How does one commemorate a career full of content and commitment?

On January 11, 2018, the Professional Responsibility Committee, the Business Law Section as a whole, and indeed the entire American legal community lost a good friend. Geoffrey C. Hazard, Jr., Professor Emeritus, prolific author, distinguished scholar, former executive director of the American Law Institute, and former Business Law Advisor, passed away at the age of 88.

Geoff’s was a storied teaching career, spanning over 50 years. He grew up in Kirkwood, Missouri and graduated from Swarthmore College and Columbia Law School. He taught law at Yale, the University of Chicago, the University of California at Berkeley, the University of Pennsylvania, and the University of California, Hastings, from which he retired in 2013. Though his interests in the law were wide-ranging (he once taught at course entitled “Western Moral Concepts”), his principal areas of academic interest were civil procedure and legal ethics.

His choice of these areas of concentration, as he recounted in a 2014 interview with Business Law Today, was not deliberate but purely adventitious. Originally slated to teach torts at Boalt Hall in the 1950s, he switched to civil procedure when a staffing problem created a need in that discipline. “It was a lucky break for me,” he said. He never looked back.

Similarly, an accident of fate led him to the field of legal ethics. Concurrently with a move in 1964 to teach at the University of Chicago, Geoff became executive director of the American Bar Foundation, which led to involvement in the drafting of the Model Code of Professional Responsibility. He went on to be the principal draftsman of the Model Code of Judicial Conduct in 1972 and the reporter for the Model Rules of Professional Conduct in 1983.

It is well known that all of us take a professional responsibility course in law school as a mandatory prerequisite to the awarding of a law degree. Ethics credit is also a mainstay of many states’ mandatory continuing legal education (CLE) requirements. What is less well known is that inclusion of ethics in the core curriculum and in CLE is due to Geoff’s efforts to gain widespread recognition of the central importance of this subject.

The list of influential treatises and casebooks co-authored by Professor Hazard is impressive. Prominent among them are The Law of Lawyering (4th ed. 2015) with W. William Hodes and Peter R. Jarvis; The Law of Ethics of Lawyering (6th ed. 2017) with Susan P. Koniak, Roger C. Cramton, George M. Cohen, and W. Bradley Wendel; and Legal Ethics: A Comparative Study (2004) with Angelo Dondi. Also of particular interest to our Section’s readership, and exemplary of the breadth of Geoff’s interests, is Board Games: The Changing Shape of Corporate Power (1988) with Arthur Fleisher, Jr. and Miriam Z. Klipper, a book that examined the transformation of industry, finance, and corporate governance by the M&A wave of the 1980s.

Characteristic of Geoff’s collaborative nature was this marked preference for co-authorship. As he explained in his 2014 Business Law Today interview, “[Y]ou have to talk about your ideas with your colleague. Typically, that results in seeing things that you wouldn’t have seen if you didn’t have the conversation.”

Collaborative efforts were also, of course, at the heart of his work when he succeeded Herbert Wechsler as the fourth executive director of ALI. Serving for 15 years in that capacity, Geoff’s stewardship saw the completion of many important projects, including the Principles of Corporate Governance and the Restatement (Third) of Foreign Relations Law, and the initiation of new or updated Restatement projects in a host of areas, including Agency, The Law Governing Lawyers, Property, Restitution, Suretyship, Torts, Trusts, and Unfair Competition. He was also involved in the parturition (and increasing globalization) of several Principles of the Law projects, including Family Dissolution, Transnational Civil Procedure, and Transnational Insolvency.

For all his immense learning, Geoff was a quiet and reserved member of the Professional Responsibility Committee, but he was a reliable participant. Even when age, infirmity, or the press of other commitments prevented him from attending meetings in person, he regularly communicated his thoughts and was tremendously helpful to me during my tenure as chair of that committee. He was invariably supportive of our efforts and complimentary of the work we did when advising the Section on resolutions proposed for consideration by the House of Delegates.

Geoff Hazard’s imprint on legal ethics, and on the American legal system in general, is immanent. He was a gentleman, a scholar, a mentor, a counselor, and a friend. He will be sorely missed.

In the summer of 2016, the Uniform Law Commission (ULC) adopted a revised Uniform Unclaimed Property Act (the 2016 Act). The 2016 Act is, in a number of respects, a better product than both the 1981 and 1995 versions; unfortunately, the 2016 Act left intact and expanded a number of highly controversial—and likely unconstitutional—provisions from the prior Acts. In particular, the 2016 Act expands states’ jurisdiction to escheat unclaimed property inconsistent with federal common law. The 2016 Act purports to alter, rather than defer to, the debtor-creditor relationship, which is contrary to both federal law and the basic purpose of unclaimed property laws to return missing property to the rightful owner. The 2016 Act also lacks adequate constitutional safeguards for securities owners, whose property can be escheated and liquidated without proper notice after a relatively short period of time. For these and other reasons discussed herein, the Unclaimed Property Subcommittee of the Tax Committee of the Business Law Section voted to urge the American Bar Association to reject the 2016 Act if presented before the House of Delegates in its current form.

The 2016 Act Violates Federal Common-Law Rules Limiting States’ Jurisdiction to Escheat Unclaimed Intangible Property

In Texas v. New Jersey,^[1] the U.S. Supreme Court addressed the fundamental question of when a state has the right and power to escheat unclaimed intangible property. The court noted that for tangible property, “it has always been the unquestioned rule in all jurisdictions that only the State in which the property is located may escheat.”^[2] Intangible property has no physical situs, however, and thus initially created uncertainty as to which state had the right to escheat or take custody of such property. The Supreme Court had made clear in Western Union Telegraph Co. v. Pennsylvania^[3] that a holder of unclaimed intangible property could not, under the due process clause of the U.S. Constitution, be subject to the possible conflicting liabilities caused by two or more states seeking to escheat the same intangible property. Until Texas, however, there was no clear rule establishing which state had the right to escheat unclaimed intangible property in any particular case.

The court in Texas established two rules intended to settle “once and for all” whether a particular state has jurisdiction to escheat unclaimed intangible property. The court recognized that unclaimed intangible property is an unsatisfied “debt” that is owed by the debtor to the creditor.^[4] Reasoning that a debt is the property of the creditor, the court established a “primary rule” that “the right and power to escheat the debt should be accorded to the State of the creditor’s last known address as shown by the debtor’s books and records.”^[5] The court then established a “secondary rule,” which permits the state of domicile of the debtor to escheat the property if (1) the last known address of the owner of the property is unknown; or (2) the owner’s “last known address is in a State which does not provide for escheat of the property.”^[6] The court reaffirmed these rules in Pennsylvania v. New York and applied them strictly to require escheat of unclaimed money orders to Western Union’s state of domicile (or state of last known address, if Western Union had such records), rather than the state in which the money orders were sold.^[7]

The primary and secondary rules constitute federal common law that cannot be superseded by any state.^[8] Furthermore, these rules have been held to apply not only in the context of interstate disputes, but also in controversies between states and potential holders of unclaimed property. For example, in Am. Petrofina Co. of Tex. v. Nance,^[9] the court declared an Oklahoma escheat statute invalid “because it is inconsistent with the federal common law set forth in Texas v. New Jersey.”^[10] The court held that “[t]he Supreme Court’s decision in Texas v. New Jersey may be relied upon to prevent state officials from enforcing a state law in conflict with the Texas v. New Jersey scheme for escheat or custodial taking of unclaimed property.”^[11] The Tenth Circuit affirmed, stating, “the district court’s reasoning is in accord with our views.”^[12] The Third Circuit reached the same conclusion in N.J. Retail Merchants Ass’n v. Sidamon-Eristoff.^[13]

The Third Circuit recently revisited this issue in Marathon Petroleum Co. v. Sec’y of Finance,^[14] expressly holding that “we disagree with [the district court’s] conclusion that private parties cannot invoke federal common law to challenge a state’s authority to escheat property.”^[15] The court analyzed the issue in detail, explaining that “the reasoning of the Texas cases is directly applicable to disputes between a private individual and a state” because the federal common law rules “were created not merely to reduce conflicts between states, but also to protect individuals.”^[16] The court stated, “without a private cause of action, the Texas trilogy’s protections of property against escheatment would, in many instances, become a dead letter.”^[17] The court warned that “[d]enying a private right of action would leave property holders largely at the mercy of state governments for the vindication of their rights” and “would make it easier for states outside of the line of priority to escheat property and would require the Supreme Court to exercise or delegate its original jurisdiction in a greater number of cases, undermining one of the chief benefits of the rules of priority.”^[18] The court also noted that “[m]aking private rights contingent on state action would likewise undermine the Supreme Court’s goal of national uniformity, because whether an individual is protected would depend on whether a state brings suit to contest escheatment of the property.”^[19] The court concluded that “the Supreme Court’s desire for a uniform and consistent approach to escheatment disputes indicates that a private right of action is fully appropriate.”^[20] Finally, the court noted, “allowing private parties to sue also provides secondary benefits that serve the public interest. In protecting their own interests, private parties may also be aiding states in the maintenance of their sovereignty.”^[21]

Furthermore, the Marathon court unequivocally held that “the two states allowed to escheat under the priority rules of the Texas cases are the only states that can do so.”^[22] The court further elaborated that “[c]onstructed as federal common law, that order of priority gives first place to the state where the property owner was last known to reside. If that residence cannot be identified or if that state has disclaimed its interest in escheating the property, second in line for the opportunity to escheat is the state where the holder of the abandoned property is incorporated. Any other state is preempted by federal common law from escheating the property.”^[23] Several lower court cases have reached the same conclusion.^[24]

The 2016 Act, like the 1981 and 1995 Acts, deviates from these rules in several important respects.

