Is it illegal for a teacher to take notes being passed from student to student?

No, the teacher is acting in loco parentis (Latin for "if you were home you'd be driving your parents nuts") and as such can certainly confiscate notes, disruptive electronic devices, weapons, and other contraband. If you want to argue the point, you are asking for the next level which can include detentions, and expulsions.

Your proper response is to say, "I'm sorry for disrupting class. Here's the note." then sit down and crack your book and get on with your education.