524 U.S. 156 (1998)
Texas, like 48 other States and the District of Columbia, has adopted an Interest on Lawyers Trust Account program.1 Under these programs, client funds held by an attorney in connection with his practice of law are deposited in bank accounts.2 The interest income generated by the funds is paid to foundations that finance legal services for low-income individuals.3
In 1984, the Supreme Court of Texas issued an order 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.4 Interest earned by the funds deposited in an IOLTA account is to be paid to the Texas Equal Access to Justice Foundation, a nonprofit corporation established by the Supreme Court of Texas.5 The Internal Revenue Service does not attribute the interest generated by an IOLTA account to the individual clients for federal income tax purposes.6 This is so long as the client has no control over the decision whether to place the funds in the IOLTA account and does not designate who will receive the interest generated by the account.7
Respondents are the Washington Legal Foundation, Michael Mazzone, and William Summers.8 Mazzone is an attorney admitted to practice in Texas who maintains an IOLTA account into which he regularly deposits client funds.9 Summers is a Texas citizen and businessman whose work requires him to make regular use of the services of an attorney.10 In January 1994, Summers learned that a retainer he had deposited with his attorney was being held in an IOLTA account.11
In February 1994, respondents filed this suit against petitioners—TEAJF, W. Frank Newton, in his official capacity as chairman of TEAJF, and the nine Justices of the Supreme Court of Texas.12 The District Court granted summary judgment to petitioners.13 The Court of Appeals for the Fifth Circuit reversed.14 The Supreme Court granted certiorari in 1997.15
Whether interest earned on client funds held in IOLTA accounts is the private property of the client or the attorney for purposes of the Takings Clause of the Fifth Amendment?16
The Fifth Amendment, made applicable to the States through the Fourteenth Amendment, provides that private property shall not be taken for public use without just compensation.17 Because the Constitution protects rather than creates property interests, the existence of a property interest is determined by reference to existing rules or understandings that stem from an independent source such as state law.18 The rule that interest follows principal has been established under English common law since at least the mid-1700's and has become firmly embedded in the common law of the States, including Texas.19
Yes. All agree that under Texas law the principal held in IOLTA trust accounts is the private property of the client.20 When deposited in an IOLTA account, these funds remain in the control of a private attorney and are freely available to the client upon demand.21 The interest earned by the funds deposited in an IOLTA account attaches as a property right incident to the ownership of the underlying principal.22
Texas follows the rule that interest follows principal.23 Petitioners point to no background principles of property law that would lead to a different conclusion for funds temporarily deposited in an attorney trust account.24
The interest income generated by funds held in IOLTA accounts is the private property of the owner of the principal for purposes of the Takings Clause of the Fifth Amendment.25
Related opinions on this issue
Joined by Stevens, Ginsburg, And Breyer, Jj.
Justice Souter dissented because the property interest question should not be resolved in isolation from the taking and compensation questions.26 The regulatory framework might bar any net interest to the client.27 Recognition of the property right would be an inconsequential abstraction if no taking or compensation were ultimately found.28
He would vacate the Fifth Circuit judgment and remand for plenary consideration of whether a taking occurred and whether just compensation is due under the Fifth Amendment.29
Joined by Stevens, Souter, And Ginsburg, Jj.
Justice Breyer dissented on the ground that the interest is not the client's private property under the assumptions of the question presented.30 The principle that interest follows principal does not apply because federal regulations ensure the principal could not generate interest without the IOLTA program.31 The client could not have had an expectation of receiving interest without that intervention.32
Analogies from land valuation cases show that no one would say that such electricity was, for Takings Clause purposes, the owner's private property, where, as here, in the absence of the lawful government taking, there would have been no such property.33