States Lose Round in Fight With Federal Government Over Unclaimed Savings Bonds

by Michael Rato

Federal Appeals Court Rules In Laturner v. United States That U.S. Treasury Not Required to Turn Over Unknown Matured Savings Bonds

Back in April, we noted an uptick in state legislation providing states with the ability to take “title” (i.e., ownership) – not just custody – of unclaimed federal savings bonds. This was and is a marked departure from most state unclaimed property law regimes which are ostensibly designed to hold property in trust for the rightful owner so that the owner may claim it in perpetuity. Under these new laws, while the state “may” returned unclaimed escheated bonds to the original owner (provided the owner jumps through the necessary procedural and evidentiary hoops) the state is under no obligation to do so.

As one reader (Hey, we have readers!!) pointed out, this is arguably “necessary” in light of federal regulations providing that the U.S. Treasury will only turn over unclaimed savings bonds to the states if they obtain title to the bonds. See 31 CFR 315.88. But while it may be the case that the state has to take title in order to take custody of the bonds, that doesn’t answer the question of why the state has to take custody of the bonds at all. After all, for property held by the federal government, the traditional rationales of the unclaimed property laws — the need to keep property safe for the owner and preventing private holders from getting a “windfall,” — do not apply. There is no reason to believe that property being held by the federal government is in any way less likely to be be claimed by the owner. To the contrary, the owner of a savings bond is very likely to look first to the federal government to make good on the bond, and the bonds never expire. Likewise, there is no private company getting a windfall on outstanding matured federal savings bonds – the property continues to be held by the federal government.

Instead, it seems clear that this is just a revenue-raising exercise for the states. And while raising state revenue may very well be a legitimate legislative purpose, it belies the oft-asserted notion that state unclaimed property laws are solely about consumer protection. Federal savings bonds do not expire – the owner always retains the right to reclaim the matured bond principal and interest from the federal government, provided that he or she complies with the regulations of the bond program. Accordingly, the transfer of bonds from the federal government to the states does not appear to serve any interest of the holder.

Generally, the states may obtain the principal and interest due on unclaimed savings bonds only if those bonds are in the state’s possession (for example, if bonds are included in safe deposit items escheated to the state). A recent case decided by the United States Court of Appeals for the Federal Circuit, dealt with efforts by Kansas and Arkansas to compel the federal government to turn over all matured and dormant bonds held by the federal government for Kansas or Arkansas residents, “estimated to be worth hundreds of millions of dollars.” After the federal government refused — on the grounds that the states were not in possession of the bonds — the states sued the federal government in the U.S. Court of Federal Claims. That court intially ruled that the states were entitled to escheat the unclaimed bonds and the federal government appealed.

On appeal, the United States Court of Appeals for the Federal Circuit reversed the lower court’s order, holding that the federal government had no obligation to turn over the proceeds of bonds that are (presumably) still in the possession of the rightful owner. The Court of Appeals did so on two independent grounds: “federal preemption” (the concept that validly enacted federal laws take precedence over conflicting state laws) and the derivative rights doctrine (the concept that the state’s rights with regard to unclaimed property are “derivative” of the owner’s rights – no more, and no less).

With regard to federal preemption, the Court gave an overview of the doctrine, and noted that “Federal law of course governs the interpretation of the nature and rights and obligations created” by U.S. government savings bonds. In particular, the Court noted, federal law confers upon those bond holders the right to keep their bonds after maturity. See 31 U.S.C. 3105(b)(2)(A). As such, the Court held that any state law inconsistent with the federal right to maintain ownership of bonds after maturity (such as the Arkansas and Kansas laws whereby the state takes away that ownership right after maturity) were preempted by federal law and thus invalid.

The Federal Circuit also rejected the states’ claim for the bonds on the separate grounds of the derivative rights doctrine. As noted by the Court, it was undisputed that “even if Federal law recognized them [i.e., the states] as the rightful bond owners, they could have no greater rights than the original bond owners.” Under federal law, in order to redeem a bond, the owner must have either (a) possession of the bond; or (b) the bond serial number. Accordingly, because the states had neither possession of the bonds or the serial numbers, the states could not claim the unredeemed bonds.