The “Tertiary Rule”

First, in addition to the primary and secondary rules, the 2016 Act includes a tertiary rule, which grants the right to escheat to the state in which the transaction giving rise to the property occurred, if the property was not escheated under the primary or secondary rules.^[25] This rule is problematic for several reasons:

• First, in Texas, the Supreme Court was primarily concerned with crafting priority rules that would “unambiguously and definitely resolve disputes among states regarding the right to escheat abandoned property.”^[26] In other words, the court intended the primary and secondary rules to be the sole bases under which states may take custody of unclaimed property. If a state were permitted to adopt a tertiary rule, then different states could easily adopt conflicting tertiary rules.^[27] This would ultimately result in an interstate dispute of the sort the court expressly sought to avoid. The possibility of such additional rules would also undermine the Supreme Court’s focus on ease of administration, which was another important objective of the court in creating these rules.
• Second, in crafting the primary and secondary rules, the court stated that it wanted to avoid “[t]he uncertainty of any test which would require us in effect either to decide each escheat case on the basis of its particular facts or to devise new rules of law to apply to ever-developing new categories of facts.”^[28] On this basis, the Texas court then specifically rejected a transaction-based custody rule like that in the 2016 Act, which would allow a state to take custody of unclaimed property based on where the transaction giving rise to the property occurred.^[29] Subsequently, in Pennsylvania v. New York,^[30] the court again rejected a transaction-based custody rule proposed by Pennsylvania with respect to unclaimed money orders.
• Third, in Delaware v. New York,^[31] the court recognized that a state’s power to escheat is derived from the principle of sovereignty. However, if the tertiary rule were enforceable, it would allow the transaction state to infringe on the sovereign authority of other states.^[32] Specifically, the tertiary rule would force a holder that is incorporated in a state that does not escheat the property at issue to turn over such property to the tertiary state, which “would give states the right to override other states’ sovereign decisions regarding the exercise of custodial escheat.”^[33] The “ability to escheat necessarily entails the ability not to escheat,” and “[t]o say otherwise could force a state to escheat against its will, leading to a result inconsistent with the basic principle of sovereignty.”^[34]

The constitutionality of the tertiary rule was specifically addressed by the Third Circuit in N.J. Retail Merchs. Ass’n et al. v. Sidamon-Eristoff.^[35] In that case, the court concluded that the tertiary rule “would stand as an obstacle to executing the purposes of the federal law” and, thus, that the plaintiffs had satisfied their burden of showing that the tertiary rule was “likely preempted under Texas, Pennsylvania, and Delaware.”^[36] The Third Circuit’s decision affirmed the lower district court’s opinion, which similarly concluded that under the federal priority rules, “there is no room for a third priority position.”^[37] “If the secondary-rule state does not escheat,” the court held, “the buck stops there.”^[38]

The 2016 Act, in apparent recognition that the tertiary rule is problematic, does not apply such rule if the holder’s state of domicile “specifically exempts” the property in question.^[39] For example, if the holder is domiciled in a state that exempts gift cards from escheat, the holder need not be concerned with a state attempting to escheat gift cards on the basis that the cards were sold in the state. As a practical matter, this change is an improvement in that it reduces the number of instances in which the tertiary rule will apply. However, it does not address the key constitutional defect of that rule, which is that any tertiary rule, no matter how narrowly crafted, contravenes Texas and is thus preempted. Furthermore, as a practical matter, states often do not “specifically exempt” property from escheat, but nonetheless may not actually escheat such property. For example, a number of states repealed provisions requiring the escheat of gift cards in recognition that such escheat violates basic principles of unclaimed property law (discussed further below), but did not expressly exempt gift cards from escheat by statute. There is no constitutional or policy rationale for permitting the transaction state to escheat the property in this instance, but not where the state has “specifically exempted” the property from escheat.

Foreign-Owned Property

Like the 1981 and 1995 Acts, the 2016 Act also permits the state of domicile of the holder to escheat property if the last known address of the owner is located in a foreign country.^[40] Similar to the tertiary rule, however, the Supreme Court has not permitted the holder’s state of domicile to escheat property belonging to an owner residing in a foreign country. To the contrary, the court expressly stated in Texas that the state of domicile of the holder has the right to escheat only where the last known address of the owner of the property is unknown or “is in a State which does not provide for escheat of the property.”^[41] Accordingly, just as with the tertiary rule, a new rule providing for escheat of foreign property likewise goes beyond Texas and therefore is preempted. Indeed, as noted above, the Third Circuit reached the same conclusion in a different context in Marathon, expressly holding that “[c]onstructed as federal common law, that order of priority gives first place to the state where the property owner was last known to reside. If that residence cannot be identified or if that state has disclaimed its interest in escheating the property, second in line for the opportunity to escheat is the state where the holder of the abandoned property is incorporated. Any other state is preempted by federal common law from escheating the property.”^[42]

Accordingly, the 2016 Act’s provisions requiring escheat of foreign-owned property are likely unconstitutional on this basis alone. Moreover, the escheat of foreign-owned property also raises serious constitutional concerns under the foreign affairs doctrine^[43] and the commerce clause.^[44] In Zschernig v. Miller,^[45] for example, the Supreme Court invalidated an Oregon statute because it had more than “some incidental or indirect effect in foreign countries” and posed a “great potential for disruption and embarrassment” of the nation’s foreign relations.^[46] The statute in question barred a nonresident alien from acquiring property of an Oregon decedent by testamentary disposition, and required that the property be escheated to Oregon unless the nonresident could show that his country of origin would grant reciprocal rights to a U.S. citizen and that his government would not confiscate the inherited property.^[47] Similarly, in Japan Line, Ltd. v. County of Los Angeles,^[48] the Supreme Court held that Los Angeles County was prohibited by the commerce clause from imposing a fairly apportioned property tax on shipping containers owned by foreign companies that were physically located within the county. The court recognized that special considerations beyond those that govern the regulation of property owned by U.S. citizens come into play when states seek to regulate property owned by foreign citizens, even when that property is physically used in the United States because “[f]oreign commerce is preeminently a matter of national concern.” The court emphasized the “overriding concern” that “the Federal Government must speak with one voice when regulating commercial relations with foreign governments.”^[49] The court wanted to avoid international disputes and potential retaliation by foreign countries.^[50] These same concerns apply in the escheat context, particularly where the property is not just escheated but liquidated (as in the case of securities). Indeed, if merely taxing foreign-owned property is unconstitutional, then it follows that entirely depriving an owner of such property should similarly be unconstitutional. The escheat by states of foreign-owned property also prevents the federal government from “speak[ing] with one voice when regulating commercial relations with foreign governments.”^[51] Notwithstanding the ULC’s goals, state unclaimed property laws are anything but uniform in that the states have variously adopted different versions of the Uniform Act, deviated from the Uniform Acts in significant ways, or adopted unique unclaimed property laws.^[52] This is hardly part of the “uniform system or plan” required by law.^[53]

The escheat of foreign-owned property also may conflict with U.S. treaties with foreign countries, foreign laws, due process, and other international legal standards. Indeed, the foreign country in which the owner is located has a greater interest in regulating the unclaimed property belonging to its citizens than the U.S. state where the holder of the property is domiciled. This is in accordance with the escheat rules developed in Texas, which reflect the traditional view of escheat as an exercise of sovereignty over person and property owned by persons and the common-law concept of mobilia sequuntur personam, and which recognize that the state of address of the owner has a superior interest of the state of domicile of the holder.

