PAUL SCHNEIDER, et al., Plaintiffs, v. CALIFORNIA DEPARTMENT OF CORRECTIONS, et al., Defendants.



No. C 96-1739 SI



UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA



91 F. Supp. 2d 1316; 2000 U.S. Dist. LEXIS 4199



March 21, 2000, Decided

March 22, 2000, Filed, Entered in Civil Docket







SUBSEQUENT HISTORY: Vacated by, Remanded by Schneider v. Cal. Dep't of Corr., 2003 U.S. App. LEXIS 19937 (9th Cir. Cal., Sept. 29, 2003)



PRIOR HISTORY: Schneider v. California Dep't of Corrections, 151 F.3d 1194, 1998 U.S. App. LEXIS 17712 (9th Cir. Cal., 1998)



DISPOSITION: [**1] Defendant's motion for summary judgment GRANTED and plaintiffs' motion for preliminary injunction DENIED.









COUNSEL: For PAUL JOHN SCHNEIDER, TODD LEWIS ASHKER, BRIAN DEVLIN HEALY, STEVE OLIVARES, DWAYNE MCELWEE, EARL B. WILSON, RICARDO LEYVA, ANTHONY LEE LIKAI, DANIEL DEMARCO, THOMAS CHARLES KLEVE, MICHAEL RAY HANLINE, KATHERINE CALDWELL, THERESA FREDERICKS, RICK TERFLINGER, DAVID SHORE, Plaintiffs: Herman A.D. Franck, V, Franck & Associates, Stephen T. Gargaro, Stephen T. Gargaro Law Offices, San Francisco, CA.


For DAVID SHORE, Plaintiff: Dan M. Himmelheber, San Mateo, CA.


For CALIFORNIA DEPARTMENT OF CORRECTIONS, JAMES GOMEZ, C. A. TERHUNE, defendants: Allen R. Crown, CA State Attorney General's Office, Sacramento, CA.


For CALIFORNIA DEPARTMENT OF CORRECTIONS, JAMES GOMEZ, defendants: Peter J. Siggins, Deputy Attorney Gen., Bruce M. Slavin, Deputy Attorney Gen., Morris Lenk, CA State Attorney General's Office, San Francisco, CA.


For CALIFORNIA DEPARTMENT OF CORRECTIONS, JAMES GOMEZ, C. A. TERHUNE, defendants: Bill Lockyer, CA Attorney General, CA State Attorney General's Office, San Francisco, CA.



JUDGES: SUSAN ILLSTON, United States District Judge.



OPINIONBY: SUSAN ILLSTON



OPINION: [**2]

[*1318] ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND DENYING PLAINTIFFS' MOTION FOR PRELIMINARY INJUNCTION

On February 11, 2000, the Court heard argument on a motion for summary judgment by defendant C. A. Terhune, Director of the California Department of Corrections ("CDC") and a motion for preliminary injunction by plaintiffs. Having carefully considered the arguments of counsel and the papers submitted, the Court GRANTS defendant's motion for summary judgment and DENIES plaintiffs' motion for preliminary injunction.

BACKGROUND


1. Procedural History

Plaintiffs are fifteen current and former California inmates who have brought a § 1983 action against defendants California Department of Corrections ("CDC"), James Gomez, former Director of the CDC, and C.A. Terhune, current Director of the CDC. Plaintiffs allege that defendants committed an unconstitutional taking and violated prisoners' equal protection rights by failing to pay interest on funds deposited by prisoners in Inmate Trust Accounts ("ITAs").

On March 24, 1997, this Court held that plaintiffs did not possess a property interest in the interest income earned on money placed in ITAs and dismissed [**3] plaintiffs' complaint without leave to amend. See Schneider v. California Dept. of Corrections, 957 F. Supp. 1145, 1149 (N.D. Cal. 1997). After this Court denied reconsideration of its ruling, plaintiffs appealed. On August 4, 1998, the Court of Appeals for the Ninth Circuit reversed and remanded, holding that plaintiffs possessed a constitutionally cognizable property right in the interest earned on funds deposited into the ITAs. Because such a property right triggered Fifth Amendment takings scrutiny, the Court ordered further discovery and proceedings regarding accrual of actual or constructive interest on ITA funds. See Schneider v. California Dept. of Corrections, 151 F.3d 1194, 1201 (9th Cir. 1998).

On May 14, 1999, plaintiffs filed an amended complaint, alleging § 1983 damages resulting from defendants' alleged unconstitutional taking and violation of plaintiffs' equal protection rights. Plaintiffs also requested injunctive relief. On August 20, 1999, this Court dismissed defendants CDC and James Gomez from this action. See Schneider v. California Dept. of Corrections, No. 96-1739 SI (N.D. Cal. Aug. 20, 1999) (Order Granting Motion to [**4] Dismiss). Now before the Court is defendant Terhune's motion for summary judgment, and plaintiffs' motion for preliminary injunction.


2. Factual History

Plaintiffs are current and former state inmates of Pelican Bay State Prison, California Correctional Institution, and the Central California Women's Facility. The inmates allege that defendant Terhune has violated the Fifth Amendment Takings Clause and the Fourteenth Amendment Equal Protection Clause by failing to pay [*1319] constructive interest on funds deposited by prisoners into ITAs, but offering interest to state parolees. See Compl. PP 30-31, 39-41.

For security reasons, state prisoners are not permitted to possess money while in prison. See 15 C.C.R. § 3006(b); Flores Decl. P 3. Should prisoners wish to have access to funds while incarcerated, n1 inmates can choose to place their money in either an ITA, which does not earn interest to the prisoner, or in a Passbook Savings Account, which does earn interest. n2 See Flores Decl. P 6; Response to Plffs' Second Set of Interrogatories, No. 1. Only those funds placed in an ITA are available to inmates for use in the prison Canteen n3 to purchase items such as soap [**5] and toothpaste. See Flores Decl. P 6. The CDC does not charge the prisoners a fee for maintaining the ITAs. See id. P 2.



n1 Inmates retain the option of placing their funds outside the California Department of Corrections system with family, friends, institutional trustees, etc.

n2 The Passbook Savings Account program was implemented in response to the California Court of Appeal decision in In re Parker, 151 Cal. App. 3d 583, 198 Cal. Rptr. 796 (1984). Because of a growing problem in the trafficking and use of narcotics and other contraband in prison, in 1981 California prison inmates were prohibited by regulation from establishing passbook savings accounts with outside banks, and were restricted to "long term investments" for their funds. The California court found that less restrictive alternatives were available to the prison authorities to afford protection against the narcotics and contraband threat, and this passbook savings program was developed as a result.

n3 The Canteen is the facility at the prison where inmates are able to purchase sundries.


[**6]

The California Penal Code provides that, when specifically authorized on a separate written form by the inmate, the CDC may place ITA funds into an interest-bearing bank account. See Cal. Penal Code § 5008; Declaration of Counsel in Supp. of Mtn. for Prelim. Inj., Exh. E. Prior to October 1998, ITA funds that exceeded the estimated current needs of inmates were deposited into the Inmate Welfare Fund ("IWF"), a fund which is used to improve prison conditions and provide prisoner programs, such as movies and library materials. See Flores Decl. PP 7, 9. In turn, IWF funds in excess of the estimated needs of the IWF program were deposited into the State Treasury. See Flores Decl. P 7. Any interest earned on these excess IWF funds was returned to the IWF account. See id. n4 However, as of October 1998, excess ITA funds are no longer transferred into the IWF account or the State Treasury. Rather, these funds remain in the individual inmates' non-interest-bearing ITAs.



n4 In the first six months of 1999, excess IWF funds earned interest at a rate of 5.134%.


[**7]

Based upon a survey performed by R. Flores, Chief of the Inmate Welfare Fund and Trust Accounting Section of the CDC, defendant estimates that operating the current non-interest-bearing ITA system costs $ 1,1789,892 per year (or $ 7.84 per prisoner), no part of which is actually charged to the prisoners. See Flores Decl. PP 2, 11. The CDC further estimates that the annual interest earned on ITA funds would total $ 516, 116.28, or $ 3.43 per prisoner. See id. P 12. In order to institute and maintain a system in which ITA funds earn interest and in which that interest is accounted for to each individual inmate, additional staffing, equipment, and office space costs may also be necessary. See id. P 10. As such, interest-bearing ITA accounts would generate substantial, systemic net losses. See id. P 13.