Given the relatively few reported decisions relating to unclaimed property, the Federal Circuit’s decision in Laturner is an important precedent for several reasons. First, the Court’s reasoning with regard to the derivative rights doctrine is an important reaffirmation that the states’ rights with regard to unclaimed property are no greater than the rights of the original owner – a concept which states have increasingly attacked in litigation, regulations, and unclaimed property audits. Second, the Federal Circuit’s application of federal preemption to the unclaimed property laws has potentially many other parallels in federal law.

The Laturner decision, however, is probably not the end of the story. As the opinion notes, the states’ next step is likely to file a “Freedom of Information Act” request with the U.S. Treasury, demanding disclosure of the serial numbers of the unclaimed bonds. Assuming the states get that information, they likely will try to redeem the bonds themselves without regard to whether the original bonds are still in the owners’ possession.

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Colorado State Auditor Issues Report Critical of State Unclaimed Property Division

by Michael Rato

State Watchdog Finds Claim Processing and Other Deficiencies

The Colorado Office of the State Auditor recently issued a Report reviewing the performance of the Colorado State Department of Treasury, Division of Unclaimed Property. For those who don’t want to read the full report, a summary of the key findings can be found here. The Auditor expresses the concern that the Division “is not fully meeting its core responsibility under the Unclaimed Property Act to reunite citizens with lost or forgotten property.” As support for that conclusion, the Auditor notes the following:

  • The Division has not mailed notification letters to the owners of unclaimed property since March 2005 (representing over 1.5 million notifications that have not been issued);
  • The Court failed to process claims within 90 days (as required by statute) in nearly half of cases, with at least one claim taking more than a year and a half to process;
  • More than half of the claims reviewed by the State Auditor, were “identified as duplicate, incomplete, inaccurate, or questionable that did not represent valid claims.”

The Auditor’s recommendations to the Division are also notable in that most of them amount to suggestions that the Division simply comply with the applicable laws already in force relating to owner notice, claims processing, and claims payment. In light of the Report, owners of unclaimed property have some reason to be hopeful that the Division’s claim processing performance will improve.

It’s the Big White Building With the Ionic Columns and the Statue of Alexander Hamilton . . .

by Michael Rato

An Exercise in Finding the Owners of Unclaimed Property

One of the theoretical policy justifications for state unclaimed property laws is that the states will be conscientious about finding missing owners and reuniting them with their property. Indeed, according to the National Association of Unclaimed Property Administrators (an affiliate of the National Association of State Treasurers) the “purpose of unclaimed property laws is to protect consumers by ensuring money owed to them is returned to them, rather than remaining permanently with financial institutions, business associations, governments, and other entities.”

Given that premise, the identities of “lost” owners with property being held by the state never cease to amaze. Property is not just held for those truly “lost,” or famously reclusive authors, or politicians too busy to open mail, or those off in a galaxy far, far away. Some owners of unclaimed property are . . . ahem, presumably easier to find. As we pause the week to celebrate the 243rd birthday of the United States of America, note that California, New York, Illinois, Texas, Washington, D.C., and no doubt others are all holding “abandoned” or “unclaimed” property for the United States of America, United States Government and/or United States Treasury (and probably hundreds of other federal agencies).

While Washington D.C. might get a pass here because of the whole “Taxation Without Representation” thing, for the other jurisdictions searching in vain for the United States Treasury: try the big white building in Washington, D.C. with the ionic columns and the statues of Alexander Hamilton and Albert Gallatin . . . or, you know, the back of the $10 bill

Happy Fourth Everyone!

Nevada Passes 2016 Uniform Act Amendments

by Michael Rato

On June 7, 2019, Nevada Governor Steve Sisolak approved Senate Bill 44 which incorporates certain provisions of the 2016 Uniform Unclaimed Property Act into the Nevada Unclaimed Property Act. In particular, the new legislation adds provisions relating specifically to payroll cards and virtual currency and exempts game-related digital content and loyalty cards. It also changes the dormancy standards for life insurance policies and IRA accounts to more closely mirror the provisions of the Uniform Act and allows for the use of electronic communications.