As with the tertiary rule, the 2016 Act makes some effort to soften its provisions applicable to foreign-owned property, providing that escheat is permitted only by the holder’s state of domicile if the foreign country “does not provide for custodial taking of the property” (whatever that means) or the property is “specifically exempt from custodial taking” under the laws of the foreign country.^[54] The official commentary to the 2016 Act admits, however, that Texas did not permit such escheat, which under the rationale of the federal appellate courts that have addressed the issue means that such escheat is impermissible. Indeed, if the foreign country does not require the escheat of the property (but also does not “specifically exempt” it), the 2016 Act’s provision would “override” the foreign country’s “sovereign decisions regarding the exercise of custodial escheat.”^[55] As noted above, the “ability to escheat necessarily entails the ability not to escheat,” and “[t]o say otherwise could force a state to escheat against its will, leading to a result inconsistent with the basic principle of sovereignty.”^[56]

The commentary to the 2016 Act further tries to justify the escheat of foreign-owned property by offering the conclusory assertion that “the rationale used by the Court in [Zschernig v. Miller] is neither controlling nor compelling in the context of unclaimed property.” But the court’s reasoning in Zschernig should apply here. In that case, the Supreme Court invalidated an Oregon statute because it had more than “some incidental or indirect effect in foreign countries” and posed a “great potential for disruption and embarrassment” of the nation’s foreign relations.^[57] The Oregon statute required the state to evaluate foreign laws to determine whether the foreign citizen’s country of origin would grant reciprocal rights and would not confiscate the inherited property.^[58] The 2016 Act similarly requires an evaluation of a foreign country’s laws to determine if such laws “provide for escheat” or “specifically exempt” the property at issue from escheat. A state’s confiscation of supposedly unclaimed property creates a significant “potential for disruption and embarrassment” of the nation’s foreign relations, particularly where the state is not merely acting in a custodial capacity but is liquidating the property and causing the owner to lose property rights as a result. Foreigners own over $6 trillion in U.S. corporate stock, and states escheat hundreds of millions (if not billions) of dollars of such stock per year.^[59] It strains credibility to suggest that the appropriation of foreign property on such a massive scale does not have the potential to significantly impact foreign investors and relations.

The official commentary does not address the fact that the escheat of foreign-owned property conflicts with the commerce clause by regulating commercial relations with foreign countries.

Other Jurisdictional Problems

The 2016 Act also deviates from the Texas rules in other significant ways. For example, it permits a state to escheat property if the holder of the property does not have a record of the owner’s address or identity, but “the administrator has determined” by other means that the last-known address of the owner is in the state.^[60] In Texas, however, the court held that under the primary rule, “each item of property . . . is subject to escheat only by the State of the last known address of the creditor, as shown by the debtor’s books and records.”^[61] Accordingly, the court’s decision in Texas does not appear to support the use by a state of extrinsic evidence of the owner’s address to establish an obligation of the holder under the primary rule. To the contrary, as noted above, one of the key objectives of the court in creating the federal common-law rules was to establish rules that are simple and easy to administer.^[62] In particular, the court chose the primary rule because it “involves a factual issue simple and easy to resolve, and leaves no legal issue to be decided.”^[63] The court explained that “by using a standard of last known address, rather than technical legal concepts of residence and domicile, administration and application of escheat laws should be simplified.”^[64] The court’s goals of simplicity and ease of administration would be served by applying the primary rule based solely on the holder’s records. The court’s decision in Texas seems to be reasonably clear on this point, given the court stated that “since our inquiry here is not concerned with the technical domicile of the creditor, and since ease of administration is important where many small sums of money are involved, the address on the records of the debtor, which in most cases will be the only one available, should be the only relevant last-known address.”^[65]

The 2016 Act, like the 1981 and 1995 Acts, also includes language that arguably permits a holder’s state of domicile to assert unclaimed property jurisdiction over property that is not subject to escheat by the state of the last known address of the owner, an issue not expressly addressed by the court in Texas but which is inconsistent with the sovereign authority of the primary state to determine not to exercise its right to escheat the property. To the extent that the Texas decision was unclear on this point, the court’s later decisions in Pennsylvania and Delaware appeared to clarify that the secondary rule can apply only if there is no record of the owner’s address or the primary state “does not provide for escheat of intangibles”^[66] or “does not provide for escheat”^[67] at all. These subsequent articulations of the federal common-law rules suggest that the court’s intent was to allow the holder’s state of domicile to escheat the property if the first-priority state has not adopted an escheat law applicable to intangible property in general, and not that the court was intending to allow the holder’s state of domicile to escheat property exempted by the primary state. Indeed, the Third Circuit later recognized that “[w]hen fashioning the priority rules, the Supreme Court did not intend [to] . . . give states the right to override other states’ sovereign decisions regarding the exercise of custodial escheat.”^[68] The full faith and credit clause of the U.S. Constitution^[69] would also apparently require the second-priority state to give full recognition to the first-priority state’s sovereign right not to escheat the exempted property. The full faith and credit clause expresses “a unifying principle . . . looking toward maximum enforcement in each state of the obligations and rights created or recognized by the statutes of sister states,”^[70] and “preserve[s] rights acquired or confirmed under the public acts and judicial proceedings of one state by requiring recognition of their validity in others.”^[71]

The 2016 Act’s provision is an improvement over that in the 1981 and 1995 Acts because it prohibits the state of domicile from escheating property that is “specifically exempted” from escheat by the state in which the owner is located. However, as discussed with respect to the tertiary rule and the provision applicable to foreign-owned property, although this clarification is helpful from a practical perspective where the property is specifically exempted, it does not remedy the constitutional defect. The federal common-law rules appear to prohibit these types of alternative claims outright, even if they are “watered down” from those in the 1981 and 1995 Acts.

The 2016 Act also includes a new provision defining the last-known address of the owner for purposes of establishing state jurisdiction to escheat to mean “any description, code, or other indication of the location of the apparent owner which identifies the state, even if the description, code, or indication of location is not sufficient to direct the delivery of first-class United States mail to the apparent owner.”^[72] The 2016 Act provides that “[i]f the United States postal zip code associated with the apparent owner is for a post office located in this state, this state is deemed to be the state of the last-known address of the apparent owner unless other records associated with the apparent owner specifically identify the physical address of the apparent owner to be in another state.”^[73] By contrast, the 1981 Act defined “last known address” to mean “a description of the location of the apparent owner sufficient for the purpose of the delivery of mail.” The 1995 Act was silent on the qualifying address issue. The official commentary to the 2016 Act justifies the change as follows:

the policy underlying the rules establishing priority among contending states is that unclaimed property should be held by the administrator of the state where the owner is most likely to look for it, which is the state in which the owner resided, i.e., had his or her ‘last known address’, if that state can be determined. It follows that limiting the first priority only to states determined by having an address suitable for mailing frustrates that policy when the owner’s state of last known address can be determined another way.

This explanation makes a certain amount of practical sense. However, in Texas, the court did not define the term “address,” and thus it would seem that the court intended the ordinary meaning of the term to apply.^[74] The ordinary meaning of the term “address” has been defined to be a mailing address.^[75] It would therefore appear that the 2016 Act’s definition of “address,” although perhaps justifiable from a policy perspective, may be preempted by the federal common law jurisdictional escheat rules. Indeed, as the Supreme Court cautioned in Pennsylvania, “to vary the application of the Texas rule according to the adequacy of the debtor’s records would require this Court to do precisely what we said should be avoided—that is, ‘to decide each escheat case on the basis of its particular facts or to devise new rules of law to apply to ever-developing new categories of facts.”^[76] Including a provision that is likely superseded by federal law will invite both interstate disputes and disputes between holders and states. As things currently stand, 17 states still define “last known address” to be a description of the owner’s location sufficient for the purpose of delivery of mail.^[77] Only eight states have adopted the definition from the 2016 Act or a similar definition.^[78]

The 2016 Act Continues to Violate the Fundamental Principle in State Unclaimed Property Laws That the State’s Right to Escheat Is Derived from the Owner’s Right to Claim the Property

In Delaware v. New York,^[79] the Supreme Court clarified that the federal common-law rules established in Texas “cannot be severed from the law that creates the underlying creditor-debtor relationships.” Thus, “[i]n framing a State’s power of escheat, we must first look to the law that creates property and binds persons to honor property rights.”^[80] Put more simply: “the holder’s legal obligations not only defined the escheatable property at issue, but also carefully identified the relevant ‘debtors’ and ‘creditors.’”^[81] Accordingly, a state’s right to escheat is defined by the legal obligation that is owed by the debtor to the unknown or absent creditor, and the debtor—and not any other person—has the legal obligation to comply with any applicable unclaimed property laws.

Accordingly, Delaware stands for the common-sense principle that the state can only escheat property that is actually owed to the creditor or owner. Indeed, if this were not true, then the state would be escheating property from someone who does not owe it for the purpose of giving it to someone to whom it does not belong. The principle that the state’s rights are derived from those of the absentee creditor, and thus limited to property actually owed to that creditor, has become known as the principle of derivative rights or as the “derivative rights doctrine.”^[82] Numerous courts have embraced this doctrine.^[83]

The court in Delaware clarified that in determining whether a state has the right to escheat unclaimed property, the first step is to “determine the precise debtor-creditor relationship as defined by the law that creates the property at issue.”^[84] Accordingly, the court found that the “holder” of unclaimed property with the potential obligation to report and remit such property to the state is the “debtor” or the “obligor.” As the court stated: “[f]unds held by a debtor become subject to escheat because the debtor has no interest in the funds.”^[85] Conversely, if a person does have an interest in the property the state seeks to escheat, then the person is not the legal debtor, and so cannot be the “holder” and cannot have an obligation to escheat the property.

