal and the accrued interest in aggregation. That said, the character of the government action is best viewed in the context of the industry it regulates. Banking is a heavily regulated industry, and the ability of particular types of deposits to earn interest has often been the subject of banking regulations. In fact, without the Federal Government's regulations regarding what types of accounts can earn interest, the IOLTA program may never have been born. Moreover, the ability to practice a profession -and the conduct expected of those who do-is also heavily regulated. Lawyers have always been held to the highest legal and ethical standards. As part of their state bar membership, lawyers in Washington are encouraged to provide legal services to persons of limited means or to public service or charitable groups.  Wash. Rules of Prof'l Conduct R. 6.1. With or without IOLTA, they are required to segregate their clients' funds from their own to ensure that funds are not used improperly. Wash. Rules of Prof'l Conduct R. 1.14. When LPOs are admitted to perform a limited practice of law, they are held to the same legal and ethical standards as lawyers. Thus, they, too, are expected to safeguard their clients' property and to do their best to ensure that the legal system is available to all who need it. Viewed in this context, the IOLTA regulations are not out of character for either the commercial industry or the professions they affect. 71 The Takings Clause does not prevent the Government from being able to regulate how people use their property but limits that ability to what is just and fair.  Andrus, 444 U.S. at 66-67. Although [t]he government may impose regulations to adjust rights and economic interests among people for the public good, it may not force `some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.'  Wash. Legal Found. v. Mass. Bar Found., 993 F.2d at 974 (citation omitted). Here, neither Brown nor Hayes is being singled out to bear a burden that should be borne by the public as a whole. They, as participants in our legal system, are required to place their money in IOLTA trust accounts that generate funds at no cost to them and that expand access to the legal system from which they benefit. Given the highly regulated nature of the banking and professional industries the IOLTA rules affect, this additional unobtrusive regulation does not exceed what is just and fair -especially where Brown and Hayes would have earned no interest absent IOLTA. We therefore conclude that Washington State's IOLTA program does not take either Brown's or Hayes's property.