Tag: cases

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

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.

Oklahoma Supreme Court Affirms Dismissal of Suit Challenging State’s Unclaimed Property Program as “Ponzi Scheme”

Recently, the Supreme Court of Oklahoma issued a decision in Dani v. Miller, an attempted class action suit challenging Oklahoma’s Unclaimed Property Program as a “Ponzi Scheme.”  In that case, an Oklahoma resident filed a number of constitutional and common-law challenges to the Oklahoma Unclaimed Property Act and its administration.  In particular, the plaintiff was challenging Oklahoma’s practice (shared by nearly all the states) of only holding a portion of unclaimed property to pay out claims, while using the rest for state revenue.  As the Oklahoma Supreme Court explained:

“[T]he UUPA contemplates and accounts for the fact that not all owners of abandoned property will seek to recover it.  The UUPA therefore creates a system where a reserve is maintained in the Unclaimed Property Fund to pay approved claims and the remainder is deposited to the General Revenue Fund for use by the state.”

The plaintiffs contended that Oklahoma’s unclaimed property program was a “Ponzi scheme”* because “the reserve is not sufficient to pay all potential (including not-yet-established) claims and new abandoned property is to be used to pay any established claims exceeding the reserve.” The Court rejected this argument on two grounds.  First, the Court held that there was nothing fraudulent or deceptive about Oklahoma’s program as its procedures (including the deposit of funds into the states general revenue) were all disclosed (and in fact, mandated by) state law.  Second, the court explained that “[t]he State is not deceiving new investors to pay valid claims, but rather is paying those claims with abandoned property it would be taking in anyway, per the terms of the UPPA.  [The Act thus] operates in such a manner that even if they must wait, owners of abandoned property with valid claims will always be able to eventually recover their previously presumed-abandoned property.”  (emphasis added).

While the Court’s reasoning seems  sound insofar as it recounts how state unclaimed property programs actually work, notably implicit in the court’s decision — and, in fact, in the operation of the states’ programs themselves — is the idea that the influx of unclaimed property funds will continue forever.  While there may be nothing deceptive or fraudulent in how these programs work, the fact remains that, at least in the first instance, a claimant’s ability to recover his or her property is not a function of the state’s ability to serve as a custodian or caretaker of unclaimed property, but rather its ability to keep that property coming in.

*  A “Ponzi scheme” named after Charles Ponzi, is a fraudulent scheme wherein victims are generally promised a guaranteed return in exchange for an investment, and those investments are used by the fraudster to pay out returns to earlier investors.  Eventually, when the flow of new investments slows or stops, there is no money left to pay returns (or the initial investment) to any investors, and the fraudster has generally taken steps to disappear.  One of the most recent, and well-known, Ponzi schemes was the Madoff Investment Scandal.

West Virginia Supreme Court Rules That Insurers Must Track Policyholder Death Information

The West Virginia Supreme Court of Appeals recently issued an opinion in Purdue v. Nationwide Life Insurance Company, a case presenting the issue of whether life insurers are required to affirmatively undertake periodic investigations to determine whether any policyholders are deceased.

The case began in 2012, when West Virginia State Treasurer John D. Purdue sued ten life insurers, claiming that they failed to report and deliver unclaimed insurance policies in accordance with the West Virginia Unclaimed Property Act.  Specifically, the Treasurer alleged that because the insurers did not regularly review in-force policies against the Social Security Death Master File (DMF) to determine whether the policyholder was deceased, they failed to report property when due.  The Treasurer’s office sued dozens of additional insurers in 2013, making similar allegations against a total of 69 separate companies.  The insurers contested the Treasurer’s theory, generally arguing that as a contractual matter, the policies at issue were payable upon notice and proof of the insured’s death.  The insurers further noted that they were under no statutory obligation under the West Virginia Unclaimed Property Act or otherwise to undertake searches of the DMF.

In December of 2013, a West Virginia court dismissed the Treasurer’s lawsuits, siding with the insurers and ruling that there was no affirmative legal duty to search the DMF.  The Treasurer appealed the decision to the West Virgina Supreme Court, which ruled in favor of the Treasurer and sent the case back to the lower court for further proceedings.