With regard to owner claims, the new law expressly permits the state to deduct from such claims and amounts owed by the owner for outstanding child support, civil or criminal penalties, or state and local taxes. In an effort to combat fraudulent claims made for unclaimed property, the new legislation also imposes criminal penalties for the filing of false claims.

The new law goes into effect on July 1.

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Friday Lost + Found

by Michael Rato

This Week in Unclaimed Property

Uniform Act News — Colorado recently became the latest state to adopt a version of the 2016 Uniform Unclaimed Property Act. Recently, LD 1544 was introduced in the Maine Legislature, which would enact a version of the 2016 Uniform Act in that state.

Illinois Breaks Claim Processing Record — According to WILL (a station, not a person), the Illinois State Treasurer’s Office has filled over 200,000 claims and returned over $200 million in unclaimed funds to owners in the past 10 months.

Happy Star Wars Day — Tomorrow, May 4th is Star Wars Day (“May the Fourth be With You”). On that note, a recent search discloses that the California Unclaimed Property Division is holding funds for Darth Vader (who apparently spent some time in Burbank), Anakin Skywalker, Obi Wan Kenobi, Luke Skywalker, Han Solo, R2D2, C3PO, Chewbacca, and Boba Fett (at 123 Fake Street in San Jose) – but no Princess Leia.

Colorado Passes Version of 2016 Uniform Unclaimed Property Act

by Michael Rato

New Legislation, Which Reduces Many Dormancy Periods To 3 Years, Is Effective July 1, 2020

On April 16, 2019, Colorado Governor Jared S. Polis signed Senate Bill 19-088 into law, which adopts a version of the 2016 Uniform Unclaimed Property Act. Under the new law, the dormancy period for most property types will drop to 3 years (down from 5). Certain bank accounts and gift cards will still be subject to a 5 year dormancy period, and other items like payroll and dissolution proceeds will continue to have a 1 year dormancy period.

With respect to securities, the new legislation imposes a 3 year dormancy period, that now begins to run upon the second instance of returned mail (as opposed to the former unclaimed dividend standard). The new law also leaves in place certain Colorado-specific exemptions that were in the prior Unclaimed Property Act, such as the exemption for certain lawyer trust accounts, gaming chips or tokens, property held by racetracks, and certain gift card proceeds held by small issuers.

The new legislation keeps the current October 31 reporting deadline for property deemed abandoned as of the previous June 30. The new law goes into effect for the 2020 report.

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Is “True Escheat” The Future of Unclaimed Property Laws?

by Michael Rato

Nevada is considering a bill “providing that all property rights and legal title to, and ownership of” of U.S. savings bonds would “vest in this State” after three years. After that three year period, the state could choose to pay the proceeds to the rightful owner of the bond, but the decision to do so would be left to the state’s discretion. West Virginia is considering similar legislation, A law proposed in Hawaii goes even further providing that all unclaimed property with a value of $100 or less shall immediately “escheat to the State and be transferred to the general fund.” These are just a few examples of a new (and for unclaimed property owners, troubling) trend in unclaimed property legislation — a shift from “custodial” escheat laws to “true” escheat laws.

Currently, most state unclaimed property laws are “custodial” in nature — meaning that the state takes possession of the unclaimed property on the rightful owner’s behalf, but the state never actually takes “title” (i.e., ownership). Instead, the state holds the property in trust, and the rightful owner can always claim the property from the state when he or she becomes aware of it. To be sure, the state may use those monies for schools, roads, or other budgetary purposes in the interim, but the rightful owner retains the right to get his or her money or property back.

