Court Opinion

ID: 11925
Source: CourtListenerOpinion
Date Created: 2010-04-25 06:09:02+00
Date Added: 2024-06-11T13:32:57.455727
License: Public Domain

REVISED
                  UNITED STATES COURT OF APPEALS

                             FIFTH CIRCUIT

                             ____________

                              No. 95-50160
                             _____________

WASHINGTON LEGAL FOUNDATION, WILLIAM R. SUMMERS,
MICHAEL J. MAZZONE,

                                       Plaintiffs-Appellants,

                  versus

TEXAS EQUAL ACCESS TO JUSTICE FOUNDATION,
W. FRANK NEWTON, CHAIRMAN, TEXAS EQUAL ACCESS
TO JUSTICE FOUNDATION, THOMAS R. PHILLIPS, CHIEF JUSTICE,
RAUL GONZALEZ, JUSTICE, JACK HIGHTOWER, JUSTICE,
NATHAN L. HECHT, JUSTICE, LLOYD A. DOGGETT, JUSTICE,
BOB GAMMAGE, JUSTICE, CRAIG T. ENOCH, JUSTICE, JOHN CORNYN
JUSTICE, ROSE SPECTOR, JUSTICE, SUPREME COURT DFTS,

                                       Defendants-Appellees.

                  ______________________________

         Appeal from the United States Court of Appeals
                for the Western District of Texas
                  ______________________________
                           February 14, 1997

On Petitions for Rehearing and Suggestions for Rehearing En Banc
       (Opinion September 12, 1996, 5th Cir., 94 F.3d 996)

Before WISDOM, GARWOOD and JONES, Circuit Judges.

PER CURIAM:

     The Petitions for Rehearing are DENIED and the court having
been polled at the request of one of the members of the court and
a majority of the judges who are in regular active service not
having voted in favor, (FRAP and Local Rule 35) the Suggestions for
Rehearing En Banc are also DENIED.

                                   1
POLITZ, Chief Judge, KING, WIENER, BENAVIDES, STEWART and PARKER,
Circuit Judges, dissent from the refusal of the court to grant
rehearing en banc.

FORTUNATO P. BENAVIDES, joined by POLITZ, Chief Judge, STEWART and
PARKER, Circuit Judges, dissenting from failure to grant rehearing
en banc:

     In the subject case, a panel of this court held that “clients

... have a cognizable property interest in the interest proceeds

that are earned on their deposit in IOLTA accounts.”   94 F.3d 996,

1005 (5th Cir. 1996).    In reaching this conclusion, the panel

relied upon the traditional rule applied in Texas that “interest

follows principal,” which recognizes that interest earned on a

deposit belongs to the owner of the principal.   Id. at 1000.   The

panel also relied upon the Supreme Court’s opinion in Webb’s

Fabulous Pharmacies, Inc. v. Beckwith, which in turn relied upon

the same state law rule to hold that “earnings of a fund are

incidents of ownership of the fund itself and are property just as

the fund itself is property.”   Id. at 1002 (quoting 449 U.S. 155,

164, 101 S. Ct. 446, 66 L. Ed. 2d 358 (1980)).

     This decision is an important one because it contradicts every

other court in the country that has addressed this issue, including

two of our sister circuits and a large number of state appellate

courts.1   Moreover, while purporting to resolve only a threshold

     1
        See Washington Legal Fdn. v. Mass. Bar Fdn., 993 F.2d 962
(1st Cir. 1993); Cone v. State Bar of Fla., 819 F.2d 1002 (11th
Cir.), cert. denied, 484 U.S. 917, 108 S. Ct. 268, 98 L. Ed. 2d 225
(1987); Carroll v. State Bar of Cal., 166 Cal. App. 3d 1193, 213
Cal. Rptr. 305 (Cal. Ct. App. 1984), cert. denied, 474 U.S. 848,
106 S. Ct. 142, 88 L. Ed. 2d 118 (1985); Petition by Mass. Bar Ass’n,
478 N.E.2d 715 (Mass. 1985); In re Interest on Lawyers’ Trust

                                2
issue in this case, the opinion is bound to create difficulties and

confusion for the district court on remand.             Finally, this case

poses an unwarranted threat to a primary source of funding for

public interest legal organizations in this circuit at a time when

these   organizations   are     already   struggling     for    their   lives

financially.   For the foregoing reasons, I believe that this case

is worthy of our en banc consideration and respectfully dissent

from the contrary conclusion of my colleagues.

