Brown v. Legal Foundation of Washington
The Supreme Court upheld Washington's program requiring lawyers to pool clients' trust-account funds and send the interest to charities that provide legal services for the poor, ruling that no compensation is owed because the clients suffered no net financial loss.
The Court agreed the interest was the clients' private property and that transferring it to the charity was technically a 'taking,' but held that the Constitution requires only compensation for actual pecuniary loss, and here the clients could never have earned any usable interest on their own, so their loss and the compensation due was zero.
How it got here: A federal trial court granted summary judgment for the state; a Ninth Circuit panel reversed and remanded, but the en banc Ninth Circuit reinstated the judgment for the state, and the clients asked the Supreme Court to review.
The Case in Depth
What happened
Washington, like every state, runs an IOLTA program: lawyers and closing agents must deposit client trust funds that are too small or short-term to earn net interest for the client into pooled accounts, with the interest sent to the Legal Foundation of Washington to fund legal aid for the poor. Two people who had money briefly held in escrow during real estate closings sued, arguing the state was unconstitutionally taking their property.
The question before the Court
When a state requires lawyers to pool clients' money into interest-earning trust accounts and send the interest to legal-aid charities, do the clients have to be paid anything for that interest?
The Court's answer
No the Court ruled that clients whose escrow funds were pooled into Washington's IOLTA program are not entitled to any payment, even though the interest earned technically belonged to them and was taken by the state. The Court agreed a 'taking' occurred when the interest was transferred to the Legal Foundation of Washington, but said the Constitution only requires compensating an owner's actual pecuniary loss, not the government's gain.
Because Washington's rules require any funds capable of earning net interest to be placed in accounts that pay the client directly, only funds that could never have generated usable interest end up in the pooled IOLTA accounts. So the clients' net loss and therefore the compensation owed was zero, even though the interest had real value once pooled together.
Curious how the Court got there? See the step-by-step legal reasoning →
Why it matters
This ruling let every state's IOLTA program keep operating as designed, preserving roughly $200 million a year in funding for legal aid to the poor. Individuals and businesses whose escrow or trust funds sit briefly in these pooled accounts will not be compensated for the interest, even though the Court recognized that interest as their property.
What changes now
The decision is final on the merits and resolves the constitutional challenge in the state's favor, so there is no remand for further factual development. IOLTA programs across the country, which fund legal aid for the poor, can continue operating without paying interest to clients whose funds are pooled. The Court left open, without deciding, a First Amendment 'compelled speech' concern raised by Justice Kennedy's dissent about being forced to fund causes chosen by the state.
What this does not decide
The Court did not decide any First Amendment claim about being forced to associate with or fund the charities receiving IOLTA money; it also did not decide what compensation, if any, would be owed if a lawyer mistakenly placed money that could have earned net interest into an IOLTA account, since it found that scenario was not properly presented here.
Concurrences and dissents
Dissent — Justice Scalia
Justice Scalia argued the Court invented a new exception letting the government take property without compensation whenever the property was created by a government program, contradicting Phillips and 80 years of precedent holding that just compensation means the fair market value of what was taken, not merely the owner's 'net loss.' He argued the clients were entitled to the full interest actually earned on their funds, not zero, and warned the ruling could let governments seize other government-created benefits like welfare payments without paying for them.
Dissent — Justice Kennedy
Justice Kennedy joined Scalia's dissent in full and added that the state's IOLTA scheme not only unconstitutionally takes property but also creates a monopoly that forces the true owners of the interest to fund causes chosen by Washington's Supreme Court, raising an unaddressed First Amendment compelled-speech concern beyond the takings violation.
How the Court got there
The legal reasoning, step by step
- The Court first asked whether the IOLTA program serves a 'public use,' the first requirement of the Takings Clause, and found this easily satisfied because funding legal services for the poor is a legitimate public purpose, just as a special tax would be.
- The Court then classified the taking as a 'per se' taking rather than a 'regulatory taking' governed by the fact-specific Penn Central test, reasoning that once interest is generated in the pooled account, transferring it to the charity resembles a direct physical appropriation of property, similar to occupying a small piece of a rooftop.
- Turning to the compensation question, the Court applied the long-standing rule that just compensation is measured by what the owner actually lost, not by what the government gained.
- Because Washington's rules require funds capable of earning net interest to be placed in interest-paying accounts for the client instead of the pooled IOLTA account, the Court reasoned that any money that lawfully ends up in an IOLTA account could not, under the rules, have earned net interest for the client anyway.
- Applying that principle to the facts, the Court concluded the clients' net pecuniary loss was zero, since without the pooling arrangement their small or short-term deposits would not have generated any usable interest at all.
- The Court therefore held that just compensation for a net loss of zero is zero, satisfying the Fifth Amendment's compensation requirement even though a technical taking occurred.
Doctrinal impact
Cases affected by this decision
Reaffirms Phillips v. Washington Legal Foundation (524 U.S. 156)
The Court relied on Phillips' holding that IOLTA interest is the client's private property as the basis for finding a taking occurred.
Distinguishes Webb's Fabulous Pharmacies, Inc. v. Beckwith (449 U.S. 155)
The majority distinguished this case involving court-held interpleader funds from the IOLTA compensation question here.
Limits Penn Central Transp. Co. v. New York City (438 U.S. 104)
The Court held Penn Central's ad hoc balancing test does not apply to this per se taking of already-generated interest.