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.