Monday, April 30, 2012

Unclaimed Property 101 Part 2 ("Where") - Jurisdiction - What State Makes the Rules?

Today, we are going to continue our break from the New Jersey gift card saga and take a step back to first principles by continuing our new feature to the blog:  "Unclaimed Property 101."  In these articles, we will provide a primer on the basic unclaimed property laws and policies that govern an unclaimed property holder's (or owner's) rights and responsibilities.  While this represents a departure from our gift card discourses, it is not entirely unrelated.  Indeed, most of the ink spilled for and against New Jersey's gift card legislation relates to the law's requirement that gift card sellers collect the purchaser's name and address (or at least zip code) information at the time of purchase.  Why does the law do that?  Good question.  Here's the answer:

In the beginning . . . .

In the beginning, there were no set rules for determining which state had the primary right to take custody of unclaimed property.  In many situations -- for example, an insurance policy held by a NY-incorporated life insurer, located in NY, for the benefit of a NY resident -- these priority rules did not matter.  However, where multiple states had some "contact" with the transaction, there raised the possibility of dual claims.  In 1948, in the case of Connecticut Mut. Life Ins. v. Moore, the Supreme Court of the United States was faced with the question of whether New York could enforce its abandoned property law to take custody of life insurance policies belonging to NY residents where the insurance company was not a NY corporation.  The nine insurance companies who challenged the NY abandoned property law in Connecticut Mutual argued, among other things, that only their respective states of incorporation, not New York, had the power to escheat any dormant insurance policies that they held.

The Supreme Court rejected this argument.  In so doing, however, the Court (temporarily) ducked the question of competing state claims for the same property, explaining that "[t]he problem of what another state than New York may do is not before us.  That question is not passed upon."  The question presented, the Court explained, was simply whether New York had the constitutional power to escheat the policies.  The Court concluded that it did.  As to the claims of other states or former NY residents who moved to other states, the Court "reserve[d] any conclusion as to New York's power in such situations."

1961:  Mantle and Maris Chase Babe Ruth, Pennsylvania Chases Money Orders

The Supreme Court was again faced with the issue of escheat jurisdiction in 1961, in the case of Western Union v. Pennsylvania.  In that case, Pennsylvania sought to take custody of unclaimed telegraphic money orders purchased from Western Union (then a New York corporation) by Pennsylvania residents, to be transmitted to recipients in other states.  For its part, Western Union made clear that it did not have any intention of keeping the property, but was concerned about other states (particularly New York) suing Western Union for the same funds.  As the Supreme Court noted, Western Union's concern was not merely theoretical:  "The claims of New York are particularly aggressive, not merely potential, but actual, active and persistent -- best shown by the fact that New York has already escheated part of the very funds originally claimed by Pennsylvania."  Recognizing this potential dual liability, the Supreme Court reaffirmed what can be construed as the first rule of unclaimed property jurisdiction:

RULE "ZERO":  A holder cannot be liable to more than one state for the same property.

Or, as put somewhat more eloquently by the Court:
 [Our cases] have recognized that when a state['s] jurisdiction purports to be based, as here, on the presence of property within the State, the holder of such property is deprived of due process of law if he is compelled to relinquish it without assurance that he will not be held liable again in another jurisdiction or in a suit brought by a claimant who is not bound by the first judgment.
Western Union, 368 U.S. at 75.

In this case, despite having been seemingly confronted with a direct dispute between two states (Pennsylvania and New York) concerning the property in question, the Court again temporarily sidestepped the issue.  In particular, the Court explained that it didn't then have to "attempt to decide the difficult legal questions presented when many different States claim power to escheat intangibles involved in transactions taking place in part in many States" because it was clear that the state courts of Pennsylvania could not force other states to participate in the escheat proceedings against Western Union.  Accordingly, the Court ruled in favor of Western Union, and put off the inter-state conflict for another day.