The court’s analysis and conclusion is consistent with the age-old axiom that escheat is a right of succession, pursuant to which the state takes custody of property owed to another person who has failed to claim that property. Indeed, citing the Supreme Court’s earlier decision in Christianson v. King County,^[86] one federal district court more explicitly summarized the derivative rights principle as follows:

The United States Supreme Court has distinctly held that the right of escheat is a right of succession, rather that [sic] an independent claim to the property escheated. The result of that is this: ‘The State’s right is purely derivative; it takes only the interest of the unknown or absentee owner.’^[87]

The 2016 Act deviates from the federal common law principle of derivative rights—i.e., that the holder’s unclaimed property obligation must be based on “the precise debtor-creditor relationship as defined by the law that creates the property at issue”^[88]—in several important respects.

Perhaps most importantly, the 2016 Act, like the 1981 and 1995 Acts, includes a so-called antilimitations provision, which provides that:

Expiration, before, on, or after the effective date of this [act], of a period of limitation on an owner’s right to receive or recover property, whether specified by contract, statute, or court order, does not prevent the property from being presumed abandoned or affect the duty of a holder under this [act] to file a report or pay or deliver property to the administrator.^[89]

These antilimitations provisions were expanded from those in the 1954 and 1966 Acts to include “contractual” limitations. Thus, these revised provisions purport to override contractual restrictions on an owner’s right to claim property—even if those restrictions are valid and enforceable under applicable laws governing the debtor-creditor relationship. These provisions purport to change the underlying debtor-creditor relationship, rather than defer to it, in direct contravention of Delaware v. New York.

States have argued that the Supreme Court’s 1948 decision in Connecticut Mutual Life Ins. Co. v. Moore^[90] somehow overrides Delaware (decided 45 years later) and permits states to ignore contractual conditions that may prevent the property from being owed. However, Connecticut Mutual involved the narrow issue of whether New York’s escheat statute applicable to life insurance proceeds violated the contract clause of the U.S. Constitution. It did not address the derivative rights principle other than to suggest that a state cannot constitutionally alter substantive contract conditions existing between the parties.

The law at issue in Connecticut Mutual permitted escheat of unpaid life insurance proceeds owed under preexisting policies even without satisfying the insurance policy conditions requiring proof of death and surrender of the policy. The insurance companies argued that these contract conditions served a substantive purpose—they were intended to provide information from which the companies could establish defenses to their obligation to pay. Consequently, the companies argued that New York’s attempt to require an insurance company to pay the policy proceeds to the state without satisfaction of these conditions materially changed the terms of its contracts with policyholders, and therefore substantially impaired the contracts in violation of the contract clause. In rejecting this argument, the court stated that the “enforced variations from the policy provisions” were not unconstitutional because otherwise “the insurance companies would retain moneys contracted to be paid on condition and which normally they would have been required to pay.”^[91] In explaining its holding, the court stated:

When the state undertakes the protection of abandoned property claims, it would be beyond a reasonable requirement to compel the state to comply with conditions that may be proper as between the contracting parties. The state is acting as a conservator, not as a party to a contract.^[92]

Nevertheless, the court did not hold that a state may simply ignore all contract conditions that exist between a debtor and creditor, and thereby claim as property an amount that is not owed. To the contrary, the court pointed out that the New York Court of Appeals had construed the escheat law to leave “open to the insurance companies all defenses except the statute of limitations, noncompliance with policy provisions calling for proof of death or of other designated contingency, and failure to surrender a policy on making a claim.”^[93]

Strikingly, none of the potential defenses cited by the court or the insurers was that the insured had not actually died. Thus, all of the parties and the court assumed that the insurers would have had actual knowledge of death before escheating—the standard later adopted in the 1981 Act. Given that the court did not place on the insurers any obligation to affirmatively determine whether insureds had died, such an assumption would have been quite reasonable. Therefore, the “proof of death” in question was the merely formalistic substantiation required by the policies. Indeed, given the highly restricted ability at that time to affirmatively determine deaths, insurers would have had no ability to escheat without having actual knowledge of death, which in most cases could arise only by having been provided with some reliable notice of the death, even if not in the exact form required by the policy and the insurance laws of the state.

In other words, the court addressed only formalistic contract conditions on property that was already classified as “abandoned” by the unclaimed property statute and “which normally [the insurance companies] would have been required to pay.”^[94] The court specifically recognized that nonformalistic conditions may be raised as defenses to escheat if those conditions have not been satisfied.^[95] Connecticut Mutual would therefore not support a state escheat law that provides that the state need not satisfy a substantive condition of ownership. Indeed, in distinguishing the Connecticut Mutual decision, one court stated that the Supreme Court excused compliance with contract conditions “which only go to formalism of interest, such as proof of death . . . but it is nevertheless held to compliance with matters that deal with substantive determination of ownership.”^[96] Furthermore, a number of courts have subsequently denied state claims to property where the purported owner of the property had not satisfied certain conditions to claim the property.^[97]

More importantly, even if a state could adopt escheat laws that would override other, more substantive conditions without violating the contract clause, that does not mean that such laws would not violate the federal common-law rules set forth in Delaware v. New York, the takings clause, substantive due process, or other laws. These issues were never considered by the Connecticut Mutual court; thus, that decision does not stand for the proposition that such escheat laws are valid. Indeed, the Delaware court, citing Connecticut Mutual, stated:

Unless we define the terms “creditor” and “debtor” according to positive law, we might “permit intangible property rights to be cut off or adversely affected by state action . . . in a forum having no continuing relationship to any of the parties to the proceedings.” Pennsylvania at 213. Cf. Connecticut Mut. Life Ins. Co. v. Moore, 333 U.S. 541, 549–550, 92 L. Ed. 863, 68 S. Ct. 682 (1948) (upholding New York’s escheat of unclaimed insurance benefits only “as to policies issued for delivery in New York upon the lives of persons then resident therein where the insured continues to be a resident and the beneficiary is a resident at . . . maturity”). Texas and Pennsylvania avoided this conundrum by resolving escheat disputes according to the law that creates debtor creditor relationships; only a state with a clear connection to the creditor or the debtor may escheat.^[98]

Given the court’s emphatic requirement in Delaware that a debtor-creditor relationship exist under the positive law of the state, the court would not have cited Connecticut Mutual if that case stood for the broad proposition that states are not bound by contractual contingencies. Delaware v. New York does not allow the state to create a debtor-creditor relationship where none exists, and neither does Connecticut Mutual.^[99]

The 2016 Act (like the 1981 and 1995 Acts before it) also attempts to justify the contractual antilimitations provisions by citing three so-called private escheat cases. Each of these cases involved unusual factual situations in which the courts found that the holders of unclaimed property had unilaterally taken actions designed specifically to circumvent state unclaimed property laws by cutting off the rights of owners after a specified period of time.^[100] The private escheat actions are in stark contrast to most time-based contractual limitations provisions entered into between sophisticated business entities, which are entered into for valid business reasons, such as to provide certainty to the parties. Furthermore, all of the private escheat cases predate Delaware v. New York; thus, none of them considered the restraints imposed by federal common law on the state’s jurisdiction to escheat.

In limited recognition of the derivative rights principle, the 2016 Act includes narrow, optional exemptions for gift cards, store credits, and other similar obligations to provide merchandise or services rather than cash.^[101] Yet, even these narrow—and optional—exemptions appear to be merely a nod to political reality and do not adequately take account the fundamental constitutional issue that the state’s rights are based on the underlying debtor-creditor relationship; therefore, if cash is not owed to the creditor, the state should be constitutionally barred from demanding the escheatment of cash from the holder.^[102]

It is worth noting the 2016 Act does contain one helpful clarification regarding the definition of “holder,” which is consistent with Delaware. The official comments to the Act provide that:

In most instances, there should be only one holder of obligations for unclaimed property purposes—the exception being where there are multiple obligors directly liable on a specific obligation, such as co-borrowers on a loan. In circumstances where more than one party potentially meets the definition of holder, the party which is primarily obligated to the owner should be treated as the holder for purposes of application of unclaimed property laws. See, e.g., Clymer v. Summit Bancorp, 792 A.2d 396 (NJ 2002) (issuer of bonds, not trustee in possession of funds to be used to pay bondholders and having contractual obligation to issue such payments, is the holder for purposes of determining applicable dormancy period). Where one party has a direct legal obligation to the owner of the property, and another party has possession of funds associated with the property and an obligation to hold it for the account of, or to pay or deliver it to, the owner solely by virtue of a contractual relationship with the party who is directly obligated to the owner, but who has not assumed direct liability to the owner, it is the party who is directly obligated to the owner who is the holder for purposes of the act. For example, the issuer of stock or bonds, and not a third party transfer agent or paying agent contracted by the issuer, would, in such circumstances, be the holder of the obligation and any unclaimed dividends on the stock or interest on the bonds. On the other hand, where a party contractually assumes direct liability to the owner for an obligation and is in possession of the funds associated with such obligation, the assuming party becomes the applicable holder for purposes of application of unclaimed property obligations.

