Edited Text © Matthew Woessner 2003
Brown v. Legal
Foundation of
Decided 5 to 4 in favor the Legal Foundation of Washington
Justice Scalia, with whom The Chief Justice, Justice Kennedy, and Justice Thomas join, dissenting.
The
Court today concludes that the State of
contrary.
Dissent Part I
In 1984 the Supreme Court of Washington issued an order requiring lawyers to place all client trust funds in “ identifiable interest-bearing trust accounts. ”‘ If a client’s funds can be invested to provide a “ positive net return ”‘ to the client, the lawyer must place the funds in an account that pays interest to the client. If the client’s funds cannot earn a “ positive net return ”‘ for the client, the funds are to be deposited in a pooled interest-bearing IOLTA account with the interest payable to the Legal Foundation of Washington (LFW), a nonprofit organization that provides legal services for the indigent. A lawyer is not required to obtain his client’s consent, or even notify his client, regarding the use of client funds in IOLTA accounts or the payment of interest to LFW. The Supreme Court of Washington dismissed all constitutional objections to its 1984 order on the now-discredited ground that any interest that might be earned on IOLTA accounts would not be “ property ”‘ of the clients.
As
the Court correctly notes,
Dissent Part II
When
a State has taken private property for a public use, the Fifth Amendment
requires compensation in the amount of the market value of the property on the
date it is appropriated. As we explained in
In holding that any just compensation that might be owed is zero, the Court neither pretends to ascertain the market value of the confiscated property nor asserts that the case falls within one of the two exceptions where market value need not be determined. Instead, the Court proclaims that just compensation is to be determined by the former property owner’s “ net loss, ”‘ and endorses simultaneously two competing and irreconcilable theories of how that loss should be measured. The Court proclaims its agreement with the Ninth Circuit majority that just compensation is the interest petitioners would have earned had their funds been deposited in non-IOLTA accounts. At the same time, the Court approves the view of the Ninth Circuit dissenters that just compensation is the amount of interest actually earned in petitioners’ IOLTA accounts, minus the amount that would have been lost in transaction costs had petitioners sought to keep the money for themselves. The Court cannot have it both ways–as the Ninth Circuit itself realized–but even if it could, neither of the two options from which lower courts may now choose is consistent with Phillips or our precedents that equate just compensation with the fair market value of the property taken.
Dissent Part II A
Under the Court’s first theory, just compensation is zero because, under the State Supreme Court’s Rules, the only funds placed in IOLTA accounts are those which could not have earned net interest for the client in a non-IOLTA savings account. This approach defines petitioners’ “ net loss ”‘ as the amount of interest they would have received had their funds been deposited in separate, non-IOLTA accounts.
This definition of just compensation has no foundation in reason. Once interest is earned on petitioners’ funds held in IOLTA accounts, that money is petitioners’ property. It is at that point that the State appropriates the interest to fund LFW–after the interest has been generated in the pooled accounts–and it is at that point that just compensation for the taking must be assessed. It may very well be, as the Court asserts, that petitioners could not have earned money on their funds absent IOLTA’s mandatory pooling arrangements, but just compensation is not to be measured by what would have happened in a hypothetical world in which the State’s IOLTA program did not exist. When the State takes possession of petitioners’ property–petitioners’ money–and transfers it to LFW, the property obviously has value. The conclusion that it is devoid of value because of the circumstances giving rise to its creation is indefensible.
Consider the implications of the Court’s approach for a case such as Webb’s Fabulous Pharmacies, Inc. v. Beckwith, (1980), which involved a Florida statute that allowed the clerk of a court, in his discretion, to invest interpleader funds deposited with that court in interest-bearing certificates, the interest earned to be deemed “ ‘income of the office of the clerk of the circuit court. “’ The appellant in Webb’s had tendered nearly $2,000,000 to a state court after filing an interpleader action, and we held that the state court’s retention of the more than $100,000 in interest generated by those funds was an uncompensated taking of private property.
