Unclaimed Property Dispute in Supreme Court May Impact Retailers

We have written previously about various issues relating to state unclaimed property (here, here, and here). This term, the Supreme Court is set to decide a case that may have a significant impact on companies’ obligations under these laws.

As background, unclaimed property law has its roots in the doctrine of “escheat,” a term dating back to English common law. The doctrine of escheat provided that if a person died without heirs his property would revert to the crown or state. In the modern era, these laws require a business that holds property on behalf of a third-party to report and turn over to the state any property not claimed or redeemed by its owner after the passage of a “dormancy” period. For retailers, the issue frequently arises in the context of unused balances of gift cards and gift certificates, which are subject to escheat under the laws of some states but not others, and which can result in significant liabilities. In recent years, states have begun to rely increasingly on aggressive enforcement of their unclaimed property laws to generate revenues.

Because different states have different laws, and because all states are hungry for revenue, businesses may find themselves caught in the middle, with multiple states making claims to unclaimed property held by the business. Since 1965, these disputes have generally been governed by a federal common law rule announced by the Supreme Court in the case Texas v. New Jersey, 379 U.S. 674 (1965), which held that property is escheated to the state of the property holder’s last known address. If there is no last known address, the property is escheated to the state of the holder’s corporate domicile. This rule has been quite advantageous for states like Delaware, in which many businesses incorporate. In 2013, unclaimed property provided 16% of the total revenue for Delaware’s general fund.

The case presently before the Supreme Court, Delaware v. Pennsylvania and Wisconsin, is a dispute between states over unclaimed funds relating to “Official Checks” issued by MoneyGram in various states, including Wisconsin and Pennsylvania. Wisconsin and Pennsylvania (along with 18 other states that are not presently parties to the dispute) contend that the disposition of unclaimed Official Checks is governed by the Disposition of Abandoned Money Orders and Traveler’s Checks Act of 1974, 12 U.S.C. §2503, a federal law which provides that the state in which a money order or traveler check is sold has the exclusive right to take custody of abandoned money orders or travelers checks. If the state of sale is not known, unclaimed money orders or travelers checks escheat to the state in which the holder of the abandoned property has its principle place of business. Delaware contends that MoneyGram’s Official Checks are neither money orders nor traveler’s checks, and that the federal common law rule of Texas v. New Jersey applies, giving Delaware a right to any unclaimed property with no last known address, because MoneyGram is incorporated in Delaware.

It is possible the case will be resolved on narrow statutory grounds of whether the abandoned Official Checks are subject to the federal law governing abandoned money orders and travelers’ checks. It is also possible, however, that the Court will take the opportunity to revisit the federal common law priority rule of Texas v. New Jersey. The rule was intended to be simple, but has not prevented conflicts as states have become more aggressive in their unclaimed property laws and their enforcement, including through the use of private auditors paid on contingency. In this environment, businesses may find themselves caught between different states each asserting claims on the same abandoned property. If the Court revises the priority rules, it could have a major impact on state budgets, and on the way retailers handle unclaimed property.