This language still leaves some ambiguity where a party contractually assumes direct liability to the owner, but is not in possession of the funds. Presumably, in that situation, the “holder” is still the obligor, consistent with Delaware, rather than the person in possession of property, but it would have been preferable if the 2016 Act had made that clear.

The 2016 Act Includes Some Improvements to Better Protect Securities Owners, but Does Not Go Far Enough to Satisfy Constitutional Requirements

The 2016 Act provides that the dormancy period for securities for abandonment purposes is not triggered until mail sent to the owner has been returned as undeliverable.^[103] This is commonly referred to as a Returned by Post Office (RPO) dormancy standard and has already been adopted by many (but certainly not all) states. Unlike the 1995 Act, this new RPO rule applies to all securities, not just nondividend-paying securities or securities enrolled in a dividend reinvestment account. This new rule is consistent with federal securities regulations promulgated in 1997 by the Securities and Exchange Commission,^[104] which were enacted specifically to protect security holders from having their shares escheated by requiring transfer agents, brokers, and dealers to exercise reasonable care to attempt to locate “lost security holders.”^[105] For this purpose, the regulation defines a “lost security holder” to mean a security holder to whom mail has been sent at the address of record and returned as undeliverable and for whom the transfer agent, broker, or dealer has not received information regarding the security holder’s new address. The RPO rule is consistent with this regulation because under this rule, the securities will not be escheated until mail has been returned as undeliverable and the issuer of the securities (or other party) has conducted the requisite due diligence under federal law to try to locate the missing owner.

The 2016 Act also includes new notice provisions to owners of escheated securities. Specifically, the revised Act provides that the state must send written notice by first-class mail to the apparent owner and must maintain an electronically searchable website or database accessible by the public which contains the names reported to the administrator of all apparent owners for whom property is being held by the administrator.^[106] These provisions are generally an improvement over those in the 1981 and 1995 Acts; however, although such notice may satisfy constitutional requirements for certain types of escheated property, it is likely still constitutionally inadequate to permit liquidation of securities. First, the 2016 Act is conspicuously silent as to when such notice must be sent. Even the 1981 Act required notice to be published within the year following the year of escheat (although the 1981 Act was deficient in not requiring notice by mail and other means except by newspaper publication, which was almost certainly constitutionally inadequate^[107]). Second, the 2016 Act does not require the notice to inform the owner that the state will liquidate the securities, and thus fails to apprise the owner of the potential harm that could result from the escheatment of the securities. Third, the 2016 Act requires the notice to be sent to an address that is already presumed to be invalid because the securities are reported as unclaimed after the holder’s mail to the last known address is returned undeliverable. The Supreme Court has held that to satisfy due process, “[t]he means employed [for the notice] must be such as one desirous of actually informing the absentee might reasonably adopt to accomplish it.”^[108] Thus, “notice required will vary with circumstances and conditions.”^[109] A notice process that is a “mere gesture” is not due process.^[110]

To satisfy due process, therefore, the state must undertake further analysis of the type of reasonable action appropriate to attempt to locate the owner of unclaimed securities to provide notice of the impending sale of the owner’s property. Indeed, in Jones v. Flowers, the court expressly held that “when mailed notice of a tax sale is returned unclaimed, the State must take additional reasonable steps to attempt to provide notice to the property owner before selling his property, if it is practicable to do so.”^[111] The court explained that it did not think that “a person who actually desired to inform a real property owner of an impending tax sale of a house he owns would do nothing when a certified letter sent to the owner is returned unclaimed,” and “failure to follow up would be unreasonable, despite the fact that the letters were reasonably calculated to reach their intended recipients when delivered to the postman.”^[112] The court’s other rulings further support the conclusion that further notice is required if the regular mailing is known to be ineffective or if it would be unreasonable not to do so based on the other facts and circumstances involved.^[113] Indeed, in a recent concurring opinion issued by Justice Alito (joined by Justice Thomas) in the U.S. Supreme Court’s denial of certiorari in Taylor v. Yee,^[114] Justice Alito made clear that the constitutional issue of adequate notice before seizing private property is an “important” one. Justice Alito stated that “[w]hen a State is required to give notice, it must do so through processes ‘reasonably calculated’ to reach the interested party—here, the property owner.” Furthermore, Justice Alito specifically suggested that states should take advantage of changes in technology that make it easier to locate owners and return their property to them. Accordingly, we believe that the states should be required to utilize other records available to them, such as tax and real estate records, motor vehicle registration databases, the State Vital Statistics database, the U.S. Postal Service’s National Change of Address database, and other publicly available databases such as Accurint or Google to try to locate the missing owner and reunite him or her with the escheated securities.^[115] Such actions should be taken well before the securities are liquidated.

The escheat and liquidation provisions in the 2016 Act likely do not satisfy substantive due process and takings concerns. The 2016 Act prohibits the state from selling the owner’s securities within the first three years following the remittance of dormant securities, and requires the owner be “made whole” if the state liquidates the securities during the three years following this “no liquidation” period—thus effectively providing six years of protection. At the same time, the 2016 Act shortens the dormancy period in the 1995 Act from five years to three years. Thus, whereas the 1995 Act provided a total of eight years of protection, the 2016 Act provides a total of nine years of protection. To be sure, every year counts, and so the 2016 Act is at least moving in the right direction.

However, that does not mean there is no taking. To the contrary, a state’s escheat and liquidation of securities is a physical appropriation of property giving rise to a per se “taking” because the owner loses the entire “bundle” of rights in the securities.^[116] When a government “physically takes possession of an interest in property,” it has a “categorical duty to compensate the former owner,” regardless of whether it takes the entire property or merely a portion thereof.”^[117] The government “is required to pay for that share no matter how small.”^[118] Thus, the issue is how much compensation must be paid by the state. There is scant case law involving takings of securities; however, in United States v. Miller,^[119] the Supreme Court held that “[t]he owner is to be put in as good [a] position pecuniarily as he would have occupied if his property had not been taken.” In addition, in Seaboard Air Line Ry. Co. v. United States,^[120] the court specifically held that where the state seized land belonging to an owner, but the owner was not compensated until after the taking, the amount of just compensation to be paid to the owner was not limited to the value of the land at the time of the taking. Thus, any failure of the state to make an owner whole appears to contravene Seaboard, regardless of when the owner comes forward.^[121] Indeed, New York—which has a significant state interest in escheating securities—has adopted a permanent “make whole” provision for this reason.

States have argued that the escheat and liquidation of securities (or any property) does not constitute a taking based on Texaco, Inc. v. Short,^[122] in which the court held there was no taking where the former owner had abandoned his property and therefore “retain[ed] no interest for which he may claim compensation.”^[123] But this argument confuses “unclaimed” property with “abandoned” property. Modern custodial escheat laws do not involve abandoned property at all, as was the case in Texaco. They involve property that is merely “unclaimed” by the owner often because it has been temporarily forgotten, as opposed to “abandoned” property, which normally indicates an affirmative intent to relinquish rights in the property (or at the very least, a substantial lack of contact with the property such that it would be reasonable to presume the owner had intended to abandon it). That is why the Uniform Acts provide for much shorter dormancy periods for unclaimed property than for older laws involving property that was actually abandoned. One cannot reasonably contend that a person has relinquished all property rights in his or her securities simply because one has not affirmatively accessed his or her account for three, five, or even nine years. Indeed, in Texaco, the state law at issue assumed mineral interests were abandoned after those property rights were left unused by the owner for 22 years.

Furthermore, the court made clear that “[w]e need not decide today whether the State may indulge in a similar assumption in cases in which the statutory period of nonuse is shorter than that involved here, or in which the interest affected is such that concepts of ‘use’ or ‘nonuse’ have little meaning.”^[124] Securities are passive assets such that “concepts of ‘use’ or ‘nonuse’ have little meaning,” and no regular activity is expected. Thus, it is unclear that the court would sanction even a 22-year period for the escheat and liquidation of securities, particularly given the proliferation of target-date mutual funds, buy-and-hold strategies, and other investments or practices that encourage the investor not to touch the securities for decades. Indeed, in Cerajeski v. Zoeller^,[125] the Seventh Circuit specifically expressed that a three-year dormancy period for interest “present[s] a serious question whether it is consistent with the requirement in the Fourteenth Amendment that property not be taken without due process of law.”