But what would have been just compensation for the taking in Webb’s under today’s analysis? It would consist not of the amount of interest actually earned by the principal, but rather of the amount that would have been earned had the State not provided for the clerk of court to generate the interest in the first place. That amount would have been zero since, as we noted in Webb’s, Florida law did not require that interest be earned on a registry deposit, Section 28.33’s authorization for the clerk of court to invest the interpleader funds, like the Washington Supreme Court’s IOLTA scheme, was a state-created opportunity to generate interest on monies that would otherwise lie fallow. As the Florida Supreme Court observed, “ interest accrues only because of section 28.33. In this sense the statute takes only what it creates. ”‘
In Webb’s this Court unanimously rejected the contention that a state regulatory scheme’s generation of interest that would otherwise not have come into existence gave license for the State to claim the interest for itself. What can possibly explain the contrary holding today? Surely it cannot be that the Justices look more favorably upon a nationally emulated uncompensated taking of clients’ funds to support (hurrah!) legal services to the indigent than they do upon a more local uncompensated taking of clients’ funds to support nothing more inspiring than the Florida circuit courts. That were surely an unprincipled distinction. But the real, principled basis for the distinction remains to be disclosed. And until it is disclosed, today’s endorsement of the proposition that there is no taking when “ the State giveth, and the State taketh away, ”‘ has potentially far-reaching consequences. May the government now seize welfare benefits, without paying compensation, on the ground that there was no “ net loss, ”‘
What is more, the Court’s reasoning calls into question our holding in Phillips that interest generated on IOLTA accounts is the “ private property ”‘ of the owners of the principal. An ownership interest encumbered by the right of the government to seize monies for itself or transfer them to the nonprofit organization of its choice is not compatible with any notion of “ private property. ”‘ True, the Fifth Amendment allows the government to appropriate private property without compensation if the market value of the property is zero (and if it is taken for a “ public use”). But the Court does not defend the State’s action on the ground that the money taken is worthless, but instead on the ground that the interest would not have been created but for IOLTA’s mandatory pooling arrangements. The Court thereby embraces precisely the line of argument we rejected in Phillips: that the interest earned on client funds in IOLTA accounts could not be deemed “ private property ”‘ of the clients because those funds “ cannot reasonably be expected to generate interest income on their own. ”‘
Dissent Part II B
The Court’s rival theory for explaining why just compensation is zero fares no better. Contrary to its aforementioned description of petitioners’ “ net loss ”‘ as the amount their funds would have earned in non-IOLTA accounts, the Court declares that just compensation is “ the net value of the interest that was actually earned by petitioners, ”‘ net value consisting of the value of the funds, less “ transaction and administrative costs and bank fees ”‘ that would be expended in extracting the funds from the IOLTA accounts, . To support this concept of “ net value, ”‘ the Court cites nothing but the cases discussed earlier in its opinion, which establish that just compensation consists of the value the owner has lost rather than the value the government has gained. In this case, however, there is no difference between the two. Petitioners have lost the interest that Phillips says rightfully belongs to them–which is precisely what the government has gained. The Court’s apparent fear that following the Constitution in this case will provide petitioners a “ windfall ”‘ in the amount of transaction costs saved is based on the unfounded assumption that the State must return the interest directly to petitioners. The State could satisfy its obligation to pay just compensation by simply returning petitioners’ money to the IOLTA account from which it was seized, leaving others to incur the accounting costs in the event petitioners seek to extract their interest from the account.
