Every State uses interest on
lawyers' trust accounts (IOLTA) to pay for legal
services for the needy. In promulgating Rules establishing
Washington's program, the State Supreme Court required
that: (a) all client funds be deposited in interest-bearing
trust accounts, (b) funds that cannot earn net interest
for the client be deposited in an IOLTA account,
(c) lawyers direct banks to pay the net interest
on the IOLTA accounts to the Legal Foundation of
Washington (Foundation), and (d) the Foundation
use all such funds for tax-exempt law-related charitable
and educational purposes. It seems apparent from
the court's explanation of its IOLTA Rules that
a lawyer who mistakenly uses an IOLTA account for
money that could earn interest for the client would
violate the Rule. That court subsequently made its
IOLTA Rules applicable to Limited Practice Officers
(LPOs), nonlawyers who are licensed to act as escrowees
in real estate closings. Petitioners, who have funds
that are deposited by LPOs in IOLTA accounts, and
others sought to enjoin respondent state official
from continuing this requirement, alleging, among
other things, that the taking of the interest earned
on their funds in IOLTA accounts violates the Just
Compensation Clause of the Fifth Amendment, and
that the requirement that client funds be placed
in such accounts is an illegal taking of the beneficial
use of those funds. The record suggests that petitioners'
funds generated some interest that was paid to the
Foundation, but that without IOLTA they would have
produced no net interest for either petitioner.
The District Court granted respondents summary judgment,
concluding, as a factual matter, that petitioners
could not make any net returns on the interest accrued
in the accounts and, if they could, the funds would
not be subject to the IOLTA program; and that, as
a legal matter, the constitutional issue focused
on what an owner has lost, not what the taker has
gained, and that petitioners had lost nothing. While
the case was on appeal, this Court decided in Phillips
v. Washington Legal Foundation, 524 U.S. 156, 172,
that interest generated by funds held in IOLTA accounts
is the private property of the owner of the principal.
Relying on that case, a Ninth Circuit panel held
that Washington's program caused an unconstitutional
taking of petitioners' property and remanded the
case for a determination whether they are entitled
to just compensation. On reconsideration, the en
banc Ninth Circuit affirmed the District Court's
judgment, reasoning that, under the ad hoc approach
applied in Penn Central Transp. Co. v. New York
City, 438 U.S. 104, there was no taking because
petitioners had suffered neither an actual loss
nor an interference with any investment-backed expectations,
and that if there were such a taking, the just compensation
due was zero.
Held:
1. A state law requiring that client funds that
could not otherwise generate net earnings for
the client be deposited in an IOLTA account is
not a "regulatory taking," but a law
requiring that the interest on those funds be
transferred to a different owner for a legitimate
public use could be a per se taking requiring
the payment of "just compensation" to
the client. Pp. 13-17.
(a) The Fifth Amendment imposes two conditions
on the state's authority to confiscate private
property: the taking must be for a "public
use" and "just compensation" must
be paid to the owner. In this case, the overall,
dramatic success of IOLTA programs in serving
the compelling interest in providing legal services
to literally millions of needy Americans qualifies
the Foundation's distribution of the funds as
a "public use." Pp. 13-14.
(b) The Court first addresses the type of taking
that this case involves. The Court's jurisprudence
concerning condemnations and physical takings
involves the straightforward application of per
se rules, while its regulatory takings jurisprudence
is characterized by essentially ad hoc, factual
inquiries designed to allow careful examination
and weighing of all relevant circumstances. Tahoe-Sierra
Preservation Council, Inc. v. Tahoe Regional Planning
Agency, 535 U.S. 302, 322. Petitioners separately
challenged (1) the requirement that their funds
must be placed in an IOLTA account and (2) the
later transfers of interest to the Foundation.
The former is merely a transfer of principal and
therefore does not effect a confiscation of any
interest. Even if viewed as the first step in
a regulatory taking which should be analyzed under
the Penn Central factors, it is clear that there
would be no taking because the transaction had
no adverse economic impact on petitioners and
did not interfere with any investment-backed expectation.
438 U.S., at 124. A per se pproach is more consistent
with the Court's reasoning in Phillips than Penn
Central's ad hoc analysis. Because interest earned
in IOLTA
accounts "is the 'private property' of the
owner of the principal," Phillips, 524 U.S.,
at 172, the transfer of the interest to the Foundation
here seems more akin to the occupation of a small
amount of rooftop space in Loretto v. Teleprompter
Manhattan CATV Corp., 458 U.S. 419, which was
a physical taking subject to per se rules. The
Court therefore assumes that petitioners retained
the beneficial ownership of at least a portion
of their escrow deposits until the funds were
disbursed at closings, that those funds generated
interest in the IOLTA accounts, and that their
interest was taken for a public use when it was
turned over to the Foundation. This does not end
the inquiry, however, for the Court must now determine
whether any "just compensation" is due.
Pp. 14-17.
2. Because "just compensation" is
measured by the owner's pecuniary loss--which
is zero whenever the Washington law is obeyed--there
has been no violation of the Just Compensation
Clause. Pp. 17-22.
(a) This Court's consistent and unambiguous
holdings support the conclusion that the "just
compensation" required by the Fifth Amendment
is measured by the property owner's loss rather
than the government's gain. E.g., Boston Chamber
of Commerce v. Boston, 217 U.S. 189, 195. Applying
the teachings of such cases to the question here,
it is clear that neither petitioner is entitled
to any compensation for the nonpecuniary consequences
of the taking of the interest on his deposited
funds, and that any pecuniary compensation must
be measured by his net losses rather than the
value of the public's gain. Thus, if petitioners'
net loss was zero, the compensation that is due
is also zero. Pp. 17-19.
(b) Although lawyers and LPOs may occasionally
deposit client funds in an IOLTA account when
those funds could have produced net interest for
their clients, it does not follow that there is
a need for further hearings to determine whether
petitioners are entitled to compensation from
respondents. The Washington Supreme Court's Rules
unambiguously require lawyers and LPOs to deposit
client funds in non-IOLTA accounts whenever those
funds could generate net earnings for the client.
If petitioners' money could have generated net
income, the LPOs violated the court's Rules, and
any net loss was the consequence of the LPOs'
incorrect private decisions rather than state
action. Such mistakes may give petitioners a valid
claim against the LPOs, but would provide no support
for a compensation claim against the State or
respondents. Because Washington's IOLTA program
mandates a non-IOLTA account when net interest
can be generated for the client, the compensation
due petitioners for any taking of their property
would be nil, and there was therefore no constitutional
violation when they were not compensated. Pp.
19-22.
271 F.3d 835, affirmed.
Stevens, J., delivered the opinion of the Court,
in which O'Connor, Souter, Ginsburg, and Breyer,
JJ., joined. Scalia, J., filed a dissenting opinion,
in which Rehnquist, C. J., and Kennedy and Thomas,
JJ., joined. Kennedy, J., filed a dissenting opinion.
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