Appeal from the United States District Courtfor the Northern District of CaliforniaSusan Illston, District Judge, PresidingArgued and SubmittedMarch 12, 1998--San Francisco, CaliforniaSubmission Deferred March 23, 1998Resubmitted July 1, 1998Filed August 4, 1998Before: Joseph T. Sneed, Harlington Wood, Jr.,** andDiarmuid F. O'Scannlain, Circuit Judges.Opinion by Judge O'Scannlain
_____________________________COUNSEL Herman A.D. Franck V, Franck & Associates, San Francisco,California, for the plaintiffs-appellants.Allen R. Crown, Deputy Attorney General, San Francisco,California, for the defendants-appellees.
_____________________________OPINION O'SCANNLAIN, Circuit Judge:We are asked to decide whether the California Departmentof Corrections' policy of withholding from prisoners the inter-est that is earned on their inmate trust accounts contravenesthe Takings Clause of the Fifth Amendment.IThe appellants are inmates currently and formerly incarcer-ated at several California state prisons. For security reasons,inmates are not permitted under California law to possessmoney while in prison. See 15 C.C.R. S 3006(b). The Califor-nia Department of Corrections ("State") has therefore estab-lished two separate types of trust accounts into whichprisoners may place personal funds during their incarceration.The first, an Inmate Passbook Savings Account ("IPSA"), isadministered by Bank of America, and pays interest directlyto the inmate. The second, an Inmate Trust Account ("ITA"),does not pay interest to the inmate. Each prisoner has theoption of authorizing the State to establish and maintain anITA on his behalf, but he is not required to do so. See 15C.C.R. S 3075.1(d)(3) ("CDC Form 345"). There are, how-ever, two obvious incentives to establish an ITA. First, inorder to set up an IPSA interest-bearing account, an inmate isrequired to maintain an ITA with a minimum balance of$25.00. Second, and more significantly, only those fundsplaced into an ITA are available to the inmate for purchasesin the prison canteen, such as soap and toothpaste. CDC Form345, which a prisoner must sign in order to set up an ITA,specifically provides: "I authorize the Director of Correctionsto maintain a trust fund account in my name, thus enabling meto make purchases from the canteen. I also understand that ifI do not complete and sign this form, my canteen privilegeswill be lost." Id. There is, on the other hand, also a distinct disincentive tomaintain an ITA. The California Penal Code specifies that anyinterest earned on inmate funds placed in ITAs shall be allo-cated, not to the prisoners themselves, but rather to the"Inmate Welfare Fund." See Cal. Penal Code S 5008. In fact,in signing CDC Form 345 -- the same form that sanctions theestablishment of an ITA -- a prisoner expressly "authorize[s]any interest earned on monies held for [him] in such trust [to]be deposited into the Inmate Welfare Fund." 15 C.C.R.S 3075.1(d)(3). According to California law, funds placed inthe Inmate Welfare Fund "shall be used for the benefit, educa-tion, and welfare of inmates of prisons and institutions underthe jurisdiction of the Department of Corrections, " includingbut not limited to the establishment and maintenance of prisoncanteens and hobby shops. Cal. Penal Code S 5006.To summarize, then, an inmate must maintain an ITA inorder to purchase items in the prison canteen. However, as amatter of California statutory law, the inmate cannot himselfcollect any interest earned on funds placed in his ITA. A pris-oner, as the appellants put it, "has one choice: canteen orinterest. Not both."The prisoners who are parties to this controversy filed suitin federal district court pursuant to 42 U.S.C.S 1983, arguingthat the State's policy of not paying interest on inmates' ITAsconstitutes a taking of private property for public purposes inviolation of the Fifth and Fourteenth Amendments. Rejectingthe prisoners' contention, the district court dismissed their suitwithout leave to amend: [T]he Court finds that inmates in California do not have a protected property interest in the interest income earned on Inmate Trust Accounts and that they are not deprived of earning interest on their funds because they can elect to place their money in a Passbook Savings Account. Therefore, the Court concludes that plaintiffs have not stated, and cannot state, a claim for violation of the Fifth Amendment Takings Clause.Schneider v. California Dep't of Corrections, 957 F. Supp.1145, 1149 (N.D. Cal. 1997). After the district court deniedthe prisoners' application for leave to file a motion for recon-sideration, the prisoners timely