Brown v. Legal Foundation of Washington

RESPONDENT: Legal Foundation of Washington
LOCATION: Dr. Nguyen's Office

DOCKET NO.: 01-1325
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Ninth Circuit

CITATION: 538 US 216 (2003)
ARGUED: Dec 09, 2002
DECIDED: Mar 26, 2003

Charles Fried - Argued the cause for the petitioners
Christopher G. Senior - for the National Association of Home Builders as amicus curiae
David J. Burman - Argued the cause for the respondent Legal Foundation of Washington
James S. Burling - for the Pacific Legal Foundation as amicus curiae urging reversal
Walter E. Dellinger, III - Argued the cause for the respondents, Justices of the Supreme Court of Washington

Facts of the case

Every state uses interest on lawyers' trust accounts (IOLTA) to pay for legal services for the needy. Among it rules, Washington's program requires that funds that cannot earn net interest for the client be deposited in an IOLTA account. The Supreme Court of Washington extended its IOLTA rules to cover Limited Practice Officers (LPOs), nonlawyers who are licensed to act as escrowees in real estate closings. Allen Brown and Greg Hayes alleged that they regularly purchase and sell real estate, in the course of such transactions they deliver funds to LPOs who are required to deposit them in IOLTA accounts, and the taking of the interest earned on their funds in IOLTA accounts violates the Just Compensation Clause of the Fifth Amendment. The District Court found, among other things, that Brown and Hayes had lost nothing. Sitting en banc, the Court of Appeals reasoned that there was no taking because Brown and Hayes had suffered neither an actual loss nor an interference with any investment-backed expectations.


Does the use of interest on lawyers' trust accounts to pay for legal services provided to the needy constitute a state taking in violation of the Just Compensation Clause of the Fifth Amendment?

Media for Brown v. Legal Foundation of Washington

Audio Transcription for Oral Argument - December 09, 2002 in Brown v. Legal Foundation of Washington

Audio Transcription for Opinion Announcement - March 26, 2003 in Brown v. Legal Foundation of Washington

William H. Rehnquist:

The opinion of the Court in NO. 01-1325 Brown versus Legal Foundation of Washington will be announced by Justice Stevens.

John Paul Stevens:

In the course of their legal practice, attorneys are frequently required to hold clients funds various lengths of time.

They have a professional obligation to avoid commingling their client's money with their own.

But it is not unethical to pull several client's fund in a single trust account.

Before 1980, client funds were typically held in non-interest bearing federal insured checking accounts, but because the federal banking regulations in effect since the great depression prohibited banks from paying interests on checking accounts the value of the use of the client's money in such accounts innured to the banking institution.

In 1980 Congress authorized federally insured banks to pay interest on a limited category of demand deposit referred to as NOW accounts.

This category includes deposits made by individuals and charitable organizations but does include those made by for profit corporations or partnerships, unless the deposits are made pursuant to a program under which charitable organizations have the inclusive right to the interest.

In response to the change in federal law, every State in the Nation has adapted a so-called IOLTA program.

IOLTA is an acronym for Interest On Lawyers Trust Accounts.

Authorizing the use of NOW accounts for the deposit of client funds and providing that all the interest on such accounts be used for charitable purposes.

This case presents a challenge to the constitutionality of the IOLTA program adopted by the State of Washington Supreme Court.

An important feature of that program is that it categorically prohibits deposits of client funds into IOLTA accounts if those funds could produce net interest for the client.

The two petitioners in this case are individuals who regularly purchase and sell real estate.

One of them made an excrow deposit of about $15,000 that was placed in an IOLTA account for two weeks and the other made a $90,000.00 excrow payment that was held in an IOLTA account for two days.

The parties assumed that the first deposit generated some interest and that the second earned $4.96, but neither petitioner claimed that he could have earned any net interest in a non-IOLTA account, or that the interest earned on his deposit in the IOLTA account actually exceeded the bank charges and other transaction cost that would have been incurred in an attempt to remit any net interest to him.

After discovery, the District Court granted the defendant's motions for summary judgment.

As a matter of fact, it concluded that in no event can the client depositors make any net returns on the interest acrued in this accounts, and as a matter of law, it concluded that constitutional issue focuses on what the owner has lost not what the government has gained.

Since petitioners had lost nothing there had been no taking without just compensation.

The Court of Appeals for the Ninth Circuit sitting en banc affirm and we granted certiorari.

Like all of the other judges who have participated in this case, we agree with the proposition that just compensation required by the taking clause of the Fifth Amendment is measured by the property owners loss rather by the government's gain.

Petitioners' loss under Washington’s IOLTA rules was zero.

As a matter of constitutional law the just compensation that is due for a net loss of zero is zero.

Accordingly, we affirm the judgment of the Ninth Circuit.

Justice Scalia has filed the dissenting opinion that has joined by the Chief Justice, Justice Kennedy and Justice Thomas; Justice Kennedy has also filed a dissenting opinion.