LEGAL STANDARD

A motion for summary judgment may be granted when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c).

A party seeking summary [**8] judgment bears the initial burden of informing the [*1320] court of the basis for its motion and of identifying those portions of the pleadings and discovery responses which demonstrate the absence of a genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). Where the moving party will have the burden of proof on an issue at trial, the movant must affirmatively demonstrate that no reasonable trier of fact could find other than for the moving party. However, on an issue for which the nonmoving party will have the burden of proof at trial, the movant can prevail merely by pointing out that there is an absence of evidence to support the nonmoving party's case. Id. If the moving party meets its initial burden, the nonmoving party must then set forth, by affidavit or as otherwise provided in Rule 56, "specific facts showing that there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986); Fed. R. Civ. P. 56(e).

In judging evidence at the summary judgment stage, the Court does not make credibility determinations or weigh [**9] conflicting evidence and draws all inferences in the light most favorable to the nonmoving party. See T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Assn., 809 F.2d 626, 630-31. The evidence presented by the parties must be admissible. Fed. R. Civ. P. 56(e). Hearsay statements found in affidavits are inadmissible. See, e.g., Fong v. American Airlines, Inc., 626 F.2d 759, 762-63 (9th Cir. 1980). Conclusory, speculative testimony in affidavits and moving papers is insufficient to raise genuine issues of fact and defeat summary judgment. See Falls Riverway Realty, Inc. v. Niagara Falls, 754 F.2d 49 (2d Cir. 1985); Thornhill Pub. Co., Inc. v. GTE Corp., 594 F.2d 730, 738 (9th Cir. 1979).

DISCUSSION


1. Fifth Amendment Takings Clause

Defendant asserts that the questions on remand are "whether there has been a 'taking,' whether there has been 'just compensation' and whether, if the interest were paid to the [plaintiffs], there would be any 'net interest.'" Dft's Mtn. for Summ. Judg., at 6. Defendant argues that, though ITA accounts do not currently bear interest, were these funds to be deposited into interest-earning [**10] accounts, the costs of administering those interest-bearing accounts would greatly exceed the amount of interest owed to individual plaintiffs. Therefore, if plaintiffs were to bear the economic consequences of such an interest-bearing system, the system would actually present a detriment, rather than a benefit, to plaintiffs. Furthermore, defendants contend, because plaintiffs have not been and are not now charged for the costs of administering the ITAs, they have received just compensation for any interest income not remitted to them.

Plaintiffs allege that defendant's failure to pay interest on funds deposited by prisoners in an ITA constitutes a taking in violation of the Fifth Amendment. Plaintiffs further counter that, as fiduciary and trustee of the ITA, Terhune has the duty to place the funds into interest bearing accounts. Therefore, these funds should be viewed as earning "constructive interest." See Mtn for Prelim. Inj., at 8. Plaintiffs assert that the "policy . . . of placing inmates' funds into non-interest-bearing accounts" and not remitting, "constructive interest" to plaintiffs is a violation of the Fifth Amendment. Compl. P 19. Plaintiffs also argue that defendant's [**11] contention that the cost of operating such an interest-bearing ITA would exceed the interest owed is speculative, but plaintiffs provide no evidence or analysis that would produce a contrary result. Rather plaintiffs assert that the best evidence that an interest-bearing system would cause plaintiffs a net loss would be to actually operate an interest-bearing ITA system.

The Fifth Amendment provides that "private property [shall not] be taken [*1321] for public use, without just compensation." U.S. Const. amend. V. The Fifth Amendment Takings Clause has been held to apply to the states through the due process clause of the Fourteenth Amendment. See Webb's Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155, 160, 101 S. Ct. 446, 450, 66 L. Ed. 2d 358 (1980). However, "not every destruction or injury to property by governmental action has been held to be a 'taking' in the constitutional sense." Armstrong v. United States, 364 U.S. 40, 48, 4 L. Ed. 2d 1554, 80 S. Ct. 1563 (1960). The Fifth and Fourteenth Amendment property and due process guarantees apply only to situations in which an individual is deprived of property in which there exists a constitutionally [**12] protected property interest. See Board of Regents v. Roth, 408 U.S. 564, 569, 92 S. Ct. 2701, 2705, 33 L. Ed. 2d 548 (1972). It is undisputed that plaintiffs hold such a property interest both in the funds that they deposit into ITAs and in any interest income earned therefrom. See Schneider, 151 F.3d at 1201.

The Supreme Court has "eschewed the development of any set formula for identifying" a Fifth Amendment taking which is not a "per se" taking of property. Connolly v. Pension Benefit Guaranty Corp., 475 U.S. 211, 224, 106 S. Ct. 1018, 89 L. Ed. 2d 166 (1986). Instead, the Court has relied on a case-by-case, factual inquiry. See id. In making this assessment, the Court has identified three factors: (1) the economic impact on the plaintiff; (2) the extent of interference with plaintiff's investment-backed expectations; and (3) the character of the governmental action. See id. at 225, 106 S. Ct. 1018 (citing Penn. Cent. Transp. Co. v. New York City, 438 U.S. 104, 124, 98 S. Ct. 2646, 57 L. Ed. 2d 631 (1978)).

A. Economic Impact on Plaintiffs

Defendant asserts that the ITA system incurs [**13] annual operating expenses of over $ 1 million (or over $ 7.00 per inmate), costs which the CDC does not pass along to the plaintiffs in the form of charges or fees. See Flores Decl. P 3, 11. Defendant further argues that the interest earned on ITA funds would represent a de minimis amount, averaging no more than $ 4.00 per prisoner. Therefore, defendant claims that any withheld interest income, real or constructive, can essentially be characterized as fees "for services rendered" by the CDC. Phillips v Washington Legal Found., 524 U.S. 156, 171, 141 L. Ed. 2d 174, 118 S. Ct. 1925 (1998) (quoting Webb's Fabulous Pharmacies, 449 U.S. at 157, 101 S. Ct. at 448-449). Plaintiffs counter that Washington Legal Foundation, Webb's Fabulous Pharmacies, and Schneider support their proposition that any use by the government of actual or constructively accrued interest constitutes a taking for public use without compensation.

Because interest does not actually accrue on the individual ITAs or on the IWF accounts, there is no "actual interest" used by the CDC. Although both Washington Legal Foundation and Schneider found property rights [**14] in the interest earned on the funds in question, neither Court decided the issue of whether the disputed use of funds constituted a taking in violation of the Fifth Amendment. See Washington Legal Found., 524 U.S. at 172 (holding that the owner of the principal retained a property right in the interest earned from funds held in "IOLTA" accounts); see also Schneider, 151 F.3d at 1201 (holding that inmates maintain a property interest in any income earned on ITAs). Rather, the resolution of that issue was remanded to the district court.

Indeed, after a trial on the merits of the Washington legal Found. IOLTA case, the district court addressed the takings issue and held that plaintiffs' Fifth Amendment claim failed. See Washington Legal Found. v. Texas Equal Access to Justice Found., 86 F. Supp. 2d 624, 2000 U.S. Dist. LEXIS 2284, 2000 WL 257372 at *22 (W.D. Tex. (2000)). Specifically, the Court found that the Interest on Lawyers' Trust Account ("IOLTA") program had no [*1322] economic impact on plaintiffs, because the type of funds which generated interest while in IOLTA accounts would be incapable of generating interest absent IOLTA. See id. [**15] at *21.

Theoretically, the funds at issue in this case differ from those at issue in Texas Equal Access. However, in practice, there is great similarity. Just as the cost of placing money in a non-IOLTA account "would subsume the interest earned," id., the uncontradicted evidence in this case shows that the expense of administering an interest-bearing ITA system would dwarf the small quantity of interest generated, leaving nothing for distribution to individual prisoners. See Flores Decl. P 11-13; see also Texas Equal Access, 2000 WL 257372 at *15 (explaining that, though the cost of "operating an IOLTA account is zero," "in-firm pooling" produced $ 10 interest and generated $ 12 in fees). Moreover, here plaintiffs have the option of placing any money on which they wish to gain interest in a separate savings account. Therefore, Phillips and its related authorities do nothing to strengthen plaintiffs' argument.