appealed.IIA dismissal for failure to state a claim pursuant to FederalRule of Civil Procedure 12(b)(6) is a ruling on a question oflaw that we review de novo. See Cohen v. Stratosphere Corp.,115 F.3d 695, 700 (9th Cir. 1997). In examining the districtcourt's Rule 12(b)(6) dismissal, we must "take as true all alle-gations of material fact stated in the complaint and construethem in the light most favorable to the nonmoving party."Warshaw v. Xoma Corp., 74 F.3d 955, 957 (9th Cir. 1996). Asthe Supreme Court has stated, "[t]he issue is not whether aplaintiff will ultimately prevail but whether the claimant isentitled to offer evidence in support of the claims. Indeed itmay appear on the face of the pleadings that a recovery isvery remote and unlikely but that is not the test. " Scheuer v.Rhodes,
416 U.S. 232, 236
(1974). Rather, "a complaintshould not be dismissed for failure to state a claim unless itappears beyond doubt that the plaintiff can prove no set offacts in support of his claim which would entitle him torelief." Conley v. Gibson,
355 U.S. 41, 45
-46 (1957).Our review in this case is even more searching than usualbecause the district court dismissed the prisoners' complaintwithout leave to amend. "[D]ismissal without leave to amendis improper unless it is clear, upon de novo review, that thecomplaint could not be saved by any amendment." Chang v.Chen, 80 F.3d 1293, 1296 (9th Cir. 1996).IIIThe State contends, as an initial matter, that the fundsdeposited in the inmates' ITAs never actually accrued anyinterest. Because there was no interest earned, the State main-tains, there was none to be unconstitutionally "taken."The State is not required by California law to place ITAmonies in an interest-bearing account. Rather, the Penal Codemerely provides that the State "may deposit such funds ininterest-bearing bank accounts" and that, if it does so, it "shalldeposit the interest or increment accruing on such funds in theInmate Welfare Fund." Cal. Penal Code S 5008 (emphasisadded). Whether, as a factual matter, the funds deposited inthe ITAs involved in this case actually generated interest thatwas withheld from the inmates, or instead failed to accrueinterest at all, is a subject of some doubt. Indeed, counsel foreach side, when asked at oral argument whether the prisoners'ITA funds actually netted any interest, offered the sameresponse: "I don't know." Somewhat surprisingly, on its face,the prisoners' own complaint suggests that the ITAs here atissue might not have earned any interest. Although, in places,the complaint refers alternatively to "the actual and/or con-structive accrual of interest" (indicating that the inmates werethemselves uncertain whether their funds actually generatedinterest), in others, it refers to the ITA as "purportedly [being]a non-interest bearing account" and as having a "non-interest-bearing" quality. Moreover, attached as Exhibit B to theinmates' complaint is a copy of a denial of an internal prisonadministrative appeal, signed by prison officials, which statesquite specifically that "Inmate Trust funds are deposited in anon-interest bearing account; and therefore, there is no inter-est earned to be paid to the inmates."1 Ordinarily, the face of the plaintiffs' complaint, see Cam-panelli v. Bockrath, 100 F.3d 1476, 1479 (9th Cir. 1996), andthe exhibits attached thereto, see Parks School of Business,Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995), wouldcontrol the Rule 12(b)(6) inquiry. However, because the dis-trict court below dismissed the inmates' action without leaveto amend, the situation with which we are presented is some-what different. Pursuant to well-established circuit precedent,"dismissal without leave to amend is improper unless it isclear, upon de novo review, that the complaint could not besaved by any amendment." Chang, 80 F.3d at 1296 (emphasisadded). Here, the prisoners' complaint assuredly could havebeen cured by an appropriate amendment. Specifically, theinmates could have alleged (if true) that the ITA funds did infact accrue interest, but that the interest was paid to theInmate Welfare Fund pursuant to California Penal CodeS 5008 rather than to the inmates themselves. 