Phillips v. Washington Legal Foundation
Headline: Interest earned on small client funds in IOLTA accounts is ruled the client's private property, limiting states’ ability to claim those earnings and affecting how lawyers and legal-aid foundations handle pooled funds.
Holding: In a single sentence, the Court held that interest earned on client funds in IOLTA accounts is the client's private property for purposes of the Fifth Amendment.
- Labels IOLTA account interest as clients' property, enabling takings claims.
- Affects IOLTA programs in most states and legal-aid funding flows.
- May prompt compensation litigation on remand for affected clients.
Summary
Background
In Texas, lawyers must place small or short-term client funds into special interest-bearing IOLTA accounts. The interest from those pooled accounts is paid to a foundation that funds legal services for low-income people. Washington Legal Foundation and two individuals sued, saying this practice takes their property without compensation. The district court sided with Texas, the Fifth Circuit found the interest belongs to clients, and the Supreme Court agreed to resolve the split among courts.
Reasoning
The core question was whether interest earned on money held in IOLTA accounts is the client's private property. The Court looked to Texas rules, state bar orders, and the long-standing common-law idea that “interest follows principal.” The Court concluded that any interest that actually accrues is an incident of ownership of the underlying client funds and therefore belongs to the client. The Court rejected the argument that the interest was government-created value and noted that banks and tax rules do not convert the interest into the State’s property. The Court emphasized that possession, control, and the right to dispose of the earnings are property rights even if the earnings are small.
Real world impact
The ruling says clients own the interest earned in IOLTA accounts, which could allow affected clients to press takings claims on remand. The decision reaches IOLTA programs used in most States and affects how pooled interest is allocated to legal-aid foundations. The Court did not decide whether a compensable taking occurred or what compensation, if any, is due; those questions go back to lower courts and could require accounting or program adjustments.
Dissents or concurrances
Justices Souter and Breyer dissented, arguing the Court should not resolve the property question alone. They said federal banking and tax rules and the practical lack of net interest might mean no compensable taking, so taking and compensation issues should be considered together on remand.
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