                                     I.

     Texas is one of fifty states that operates an Interest on

Lawyers Trust Account Program (“IOLTA”).              The IOLTA concept is

possible because   there      are   situations   in   which    the   costs   of

maintaining funds held by lawyers for their clients exceed the

interest that a client can earn from a financial institution. When

the amount of a client’s funds to be held is nominal or when a

client’s funds will be held for a brief period of time, the deposit

of a client’s funds acts as an interest-free loan to the bank.

IOLTA is an attempt to transfer this benefit from banks to legal

providers for the indigent.         The Texas IOLTA program has been a

resounding success, raising approximately $10 million per year for

legal services organizations in the state.

     The plaintiffs brought this action because of their objections

Accounts, 648 S.W.2d 480 (Ark. 1983); In re Adoption of Amendments
to C.P.R. D.R. 9-102 IOLTA, 102 Wash. 2d 1101 (Wash. 1984); In re
Lawyers’ Trust Accounts, 672 P.2d 406 (Utah 1983); In re New
Hampshire Bar Ass’n, 453 A.2d 1258 (N.H. 1982); In re Minnesota
State Bar Ass’n, 332 N.W.2d 151 (Minn. 1982); In re Interest on
Trust Accounts, 402 So. 2d 389 (Fla. 1981).

                                      3
to the activities of the recipients of IOLTA funds.2                     Washington

Legal Fdn., 94 F.3d at 999.          The plaintiffs contend that the IOLTA

program constitutes an unconstitutional taking of property, in

violation of the Fifth Amendment to the United States Constitution,

and that the program violates the First Amendment because it forces

them to support speech they find offensive.               The plaintiffs seek an

injunction against further operation of the Texas IOLTA program and

compensation for any interest earned on their deposits into IOLTA

accounts.

     The     district    court        concluded        that     the     plaintiffs’

constitutional challenges failed at the threshold because the

plaintiffs could not establish a property interest in the earnings

from funds deposited in IOLTA accounts.                      The district court,

therefore, granted summary judgment in favor of the defendants. On

appeal, a panel of this court reversed the decision of the district

court and remanded the case for further proceedings.

                                       II.

     “The    pertinent       words    of       the   Fifth    Amendment     of   the

Constitution of the United States are the familiar ones: ‘nor shall

private     property    be    taken     for      public      use,     without    just

compensation.’”    Webb’s Fabulous Pharmacies, 449 U.S. at 160.                    In

order to prevail on a takings clause claim, a plaintiff must

      2
           IOLTA rules provide that “[t]he Foundation shall make
grants to organizations ... hav[ing] as a primary purpose the
delivery of legal services to low income persons....” TEXAS RULES
OF COURT—STATE, Rules Governing the Operation of the Texas Equal
Access to Justice Foundation (“IOLTA Rule”), Rule 10 (West 1996).
Eligible recipient organizations “shall use such funds to provide
legal services to individual indigent persons.” IOLTA Rule 11.

                                           4
establish an interest in private property. “Property interests ...

are not created by the Constitution.           Rather, they are created and

their dimensions are defined by existing rules or understandings

that stem from an independent source such as state law.”                 Board of

Regents v. Roth, 408 U.S. 564, 577, 92 S. Ct. 2701, 33 L. Ed. 2d 548

(1972).    “But a mere unilateral expectation or an abstract need is

not a property interest entitled to protection.”                Webb’s Fabulous

Pharmacies, 449 U.S. at 161.