The rationale for such “custodial” escheat laws is reasonably straightforward: given that the rightful owner is not in possession, someone is going to have the “free” use of the money. Better that it be the state for the use of all citizens than a private company. In the custodial paradigm, the owner theoretically is no worse off by the state, rather than a company, holding his or her property (at least if the property is cash, and not securities)

In a “true” escheat system, the state ultimately acquires not only custody of the property, but ownership. As a result, the rights of the original owner are deemed “cut off.” As explained by 18th Century English jurist William Blackstone in his Commentaries on the Laws of England, the rationale for “true” escheat laws is that all property rights were ultimately derived from the sovereign: “The grand and fundamental maxim of all feudal tenure is this; that all lands were originally granted out by the sovereign, and are therefore holden, either mediately or immediately, of the crown.” Accordingly, where something happens to the current owner, the property reverts back to the sovereign.

While this rule may still make sense for “real property” (i.e., land) with the sovereign being the state, it is not for most “intangible” property. A share of stock you purchase from an issuer, a CD you deposit at a bank, a payroll check — none of these items “originated” with the state. The potential for true escheat laws, along with the ever expanding scope of unclaimed property laws, and the apparently inexorable process of making dormancy periods shorter and shorter, could very well have a significant and negative impact on the owners of unclaimed property.

While the current proposals appear to be modest (just a single property type here, a $100 limit there) it is not hard to imagine such laws being expanded. Owners should be wary.

Arkansas Passes Law For Immediate Liquidation of Unclaimed Securities

by Michael Rato

Recently, we posted an article addressing the potential pitfalls to owners arising out of the states’ identification and handling of “unclaimed” securities accounts. In that article, we noted a bill pending in Arkansas legislature permitting the Administrator of unclaimed property in that state to sell escheated securities immediately upon receipt, instead of holding them for three years. That bill became recently became law.

The new law was also passed as an emergency measure meaning that the legislature made a determination that this new law was “immediately necessary for the preservation of the public peace, health, and safety.” Accordingly, the law became effective immediately upon its approval by the Governor on March 15.

Assuming that the state begins the practice of immediately selling securities reported to the state, it means that owners who later seek to recover their property from the state will not receive the securities — nor any of the dividends, splits, or other compensation that may have accrued after the shares were reported — but rather just the value of the securities at the time of liquidation, less any fees incurred by the state.

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Friday Lost + Found

by Michael Rato

IRS Holding $1.4B in Unclaimed Refunds — According to CBS News the Internal Revenue Service has announced that it has approximately $1.4 billion in unclaimed tax returns for more than a million taxpayers. In addition to background on how these amounts have gone unclaimed, the article also has some tips for those who may have fallen behind on filings.

California Holding Over $9 Billion in Unclaimed Property — From time to time, states will publish estimates of the approximate amount of unclaimed funds being held at a given time. According to a recent press release from the California State Controller’s Office, the Golden State holds over $9 billion dollars in unclaimed funds waiting for its rightful owners.

Former Mutual Fund Employee Convicted of Stealing from Dormant Accounts — Whenever any organization has a cache of dormant or otherwise unclaimed funds lying around (so to speak) there will be those who see the potential to take some of that money for themselves. According to the Philly Inquirer, a supervisor at a large mutual fund company has recently pleaded guilty to stealing more than $2 million “from dormant accounts that were slated for ‘escheat.'” He then issued checks from these accounts to various family members. There is no information on how the scam was discovered, but according to the Inquirer “[s]entencing guidelines call for a potential 46 years in prison, $2.1 million in restitution and a $1.25 million fine.”

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Nebraska Makes Changes to Unclaimed Property Notification Requirements

by Michael Rato

New Law Changes Funding & Notice Provisions

On March 12, the Governor of Nebraska approved Legislative Bill 406 which amends various technical and administrative provisions of that state’s unclaimed property act. Among the more notable provisions are those which reduce the state’s obligation to publish and mail notice to owners of unclaimed property. Under the prior law, the state was obligated to mail notice and publish details relating to all items of $25 or more. The new law raises that threshold to $50. The new law also increases the amount held in the unclaimed property trust fund from $500,000 to $1 million.