Opinion ID: 775593
Heading Depth: 2
Heading Rank: 1

Heading: Private Property

Text: 32 Following the Supreme Court's decision in Phillips, there can be no doubt that the interest earned on IOLTA account deposits is the private property of the owners of the principal. Thus, under Phillips, Appellants Brown and Hayes have a property right to whatever interest their individual deposits generate. 33 Appellees nevertheless attempt to distinguish Phillips, urging us to hold that, because property rights are created by state law, Phillips, which assessed property rights under Texas law, does not control the decision under Washington State law. See Phillips, 524 U.S. at 164 (quoting Bd. of Regents of State Colleges v. Roth, 408 U.S. 564, 577 (1972)) ([T]he existence of a property interest is determined by reference to `existing rules or understandings that stem from an independent source such as state law.' ). This attempt is unavailing, however, because whatever distinction there may exist between Texas and Washington property law is not a tenable basis for avoiding the rule of Phillips. 34 In reaching its conclusion that regardless of whether the owner of the principal has a constitutionally cognizable interest in the anticipated generation of interest by his funds, any interest that does accrue attaches as a property right incident to the ownership of the underlying principal, id. at 168 (emphasis in original), the Phillips majority relied upon [t]he rule that `interest follows principal' [that] has been established under English common law since at least the mid1700's. Id. at 165 (quoting Beckford v. Tobin, 27 Eng. Rep. 1049, 1051 (Ch. 1749) ([I]nterest shall follow the principal, as the shadow the body.)). Because Texas courts had long recognized the application of this common law rule, the Court rejected the argument that certain provisions of Texas law--income-only trusts and marital community property rules--demonstrated its disavowment. Id. at 167-68. Furthermore, allowing Texas to legislatively sidestep the Takings Clause by disavowing traditional property interests long recognized under state law would directly contradict the Court's holding in Webb's Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155 (1980), that  `a State, by ipse dixit, may not transform private property into public property without compensation' simply by legislatively abrogating the traditional rule that `earnings of a fund are incidents of ownership of the fund itself and are property just as the fund itself is property.'  Phillips, 524 U.S. at 167 (citation omitted). 35 We applied Webb's and Phillips in Schneider v. California Department of Corrections, 151 F.3d 1194 (9th Cir. 1998), which held, despite a state statute to the contrary, that prisoners possess a constitutionally cognizable property right in the interest earned on the principal held in Inmate Trust Accounts. Schneider, 151 F.3d at 1201. Seeking to square Webb's and Phillips, which held that the common law rule that interest follows principal could not be abrogated by state statute, with Roth, which held that property interests were protected by the Constitution but created by state law, we distinguished between new property interests and old property interests. Id. at 1200-01. Although Roth, a socalled `new property' case, affirmed theunremarkable proposition that state law may affirmatively create constitutionally protected `new property' interests, it in no way implie[d] that a State may by statute or regulation roll back or eliminate traditional `old property' rights. Id. at 1200 (emphasis in original). 36 The States' power vis-a-vis property thus operates as a one-way ratchet of sorts: States may, under certain circumstances, confer new property status on interests located outside the core of constitutionally protected property, but they may not encroach upon traditional old property interests found within the core. 37 Id. at 1200-01 (emphasis in original). We defined the core of constitutionally protected property . . . by reference to traditional `background principles' of property law.  Id. Because of the common law pedigree and near-universal endorsement by American courts[,] we concluded that the interest follows principal rule lay at the core of property law, and therefore could not be abridged by state statute. Id. at 1201 (citation omitted). 38 Although Appellees attempt to demonstrate that under Washington law, Brown and Hayes have no property right in the IOLTA interest, any distinctions that can be drawn between Washington law and Texas law (Phillips ), Florida law (Webb's), or California law (Schneider) are immaterial. This is particularly true given that Washington adopted the common law, as did most other states, by enacting areception statute that provides that [t]he common law, so far as it is not inconsistent with the Constitution and laws of the United States, or of the state of Washington, nor incompatible with the institutions and condition of society in this state, shall be the rule of decision in all the courts of this state. Wash. Rev. Code &#167 4.04.010. Furthermore, Washington state courts have previously applied the common law interest follows principal rule. In Tacoma School District. v. Hedges, 42 P. 522, 522 (Wash. 1895), the Washington Supreme Court held that [i]n the absence of any statute upon the subject, the interest and penalties collected upon delinquent taxes should go to the school districts entitled to the principal rather than a general county fund. In 1988, nearly a century later, a Washington appellate court, look[ing] to the common law and relying on the principle that interest on public funds follows the ownership of those funds, held that penalty and interest would follow the taxes upon which they were assessed. City of Seattle v. King County, 762 P.2d 1152, 1155 (Wash. Ct. App. 1988). 39 Thus, Appellees' attempts to distinguish Phillips by pointing to differences between Washington and Texas property law fail. The interest earned on the principal owned by Brown and Hayes held in IOLTA accounts is their private property.