     At the outset, it is important to draw a distinction never

addressed by the panel between “accrued interest” and “interest

proceeds.”     The panel correctly noted that accrued interest is

always created by funds deposited in a bank.            See Washington Legal

Fdn., 94 F.3d at 1003.        The IOLTA concept is simply an attempt to

transfer     this   accrued     interest       from   banks     to     legal    aid

organizations.        Interest proceeds, however, are the amount of

accrued    interest    that   remains       after   deducting    the    costs   of

administering a deposited fund.         It is undisputed that a client’s

funds may be deposited in an IOLTA account only if they are

incapable of producing interest proceeds because of the nominal

amount or the short duration of the deposit.3

     3
          IOLTA Rule 6 provides, in part:

     The funds of a particular client are nominal in amount or
     held for a short period of time, and thus eligible for
     use in the Program, if such funds, considered without
     regard to funds of other clients which may be held by the
     attorney, ... could not reasonably be expected to earn
     interest for the client or if the interest which might be
     earned on such funds is not likely to be sufficient to
     offset the cost of establishing and maintaining the
     account, service charges, accounting costs and tax

                                        5
     A careful reading of Webb’s makes clear that the existence of

interest proceeds to which the depositors were entitled was a

prerequisite to the Court’s decision.           In reaching its conclusion

that creditors had a cognizable property right to the interest from

an interpleader fund deposited with the court clerk for their

benefit,   the   Court   held   that   “[t]he    earnings   of   a    fund   are

incidents of ownership of the fund itself and are property just as

the fund itself is property.” Webb’s Fabulous Pharmacies, 449 U.S.

at 164 (emphasis added).        A clear implication of this holding is

that if a fund generates no earnings to which its owner is

entitled, there is no cognizable property interest.

     Moreover, when the Court discussed whether the creditors had

a property interest in the principal of the interpleader fund, the

Court recognized that “[i]t is true, of course, that none of the

creditor claimants had any right to the deposited fund until their

claims were recognized and distribution was ordered.”                Id. at 161

(citation omitted).      In concluding that the creditors did in fact

have a property interest, the Court was careful to note that

“[e]ventually, and inevitably, that fund, less proper charges

authorized by the court, would be distributed among the creditors

reporting costs which would be incurred in attempting to obtain
interest on such funds for the client.

     It is worth noting that whether attorneys correctly apply the
requirements of Rule 6 is irrelevant to the constitutional issue
resolved by the panel’s opinion.     If attorneys violate IOLTA’s
rules by depositing ineligible funds, it seems that any action a
client might have would be against her attorney. To the extent the
state may be implicated, this is certainly not because IOLTA’s
rules result in the taking of a client’s property, but rather
because IOLTA’s rules were not followed.

                                       6
as their claims were recognized by the court.”                     Id.    This language

makes clear that the Court will not recognize a constitutionally

cognizable interest in the principal of a deposited fund unless and

until it is clear that the fund will be distributed as proceeds to

its beneficiary.            Therefore, when the Court later concluded that

earnings from such a fund are property “just as the fund itself is

property,” id. at 164, the Court strongly suggested that interest

proceeds    are    a    necessary    prerequisite        to    a    constitutionally

cognizable property interest in the earnings from a deposited fund.

     Finally, the Court was careful to limit its holding to cases

in which a separate statute authorizes the state to subtract its

administrative costs.            See id. at 164-65.           In those cases it is

clear   that      interest       proceeds       exist   because          the   costs    of

administering the fund have already been subtracted from the

accrued interest generated by the fund.                 Therefore, it is equally

clear that the fund’s owner has been deprived of a property

interest.    In cases where “double tolling” of this sort does not

occur, it cannot be so easily determined whether the fund’s owner

has been deprived of interest proceeds to which she is entitled.

It is clear to me that the Court limited its holding because a

bright-line rule establishing a property interest in this latter

situation would be inappropriate.

     Similarly, it follows that the state law rule that “interest

follows principal” controls only when interest is earned on the

principal    or,       in    other   words,      when   interest          proceeds     are

                                            7
available.4      Consider the fate of the plaintiffs’ accrued interest

in the absence of IOLTA.        Because the costs of administering the

deposited funds would exceed any interest earned by a client, the

bank would keep the accrued interest.            Are the banks violating the

traditional state law rule?        Are the banks somehow converting or

stealing the clients’ property? The answer of course is no—because

the clients had no interest in property to take.

                                    III.

     The panel attempted to avoid this reality by claiming that a

bank assigns interest to a depositor in a two-part process.               See

Washington Legal Fdn., 94 F.3d at 1003.            According to the panel, a

bank attributes interest to an account prior to deducting any of

its fees.     Id.     From this, the court concluded that “a property

interest attaches the moment that the interest accrues....”              Id.