2There is but one circumstance under which such an amend-ment would not have saved the prisoners' complaint, namely,if the confiscation and redistribution of actually-accrued inter-est on ITA accounts would not violate the Takings Clause.Both the district court in its order and the State on appeal con-cluded precisely that. In its decision, the district court deemedthe parties' factual dispute over the accrual of interest to beof no particular constitutional moment: "[W]hether interest isactually earned on these funds does not affect the constitu-tional analysis." Schneider, 957 F. Supp. at 1147 n.5. Thecourt simply assumed for the purposes of its decision that theITA funds did generate interest. It nonetheless concluded that,in view of Penal Code S 5008, "inmates in California do nothave a protected property interest in the interest incomeearned on [ITAs]." Id. at 1149. Consequently, it held that"plaintiffs have not stated, and cannot state, a claim for viola-tion of the Fifth Amendment Takings Clause." Id. In its briefto this court, the State agreed: Even if there were interest paid on the inmate trust accounts, the law of the state of California requires that the interest be deposited into the Inmate Welfare Fund for the benefit of all inmates rather than depos- ited to the individual inmates' trust accounts. Thus, there is no property interest belonging to plaintiffs in the interest income, actual or imagined, from the inmate trust accounts.Appellees' Opening Brief at 6 (emphasis added). Hence, inthe estimation of both the district court and the State onappeal, the resolution of the prisoners' Takings Clause claimsimply boils down to the definition of compensable "propertyinterests." Because the inmates possess no such interest, thedistrict court concluded and the State argues on appeal, theycannot state a claim under the Takings Clause of the FifthAmendment.In view of the stringency of circuit law regarding Rule12(b)(6) dismissals without leave to amend, for the purposesof this appeal, we shall assume, as did both the district courtand the State on appeal, that interest did, in fact, accrue on theprisoners' ITAs, and that the State deposited the interestincome into the Inmate Welfare Fund rather than distributingit to the prisoners. On the basis of that assumption, we turnto review the district court's conclusion that the prisoners pos-sessed no constitutionally protected property interest inactually-acquired interest income.IV[1] Pursuant to the Takings Clause of the Fifth Amend-ment, "private property [shall not] be taken for public use,without just compensation." U.S. Const. amend. V. Althoughoriginally intended as a limitation only on the federal govern-ment, see Barron v. Mayor & City Council of Baltimore, 32U.S. (7 Pet.) 243, 250-51 (1833), the Takings Clause has longbeen held to apply to the States through the Due ProcessClause of the Fourteenth Amendment, see Chicago, Burling-ton & Quincy R.R. Co. v. Chicago,
166 U.S. 226
, 239 (1897).In order to state a claim under the Takings Clause, a plaintiffmust first demonstrate that he possesses a "property interest"that is constitutionally protected. See Ruckelshaus v. Mon-santo Co.,
467 U.S. 986, 1000
-01 (1984); Penn CentralTransp. Co. v. New York,
438 U.S. 104, 125
(1978). Only ifhe does indeed possess such an interest will a reviewing courtproceed to determine whether the expropriation of that inter-est constitutes a "taking" within the meaning of the FifthAmendment.AThe inmates first argue that they are entitled to relief on thebasis of our decision in Tellis v. Godinez, 5 F.3d 1314 (9thCir. 1992). In Tellis, we reversed a district court's grant ofsummary judgment for prison officials in a suit brought by astate inmate alleging that the prison had violated the TakingsClause by withholding interest earned on funds in his personalprison bank account. See id. at 1317. We premised our hold-ing on a Nevada statute which specifically provided that"[t]he interest and income earned on the money in the [prison-er's] fund, after deducting any applicable charges, must becredited to the fund." Nev. Rev. Stat. S 209.241. We con-cluded that "[t]he plain language of this section . . . doescreate a protected property interest in interest and incomeactually earned on money deposited in the prisoners' personalproperty fund." Tellis, 5 F.3d at 1317.[2] Here, there is no California analogue to the Nevada stat-ute that might be deemed to create a property interest cogniza-ble under the Takings Clause. Indeed, California statutory lawsuggests precisely the opposite conclusion. California PenalCode S 5008 states, in terms both clear and mandatory, thatthe State "shall deposit the interest or increment accruing on[prisoners' ITA] funds in the Inmate Welfare Fund." Cal.Penal Code S 5008. The Penal Code neither requires nor per-mits the payment of ITA interest to the prisoners themselves.Consequently, not only does California statutory law notcreate a property interest in the inmates, it appears to deny theexistence of any such interest. Tellis is thus of little help to theinmates.B[3] According to the State, the conclusion that S 5008 doesnot create a property interest in the inmates' interest incomeends the constitutional inquiry. We emphatically disagree.Although an explicit statutory provision may indeed be asufficient condition to the creation of a constitutionally cogni-zable property interest, see, e.g., Tellis, 5 F.3d at 1317, itassuredly is not a necessary one. Notwithstanding the State'sprotestations to the contrary, property rights can -- and oftendo -- exist wholly independently of statutes recognizing themas such. Indeed, as the Supreme Court's decisions in Webb'sFabulous Pharmacies, Inc. v. Beckwith,
