21 States Challenge Delaware
On June 9, 2016, Texas Attorney General Ken Paxton announced that he would file a lawsuit on behalf of 21 states before the U.S. Supreme Court, seeking more than $150 million from Delaware.
The lawsuit claims that Delaware is holding uncashed MoneyGram Official Checks (“Official Checks”) that should have been reported to the state where the Official Check was issued, and not Delaware, MoneyGram’s state of incorporation. In February, Pennsylvania also filed a lawsuit against Delaware, claiming that it was holding more than $10 million of Official Checks that were purchased in Pennsylvania. Both lawsuits allege that beginning several years ago Delaware claimed that proceeds of unclaimed Official Checks issued by Delaware companies should be sent to Delaware, no matter where the transaction was initiated. Other than Texas, states participating in the new lawsuit include Alabama, Arizona, Colorado, Florida, Idaho, Indiana, Kansas, Kentucky, Louisiana, Michigan, Montana, Nebraska, Nevada, North Dakota, Ohio, Oklahoma, South Carolina, Utah and West Virginia.
One of the facts that makes this case so interesting is that before this year the last unclaimed property case between two or more states to be heard by the U. S. Supreme Court was Delaware v. New York, 507 U.S. 490 (1993). In a series of cases that began with Texas v. New Jersey, 379 U.S. 674 (1965) and ended with Delaware v. New York in 1993, the Court laid out, and confirmed, the rules defining which state had jurisdiction over unclaimed property.
Why the Confusion?
In Pennsylvania v. New York, 407 U.S. 223 (1972), the Supreme Court held that owner-unknown money orders were reportable to the domicile of the issuer. After the ruling, the losing parties pressured Congress to change the laws, and in 1974 it enacted the Disposition of Abandoned Money Orders and Traveler’s Checks Act (“Act”), which provided that unclaimed traveler's checks and money orders are subject to the jurisdiction of the state where the financial transaction was initiated. Specifically, the Act provided that for a “money order, traveler’s check, or other similar written instrument (other than a third party bank check) on which a banking or financial organization or a business association is directly liable,” the State in which such an instrument was purchased has the exclusive right to escheat or take custody of sums payable on such instruments. 12 U.S.C. § 2503. Therefore, unlike most property types, if a money order purchased in Texas remains unclaimed, the proceeds would be reportable as unclaimed property to Texas.
The apparent confusion as to where to report uncashed Official Checks appears to arise from the fact that these instruments don’t neatly fit into the “money order” or “travelers check” categories addressed in the Act, and the lack of any clear guidance as to what a “similar written instrument” might look like. Like money orders, the purchaser of an Official Check pays issuer the face amount plus a small fee for an Official Check. However, unlike money orders, Official Checks are typically issued by financial institutions, usually for substantially larger dollar amounts than money orders. The question of the day for Delaware, and the states challenging its right the Official Checks, is whether Official Checks are within the carve out envisioned by the Acts’ creators.
Under a series of U.S. Supreme Court rulings going back to Texas v. New Jersey, 379 U.S. 674 (1965), the states follow a two-tier priority scheme for reporting and claiming abandoned property. Under the first priority rule, unclaimed property is subject to the jurisdiction of the state of the owner's last known address as it appears on the holder’s records. But if the owner's address is unknown or incomplete, the second priority rule applies which provided that unclaimed property is subject to the jurisdiction of the holders’ state of domicile, which for most companies is their state of incorporation.
MoneyGram is incorporated in Delaware, and therefore, any owner-unknown property in its possession would typically be reportable to Delaware, e.g. payroll checks, uncashed vendor checks, etc. If it’s determined that Official Checks are not covered by the Act, then they would fall within the provisions of the second priority and under Delaware’s jurisdiction. However, if the Court determines that they do fall within the money orders, traveler’s checks, or other similar written instruments referred to in the Act, then the states in which the Official Checks were sold would have jurisdiction over them if they remain uncashed.
As the states continue to rely on unclaimed property as a potential source of revenue, more disputes like the ones filed this year are likely to arise. True Partners will continue to monitor this and other litigation as it arises, and will release relevant updates as the cases progress.
About Unclaimed Property…
Unclaimed property is any intangible property that is owed by a company and has gone unclaimed for a specific period of time by the rightful owner. Every company is likely to generate unclaimed property and has a legal responsibility to report and remit that property to the appropriate jurisdiction. Generally, there is no statute of limitations on a holder’s unclaimed property liability, and a holder’s state of incorporation can estimate a holder’s potential liability for periods where actual records are not available. Companies not in full compliance with the state’s unclaimed property laws often have many concerns about getting into compliance, including the likelihood of triggering interest and penalty assessments or being selected for an examination. However, once aware of the various rules and processes, every holder should consider taking advantage of the various opportunities available to get into compliance for any past-due property.
True Partners Consulting’s Unclaimed Property Management Solutions Team is comprised of a national group of professionals with diverse backgrounds, including industry and government. Our team offers the best combination of experience, expertise, and resources to assist companies, regardless of their industry.
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Cathleen A. Bucholtz
Robert M. Tucci