     Even if the panel presents an accurate picture of banking

practices, however, those practices are beside the point.                 For

purposes    of    a   takings   clause       challenge,   a   constitutionally

cognizable interest in property does not exist in “earnings” from

a deposited fund unless and until those earnings can be distributed

as proceeds to the fund’s beneficiary.               Because IOLTA-eligible

funds would never produce interest proceeds, earnings from such

funds cannot be distributed to the funds’ owners. For this reason,

the panel’s conclusion that a property interest was created after

     4
         The Webb’s Court’s limitation of its holding would have
been unnecessary if the “interest follows principal” rule results
in the creation of a property interest irrespective of the costs
associated with administering accrued interest.

                                         8
the first step in the bank’s process of assigning interest is

simply wrong.

     The fact that interest proceeds are created by the Texas IOLTA

program does not weaken this conclusion.          Rather, the simple

recognition that without IOLTA there would be no interest proceeds

compels it.   The plaintiffs in this case are not harmed in any way

by the existence of IOLTA and would not be benefitted in any

tangible way by its elimination.       I find it both ironic and fatal

to the plaintiffs’ claim that in order to have a property interest

in this case, they must rely on the existence of the program they

seek to eliminate.

     In addition to being consistent with a fair interpretation of

the legal authority relied upon by the panel, rejection of the

plaintiffs’ asserted property interest in this case is consistent

with the protections underlying the Takings Clause.       The Takings

Clause provides that “private property [shall not] be taken for

public use, without just compensation.”         U.S. CONST. amend. V.

While beneficial use of property is certainly not essential to the

existence of a property interest worthy of the protections of this

provision, such an interest does require that the property at issue

have some actual or potential compensable value that could accrue

to the benefit of its owner.   In addition, a primary purpose of the

Takings Clause is to protect the investment-backed expectations of

property owners that their property will not be taken for public

                                   9
use without just compensation.5

     Unless the owner of a fund deposited in an IOLTA account could

reasonably expect to receive interest proceeds (of any amount) from

her earnings, the client’s “property” does not have any compensable

value.     Moreover, the fact that the client does not receive any

interest proceeds from her deposited funds does not interfere with

her investment-backed expectations because she could not have

reasonably expected to receive any net interest when the deposit

was made.     In my view, these unusual circumstances prevent the

client from asserting a constitutionally cognizable interest in

property.

     This understanding of the Takings Clause is buttressed by the

available    remedy    for   plaintiffs   whose     property       has   been

unconstitutionally taken.       Such plaintiffs are entitled to just

compensation, i.e., the fair market value of their property.

Because the fair market value of the earnings of IOLTA-eligible

funds is $0, the client would be entitled to nothing.                In sum,

applying    Fifth   Amendment   protections   to   an   asserted    property

interest that does not have any compensable value is not consistent

with the purposes that underlie the Takings Clause—to compensate a

property owner for the value of her property that was taken for

    5
       In Lucas v. South Carolina Coastal Council, Justice Scalia
noted that the Court has “acknowledged time and again, ‘[t]he
economic impact of the regulation on the claimant and ... the
extent to which the regulation has interfered with distinct
investment-backed expectations’ are keenly relevant to takings
analysis generally.” 505 U.S. 1003, 1019 n.8, 112 S. Ct. 2886, 120
L. Ed. 2d 798 (1992) (quoting Pennsylvania Cent. Transp. Co. v. City
of New York, 438 U.S. 104, 124, 98 S. Ct. 607, 54 L. Ed. 2d 477
(1978)).

                                    10
public use.

                                  IV.

     In addition to creating a circuit split, misinterpreting the

legal authority upon which it relied, and applying a takings clause

analysis to governmental action that does not implicate relevant

fifth amendment values, the panel’s analysis can only create

confusion for the district court on remand.        The Supreme Court’s

cases dealing with the Takings Clause fit roughly into the two

categories of regulatory takings and per se takings.         See JOHN E.

NOWAK & RONALD D. ROTUNDA, CONSTITUTIONAL LAW § 11.12, at 462-66 (5th ed.

1995).   Regulatory takings involve governmental regulations that

impinge upon a property owner’s economic interests.       In regulatory

takings cases, the Court has adopted a balancing test whereby it

weighs the economic impact of the regulation on the property owner

suffering the loss against the public benefits of the regulation.

