Phillips v. Washington Legal Found.

Supreme Court of the United States · 1998 · Property

524 U.S. 156 (1998)

Updated July 23, 2026

PropertyTakings ClauseIOLTA accountsInterest follows principalprivate propertyIOLTAclient trust fundsTexas law

Facts

Texas requires attorneys to place certain client funds that are nominal in amount or expected to be held for a short time into interest-bearing IOLTA accounts. The interest generated by those accounts is paid to the Texas Equal Access to Justice Foundation, which distributes the money to organizations providing legal services to low-income persons. Under Texas law, the principal in those trust accounts remains the client's property and remains available to the client on demand. Respondents challenged the program, arguing that diverting the interest violated the Fifth Amendment.

Issue

Whether interest earned on client funds held in Texas IOLTA accounts is "private property" of the client or attorney for purposes of the Takings Clause of the Fifth Amendment. More specifically, the question was whether the interest generated on client principal deposited in IOLTA accounts belongs to the client whose funds produced it.

Rule

Property interests protected by the Takings Clause are defined by existing rules or understandings stemming from independent sources such as state law. Under the traditional and generally applicable rule that interest follows principal, any interest that actually accrues on a fund attaches as a property right incident to ownership of the underlying principal, and a State may not avoid the Takings Clause by declaring otherwise.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Ohio, attorney Priya Desai receives $4,000 from her client, Leo Martin, to hold for two weeks while a zoning matter closes. Under state rules, Priya must place short-term client funds in a pooled, interest-bearing trust account, and any interest actually generated is sent to a nonprofit civil-services fund. Leo remains entitled to the full principal on demand.

For Fifth Amendment purposes, who owns the accrued interest generated by Leo's funds?

Explanation. The majority held that when the client owns the principal, any interest that actually accrues attaches as a property right incident to that principal. A State cannot avoid that rule simply by directing the interest to a third party. The issue is ownership of the property interest, not yet whether there has been a taking or what compensation is due.