The Webb's Fabulous Pharmacies case, cited by the Supreme Court in Washington Legal Found., did rule on the constitutionality of the issue before it, but the facts of that case are not particularly relevant to the claims here. In [**16] Webb's, nearly $ 2 million in interpled funds was remitted to the county clerk. See Webb's Fabulous Pharmacies, 449 U.S. at 166, 101 S. Ct. 446. After deducting $ 9,228.74 in fees, the clerk deposited the remaining funds into an interest-bearing account. See id. Upon resolution of the dispute, the clerk retained the more than $ 100,000 in interest earned on the deposited funds. See id. The Court held that, because "interest . . . follows the principal" and because a service fee of $ 9,228.74 had already been deducted by the clerk, withholding the interest earned on the interpleader funds amounted to a taking in violation of the Fifth and Fourteenth Amendments. Id. at 162, 164. However, the Court took no position "as to the constitutionality of a statute that prescribes . . . retention of interest earned, where the interest would be the only return . . . for services . . . rendered." Id. at 164; see also Washington Legal Found., 524 U.S. at 169 (stating that the Court's "holding does not prohibit a State from imposing reasonable fees" on costs it "incurs in generating and allocating interest income"). Accordingly, [**17] Webb's appears to offer more aid to the defendant's argument than to plaintiffs.

Finally, Washlefske v. Winston, 60 F. Supp. 2d 534 (E.D. Va. 1999), the case most similar to the present circumstances, weighs against plaintiffs' argument. In Washlefske, plaintiffs argued that the Virginia Department of Corrections' ("VDOC") failure to pay to inmates interest earned on their individual interest-bearing checking accounts constituted a taking for public use without just compensation. The VDOC placed the interest earned on the inmates' interest-bearing checking accounts and on the excess inmate funds into the "local Commissary Account," which provides programs similar to California's Inmate Welfare Fund. The court found that, because (1) the local Commissary Account funds were used for the benefit of inmates, rather than for third-parties, (2) plaintiffs had other options for investing their funds but chose to use the inmate trust fund accounts, (3) the VDOC administered the accounts without charge to the inmates, and (4) plaintiffs receive a greater benefit from the pooling of the Commissary Account funds than they would from individual interest payments, the VDOC's [**18] failure to remit interest to the plaintiffs did not constitute a taking in violation of the Fifth Amendment. Washlefske, 60 F. Supp. 2d at 541-43.

Defendant asserts that, because security concerns prohibit the use of cash within the prison, the CDC's ITA accounting [*1323] system provides plaintiffs with a valuable service at no charge to them. Plaintiffs have not presented evidence countering or challenging defendant's cost estimates or showing that the cost to defendants in accounting for the funds in each inmates' ITA is not substantial, or that the offering of this service is not useful and valuable to plaintiffs. Plaintiffs have further not offered evidence that plaintiffs' present inability to earn interest on ITAs is not justly compensated by plaintiffs' access to the ITA accounting system.

Moreover, it appears that the economic impact of depositing funds into ITAs is small. The evidence shows that many prisoners would receive a minuscule amount of income from an interest-bearing account. n5 Should the state organize a system in which ITAs earn interest, the defendant's declaration provides estimates suggesting that the systemic costs would substantially exceed the [**19] total interest generated. See Flores Decl. P 11-13. If the prisoners were to bear the cost of the operation of an interest-bearing accounting system, defendant's declaration suggest that their economic interests would be harmed rather than improved. n6 See Texas Equal Access, 2000 WL 257372 at *21 (finding that the costs of administering money placed in interest-bearing non-IOLTA accounts "would subsume the interest earned").



n5 In fact, many inmates do not open ITAs and other ITAs regularly carry a zero balance. See Flores Decl. P 2.

n6 Declarant Flores acknowledges that the "estimates are very rough and would need to be refined in order to be actually used." Flores Decl. P 13. However, Flores declared that he could "make the following generalizations: (1) the costs of operating the ITA system clearly exceed the amount of interest which individual prisoners would receive if interest were paid to the individual prisoners; (2) the costs of operating the ITA system clearly exceed the amount of interest which is earned on the ITA funds; (3) if individual prisoners were charged the 'average' costs of operating the ITA system, prisoners who received the 'average' amount of interest earned on ITA accounts would be worse off than under the current system; (4) any prisoner who wishes to earn interest on his or her funds which are not in an ITA may do so." Flores Decl. P 13


[**20]

Plaintiffs argue that defendant's calculations are speculative and unreliable, but plaintiffs provide no analysis or estimate of their own. Plaintiffs complain that in April 1999, defendant stated that some of the information now set forth in defendant's supporting declaration was not available. n7 However, in the over three months which elapsed between the filing of the Flores declaration and the hearing on the summary judgment motion, plaintiffs made no attempt to depose Mr. Flores or to obtain or examine any new information which may have been used in forming the his estimate of operating costs and potential interest accruals. n8



n7 Plaintiff attaches interrogatories and document request in which defendant responds to questions concerning the "total operating cost of the ITA deposit system" by stating that defendant "does not have documents which show the 'total operational costs of administering the ITA deposit system." Response to Plff's Second Set of Interrogatories, at 3-4, attached as Exh. B to Declaration of Counsel in Supp. of Mtn. For Prelim. Inj. Plaintiffs apparently never pursued the inquiry further (i.e, with more specific interrogatories or a motion to compel further information about deposits). [**21]




n8 At oral argument, plaintiffs' counsel indicated that he had no plans to request further depositions.


Finally, on February 14, 2000, the week after oral argument, plaintiffs' moved this Court for a 60-day extension of time to allow plaintiffs to submit documentation regarding the Oregon State Department of Corrections, which "pays inmates interest on inmate trust accounts." Plffs' Ex Parte Application, at 2. n9 Thereafter, on February 22, 2000, plaintiffs submitted a request for judicial notice of Oregon Administrative Regulations, OAR § § 291-158 through [*1324] 291-158-075. Section 291-158-0035 states that "interest on all inmate accounts which accrues from investments made by the State Treasurer will be credited monthly to each inmate's trust account." Request for Judicial Notice, at 2 Monthly trust statements are provided to each inmate, and additional copies are available for $ 1 per statement. OAR 291-158-0015(3), attached to Request for Judicial Notice.



n9 Plaintiffs' Ex Parte Application for Extension of Time to Permit Submission of Further Evidence is hereby GRANTED.


[**22]

Plaintiffs, however, have not submitted evidence regarding the cost incurred by the Oregon State Department of Corrections in administering its system. Plaintiffs state that they have learned from Ms. Jay Sebastian, Fiscal Services Manager and Manager of the Oregon Inmate Trust Account Program, that the Oregon Department of Corrections does not have a record of the administrative expenses incurred in operating its ITA program. See Request for Judicial Notice, at 2. Moreover, plaintiffs apparently have no intention of either deposing Ms. Sebastian or conducting further investigations regarding the cost of Oregon's program. See id. However, absent some estimate of the costs and benefits of the Oregon system, the bare fact that Oregon administers such a program is inadequate to counter or disprove defendant's estimates regarding the costs specific to California's ITA system.

Defendant has set forth "rough" estimated costs and benefits analysis of an interest-bearing system. Plaintiffs have not responded with evidence which would show that these estimates are false, or that the lack of interest income operates to prisoners' overall economic detriment. Therefore, plaintiffs have [**23] failed to raise a genuine issue of material fact sufficient to survive summary judgment.

B. Plaintiffs' Investment-Backed Expectations

This factor in the takings analysis is most commonly used in disputes regarding real property. See Penn. Cent. Transp. Co. v. New York City, 438 U.S. at 107, 98 S. Ct. at 2650 (deciding whether the application of municipal zoning ordinances to individual buildings for the purpose of preserving historic landmarks could effect "taking" which would require the payment of "just compensation). Therefore, this factor is not as readily applicable to an analysis of purely monetary interests. However, the Supreme Court has reviewed investment-backed expectations in the context of monetary interests. See Connolly, 475 U.S. at 227, 106 S. Ct. at 1027 (finding that the retroactive application of withdrawal liability provisions to operating pension plans did not upset the investment-backed interests of employers who voluntarily participated in ERISA-regulated plans); see also Texas Equal Access, 2000 WL 257372 at *19.