449 U.S. 155
(1980),and Phillips v. Washington Legal Foundation, 118 S. Ct. 1925(1998), demonstrate, constitutionally protected property rightscan -- and often do -- exist despite statutes, such as S 5008,that appear to deny their existence. In Webb's, the SupremeCourt reviewed under the Takings Clause a Florida statutethat expressly directed a county to retain interest that hadaccrued on an interpleader fund deposited by a private partyinto the registry of the county court. The state statute underconsideration, Fla. Stat. S 28.33, provided, in pertinent part,that "[a]ll interest accruing from moneys deposited shall bedeemed income of the office of the clerk of the circuit courtinvesting such moneys." Notwithstanding S 28.33, however,which seemed quite explicitly to vest the county with owner-ship of the interest earned, the Court held that the county wasnot entitled to the earnings. Rather, the Court invoked the"usual and general rule . . . that any interest on an inter-pleaded and deposited fund follows the principal and is to beallocated to those who are ultimately to be the owners of thatprincipal." Webb's,
449 U.S. at 162
. The Court then con-cluded that "[t]he earnings of a fund are incidents of owner-ship of the fund itself and are property just as the fund itselfis property." Id. at 164. As for the express command ofS 28.33, the Court declared: [A] State, by ipse dixit, may not transform private property into public property without compensation, even for the limited duration of the deposit in court. This is the very kind of thing that the Takings Clause of the Fifth Amendment was meant to prevent. That Clause stands as a shield against the arbitrary use of governmental power.Id.[4] Just last Term, in Phillips, the Supreme Court reaf-firmed its commitment to the "interest follows principal" ruleas a constitutionally relevant aspect of Takings Clause juris-prudence. There, the Court considered whether interest earnedon client trust funds held by lawyers pursuant to Interest onLawyers Trust Account ("IOLTA") programs is a propertyright cognizable under the Takings Clause. According to theTexas IOLTA regulations, which were the immediate subjectof the Supreme Court's attention in Phillips, interest earnedon certain client funds held by lawyers was to be paid, not tothe clients themselves, but to foundations that financed legalservices for the indigent. See Texas State Bar Rule, Art. XI,SS 3-4; Texas IOLTA Rule 9(a). The Court nonetheless con-cluded that participating attorneys' clients possessed a pro-tected property interest in the earnings. In so doing, the Courtin Phillips echoed its earlier decision in Webb's. The Courtobserved that the "interest follows principal " rule "has beenestablished under English common law since at least the mid-1700's," Phillips, 118 S. Ct. at 1930 (citing Beckford v. Tobin,1 Ves. Sen. 308, 310, 27 Eng. Rep. 1049, 1051 (Ch. 1749)("[I]nterest shall follow the principal, as the shadow thebody.")), and "has become firmly embedded in the commonlaw of the various States," id. at 1930 & n.5 (collectingcases). As it had in Webb's with regard to the Floridainterpleader-fund statute, the Court in Phillips refused toaccord the Texas IOLTA rules -- which purported to divestclients of ownership of the interest income in IOLTAaccounts -- any talismanic significance. Rather, the Courtreiterated that "a State may not sidestep the Takings Clauseby disavowing traditional property interests long recognizedunder state law." Id. at 1931. The Webb's and Phillipsdecisions are therefore similar to one another (and germane tothis case) in a critical respect: In both cases, the Court relied,in the face of a contrary state statute, upon the traditionalcommon law rule that "interest follows principal " in recogniz-ing a protected property interest in earned interest income.[5] In support of its theory that "the interest [on ITA funds]belongs to the persons or entities which state law designatesas owning the interest," the State points to Board of Regentsv. Roth,