Accordingly, the 2016 Act ultimately confuses the distinction between property that is merely “unclaimed” and not “abandoned.” The short dormancy period in the Act is consistent with the concept of unclaimed property, but the state’s ability to liquidate securities without recourse is more consistent with the concept of abandoned property. If a state wants to be able to liquidate securities and not make the owner whole, it must adopt a sufficiently long dormancy period after which it is reasonable to presume that the securities are in fact abandoned and the owner has relinquished his or her rights. Alternatively, if the state does not liquidate the securities (or is willing to make the owner whole), a shorter dormancy period may be reasonable.

The 2016 Act’s Provisions Permitting the Use of Contingent-Fee Audit Firms Also Raise Significant Constitutional Concerns

The 2016 Act expressly permits states to use a third-party audit firm that is compensated on a contingent-fee basis. The official commentary explains that “while use of contingent fee auditors can be viewed as controversial, state administrators contend these auditors are necessary for audits to be undertaken.”^[126] The 2016 Act does, however, include some minor limitations on the use of such auditors. The official commentary summarized these provisions as follows:

this section limits any actual conflict of interest, or the appearance of conflict of interest, between the administrator and the contractor conducting the examination by precluding the administrator from contracting with related persons, and requiring that such third party auditing contracts be awarded on a competitive bid basis. This provision mandates that a person who is to undergo an examination or be audited by a third party contractor be given unredacted copies of the contract.

These provisions avoid the core issue, however, which is whether the use of contingent-fee auditors violates due process or public policy.

Since the early 20th century, the Supreme Court has held in Tumey v. Ohio^[127] that there is a violation of due process by a system that permits a person to be fined by someone who has direct pecuniary interest in the fine that is imposed. Although the Supreme Court has never considered the validity of using private contingent-fee audit firms, other courts have found that the use of such firms violates due process or public policy. For example, in Sears, Roebuck & Co. v. Parsons,^[128] the Georgia Supreme Court held that a contract to use a contingent-fee tax audit firm was void, reasoning that:

The power to tax rests exclusively with the government. . . . In the exercise of that power, the government by necessity acts through its agents. However, this necessity does not require nor authorize the creation of a contractual relationship by which the agent contingently shares in a percentage of the tax collected, and we hold that such an agreement offends public policy. The people’s entitlement to fair and impartial tax assessments lies at the heart of our system, and, indeed, was a basic principle upon which this country was founded. Fairness and impartiality are threatened where a private organization has a financial stake in the amount of tax collected as a result of the assessment it recommends.

The Wyoming Supreme Court reached a similar conclusion in MacDougall v. Board of Land Commissioners of the State of Wyoming.^[129] The court reasoned as follows:

No rule of law can be sound which encourages officials to neglect their duty. If state officials, charged with the collection of money due to the state under contract, were permitted to act merely perfunctorily, fail to ascertain the amount due, and in a month or a year or other time, were allowed to hire experts at large expense to do what they themselves should have done, they might deprive the state of large amounts of money, which could, by their own proper efforts made at the time, have been easily saved. Not alone would this encourage neglect of duty on their part, which is against public policy, but it might easily open wide the door to fraud, which cannot be countenanced.^[130]

In Yankee Gas Co. v. City of Meriden,^[131] the Connecticut Superior Court, relying on Tumey, held that a city’s agreement with a contract audit firm violated due process where the firm was compensated based on a percentage of the additional tax collected as a result of the audits. The court held that “the risk of a due process violation is inherent” when the person determining the tax liability has “a direct financial interest in the amount of tax assessed.”^[132]

To be sure, there are also a number of cases that have reached the opposite result, upholding the use of contingent-fee tax audit arrangements. For example, in Appeal of Philip Morris U.S.A.,^[133] the North Carolina Supreme Court held that a contingent-fee tax auditor’s contract with a local county did not violate public policy. Similarly, the Kansas Supreme Court upheld a contingent-fee “tax ferret” arrangement (in which the firm is hired to identify taxpayers that have a high probability of underreporting taxes) in Dillon Stores v. Lovelady.^[134]

These cases cannot easily be reconciled, and the due process and public policy concerns are magnified in the case of unclaimed property audits, which are almost always conducted on a multistate basis (often involving over 30 states at once). Thus, to withstand scrutiny, it appears that the administrator must, at a minimum, exercise oversight and control over the contractor and must make all material decisions regarding the potential liability of the putative holder. As a practical matter, this may prove difficult in that many state administrators currently lack the necessary expertise in unclaimed property matters, and thus give substantial deference to the contract audit firm. Although it is understandable for the states to operate in this manner, it is this type of deference that is precisely the problem.

A recent case, Temple-Inland, Inc. v. Cook,^[135] would appear to present a textbook example of what can go wrong where an audit is conducted by a private firm on a contingent-fee basis. That case involved the issue of whether Delaware’s audit practices, including its methods for estimating unclaimed property liability, were unconstitutional. The court concluded that during the course of Temple-Inland’s audit, Delaware and its audit firm “engaged in a game of ‘gotcha’ that shocks the conscience” sufficient to violate Temple-Inland’s substantive due process rights because Delaware:

(i) waited 22 years to audit [Temple-Inland]; (ii) exploited loopholes in the statute of limitations; (iii) never properly notified holders regarding the need to maintain unclaimed property records longer than is standard; (iv) failed to articulate any legitimate state interest in retroactively applying Section 1155 except to raise revenue; (v) employed a method of estimation where characteristics that favored liability were replicated across the whole, but characteristics that reduced liability were ignored; and (viii) [sic] subjected [Temple-Inland] to multiple liability.^[136]

The Temple-Inland decision rejected Delaware’s audit practice of estimating unclaimed property owed to Delaware in years for which the holder lacks complete records based on unclaimed property owed by Temple-Inland to persons in all states in the base years. The court held that such a methodology “is contrary to the fundamental principle of estimation,”^[137] which requires both the existence and the characteristics of property from the base years to be extrapolated into the reach-back years. The court then made abundantly clear that “[i]f the property in base years shows an address in another state, then the characteristic of that property has to be extrapolated into the reach back years.”^[138] Delaware’s methodology was therefore invalid because it “created significantly misleading results” by not replicating the “characteristics and qualities of the property within the sample . . . across the whole.”^[139] Put more simply, Delaware was improperly trying to escheat vastly much more property through the use of estimation than it would have received had the holder reported the property in the first place. The court also held Delaware’s “purported reasons for applying [the estimation statute] retroactively [i.e., to raise revenue] do not withstand scrutiny.”^[140] The court explained that “unclaimed property laws were never intended to be a tax mechanism whereby states can raise revenue as needed for the general welfare.”^[141] Thus, “[s]tates violate substantive due process if the sole purpose of enacting an unclaimed property law is to raise revenue.”^[142]

Of course, some of this improper behavior may have been the fault of the state itself, rather than its auditor, because Delaware is notorious for assessing huge sums against companies that conduct little or no business in the state.^[143] On the other hand, the two are perhaps inextricably linked, with the audit firm earning over $200 million from its contingent-fee arrangement with Delaware over the course of a decade, and providing lucrative retirement deals for several former high-level unclaimed property officials, including the Delaware State Escheator himself and a Deputy Attorney General.^[144]

In any event, it appears that a court will soon weigh in regarding the validity of a contingent-fee multistate unclaimed property audit arrangement. In Plains All American Pipeline, L.P. v. Cook et al.,^[145] the Third Circuit recently held that the use of a contingent-fee auditor in such an audit raises significant due process concerns, given the financial stake that the auditor has in the outcome of the audit, and has remanded the case to the district court to address that issue on the merits.

The 2016 Act Does Include Certain Improvements Compared to the 1981 Act and 1995 Acts

It should be noted that, notwithstanding these constitutional infirmities, the 2016 Act does include some notable improvements as compared to the 1981 and 1995 Acts. Perhaps the most substantial improvement is the statute of limitations provision. The 2016 Act restores the 10-year statute of limitations from the 1981 Act and provides for a five-year statute of limitations if the holder has filed a nonfraudulent report with the administrator.^[146] There are several benefits to this bifurcated approach. First, it encourages businesses to file nonfraudulent returns so that they can trigger the earlier statute of limitations. By contrast, under the 1981 Act’s rule, the statute of limitations is the same (10 years), regardless of whether a return is filed. This creates a disincentive to file a return. Another benefit of this bifurcated approach is that it encourages states to review returns and issue assessments against delinquent holders more promptly. This will serve the primary goal of these laws in returning property to the rightful owner.

The 2016 Act also includes an optional administrative appeals procedure for the first time; however, the procedure merely provides that a putative holder may initiate a proceeding under the state’s administrative procedures act for review of the administrator’s audit determination in an audit.^[147]

Conclusion

State unclaimed property laws have been trending in the wrong direction for over 30 years in that such laws have been greatly expanded in unconstitutional ways for the purpose of generating revenue for states at the expense of both owners and putative holders of unclaimed property. The 2016 Act—while containing some notable improvements from the 1981 and 1995 Acts—does little to reverse this alarming trend and continues to include provisions that are likely unconstitutional. Accordingly, we urge the American Bar Association not to endorse the 2016 Act until these constitutional infirmities are adequately addressed.