The defendant argues that, because interest-earning Passbook Savings Accounts are available [**24] to plaintiffs, no "taking" of interest has occurred. Plaintiffs counter that inmates are unconstitutionally forced to choose between earning interest via the Passbook Savings Account, which funds may not be used at the Canteen, and having access to the Canteen via their ITAs, which do not earn interest. They assert that access to the Canteen is a necessity of prison life.

Should plaintiffs wish to earn interest on their deposits, plaintiffs may invest funds in interest-bearing Passbook Savings Accounts. See Flores Decl. P 4. Moreover, it appears that access to the Canteen is not absolutely necessary, because, in fact, some inmates choose not to utilize the ITAs, while others who do open ITAs carry a zero balance. See Flores Decl. P 2. Plaintiffs have failed to submit evidence that they were not allowed access to passbook savings accounts, or that they were not permitted to keep accounts outside the jail with friends or family, or that they were not informed that they could do so. See, e.g., Leyva Decl., attached as Exh. E to Declaration of Counsel in Supp. of Prelim. Inj. (stating that she agreed to set up [*1325] an ITA account because otherwise, she "could not get food items [**25] [from] the prison store"). Plaintiffs also have not stated that they expected to earn interest on the money deposited in their ITAs.

Additionally, as noted above, the uncontradicted evidence shows that plaintiffs would receive very little interest on their ITA deposits and that the costs of administering such a system, if charged back to the inmates, would more than consume the interest earned. Accordingly, any investment expectations plaintiffs may have would not be met by the institution of an interest-bearing ITA system. Therefore, plaintiffs have not proffered evidence sufficient to raise a triable issue of fact which could defeat summary judgment.

C. Character and Benefit of the Governmental Action

Though the plaintiffs do not argue this point, their claim of an unconstitutional taking implies the argument that plaintiffs have been singled out to bear the burden of providing funding for the IWF program. However, in light of the uncontradicted evidence that any interest earned by plaintiffs would be swallowed by fees, the Court finds that plaintiffs "are in fact bearing no burden at all." Texas Equal Access, 2000 WL 257372 at *22 (finding that, because [**26] plaintiffs funds could not generate interest without IOLTA, the "program costs Plaintiffs nothing").

It should be noted that at of October 1998, in apparent response to the takings claims made in this lawsuit, defendant ceased transferring the excess ITA funds in order to generate interest for the IWF program. When that program was in effect, however, the pooling of interest earned in the IWF offered plaintiffs benefits that each individual prisoner's interest -- were it distributed -- would not be able to provide. See Flores Decl. PP 7, 9 (stating the IWF funds are used to improve prison conditions and to provide library and visiting materials). More importantly, IWF offers these benefits to the prisoners themselves rather than transferring the benefits to a population outside of the prison. See Washlefske, 60 F. Supp. 2d at 541-43 (noting that the VDOC-administered accounts provided greater benefit to prisoners than they would receive from their individual interest payments); compare Texas Equal Access, 2000 WL 257372 at *22 (upholding the constitutionality of IOLTA, which transfers a paying client's interest benefit to the Texas Equal Access [**27] to Justice Foundation in order to provide legal services to poor);. Therefore, the Court concludes that application of the interest earned on excess ITA funds to the use of the Inmate Welfare Fund provided plaintiffs with a benefit rather than an unwarranted burden.


2. Qualified Immunity

Terhune argues that he is entitled to qualified immunity from damages because it was unclear whether plaintiffs had a constitutional right to have ITA funds placed in interest bearing accounts. Plaintiffs respond that the Constitution's prohibition against governmental taking without just compensation has been clearly established for centuries, and that, as a trustee, Terhune has a fiduciary duty to assure that funds in his care are invested productively. Therefore, plaintiffs argue, their due process right to trust account interest was well-established at all relevant times.

The defense of qualified immunity protects "government officials . . . from liability for civil damages insofar as their conduct does not violate clearly established statutory or constitutional rights of which a reasonable person would have known." Harlow v. Fitzgerald, 457 U.S. 800, 818, 73 L. Ed. 2d 396, 102 S. Ct. 2727 (1982). [**28] The rule of qualified immunity "'provides ample protection to all but the plainly incompetent or those who knowingly violate the law.'" Burns v. Reed, 500 U.S. 478, 494-95, 114 L. Ed. 2d 547, 111 S. Ct. 1934 (1991) (quoting Malley v. Briggs, 475 U.S. 335, 341, 89 L. Ed. 2d 271, [*1326] 106 S. Ct. 1092 (1986)). "Therefore, regardless of whether the constitutional violation occurred, the [official] should prevail if the right asserted by the plaintiff was not 'clearly established' or the [official] could have reasonably believed that his particular conduct was lawful." Romero v. Kitsap County, 931 F.2d 624, 627 (9th Cir. 1991). The plaintiff bears the burden of proving the existence of a "clearly established" right at the time of the allegedly impermissible conduct. See Maraziti v. First Interstate Bank, 953 F.2d 520, 523 (9th Cir. 1992). If the plaintiff meets this burden, then the defendant bears the burden of establishing that his actions were reasonable, even if he violated the plaintiff's constitutional rights. Doe v. Petaluma City Sch. Dist., 54 F.3d 1447, 1450 (9th Cir. 1995); Neely v. Feinstein, 50 F.3d 1502, 1509 (9th Cir. 1995); [**29] Maraziti, 953 F.2d at 523.

In a similar action, Washlefske v. Winston, 60 F. Supp. 2d 534 (E.D. Virginia 1999), the court was presented with the comparable issue of whether funds from prisoners' individual accounts and funds in excess of the inmates' day-to-day expenses could be pooled and the interest used to acquire items such as prison library materials and exercise equipment. See id. at 534. In that case, pursuant to Phillips, the court found that the plaintiffs did in fact have a property interest in the interest earned on their trust accounts. However, the Washlefske court held that because use of the "minuscule amount of interest earned" coupled with the facts that the Virginia Department of Corrections both did not charge a fee for administering the accounts and used the total interest for the benefit of the inmates as a whole (rather than for the advantage of a "third-party beneficiary"), there was not a taking in violation of the Fifth and Fourteenth Amendments. See 60 F. Supp. 2d at 541-43.

Plaintiffs have not directed the Court's attention to any other cases which hold that it is unconstitutional [**30] for the state department of corrections to withhold de minimis interest accruals in lieu of charging an administrative service fee or to pool minimal interest accruals to provide funds for the collective benefit of inmates. Therefore, the Court concludes that defendant Terhune could have reasonably believed that failure to account for any interest accrued on funds from ITAs did not violate a clearly established constitutional right. Accordingly, the Court finds that defendant is entitled to qualified immunity from damages in the present suit.


3. Equal Protection Violation

Plaintiffs allege that state parolees are offered ITA accounts which earn interest, while inmates are denied interest payments. This difference in treatment between inmates and parolees, plaintiffs assert, constitutes an equal protection violation. Defendant argues that plaintiffs have neither presented evidence that the state maintains ITA for parolees, nor met their burden of showing an equal protection violation.

To establish an equal protection violation, plaintiffs must show that the alleged actions taken by the state (1) had a disparate impact on a suspect class and (2) was motivated by discriminatory [**31] intent. See Washington v. Davis, 426 U.S. 229, 238-239, 48 L. Ed. 2d 597, 96 S. Ct. 2040 (1976).

Plaintiffs' complaint contends that the state "gives parolees interest on any accounts in the Inmate Trust Account, but not to time-serving inmates." Compl. P 40. However, plaintiffs have not proffered evidence to the Court either that parolees are provided with ITAs that earn interest or that ITAs are maintained for parolees at all. Accordingly, the Court concludes that there exists no genuine dispute of material fact and GRANTS summary judgment for the defendant.


4. Preliminary Injunction

The Court has the authority to grant a preliminary injunction in the exercise [*1327] of its equitable powers. See Fed. R. Civ. P. 65. As the Court is acting in equity, the decision to enter a preliminary injunction is largely left to its discretion. See Big Country Foods, Inc. v. Board of Educ. of Anchorage School Dist., 868 F.2d 1085, 1087 (9th Cir. 1989). Traditionally, this rule has been interpreted to require the trial court to consider the likelihood that plaintiff will prevail on the merits and the possible harm to the parties from granting or denying [**32] the injunctive relief. See Arcamuzi v. Continental Air Lines, Inc., 819 F.2d 935, 937 (9th Cir. 1987); Sierra On-Line, Inc. v. Phoenix Software, Inc., 739 F.2d 1415, 1421 (9th Cir. 1984).