In the Supreme Court’s view, it was undisputed that unclaimed life insurance policies were escheatable three years after the insurer’s obligation to pay arose; rather, the case boiled down to when the obligation to pay arose.  According to the Treasurer, the obligation to pay arises when the policyholder dies.  According to the insurers (and the lower court) the obligation to pay does not arise until proof of the insured’s death is provided to the insurer.

The Supreme Court began its analysis by reviewing Section 2(e) of the West Virginia Act, which generally provides that property is payable “not withstanding the owner’s failure to make [a] demand” for payment.  That language, the Court explained, undercut the insurers’ argument that an insurance policy cannot be payable until such time as a claim is filed.  In so doing, the Court distinguished cases in other states requiring a claim on the grounds that those cases simply held that an insurer had no obligation to search the DMF, not that the obligation to pay doesn’t arise until a claim is made.

Having made that distinction, however, the Court was left with the following question:  How is an insurer to obtain information regarding policyholder deaths if there is no affirmative duty to search the DMF?  Indeed, the Court explicitly held that the West Virginia Unclaimed Property Act “imposes no specific duty on insurers to search the [DMF] or any comparable data source.”  The Court largely punted back to the insurers on this issue – holding that the dormancy period commences with the death of the insured and that the insurers could do whatever they want to determine when a policyholder death takes place.  Of course, the insurers could search the DMF, the Court explained, but they could also “contact its insureds directly” (e.g., call them every year), farm the task out to agents, or do whatever else the found “the most economical” so long as they obtained the required information.

The Supreme Court sent the case back to the lower court to allow the Treasurer’s office to continue its examination of the insurers’ records.

Temple-Inland Court Renders Federal Preemption Decision – Case Will Continue

Last year, a company called Temple-Inland commenced a lawsuit against the State of Delaware, challenging the findings of a Kelmar-initiated unclaimed property audit, especially as to how estimated liabilities are calculated.  In particular, Temple-Inland alleged that Delaware made an audit demand in excess of $1 million for estimated historical unclaimed property liabilities after having identified only about $150 in actual liability.  Delaware promptly moved to dismiss that litigation (that is, that the court should not even hear the dispute) and Temple-Inland responded by asking the Court for summary judgment (an order that Plaintiff is entitled to judgment as a matter of law, without the need for a trial) on the grounds of federal preemption.

Wednesday afternoon, the trial court issued its decision on the dueling motions.  In sum, both parties’ attempts for a quick knockout were largely rejected, and the case will continue.  The one substantive decision that the Court made relates to federal preemption (i.e., the argument that federal law displaces contrary state law).  The Court expressly rejected T-I’s argument that federal preemption prevented Delaware from employing estimation to assess historical unclaimed property liabilities.

The Federal Preemption Decision

In numerous cases, the Supreme Court has held that a state’s jurisdiction to take custody of unclaimed property relates to the debtor-creditor relationship between the holder and owner of unclaimed property.  In Delaware v. New York, for example, the Court held that the determination of which state was entitled to escheat property started with a determination of the “precise debtor-creditor relationship” that gave rise to the property.   In the T-I case, Temple Inland argued that the use of estimation to calculate unclaimed property liabilities (where no exact debtor-creditor relationship is shown) was preempted (i.e., prohibited) by federal authority relying on the existence of this debtor-creditor relationship, and similar authority refusing to use statistical estimates to apportion unclaimed property among the states in lieu of the Texas v. New Jersey priority rules.  T-I also argued that, although the Texas v. New Jersey and Delaware v. New York holdings arose in the context of disputes between states, the Supreme Court’s holdings in those cases were nonetheless applicable to disputes between a state and a holder.

The Delaware District Court rejected this argument and dismissed T-I’s federal preemption claim.  In so doing, the court reasoned that the since the “stated purpose” of the Texas v. New Jersey priority rules was to “apply to disputes among States, not to disputes between private parties and States” there was no relevant federal law to preempt Delaware’s enforcement of its unclaimed property act.  Accordingly, the District Court avoided the need to determine whether estimation itself was preempted via federal law by finding, in effect, that there was no applicable federal law at all.  The court’s holding regarding federal preemption necessarily resulted in the denial of T-I’s motion for summary judgment.

The Case Will Continue

As to the remainder of T-I’s claims, the court held that the complaint stated a set of facts that, if proven, might entitled T-I to relief, and thus denied the remainder of Delaware’s motion to dismiss.  The case will now continue.