Phillips v. Washington Legal Foundation

PETITIONER: Phillips
RESPONDENT: Washington Legal Foundation
LOCATION: Randon Bragdon's Dental Office

DOCKET NO.: 96-1578
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Fifth Circuit

CITATION: 524 US 156 (1998)
ARGUED: Jan 13, 1998
DECIDED: Jun 15, 1998

ADVOCATES:
Darrell E. Jordan - Argued the cause for the petitioners
Edwin S. Kneedler - On behalf of the United States, as amicus curiae, supporting the petitioners
Richard A. Samp - Argued the cause for the respondents

Facts of the case

Under Texas' Interest on Lawyers Trust Account (IOLTA) program, lawyers must deposit their client's funds into a special interest-bearing "NOW" account upon determination that the funds could not earn the client interest or compensate for other financial and accounting fees. Interest federally funded interest accrued on IOLTA accounts is then paid to the Texas Equal Access to Justice Foundation (TEAJF) which supports legal services for low-income persons. Acting on behalf of others opposed to IOLTA, the Washington Legal Foundation (the "Foundation") challenged TEAJF's receipt and use of the IOLTA funds. On appeal from an appellate court's reversal of a favorable district court decision, the Supreme Court granted the Foundation certiorari.

Question

Does Texas' public use of interest accrued on principal client funds, deposited by mandate into federally funded accounts, violate the Fifth Amendment's Takings Clause?

Media for Phillips v. Washington Legal Foundation

Audio Transcription for Oral Argument - January 13, 1998 in Phillips v. Washington Legal Foundation

William H. Rehnquist:

We'll hear argument next in Number 96-1578, Thomas R. Phillips, et al. v. Washington Legal Foundation.

Mr. Jordan.

Darrell E. Jordan:

Mr. Chief Justice and may it please the Court:

The Texas IOLTA program is an extension of the ethical rules that have always been applicable to lawyers in connection with their maintenance of client funds.

Lawyers have always been required to manage client funds as fiduciaries.

The rules required this before IOLTA programs were adopted, they require it today under IOLTA, and they would require it tomorrow if IOLTA programs went away.

William H. Rehnquist:

But they're required to manage it as fiduciaries for the benefit of the clients, are they not?

Darrell E. Jordan:

That's correct, Your Honor, Mr. Chief Justice.

Clients received no interest income on their nominal and short-term deposits before IOLTA.

During IOLTA, they don't receive any interest income on their nominal and short-term deposits, and if--

Sandra Day O'Connor:

Well, Mr. Jordan, by way of background, the IOLTA funds account also include deposits from corporations, do they not?

Darrell E. Jordan:

--That's correct, Justice O'Connor.

Sandra Day O'Connor:

And as to the corporate moneys that are deposited as opposed to the share that's the result of deposits by individuals, is there a correspondingly larger amount of interest earned?

I mean, is there interest being earned in the accounts for the corporate funds that exceed the cost of maintenance of the funds?

Darrell E. Jordan:

Justice O'Connor, we are not able to track what percentage of the IOLTA interest income that gets to the foundation comes from corporate or partnership deposits.

Sandra Day O'Connor:

Do you know what percentage of the deposits are from corporate as opposed to individuals?

Darrell E. Jordan:

I only have my opinion, and that would be, Justice O'Connor, that probably about 60 percent or so do come from corporate or partnership--

Sandra Day O'Connor:

I was curious because the amounts of individuals that... of interest earned that wouldn't exceed the cost of establishment and maintenance of the fund nevertheless seem to be generating substantial amounts of money for these programs, and so it seemed to me very likely there were corporate deposits that were generating substantially more interest, and that's why so much was being earned.

Darrell E. Jordan:

--One of the reasons, Your Honor, that IOLTA is able to earn interest for the foundation when it cannot for individual clients whose money is deposited, whose short-term and nominal funds are deposited in IOLTA accounts, is that it takes advantage of the changes in the banking law that occurred in 1980 where corporate and partnership accounts can be pooled with individual funds in an IOLTA account, and then, based on the tax ruling, there's no taxable transaction, the efficiency of the economy of scale where one pooled account and the recipient can be attributed to one foundation, all of this generates--

Sandra Day O'Connor:

Are corporations making these deposits, or anyone, for that matter, given an option about whether to have their moneys go into an IOLTA account or not, or is it required that they go into an IOLTA account?

Darrell E. Jordan:

--Justice O'Connor, the IOLTA program is mandatory for the lawyer.

Sandra Day O'Connor:

Right.

Darrell E. Jordan:

It's part of the disciplinary rules.

If--

How about for the client?

Darrell E. Jordan:

--But if there's any way a client's deposit can earn net interest for that client, whether it's a corporate client, whether it's an individual client, the lawyer's ethical responsibility is to do that.

Sandra Day O'Connor:

Well--

--But I thought for the corporate client they were prohibited from receiving the interest from the NOW account.

Darrell E. Jordan:

Your Honor, they would not be able to have those funds placed in a NOW account, a demand account.

Sandra Day O'Connor:

Right.