At the extremes, the party seeking injunctive relief must show either (1) a combination of probable success on the merits and the possibility of irreparable harm, or (2) that serious questions are raised and the balance of hardships tips sharply in the moving party's favor. See Miss World (UK) Ltd. v. Mrs. America Pageants, Inc., 856 F.2d 1445, 1448 (9th Cir. 1988); Rodeo Collection, + Ltd. v. West Seventh, 812 F.2d 1215, 1217 (9th Cir. 1987). "These are not two distinct tests, but rather the opposite ends of a single 'continuum in which the required showing of harm varies inversely with the required showing of meritoriousness.'" Miss World, 856 F.2d at 1448 (quoting Rodeo Collection, 812 F.2d at 1217). However, in any situation, the Court must find that there is some threat of an immediate irreparable injury, even if that injury is not of great magnitude. Big Country, 868 F.2d at 1088 [**33] (citations omitted); Oakland Tribune, Inc. v. Chronicle Publishing Co., Inc., 762 F.2d 1374, 1376 (9th Cir. 1985) (citations omitted).

In light of the Court's disposition on defendant's motion for summary judgment, the Court concludes that plaintiffs have not met their burden of showing a probability of success on the merits. Nor have plaintiffs presented any evidence of the possibility of irreparable harm or that the balance of hardships tips in plaintiffs favor. Accordingly, plaintiffs' motion for preliminary injunction is DENIED.

CONCLUSION

For the foregoing reasons, the Court GRANTS defendant's motion for summary judgment and DENIES plaintiffs' motion for preliminary injunction.

IT IS SO ORDERED.


Dated: March 21, 2000

SUSAN ILLSTON

United States District Judge

JUDGMENT - Dated: March 22, 2000

In accordance with the Court's Order of March, 22, 2000, judgment is hereby entered.

IT IS SO ADJUDGED.


Dated: March 22, 2000

SUSAN ILLSTON

United States District Judge

95 F.SUPP.2D 536

CARL R. CHALMERS, # 116461, Plaintiff, v. ANDREW J. WINSTON, et al., Defendant

Civil Action No. 98-1714-AM

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA, ALEXANDRIA DIVISION

95 F. Supp. 2d 536; 2000 U.S. Dist.

May 4, 2000, Decided
May 4, 2000, Filing Date


DISPOSITION: [**1] Summary judgment entered for defendants, and plaintiff's claim dismissed.




COUNSEL: FOR PLAINTIFF: Carl R. Chalmers, State Farm, VA.

FOR DEFENDANT: Mark R. Davis, Esquire, Senior Assistant Attorney General, Office of the Attorney General, Richmond, VA.

JUDGES: Honorable T. S. Ellis, III, United States District Judge.

OPINIONBY: T. S. Ellis, III

OPINION:
[*537] MEMORANDUM OPINION
Plaintiff, a prisoner in the custody of the Virginia Department of Corrections ("VDOC"), claims that VDOC's policy of retaining interest generated on the money he and other inmates earn while incarcerated violates the Takings Clause of the United States Constitution. Cross-motions for summary judgment are at bar.
I
Plaintiff Carl R. Chalmers, a VDOC prisoner since February 23, 1979, complains that VDOC unconstitutionally retains interest generated on its prisoners' funds. n1 At all times relevant to this case, plaintiff has been incarcerated in the Powhatan Correctional Center ("PCC"). The first of two named defendants, Andrew J. Winston, is the Chairman of the Board of Corrections ("BOC"), the nine citizen entity that establishes VDOC prison policies, including the policies in issue here regarding prisoner accounts [**2] and the use of interest earned on those accounts. The second defendant, Ronald Angelone, is the Director of VDOC, and as such, administers Virginia's prison system. Plaintiff seeks both monetary and injunctive relief as to each defendant. Accordingly, plaintiff's complaint is construed as brought against defendants in both their official and their individual capacities. n2

n1 Three other prisoners filed similar lawsuits in the Eastern District of Virginia, each of which was resolved in favor of defendants. See Washlefske v. Winston, 60 F. Supp. 2d 534 (E.D. Va. 1999); Gilreath v. Winston, C/A No. 3:98cv757 (E.D. Va. March 16, 2000); Titus v. Winston, C/A No. 2:98cv1428 (E.D. Va. Jan. 6, 2000).
n2 A federal court may not grant monetary relief against a state, even where a plaintiff seeks an injunction for recovery of past-due benefits. See Edelman v. Jordan, 415 U.S. 651, 663, 39 L. Ed. 2d 662, 94 S. Ct. 1347 (1974). The same rule applies whether a suit is brought directly against a state, or against a state official acting in his official capacity. See id. ("[A] suit by private parties seeking to impose a liability which must be paid from public funds in the state treasury is barred by the Eleventh Amendment."). Consequently, plaintiff's request for monetary relief is construed as brought against Winston and Angelone not in their official capacities, but in their individual capacities. And against these monetary claims defendants may assert the defense of qualified immunity. See Anderson v. Creighton, 483 U.S. 635, 638, 97 L. Ed. 2d 523, 107 S. Ct. 3034 (1987). Construing the complaint in this manner avoids the Eleventh Amendment immunity defense raised by defendants.

[**3]
[*538] Prisoners in VDOC custody may earn money while incarcerated, but they may not retain currency. Thus, prisoners must keep their money in an account, either an outside bank account or one of the accounts provided by VDOC. According to policy set by the BOC, each prisoner must maintain at least $ 25.00 in an Inmate Trust Fund Account ("ITFA"), which money is disbursed to the prisoner at the time of his or her release. Toward that end, 10% of a prisoner's prison pay check is automatically placed into a so-called "hold account" within the ITFA until the value of that account reaches $ 25.00. Under the BOC's policy in effect prior to February 28, 1999, a prisoner's earnings over the $ 25.00 retained in the hold account, as well as any funds the prisoner receives from outside sources, were deposited exclusively in a "spend account" within ITFA, and the prisoner was free to use that money to purchase goods from the prison commissary or from approved outside sources. This BOC policy was amended on February 28, 1999. Under the amended policy, prisoners have an additional option; they may deposit funds in excess of the required $ 25.00 for the hold account in an outside bank account, provided [**4] that the outside account is managed by a third party. n3 And, like the former policy, the new policy also permits prisoners to maintain funds in excess of $ 25.00 in the ITFA spend account. Both the pre- and post-February 1999 policies limit prisoner spending to funds held in the ITFA spend account.

n3 Any interest that accrues on a prisoner's outside account accrues to his benefit, and is not at issue here.