1965:  Another Day Arrives

The modern jurisdictional rules for resolving conflicts among the states concerning power to escheat unclaimed property were established by the Supreme Court in the 1965 case of Texas v. New Jersey. In that case, the State of Texas brought a case in the Supreme Court's original jurisdiction against New Jersey, Pennsylvania, and the Sun Oil Company to resolve which state had the primary right to escheat certain small debts owed by Sun Oil.  Florida also ultimately joined the litigation.  For its part, Sun Oil simply wanted to be protected from liability to multiple states from the same property (see Rule One above).  The Supreme Court explained the problem as follows:
With respect to tangible property . . . it has always been the unquestioned rule . . . that only the State in which the property is located may escheat.  But intangible property, such as a debt which a person is entitled to collect, is not physical matter which can be located on a map. The creditor may live in one State, the debtor in another, and matters may be further complicated if, as in the case before us, the debtor is a corporation which has connections with many States and each creditor is a person who may have had connections with several others and whose present address in unknown. Since the States separately are without constitutional power to provide a rule to settle this interstate controversy, and since there is no applicable federal statute, it becomes our responsibility, in the exercise of our original jurisdiction, to adopt a rule which will settle the question of which State will be allowed to escheat this intangible property. 
 Not surprisingly, each of the states involved asked the Supreme Court to adopt a different rule as to which state had the best right to escheat the funds.  The rules proposed were:
The "Texas Rule":  Escheat to the state with the most "significant contacts;"
The "New Jersey Rule":  Escheat to the holder's state of incorporation (which, in a total coincidence, just happened to be in New Jersey);
The "Pennsylvania Rule":  Escheat to the state of the holder's "principal office" (guess where that was?); and
The "Florida Rule": the state of the owner's last known address as shown on the holder's books and records.
 After considering each of these proposals, the Court concluded that the "Florida Rule" -- escheat to the state of the owner's last know address, as shown on the holder's books and records -- was preferable to the other proposals.  Specifically, the Court noted that the question of the holder's last known address was easier to apply than the other proposals.  Thus, the Court adopted:

RULE ONE:  In the first instance, unclaimed property gets reported and remitted to the state of the owner's last-known address, as shown on the holder's records.

The court also recognized that, in at least some instances, the holder would not know the last known address of the owner.  For that situation, the Court considered and adopted the "New Jersey" rule -- escheat to the holder's state of incorporation.  Thus, the Court adopted:

RULE TWO:  In situations where (a) the last-known address of the owner is unknown; or (b) the last-known address is in a state that does not provide for escheat of the property, the holder's state of corporate domicile (i.e., incorporation) has the right to escheat the property.

These two rules were reconsidered, and readopted by the Supreme Court some 25 years later in Delaware v. New York.  In that case, the property at issue consisted of securities distributions held by intermediary banks, brokers, and financial agents who cannot be located (or, in some cases, even identified).  In readopting the Texas v. New Jersey rules, the Court made clear that:

RULE THREE:  The secondary rule (escheat to the corporate domicile) also applies to situations where the identity (not just address) of the owner is unknown.

Those priority rules continue to this day.  The only exception to these jurisdictional rules is with regard to travelers' checks, money orders and other similar written instruments (not checks).  For those items, pursuant to a federal law, the rules are somewhat different:

RULE FOUR:  If the property is a travelers' check, money order, or similar written instrument (not a check, or third-party bank check), the property escheats, in the first instance, to the place of purchase of the item.

RULE FIVE:  If the property is a travelers' check, money order, or similar written instrument and the state of purchase is unknown, or the laws of the state of purchase "lack the power" to take custody of the funds, the item escheats to the holder's principal place of business.

So, there you have it.  Nearly seventy years of escheat jurisprudence boiled down to 6 rules (really, 4 if you don't issue travelers' checks and money orders).  Now, to tie that back to the beginning, these rules are why New Jersey wants to require gift card issuers to obtain zip code information for cards sold in New Jersey.  In the event that the card issuers do not collect owner name and address information, the priority rules (particularly Rule 3 above) dictate that the property will be escheated to the card issuers' state of incorporation (probably not New Jersey).  In the event that the issuer collects the owner's zip code information at the time of sale, New Jersey will argue that the zip code information (which, for NJ gift card sales is likely to be a NJ zip code) is sufficient to demonstrate that the owner's last known address is in New Jersey and that, accordingly, New Jersey has the primary right to escheat the property.  Which begs a question:  is zip code information enough to demonstrate the owner's last known address?

Alas, that is a question for another day.



  1. Mike,

    Excellent blog!! You've taken a complicated fact pattern and turned it into an easy to understand every best selling mystery you've left the reader hanging on for more :)

  2. In the case of a cashier's check or money order purchased over the phone then do you escheat to the state where the purchaser lives (and regardless of the state in which the call center taking the order is located, the state that prints the check and/or the state in which the bank liable on the check is located)?

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