See, e.g., Pennsylvania Cent. Transp. Co., 438 U.S. at 124. Viewed

as a regulatory takings case, IOLTA clearly passes muster because

the clients have suffered no economic loss and the public has

greatly benefitted.    See Massachusetts Bar Fdn., 993 F.2d at 976

(noting that Massachusetts’s IOLTA program has no economic impact

on clients and does not interfere with their investment-backed

expectations).

     Per se takings involve what might be considered a “literal”

taking of property.    The Court adopts a per se approach and finds

a compensable taking of property without a case-by-case inquiry.

See NOWAK & ROTUNDA, supra, § 11.12, at 463-64.          The Court has

                                   11
adopted a per se approach if a regulation deprives an owner of the

entire value of her property.         Id. (citing Lucas, 505 U.S. at

1003).   The Court has also adopted a per se approach if the

governmental action results in physical occupation of property or

a permanent change in rights of ownership.              Id. at 464 (citing

Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 102 S.

Ct. 3164, 73 L. Ed. 2d 868 (1982)).         Viewed as a per se takings case

whereby the clients have a property interest that is literally

appropriated    by    the   state,        IOLTA   is     almost   certainly

unconstitutional.

     Webb’s was clearly a per se takings case.           The Court’s entire

opinion is dedicated to determining that the creditors had a

property right in the principal and interest proceeds of the

subject interpleader fund.     See 449 U.S. at 156-64.         Because this

property was appropriated by the state for its own purposes, a

literal taking of the property occurred.          This latter conclusion

required no separate analysis by the Court and accordingly was

given none.    See id. at 164-65.

     The panel’s opinion in the instant case gave no explicit

indication whether the court viewed the case as a regulatory or per

se takings case.     If the panel viewed this case as one involving a

regulatory taking, it should have made this clear in its remand

order and should not have relied on Webb’s.            On the other hand, if

the panel regarded the case as one involving a per se taking, it

should not have bifurcated the inquiries regarding whether the

clients had a property right and whether a taking of that property

                                     12
occurred.     An affirmative answer to the second question would

necessarily follow from an affirmative answer to the first.

     The panel’s opinion implicitly indicated that it left open the

question of whether the case should be viewed as a regulatory

takings case or as a per se takings case.           The panel noted that “to

prevail on their taking claim, the plaintiffs must demonstrate that

the taking was against the will of the property owner.”            Washington

Legal Fdn., 94 F.3d at 1004.          In addition, the court cited Yee v.

City of Escondido, 503 U.S. 519, 539, 112 S. Ct. 1522, 118 L. Ed. 2d
153 (1992), which held that “because [a city’s] rent control

ordinance [did] not compel a landowner to suffer the physical

occupation    of    his   property,    it   [did]   not   effect   a   per    se

taking....”        While the applicability of this decision to the

context of deposited funds is not clear, it does leave open the

possibility that a per se taking did not occur in the subject case

because clients voluntarily deposit their money with an attorney

(who, in turn, deposits eligible funds into an IOLTA account).               The

fact remains, however, that Webb’s, the principal case relied upon

by the panel, was a per se takings case.             Because I abide by my

concerns regarding the panel’s conclusion that the plaintiffs

asserted a constitutionally cognizable property interest in the

accrued interest from IOLTA deposits, I would not burden the

district court with this confusion.

                                       V.

     The issue addressed by the panel in the subject case raises

very difficult and interesting conceptual issues regarding the

                                       13
proper definition of property for fifth amendment purposes.         Three

judges in this circuit have concluded that the plaintiffs have

asserted a constitutionally cognizable property interest in the

earnings from IOLTA-eligible funds, despite the inability of such

funds   to   produce   interest   proceeds.   I   disagree   with   that

conclusion, as has every other court to have addressed the issue.

Moreover, the panel’s decision on this “threshold issue” will have

important implications for the disposition of this case on remand

and, ultimately, for the constitutionality of the IOLTA programs in

Louisiana, Mississippi, and Texas.      For these reasons, I believe

that the intellectual efforts of our court’s entire membership

would have benefitted the decision making process in this clearly

important case. I regret my colleagues’ decision to deny rehearing

en banc and respectfully dissent.

                                   14