The Virginia Code authorizes the Director of VDOC to invest ITFA funds in state and federal bonds, or in federally-insured investments. See Va. Code § 53.1-44. Significantly, the interest or income generated from such investment does not accrue to each individual prisoner's spend or hold accounts. Instead, the statute provides that "any income or increment of increase received from the bonds or investments may be used by the Director for the benefit of the prisoners under his care." Va. Code § 53.1-44 (emphasis added). Pursuant to this statutory authorization, each prison deposits a portion of its [**5] ITFA funds in an interest-bearing checking account ("prison checking account") to provide funds for daily purchases from the prison commissary, and for disbursement of the hold account funds to prisoners being released. The remaining ITFA funds from each prison are pooled with ITFA funds from other VDOC prisons into a Local Government Investment Pool ("LGIP"). The funds in the LGIP are invested in approved bonds or federally-insured debt instruments, and the proceeds of this investment are then distributed to the various prisons in amounts proportional to the amounts the prisons contributed to the LGIP. The interest or income is distributed semiannually, and is currently distributed directly to each prison's commissary account, where the funds are used to purchase goods for the prisoners' benefit, such as magazine subscriptions and exercise equipment.
VDOC does not charge its prisoners a service fee for maintenance of the ITFA hold and spend accounts, and in any event, the costs of managing and maintaining the ITFA accounts at the various prisons exceeds [*539] the interest earned on the pooled ITFA funds in the LGIP and the prison checking accounts. For example, from the record, it appears [**6] that at PCC alone four employees are required to manage prisoner accounting, yet PCC received only $ 5,479.45 in interest income from the LGIP in 1998, and the prison checking account generates an average of $ 59.86 every month. This total interest income falls far short of the full costs incurred at PCC in administering the accounts. Given the administrative costs involved, VDOC does not currently trace the amount of interest generated by the ITFA funds in the LGIP or in the prison checking account that is attributable to each prisoner based on the prisoner's contributions. Indeed, were plaintiff to prevail in this matter, VDOC asserts it would simply refuse to invest ITFA funds to avoid the substantial unreimbursed costs of administering and disbursing the interest earned by the LGIP and prison checking account funds. According to VDOC, it lacks the resources and expertise to determine, in a cost-effective way, the interest to which each prisoner would be entitled.
Nonetheless, plaintiff contends that any interest generated on his money in the ITFA spend and hold accounts should be attributed to him, and that the VDOC's policy of retaining the interest, and spending it for the benefit [**7] of the prison population, violates the so-called Takings Clause of the Fifth Amendment. The parties have filed cross-motions for summary judgment as to the merits of plaintiff's constitutional claim, and defendants also raise the defenses of qualified immunity and Eleventh Amendment immunity from an award of damages. The material facts are essentially undisputed and the matter is ripe for disposition.
II
As to both plaintiff's takings claim and defendants' qualified immunity defense, n4 the threshold question is "whether the plaintiff has alleged a deprivation of a constitutional right at all." County of Sacramento v. Lewis, 523 U.S. 833, 842 n.5, 140 L. Ed. 2d 1043, 118 S. Ct. 1708 (1998); see Suarez Corp. Indus. v. McGraw, 202 F.3d 676, 685 (4th Cir. 2000). And in this case, the question presented is whether defendants' failure to apportion to plaintiff his share of interest and other income generated by the ITFA funds constitutes an unconstitutional taking of private property without just compensation in violation of the Fifth Amendment. n5 The starting point in the analysis of this question is the text of the Fifth Amendment's Taking Clause. [**8] n6 This text makes clear that any takings analysis includes three primary inquiries, namely (i) whether the res claimed to be taken is actually "private property," (ii) whether that property was "taken for public use," and (iii), if so, whether the government provided "just compensation" for the property. See, e.g., Phillips v. Washington Legal Foundation, 524 U.S. 156, 141 L. Ed. 2d 174, 118 S. Ct. 1925 (1998) (noting the three inquiries in a takings analysis, though resolving only the first). In this case, analysis need go no further than the second inquiry, as it is dispositive here.

n4 To overcome an official's defense of qualified immunity, a plaintiff must show that, at the time of the alleged violation, a "reasonable official" would have known that his actions violated the Constitution. See Anderson v. Creighton, 483 U.S. 635, 640, 97 L. Ed. 2d 523, 107 S. Ct. 3034 (1987).
n5 The applicability of the Takings Clause to the states, and hence to VDOC, has been established for more than a century. See Chicago, B. & Q.R. Co. v. Chicago, 166 U.S. 226, 241, 41 L. Ed. 979, 17 S. Ct. 581 (1897).
[**9]


n6 See U.S. Const. amend. V ("Nor shall private property be taken for public use, without just compensation.").

The first inquiry in the context of this case, is whether plaintiff has a property right in the interest earned on the funds in his ITFA spend and hold accounts, which funds are pooled with the funds of [*540] other inmates in the prison checking account and in the LGIP. While the Constitution protects property rights, it does not create them, and the question whether a particular interest represents a property right must therefore be made "by reference 'to existing rules or understandings that stem from an independent source such as state law.'" Phillips, 524 U.S. at 164 (quoting Board of Regents of State Colleges v. Roth, 408 U.S. 564, 577, 33 L. Ed. 2d 548, 92 S. Ct. 2701 (1972)). Certain property rights are created by statute, and the extent of those property rights is determined by reference to the statute creating the right. n7 Other property rights exist independently of any statute, and derive from fundamental principles of a state's property law. [**10] n8 And, although states may regulate property rights, they may not declare, by legislative fiat, that a fundamental principle of property law does not apply in a certain circumstance, without triggering Takings Clause scrutiny. n9 Put another way, "a State, by ipse dixit, may not transform private property into public property without compensation." Webb's Fabulous Pharmacies, Inc., v. Beckwith, 449 U.S. 155, 164, 66 L. Ed. 2d 358, 101 S. Ct. 446 (1980).

n7 See Roth, 408 U.S. at 577-78 (noting that a statute may "create[] and define[]" the contours of certain property rights).
n8 See Phillips, 524 U.S. at 166-67; see also Schneider v. California Dep't of Corrections, 151 F.3d 1194, 1200-01 (9th Cir. 1998) (noting that there is a "core notion" property rights determined by reference to "traditional 'background principles' of property law").
n9 See Phillips, 524 U.S. at 167 ("[A] State may not sidestep the Takings Clause by disavowing traditional property interests long recognized under state law."); Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1029, 120 L. Ed. 2d 798, 112 S. Ct. 2886 (1992) (referring to common law nuisance principles in determining whether a state regulation violated the Takings Clause); Schneider, 151 F.3d at 1200 ("There is . . . a 'core' notion of constitutionally property into which state regulation simply may not intrude without prompting Takings Clause scrutiny.").

[**11]
Thus, the common law principles of Virginia property law, as well as any relevant sections of the Virginia Code, determine whether the interest generated on a prisoner's ITFA accounts is the prisoner's private property. See Phillips, 524 U.S. at 164. In that regard, the Supreme Court in Phillips found that, at common law, any interest generated on a fund was the private property of the owner of that fund. See Phillips, 524 U.S. at 165 (acknowledging the common law principle that "interest shall follow the principal as the shadow the body.") (quoting Beckford v. Tobin, 1 Ves. Sen. 308, 310, 27 Eng. Rep. 1049, 1051 (Ch. 1749)). n10 Similarly, the conclusion that this general rule is a background principle of property law in Virginia finds ample support in the case law n11 and, in any event, is not contested by defendants. In light of this, Phillips compels the conclusion that, just as a lawyer's clients have a property right in interest [*541] generated on IOLTA funds, so, too, do prisoners have a property right in any interest generated by funds contributed to the ITFA. n12 And, significantly, every court to consider this issue since [**12] Phillips has uniformly reached the same conclusion. n13

n10 The Supreme Court found that "this rule has become firmly embedded in the common law of the various States." Phillips, 524 U.S. at 165 & n.5 (citing state law cases for the general proposition).
n11 See 10B Michie's Jurisprudence of Virginia and West Virginia § 3 ("The doctrine of interest is founded on good conscience and correct morals; it is natural justice that one who has the use of another's money should pay interest on it. Interest follows the principal as the shadow the substance.") (footnotes omitted); see also Parsons v. Parsons and Others, 167 Va. 374, 189 S.E. 448, 452 (1937) (noting the general rule "that interest 'is a legal incident of the debt' and follows the principal after maturity as 'the shadow follows the substance.'"); Goins v. Garber, 131 Va. 59, 108 S.E. 868, 871 (1921) (noting the general rule); cf. Washington & O.D. Ry. v. Westinghouse Electric & Mfg. Co., 120 Va. 620, 89 S.E. 131, 134 (1916) ("When the action is founded upon a promise . . . to pay money at a given day, interest on the principal sum from that day is a legal incident of the debt, and the right to it founded on the presumed intention of the parties.").
[**13]


n12 See Phillips, 524 U.S. at 172; see also Webb's Fabulous Pharmacies, 449 U.S. at 162.
n13 At least three other courts in this district, presented with essentially the same facts as those at bar, have determined that Phillips compels the conclusion reached here. See Washlefske v. Winston, 60 F. Supp. 2d 534, 539 (E.D. Va. 1999); Gilreath v. Winston, C/A No. 3:98cv757 (E.D. Va. March 16, 2000); Titus v. Winston, C/A No. 2:98cv1428 (E.D. Va. Jan. 6, 2000). And a panel of the Ninth Circuit recently reached this conclusion with respect to California's penal system, which had implemented a prisoner account policy similar to Virginia's. See Schneider v. California Department of Corrections, 151 F.3d 1194, 1199-1201 (9th Cir. 1998) (holding that a prisoner has a property interest in interest generated on his funds held in a prison account).
In addition, some courts had reached the same or a similar conclusion prior to Phillips. See, e.g., Eubanks v. O.L. McCotter, 802 F.2d 790, 793-94 (5th Cir. 1986) (finding a colorable basis for federal jurisdiction in prisoner's claim that the state had retained interest on an Inmate Trust Fund in violation of the Constitution, though not otherwise considering the merits of the claim). Generally, however, until Phillips, courts had ruled that a prisoner's property right to interest generated on his or her prison accounts existed, if at all, only by virtue of a state statute. See Tellis v. Godinez, 5 F.3d 1314, 1317 (9th Cir. 1992) (finding property right to interest based on state statute); Abdul-Wadood v. Bayh, 85 F.3d 631, 1996 WL 219068, at *2 (7th Cir. Apr. 30, 1996) (unpublished disposition) (finding that prisoner had no property right to interest generated on his prison account, because state law did not create such a right); Fayerweather v. Wainwright, No. TCA 75-3 (N.D. Fla. Aug. 20, 1976), digested in Pov. L. Rep. P 23,325 (CCH 1976) (holding that a prisoner had a statutory and, hence, constitutional right to interest generated on his prison account).

