Phillips v. Washington Legal Foundation

524 U.S. 156 (1998)

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Nature of the Case

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Facts

Attorneys are frequently required to hold client funds for various lengths of time. Before 1980, an attorney generally held such funds in non-interest bearing, federally insured checking accounts in which all client trust funds of an individual attorney were pooled. These accounts provided administrative convenience and ready access to funds. They were non-interest bearing because federal law prohibited federally insured banks and savings and loans from paying interest on checking accounts. In 1980, Congress authorized the creation of Negotiable Order of Withdrawal (NOW) accounts, which for the first time permitted federally insured banks to pay interest on demand deposits. Texas moved quickly to take advantage of these interest-bearing checking accounts. Its Supreme Court issued an order, now codified as Article XI of the State Bar Rules, providing that an attorney who receives client funds that are 'nominal in amount or are reasonably anticipated to be held for a short period of time' must place such funds in a separate, interest-bearing NOW account (an IOLTA account). Interest earned by the funds deposited in an IOLTA account was to be paid to the Texas Equal Access to Justice Foundation (TEAJA), a nonprofit corporation established by the Supreme Court of Texas. Respondents are the Washington Legal Foundation (WLF), Michael Mazzone, and William Summers. WLF is a public interest law and policy center with members in the State of Texas who are opposed to the Texas IOLTA program. Mazzone is an attorney admitted to practice in Texas who maintains an IOLTA account into which he regularly deposits client funds. Summers is a Texas citizen and businessman whose work requires him to make regular use of the services of an attorney. In January 1994, Summers learned that a retainer he had deposited with his attorney was being held in an IOLTA account. In February 1994, respondents filed this suit against petitioners alleging that the Texas IOLTA program violated their rights under the Fifth Amendment by taking their property without just compensation. The District Court granted summary judgment to petitioners, reasoning that respondents had no property interest in the interest proceeds generated by the funds held in IOLTA accounts. The Court of Appeals for the Fifth Circuit reversed, concluding that 'any interest that accrues belongs to the owner of the principal.'