[1]              379 U.S. 674, 678 (1965).

[2]             Id. at 677.

[3]              368 U.S. 71, 75 (1961).

[4]              Texas, 379 U.S. at 680.

[5]              Id. at 680–81.

[6]              Id. at 682.

[7]              Pennsylvania v. New York, 407 U.S. 206 (1972). Congress later adopted a federal statute which provides that money orders and traveler’s checks are escheatable to (1) the state in which such instruments are sold, if the holder has a record of such information; or (2) the state of principal place of business of the holder, if it lacks such a record. 12 U.S.C. § 2503. This is the only exception that has been adopted to the jurisdictional rules established by the court in Texas.

[8]              See, e.g., Illinois v. City of Milwaukee, 406 U.S. 91, 105–6 (1972), later opinion, 451 U.S. 304 (1981) (characterizing the decision in Texas v. New Jersey as an example of federal common law); Delaware v. New York, 507 U.S. 490, 500 (1993) (“no state may supersede” these rules); English v. Gen. Elec. Co., 496 U.S. 72, 79 (1990); Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310, 314 (1955) (“States can no more override . . . [federal] judicial rules validly fashioned than they can override Acts of Congress.”).

[9]              697 F. Supp. 1183, 1190 (W.D. Okla. 1986), aff’d, 859 F.2d 840 (10th Cir. 1988).

[10]             Id. at 1190.

[11]             Id. at 1187.

[12]             Am. Petrofina Co., 859 F.2d at 842.

[13]             669 F.3d 374 (2012).

[14]             2017 U.S. App. LEXIS 24437 (3d Cir. 2017).

[15]             Id. at *3.

[16]             Id. at *23.

[17]             Id. at *25.

[18]             Id. at *26.

[19]             Id.

[20]             Id.

[21]             Id.

[22]             Id. at *19 (emphasis in original).

[23]             Id. at *2 (emphasis added).

[24]             See, e.g., Nellius v. Tampax, Inc., 394 A.2d 233 (Del. Ch. 1978); State ex rel. Higgins v. SourceGas, LLC, No. CIVAN11C07193MMJCCLD, 2012 WL 1721783 (Del. Super. Ct. May 15, 2012); State ex rel. French v. Card Compliant, LLC, 2015 Del. Super. LEXIS 1069, at *6 (Nov. 23, 2015); Temple-Inland, Inc. v. Cook, 192 F. Supp. 3d 527 (D. Del. 2016). A few recent federal district court cases in Delaware have reached the opposite result, but those cases were superseded by the Third Circuit’s opinions in N.J. Retail Merchs. Ass’n and Marathon Petroleum, 2016 U.S. Dist. LEXIS 130358 (D. Del. Sept. 23, 2016); Office Depot, Inc. v. Cook, 2017 U.S. Dist. LEXIS 30210 (D. Del. Mar. 3, 2017); State ex rel. French v. Card Compliant, LLC et al., Civ. Action No. 14-688-GMS (Dec. 10, 2014) (Judge Sleet’s later decision in Temple-Inland, Inc., 192 F. Supp. 3d 527, also indicates that he has changed his mind on this issue).

[25]             2016 Act, § 305. See also 1981 Act, § 3(6); 1995 Act, § 4(6).

[26]             N.J. Retail Merchs. Ass’n et al. v. Sidamon-Eristoff, 669 F.3d 374, 394 (3rd Cir. 2012). The Supreme Court stated that it wanted to “settle the question” of which state will be entitled to escheat unclaimed property in any given circumstance. Texas, 379 U.S. at 677.

[27]             The risk of competing claims is amplified when considering the location of an intangible transaction where the debtor, creditor, and controlling law may be located in multiple jurisdictions.

[28]             Texas, 379 U.S. at 679.

[29]             The court held that “uncertainties” would result “if we were to attempt in each case to determine the State in which the debt was created and allow it to escheat. Any rule leaving so much for decision on a case-by-case basis should not be adopted unless none is available which is more certain and yet still fair.” Id. at 680. Determining the state in which the transaction occurred is particularly problematic for e-commerce or telephone transactions, which often involve parties in multiple states.

[30]             407 U.S. 206 (1972).

[31]             507 U.S. 490, 503 (1993).

[32]             N.J. Retail Merchs. Ass’n, 669 F.3d at 374.

[33]             Id. at 395.

[34]             Id.

[35]             669 F.3d 374.

[36]             Id. at 396.

[37]             N.J. Retail Merchs. Ass’n et al. v. Sidamon-Eristoff, 755 F. Supp. 2d 556 (D.N.J. 2010).

[38]             Id.

[39]             2016 Act, § 305.

[40]             Id. at § 304. See also 1981 Act, §§ 3, 36; 1995 Act, §§ 4, 26.

[41]             Texas, 379 U.S. at 682 (emphasis added).

[42]             Marathon Petro. Corp., 2017 U.S. App. LEXIS 24437, at *2 (emphasis added).

[43]             The U.S. Constitution vests foreign affairs powers exclusively in the federal government rather than the states. Chae Chan Ping v. United States, 130 U.S. 581, 606 (1889); see also United States v. Pink, 315 U.S. 203, 233 (1942); Bowman v. Chicago & Nw. Ry. Co., 125 U.S. 465, 482 (1888); U.S. Const. art. I, §8, cl. 3; art. II, §2, cl. 2; art. 1, §10, cl. 1–3.

[44]             U.S. Const., art. 1, §8, cl. 3 (Congress, rather than the states, shall have the sole and exclusive power to regulate commerce “with foreign Nations . . . .”); Buttfield v. Stranahan, 192 U.S. 470, 493 (1904) (Congress’s power over foreign commerce is “exclusive and absolute”).

[45]             389 U.S. 429 (1968).

[46]             Id. at 435.

[47]             Id. at 430.

[48]             441 U.S. 444 (1979).

[49]             Id. at 449 (quoting Michelin Tire Corp. v. Wages, 423 U.S. 470 (1976)).

[50]             Id. at 450–51.

[51]             Id. at 449.

[52]             All states have adopted some form of unclaimed property law, so the possibility that no state law governs has virtually disappeared with the possible exception of a few remote nonstate territories or possessions of the United States.

[53]             Japan Line, 441 U.S. at 457.

[54]             2016 Act, § 304.

[55]             N.J. Retail Merchs. Ass’n, 669 F.3d at 395.

[56]             Id.

[57]             Zschernig, 389 U.S. at 435.

[58]             Id. at 430.

[59]             U.S. Long-Term Securities Held by Foreign Residents, available at http://ticdata.treasury.gov/Publish/slt2d.txt.

[60]             2016 Act, § 302(2). See also 1981 Act, § 3(3); 1995 Act, § 4(3).

[61]             Texas, 379 U.S. at 681–82 (emphasis added).

[62]             Id. at 683.

[63]             Id. at 681.

[64]             Id. at 681. In Texas v. New Jersey, the court had also rejected other jurisdictional escheat rules proposed by states on the basis that such rules would require a case-by-case analysis that would inevitably be subject to dispute. The court wanted to avoid “[t]he uncertainty of any test which would require us in effect either to decide each escheat case on the basis of its particular facts or to devise new rules of law to apply to ever-developing new categories of facts.” Id. at 679. See also Nellius, 394 A.2d at 233, in which the Delaware Chancery Court interpreted the Supreme Court’s decisions in Texas v. New Jersey and Pennsylvania v. New York as requiring that, even if the records of the holder were proven to be inaccurate, those records would still be determinative for purposes of applying the primary rule.

[65]             Texas, 379 U.S. at 682, n.11 (emphasis added).

[66]             Pennsylvania, 407 U.S. at 210–11.

[67]             Delaware, 507 U.S. at 500, 504, 507 (stating that the second-priority rule applies if “the creditor’s last known address is in a State whose laws do not provide for escheat” or “the laws of the creditor’s State do not provide for escheat” or the “creditor’s State does not provide for escheat”). See also Pennsylvania, 407 U.S. at 212 (stating that the second-priority rule applies if the address “was located in a State not providing for escheat”).

[68]             N.J. Retail Merchs. Ass’n, 669 F.3d at 395.

[69]             U.S. Const. art. IV, § 1.

[70]             Hughes v. Fetter, 341 U.S. 609, 612 (1951).

[71]             Pink v. A.A.A. Highway Express, Inc., 314 U.S. 201, 246 (1941).

[72]             2016 Act, § 301(1).

[73]             Id. at § 301(2).