[**14]
Plaintiff's status as a prisoner does not change this conclusion. Although a prisoner loses certain rights by virtue of incarceration, it is settled that a prisoner maintains all constitutional rights "that are not inconsistent with his status as a prisoner or with the legitimate penological objectives of the corrections system." Turner v. Safley, 482 U.S. 78, 95, 96 L. Ed. 2d 64, 107 S. Ct. 2254 (1987) (citation and internal quotation marks omitted). n14 The record does not reflect that a prisoner's property right to interest generated on his funds is inconsistent with either his "status as a prisoner" or with Virginia's penological goals. n15 And, although a state does not have a constitutional obligation to place a prisoner's money in an interest-bearing account, n16 as noted above, the state may not, by legislation, eliminate a prisoner's property right in interest that is actually generated by that money. See, e.g., Webb's Fabulous Pharmacies, 449 U.S. at 164. Thus, while VDOC has "great latitude" in the management of prisoner funds on deposit with the prison, and accordingly [*542] may determine whether those funds will generate interest, "any interest [**15] that does accrue attaches as a property right incident to the ownership of the underlying principal." Phillips, 524 U.S. at 168. Indeed, a person has a property right in interest generated on his funds, even where, as here, the principal generates interest exclusively by virtue of the government's action. See Phillips, 524 U.S. at 171 (rejecting the so-called "government created value argument" that, because a state statute enabled the generation of interest, the interest was not private property). n17 In short, "the State's having mandated the accrual of interest does not mean the State or its designate is entitled to assume ownership of the interest." Webb's Fabulous Pharmacies, 449 U.S. at 162.

n14 Accordingly, defendants' reliance on Ruffin v. Commonwealth, for the proposition that, at common law, prisoners were "slaves of the State" is unwarranted. See Ruffin v. Commonwealth, 62 Va. 790, 796 (1871). It is now established that "[a] prisoner retains all the rights of an ordinary citizen except those expressly, or by necessary implication, taken from him at law." Coffin v. Reichard, 143 F.2d 443, 445 (6th Cir. 1944). In fact, Virginia has long recognized that prisoners do not forfeit "the right . . . to take, hold, and dispose of his property, real and personal." Haynes v. Peterson, 125 Va. 730, 100 S.E. 471, 472-73 (1919). Accordingly, plaintiff has the same property right in interest actually generated on his funds as a free person.
[**16]


n15 But cf. Mitchell v. Kirk, 20 F.3d 936, 938 (8th Cir. 1994) (holding that the state's decision to provide only non-interest bearing accounts to its prisoners was based on a legitimate penological objective, while not reaching the question whether prisoners had a property right in the interest generated).
n16 See, e.g., Foster v. Hughes, 979 F.2d 130, 132-33 (8th Cir.1992) (finding that the state's legitimate penological objectives outweighed any constitutional right a prisoner might otherwise have to place his money in an interest-bearing account); Gray v. Lee, 486 F. Supp. 41, 46 (D. Md. 1980) (finding no constitutional right to earn interest on money received by a person while he is incarcerated).
n17 The facts of Phillips illustrate the extent of this principle. At issue in Phillips was Texas's Interest on Lawyers Trust Account ("IOLTA") program. See 524 U.S. at 160-63. An IOLTA account is simply an interest-bearing checking account into which a lawyer may place a client's money, and which, in Texas, generates interest on behalf of the Texas Equal Access to Justice Foundation ("TEAJA"). See id. at 162-63. Yet, due to a complex web of banking regulations and ethical rules of practice, the only client funds placed into IOLTA accounts are funds that would not otherwise generate interest. See id. at 161-62. Nonetheless, the Supreme Court ruled that any interest generated on IOLTA accounts was the private property of the clients whose money was in those accounts. See id. at 172.

[**17]
Thus, plaintiff has a property right in any interest earned on his contributions to the ITFA, including that portion of interest generated by the LGIP and the prison checking account attributable to his funds. Yet, that does not end the analysis, as the second inquiry under the Takings Clause is whether VDOC's ITFA policies constitute a "taking" of plaintiff's property right to the interest. The question whether a particular governmental action represents the taking of private property, or is instead a valid regulation of private property, involves an "essentially ad hoc, factual inquiry." See Penn Central Transp. Co. v. City of New York, 438 U.S. 104, 124, 98 S. Ct. 2646, 2659, 57 L. Ed. 2d 631 (1978). Courts undertaking this ad hoc, fact-based inquiry n18 typically do so by reference to the so-called Penn Central factors, namely, (i) the nature of the governmental action, (ii) the economic impact of the governmental action on the person, and (iii) the person's "distinct investment-backed expectations" in the allegedly taken property right. See Penn Central, 438 U.S. at 124. n19

n18 In certain cases, this factual inquiry is not necessary, as government action that constitutes a "permanent physical occupation" of private property is a taking per se, notwithstanding whether the person whose property is occupied suffers any economic harm, and the sole question in that event is what compensation is just. See Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 441, 102 S. Ct. 3164, 3179, 73 L. Ed. 2d 868 (1982). And, although on a metaphorical level VDOC has "permanently occupied" the interest earned on prisoner accounts, the Supreme Court has determined that a regulation that deprives a person of money is not a "permanent physical occupation" of that person's property, because, "unlike real or personal property, money is fungible." United States v. Sperry Corp., 493 U.S. 52, 62 n.9, 110 S. Ct. 387, 395 n.9, 107 L. Ed. 2d 290 (1989). It follows that a government regulation that deprives a person of interest generated on that person's principal is not a "permanent physical occupation" of property, but is, rather, "interference [that] arises from some public program adjusting the benefits and burdens of economic life to promote the public good." Penn Central, 438 U.S. at 124, 98 S. Ct. at 2659; see also Washington Legal Foundation v. Texas Equal Access to Justice Foundation, 86 F. Supp. 2d 624, 2000 WL 257372, *20 (W.D. Tex. 2000) (holding that alienation of interest from principal did not involve a per se taking); Washlefske, 60 F. Supp. 2d at 541 (same). Accordingly, the government's action in this case is not a per se taking of plaintiff's property and each of the Penn Central factors must be considered.
[**18]


n19 See Esposito v. South Carolina Coastal Council, 939 F.2d 165, 169-70 (4th Cir. 1991) (applying the three factors); see also Washlefske, 60 F. Supp. 2d at 541-42 (applying factors to deprivation of prisoner's interest); Washington Legal Found. v. Texas Equal Access to Justice Found., 86 F. Supp. 2d 624, 2000 WL 257372 (W.D. Tex. 2000) (applying factors to interest generated on IOLTA accounts).