In any event, our cases that have distinguished the “ property owner’s loss ”‘ from the “ government’s gain ”‘ say nothing whatever about reducing this value to some “ net ”‘ amount. Remarkably, the Court does not cite the recent case of ours that specifically addresses this issue, and that does so in the very context of an IOLTA-type scheme. Phillips flatly rejected the notion that just compensation may be reduced by transaction costs the former owner would have sustained in retaining his property. And if the Federal Government seizes someone’s paycheck, it may not deduct from its obligation to pay just compensation the amount that state and local governments would have taxed, on the ground that it need only compensate the “ net loss, ”‘ to the former owner. That is why we have repeatedly held that just compensation is the “ market value ”‘ of the confiscated property, rather than the “ net loss ”‘ to the owner. “ Market value ”‘ is not reduced by what the owner would have lost in taxes or other exactions. “ ‘Just compensation’ means the full monetary equivalent of the property taken. ”‘
But the irrationality of this aspect of the Court’s opinion does not end with its blatant contradiction of a precedent (Phillips) promulgated by a Court consisting of the same Justices who sit today. Even if “ net value ”‘ (rather than “ market value”) were the appropriate measure of just compensation, the Court has no basis whatsoever for pronouncing the “ net value ”‘ of petitioners’ interest to be zero. While the Court is correct that under the State’s IOLTA rules, petitioners’ funds could not have earned net interest in separate, non-IOLTA accounts, that has no bearing on the transaction costs that petitioners would sustain in removing their earned interest from the IOLTA accounts. The Court today arbitrarily forecloses clients from recovering the “ net interest ”‘ to which (even under the Court’s definition of just compensation) they are entitled. What is more, there is no reason to believe that petitioners themselves do not fall within the class of clients whose funds, though unable to earn interest in non-IOLTA accounts, nevertheless generate “ net interest ”‘ in IOLTA accounts. That is why the Ninth Circuit dissenters (who shared the Court’s second theory of just compensation but not the first) voted to remand to the District Court for a factual determination of what the “ net value ”‘ of petitioners’ interest actually is.
To confuse confusion yet again, the Court justifies its decision not to remand by simply falling back upon the different theory of just compensation espoused by the Ninth Circuit majority–namely, that just compensation will always be zero because the funds would not have earned interest for the clients in a non-IOLTA savings account. That does not conform, of course, with the Court’s previously announced standard for just compensation: “ the net value of the interest that was actually earned by petitioners. ”‘ Assessing the “ net value ”‘ of interest “ actually earned ”‘ requires a factual determination of the costs petitioners would incur if they sought to keep the IOLTA-generated interest for themselves. By refusing to undertake this inquiry, the Court reveals that its contention that the value of interest “ actually earned ”‘ is the measure of just compensation is a façade. The Court’s affirmance of the decision below can only rest on the reasoning adopted by the Ninth Circuit majority (notwithstanding its rejection in Phillips): that property created by virtue of a state regulatory program may be taken without compensation.
Perhaps we are witnessing today the emergence of a whole new concept in Compensation Clause jurisprudence: the Robin Hood Taking, in which the government’s extraction of wealth from those who own it is so cleverly achieved, and the object of the government’s larcenous beneficence is so highly favored by the courts (taking from the rich to give to indigent defendants) that the normal rules of the Constitution protecting private property are suspended. One must hope that that is the case. For to extend to the entire run of Compensation Clause cases the rationale supporting today’s judgment–what the government hath given, the government may freely take away–would be disastrous.
The Court’s judgment that petitioners are not entitled to the market value of their confiscated property has no basis in law. I respectfully dissent.
Justice Kennedy, dissenting.
The principal dissenting opinion, authored by Justice Scalia, sets forth a precise, complete, and convincing case for rejecting the holding and analysis of the Court. I join the dissent in full.
It does seem appropriate to add this further observation. By mandating that the interest from these accounts serve causes the justices of the Washington Supreme Court prefer, the State not only takes property in violation of the Fifth and Fourteenth Amendments to the Constitution of the United States but also grants to itself a monopoly which might then be used for the forced support of certain viewpoints. Had the State, with the help of Congress, not acted in violation of its constitutional responsibilities by taking for itself property which all concede to be that of the client, the free market might have created various and diverse funds for pooling small interest amounts. These funds would have allowed the true owners of the property the option to express views and policies of their own choosing. Instead, as these programs stand today, the true owner cannot even opt out of the State’s monopoly.
The First Amendment consequences of the State’s action have not been addressed in this case, but the potential for a serious violation is there. Today’s holding, then, is doubly unfortunate. One constitutional violation (the taking of property) likely will lead to another (compelled speech). These matters may have to come before the Court in due course.