408 U.S. 564
(1972). In Roth, the Supreme Courtobserved: Property interests . . . are not created by the Consti- tution. Rather they are created and their dimensions are defined by existing rules or understandings that stem from an independent source such as state law.Id. at 577 (emphasis added). The State's reliance upon Roth,however, is misplaced. Understood in proper context, it isclear that Roth stands not for a theory of plenary state controlover the definition and recognition of compensable propertyinterests, as the State assumes, but for a much more modestproposition. Roth was a so-called "new property" case; in it,the Court considered the circumstances under which state lawmight serve to elevate certain nontraditional forms of property-- such as public employment, welfare assistance, state con-tracts and licenses, and other government largesse -- to con-stitutional status.3 The Roth Court's recognition of theunremarkable proposition that state law may affirmativelycreate constitutionally protected "new property" interests inno way implies that a State may by statute or regulation rollback or eliminate traditional "old property" rights. As theSupreme Court has made clear, "the government does nothave unlimited power to redefine property rights. " See Lorettov. Manhattan Teleprompter CATV Corp.,
458 U.S. 419
, 439(1982). Rather, there is, we think, a "core" notion of constitu-tionally protected property into which state regulation simplymay not intrude without prompting Takings Clause scrutiny.4The States' power vis-a-vis property thus operates as a one-way ratchet of sorts: States may, under certain circumstances,confer "new property" status on interests located outside thecore of constitutionally protected property, but they may notencroach upon traditional "old property" interests foundwithin the core. See Richard H. Fallon, Jr., Some ConfusionsAbout Due Process, Judicial Review, and Constitutional Rem-edies, 93 Colum. L. Rev. 309, 329 (1993). Were the rule oth-erwise, States could unilaterally dictate the content of --indeed, altogether opt out of -- both the Takings Clause andthe Due Process Clause simply by statutorily recharacterizingtraditional property-law concepts.5[6] We need not attempt to mark out with any precision thecontours of property's "core" meaning. It is sufficient, wethink, to say that the core is defined by reference to traditional"background principles" of property law. See Lucas v. SouthCarolina Coastal Council,
505 U.S. 1003, 1029
-30 (1992); cf.Ronald D. Rotunda & John E. Nowak, Treatise on Constitu-tional Law: Substance and Procedure S 17.5, at 627 (2d ed.1992) ("Certainly all of the traditional forms of real and per-sonal property fall with [the definition of `property']."). The"interest follows principal" rule's common law pedigree, see,e.g., Beckford v. Tobin, 1 Ves. Sen. 308, 310, 27 Eng. Rep.1049, 1051 (Ch. 1749), and near-universal endorsement byAmerican courts -- including California's, see, e.g., BredaConstruzioni Ferroviarie v. Los Angeles County Metro.Trans. Auth., 66 Cal. Rptr. 2d 416, 419-20 (Cal. Ct. App.1997); Pomona City Sch. Dist. v. Payne, 50 P.2d 822, 823(Cal. Ct. App. 1935) -- leave us with little doubt that interestincome of the sort at issue here is sufficiently fundamentalthat States may not appropriate it without implicating the Tak-ings Clause.C[7] California Penal Code S 5008 does not immunize theState's policy of withholding from prisoners the interestearned on their ITAs against constitutional attack. Rather, wehold that, notwithstanding S 5008, the California inmates --like the creditors in Webb's and the clients in Phillips -- pos-sess a constitutionally cognizable property interest that trig-gers Takings Clause scrutiny.V[8] In view of the unique procedural posture of this case,our holding is necessarily a narrow one. We simply hold thatthe district court erred insofar as it concluded that "inmates inCalifornia do not have a protected property interest in theinterest earned on [ITAs]" and dismissed the prisoners' com-plaint without leave to amend on that basis.On remand, the district court shall permit discovery todetermine whether or not interest actually accrues on the pris-oners' ITA funds. If the court concludes either that interestincome is, in fact, earned or that an award of "constructiveinterest" is appropriate, it shall permit the prisoners to amendtheir complaint accordingly and to proceed with their TakingsClause claims against the State.REVERSED and REMANDED with instructions. the end