[*543] In this case, none of the relevant factors suggest that the governmental action in this instance represents the taking of private property. n20 The first factor is whether the nature or character of the governmental action suggests that a taking occurred. See Penn Central, 438 U.S. at 124. Penn Central recognized that a spectrum of governmental activity exists; thus, a governmental action that involves the "physical invasion" of a person's property is more likely to represent the taking of a property right than is a "public program adjusting the benefits and burdens of economic life to promote the common good." See id. Here, [**19] the government's action is more akin to a "public program . . . to promote the common good" than a "physical invasion." n21 Given the relatively small amount of money each prisoner keeps on deposit in the ITFA, VDOC cannot maintain interest-bearing hold and spend accounts in a cost effective way, because the cost of maintaining interest-bearing accounts for each prisoner would be greater than any interest the accounts might generate. n22 Thus, were VDOC required to trace the interest generated on the ITFA to each prisoner, it would simply not invest the funds, as the costs of tracing and distributing the interest to each prisoner would far exceed the interest earned from the investment. Put another way, VDOC achieves necessary economies of scale by avoiding the administrative costs associated with maintenance of individual interest-bearing accounts. Thus, the nature of the governmental action in this case suggests that plaintiff's private property was not subject to an unconstitutional "taking," as the prison system could not economically administer individual, interest-bearing accounts for its prisoners. n23 In short, VDOC's administration [*544] of the hold and spend accounts "adjust[s] [**20] the benefits and burdens of economic life to promote the common good," and creates value where none existed before. See Penn Central, 438 U.S. at 124. n24

n20 In Phillips, the Supreme Court was presented with the limited question whether the interest generated on the IOLTA accounts was the property of the owners of the principal in the accounts. Accordingly, the Supreme Court did not address whether the state's actions constituted a taking of that property without just compensation, and remanded the case for such determination. See Phillips, 524 U.S. at 172. On remand, the district court determined that Texas's IOLTA program did not represent a taking of private property, in part because under 12 U.S.C. § 1832(a) a lawyer may not deposit a client's funds in an interest-bearing checking account that accrues interest for the benefit of the client, the lawyer, or any other individual or entity not exempted by federal law. See Washington Legal Found. v. Texas Equal Access to Justice Found., 86 F. Supp. 2d 624, 646 (W.D. Tex. 2000) ("In the absence of IOLTA, the money would necessarily generate no interest for anyone but the banks.").
[**21]


n21 Defendants suggest that the interest is properly withheld as a "fee for services" to cover the cost of managing the prisoner accounts. See United States v. Sperry, 493 U.S. 52, 63, 107 L. Ed. 2d 290, 110 S. Ct. 387 (1989) ("[A] reasonable user fee is not a taking if it is imposed for the reimbursement of the cost of government services."). Yet, this contention is belied by the record, which indicates that no part of the interest generated by the prisoner accounts is used to pay for the cost of those accounts. Instead, as noted, the interest is transferred to the Commissary Fund.
n22 Plaintiff, for example, had an average monthly balance of $ 222.31 from May 17, 1998 to November 17, 1998. Indeed, the record reflects that the interest generated by the ITFA would not now cover the cost of administering the ITFA, notwithstanding VDOC's current practice of not attributing to each prisoner the interested by that prison.
n23 Cf. Webb's, 449 U.S. at 163-64. In Webb's, the Supreme Court held that a court may not retain interest generated by funds placed in an interpleader account, when the exaction of interest is in addition to the fee charged for maintenance of the account. See id. In that event, the government action represents "a forced contribution to general government revenues" that is "not reasonably related to the costs of using the courts." Webb's Fabulous Pharmacies, 449 U.S. at 163. In this case, the record reflects that the cost of apportioning and distributing ITFA interest to each prisoner would overwhelm the value of any interest generated. Furthermore, unlike the depositor in Webb's, the prisoners are not charged a service fee for the maintenance of their accounts. Consequently, in this case, unlike Webb's, the government policy actually "adjust[s] the benefits and burdens of economic life to promote the common good," and does not represent a "forced contribution to general governmental revenues." See Webb's Fabulous Pharmacies, 449 U.S. at 163; Penn Central, 438 U.S. at 124.
[**22]


n24 This conclusion finds further support in the current policy, as a prisoner may now choose to place his money into an outside, interest-bearing account. Of course, this choice is constrained by the fact that a prisoner must maintain $ 25.00 in the hold account, and also may well wish to maintain a certain amount in the spend account for daily use. Nonetheless, that VDOC offers its prisoners a choice of maintaining outside, interest-bearing accounts suggests that it does not seek to harvest interest which would otherwise accrue to the prisoners' benefit.

The second inquiry, which focuses on the economic impact of the governmental action, also points persuasively to the conclusion that no taking occurred, as plaintiff has suffered no economic harm as a result of VDOC's policy. n25 Under the current ITFA policy, VDOC may invest the ITFA funds and use the proceeds therefrom for the benefit of all prisoners. And, as noted, it is undisputed that it is uneconomical for VDOC to trace the interest generated by ITFA to each individual prisoner. Thus, were VDOC forced, by law, to choose between (i) tracing [**23] and apportioning the ITFA interest attributable to each prisoner individually, and (ii) forgoing the investment of the ITFA funds altogether, VDOC would choose the latter course, as the former would be uneconomical. In that event, plaintiff's principal would generate no interest, while he and his fellow prisoners would lose the benefit of the goods and services purchased for their use with interest generated from the investment of ITFA funds. n26 In light of these considerations, it is plain that the governmental action in this case has had, and will have, no measurable economic impact on plaintiff.

n25 See Penn Central, 438 U.S. at 124.
n26 Although the record makes clear that the interest generated on the LGIP is used to purchase goods and services for the prisoners' benefit, the record does not reflect what use is made of interest generated on the prison checking account. This omission in the record does not affect the analysis, as any use of that interest would have no economic impact on the prisoner. VDOC cannot economically maintain individual interest-bearing accounts, and would place all ITFA funds, including those deposited in the prison checking account, into non-interest-bearing accounts were it required to trace interest attributable to each prisoner.

[**24]
And, for similar reasons, the third Penn Central factor does not operate in plaintiff's favor, as plaintiff does not now have, nor has he ever had, a reasonable, investment backed expectation that his funds in the ITFA hold and spend accounts would generate interest. See Penn Central, 438 U.S. at 124. First, plaintiff lacks a constitutional right to earn interest on money held on his behalf by the prison. n27 Second, VDOC does not have a statutory obligation to place prisoner funds into interest bearing accounts, as Virginia law gives the director of VDOC discretion to invest the funds, but does not require him to do so. n28 Thus, plaintiff cannot claim a reasonable expectation that money deposited into the ITFA will generate interest, as VDOC at any time may simply forgo investing prisoner funds altogether. n29

n27 See, e.g., Foster v. Hughes, 979 F.2d 130, 132-33 (8th Cir.1992); Gray v. Lee, 486 F. Supp. 41, 46 (D. Md. 1980).
n28 See Va. Code § 53.1-44 ("Portions of the funds held by the Director or by any state correctional facility, which belong to prisoners may, in the discretion of the Director, be invested . . . .") (emphasis added).
[**25]


n29 By contrast, a prisoner who takes advantage of the current policy, and places a portion of his money into an outside, interest-bearing account, does have a reasonable expectation that the money in the account will be invested, and that any interest generated on that money will accrue to his benefit. But this expectation derives from the prisoner's contractual relationship with the bank or other institution holding his money on account, a relationship that the prisoner does not have with the prison. Thus, a bank has a contractual obligation to pay interest according to the terms of the account, and to ensure that it can meet those terms, the bank must invest the prisoner's money. A prison, on the other hand, has no obligation to pay interest on money it holds for its prisoners, and hence, the prisoner has no reasonable expectation that the prison will invest his money for his benefit.

[*545] For these reasons, VDOC's ITFA policy does not "take" plaintiff's property, but instead, is a valid regulation for which no compensation is required. Accordingly, summary judgment is appropriate without addressing [**26] the third inquiry in a takings analysis, namely whether VDOC provided "just compensation" for the use of plaintiff's property. n30

n30 Nor is it necessary to address defendants' defense of qualified immunity, as defendants did not violate plaintiffs' constitutional rights. See Suarez Corp. Indus. v. McGraw, 202 F.3d 676, 685 (4th Cir. 2000). In any event, assuming, arguendo, that VDOC's ITFA policies violated the Takings Clause, there is no authority in this or any other circuit that would have made that fact clear to "an objectively reasonable official in the defendants' position." See Porterfield v. Lott, 156 F.3d 563, 567 (4th Cir.1998). Accordingly, in that event, the defense of qualified immunity would bar plaintiffs' request for damages.

Therefore, summary judgment will be entered for defendants, and plaintiff's claim will be dismissed. An appropriate order will enter.
T.S. Ellis, III
United States District Judge

Alexandria, Virginia
May 4, 2000