___________________________FOOTNOTES *After oral argument, prisoners Ricardo Leyva and Thomas Kleve with-drew as Plaintiffs-Appellants.**The Honorable Harlington Wood, Jr., Senior Circuit Judge, UnitedStates Court of Appeals for the Seventh Circuit, sitting by designation.1 Perhaps recognizing that their complaint was (at best) ambiguous, theinmates insisted in their memorandum to the district court opposing theState's motion to dismiss that their ITAs do indeed earn interest but thatthe interest is credited to the Inmate Welfare Fund rather than to them asindividual prisoners. The "new" allegations contained in the inmates'opposition motion, however, are irrelevant for Rule 12(b)(6) purposes. Indetermining the propriety of a Rule 12(b)(6) dismissal, a court may notlook beyond the complaint to a plaintiff's moving papers, such as a memo-randum in opposition to a defendant's motion to dismiss. See Harrell v.United States, 13 F.3d 232, 236 (7th Cir. 1993); see also 2 Moore's Fed-eral Practice, S 12.34[2] (Matthew Bender 3d ed.) ("The court may not. . . take into account additional facts asserted in a memorandum opposingthe motion to dismiss, because such memoranda do not constitute plead-ings under Rule 7(a)."). The focus of any Rule 12(b)(6) dismissal -- bothin the trial court and on appeal -- is the complaint. This case is no excep-tion. Here, the face of Exhibit B, which was attached to the prisoners'complaint, stated, in no uncertain terms, that "Inmate Trust funds aredeposited in a non-interest bearing account; and therefore, there is nointerest earned to be paid to inmates."2 The inmates maintain that whether or not interest was actually earnedon their ITA funds is irrelevant. They contend that, under the"constructive interest" doctrine, the "interest is earned whether or not it isactually earned; th[e] interest will be imputed constructively in the eventthat there were no interest charges actually placed. " In support of theirclaim, the prisoners point to language in United States v. $277,000 U.S.Currency, 69 F.3d 1491 (9th Cir. 1995), to the effect that "[a]ll financialassets in the hands of the government are a means by which the govern-ment does not have to borrow equivalent funds." Id. at 1495. They urgethat, under $277,000 U.S. Currency, the amount in interest payments thatthe California government saves by not borrowing the principal amountfrom some other source should be credited to the inmates' principal as"constructive interest."Because we are unable to ascertain either from the face of the inmates'complaint or from the relatively meager record on appeal precisely howthe prisoners' principal was deployed (i.e., whether or not it was placedin an interest-bearing account and, if not, whether or not California usedthe money in any other way to improve its own fiscal condition), weexpress no opinion as to the applicability of the "constructive interest"doctrine to the prisoners' claim. The district court may explore the matteron remand.3 See Charles Reich, The New Property, 73 Yale L.J. 733 (1964); seealso Goldberg v. Kelly,
397 U.S. 254
, 261-63 & n.8 (1970) ("It may berealistic today to regard welfare entitlements as more like `property' thana `gratuity.' ").4 Concurring in Pruneyard Shopping Center v. Robins,
447 U.S. 74
(1980), the late Justice Marshall sounded a similar theme. His commentsbear repeating at some length: I do not understand the Court to suggest that rights of property are to be defined solely by state law, or that there is no federal constitutional barrier to the abrogation of common-law rights by Congress or a state government. The constitutional terms "life, liberty, and property" do not derive their meaning solely from the provisions of positive law. . . . Quite serious constitutional ques- tions might be raised if a legislature attempted to abolish certain categories of common-law rights in some general way. Indeed, our cases demonstrate that there are limits on governmental authority to abolish "core" common-law rights, including rights against trespass, at least without a compelling showing of neces- sity or a provision for a reasonable alternative remedy.Id. at 93-94 (footnotes omitted).5 For instance, could a State, consistently with the Takings Clause, statu-torily craft its property law in such a manner that deprived car-owners oftheir rights in their automobiles? Homeowners of their rights in theirhouses? The questions are so absurd as to answer themselves, see HenryPaul Monaghan, Of "Liberty" and "Property", 62 Cornell L. Rev. 405,440 (1977), and serve to elucidate the constitutional limits of state author-ity over the definition of property rights.