[74]             See, e.g., Perrin v. United States, 444 U.S. 37, 43 (1979) (“[U]nless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning.”); Burns v. Alcala, 420 U.S. 575, 580–81 (1975) (same); Cottier v. City of Martin, 604 F.3d 553, 567 (8th Cir. 2010) (court considered the ordinary meaning of terms in interpreting case law).

[75]             See, e.g., State v. Knudson, 174 P.3d 469 (Mont. 2007) (relying on Black’s Law Dictionary’s definition of “address” as the “[p]lace where mail or other communications will reach [a] person. . . . Generally a place of business or residence; though it need not be.” Black’s Law Dictionary 38 (6th ed., West 1990)); Bank of America, N.A. v. Bridgwater Condos, LLC, 2011 WL 5866932 (Mich. Ct. App. 2011) (noting that Black’s Law Dictionary (9th ed. 2009) defines the word “address” to mean “[t]he place where mail or other communication is sent” and holding that such “definition is consistent with the plain and ordinary meaning of the term”); In re Application of County Collector, 826 N.E.2d 951, 954, 956–57 (Ill. Ct. App. 2005) (“The common and ordinary meaning of the term address . . . clearly contemplates a number and street address. No reasonable argument can be made that the conventional meaning of ‘address’ does not encompass a number and street name. This clearly is the plain and ordinary meaning of the term ‘address.’”); Hoot v. Brewer, 640 S.W.2d 758, 764–65 (Tex. Ct. App. 1982) (dissenting op.) (“I can not conceive of an address as employed in the ordinary course of usage, as being complete and meaningful, that gives only a house number or post office box number, and omitting all reference to a city.”).

[76]             Pennsylvania, 407 U.S. at 213 (emphasis added).

[77]             See Colo. Rev. Stat. § 38-13-102(8); Conn. Gen. Stat. § 3-56a(8); D.C. Code § 41-102(12); Ga. Code Ann. § 44-12-192(11); Idaho Sess. Laws § 14-501(11); Kan. Stat. Ann. § 58-3934(i); Mich. Comp. Laws § 567.222(l); N.H. Rev. Stat. § 471-C:1.XII; Okla. Stat. § 651.10; Ore. Rev. Stat. § 98.302(9); R.I. Gen. Laws § 33-21.1-1(11); S.C. Code Ann. § 27-18-20(11); S.D. Codified Laws § 43-41B-1(11); Utah Code Ann. § 67-4a-102(19); Wash. Rev. Code § 63.29.010(13); Wis. Stat. § 177.01(11); Wyo. Stat. Ann. § 34-24-102(a)(xi).

[78]             Del. Code Ann. tit. 12, § 1139(a) (“a description, code, or other indication of the location of the owner on the holder’s books and records which identifies the state of the last-known address of the owner”) (eff. Feb. 2, 2017); Fla. Stat. § 717.101(15) (“a description of the location of the apparent owner sufficient for the purpose of the delivery of mail. For the purposes of identifying, reporting, and remitting property to the department which is presumed to be unclaimed, ‘last known address’ includes any partial description of the location of the apparent owner sufficient to establish the apparent owner was a resident of this state at the time of last contact with the apparent owner or at the time the property became due and payable”); Ill. Pub. Act 100-0022, § 15-301 (eff. Jan. 1. 2018; Illinois’s prior unclaimed property law did not contain a definition); Ind. Code § 32-34-1-10(a) (“a description indicating that the apparent owner was located within Indiana, regardless of whether the description is sufficient to direct the delivery of mail”); N.J. Admin. Code 17:18-1.2 (“a description of the location of the apparent owner sufficient for the purpose of determining which state has the right to escheat the abandoned property and the zip code of the apparent owner’s (creditor’s) last known address is sufficient”); Tenn. Code Ann. § 66-29-116 (eff. July 1, 2017); Utah Code Ann. § 67-4a-301 (eff. May 9, 2017); Va. Code Ann. § 55-210.2 (“a description of the location of the apparent owner sufficient to identify the state of residence of the apparent owner for the purpose of the delivery of mail”).

[79]             507 U.S. 490, 503 (1993).

[80]             Id. at 501–02.

[81]             Id. at 503.

[82]             Some courts have carved out a narrow exception to this principle where the creditor’s claim against the debtor is barred by the statute of limitations. See, e.g., Travelers Express Co. v. Utah, 732 P.2d 121, 124 (Utah 1987) (explaining that “the rights of the State are derivative from the rights of the owners of the abandoned property. That statement is true as to the substance of the State’s claim. However, procedural requirements, such as the statute of limitations, should not bar the State.”). On the other hand, other courts have reached the opposite result. See, e.g., Pacific N.W. Bell Tel. Co. v. Dep’t of Revenue, 481 P.2d 556, 558 (Wash. 1971) (“The state’s rights under the act are derivative and it succeeds, subject to the act’s provisions, to whatever rights the owner of the abandoned property may have. If the owner may proceed against the holder of the abandoned property and legally obtain that property, then the state may also effectively enforce that same claim against the holder. If, however, the holder of the property possesses the valid defense of the bar of the statute of limitations, then that holder may successfully assert that bar against either the owner or the state, which stands in the position of the owner. The rights of the state are not independent of the rights of the owner and are therefore no greater than those of the person to whose rights it succeeds.”).

[83]             See, e.g., Insurance Co. of N. Am. v. Knight, 291 N.E.2d 40, 44 (Ill. App. 1972), appeal dismissed, 414 U.S. 804 (1973) (noting that “the rights of the State are derivative from the rights of the owner, and…the State has no greater right than that of the payee owner”); Cole v. Nat’l Life Ins. Co., 549 So. 2d 1301, 1303–04 (Miss. 1989) (“The State Treasurer agrees and the Companies concur that the Treasurer acquires his rights by and through the owners of the abandoned property. This conclusion is based on the custodial nature of the Uniform Act under which the courts have consistently held that the rights of the State are indeed derivative from the rights of the owners of abandoned property. . . .”); In the Matter of November 8, 1996 Determination of the State of New Jersey Department of the Treasury, Unclaimed Property Office, 706 A.2d 1177, 1180 (N.J. Super. Ct., App. Div. 1998), aff’d, 722 A.2d 536 (N.J. 1999) (“The implication of [the] cases [applying the derivative rights doctrine] is that the [Unclaimed Property] Act cannot, and therefore presumably was not intended to, impose an obligation different from the obligation undertaken to the original owner of the intangible property which it covers.”); State v. United States Steel Corp., 126 A.2d 168, 173 (N.J. 1956) (“Limitations operate not against the State per se, but against the basic claim of the unknown owner. If, by virtue of limitations, the owner can obtain nothing, the State is under like disability. This is the derivative consequence, long recognized in the law of escheat. The right of action to escheat or to obtain custody of unclaimed property is not derivative; but what may be obtained by exercise of the right is dependent upon the integrity of the underlying obligation.”); State v. Elizabethtown Water Co., 191 A.2d 457, 458 (N.J. 1963) (affirming that the state had no right to escheat funds resulting from unrefunded deposits made by developers where the utility had the contractual right to keep any unrefunded deposits, noting that “the State’s claims are nonetheless derivative and certainly no broader than the developers’ claims); State v. Sperry & Hutchinson Co., 153 A.2d 691, 699–700 (N.J. Super. App. Div. 1959), aff’d per curiam, 157 A.2d 505 (N.J. 1960) (holding that the state had no right to escheat the value of unredeemed trading stamps when the contractual terms required a minimum quantity for redemption, noting that the “State’s rights are no greater than that of each stamp holder” and “entirely derivative”); Bank of Am. Nat’l Trust & Sav. Ass’n v. Cranston, 252 Cal. App. 2d 208, 211 (1967) (“The Controller’s rights under the act are derivative. He succeeds, subject to the act’s provisions, to whatever rights the owners of the abandoned property may have.”); Blue Cross of N. Cal. v. Cory, 120 Cal. App. 3d 723 (1981) (holding that “the Controller’s rights under the UPL are ‘derivative,’ and that he accordingly succeeds to whatever rights the owner of unclaimed property may have and no more”); State v. Standard Oil Co., 74 A.2d 565, 573 (1950), aff’d, 341 U.S. 428 (1951) (“The State’s right is purely derivative: it takes only the interest of the unknown or absentee owner.”); Bank of Am. v. Cory, 164 Cal. App. 3d 66, 74–75 (1985) (“With those objectives in mind, we find the derivative rights theory . . . helpful in determining if a statute of limitations is applicable to an action to enforce compliance with the UPL. . . . ‘The Controller’s rights under the act are derivative. He succeeds, subject to the act’s provisions, to whatever rights the owners of the abandoned property may have.’”) (internal citations omitted); Barker v. Leggett, 102 F. Supp. 642, 644–45 (W.D. Mo. 1951), appeal dismissed, 342 U.S. 900 (1952), reh’g denied, 342 U.S. 931 (1952) (“‘The state as the ultimate owner is in effect the ultimate heir.’ The United States Supreme Court has distinctly held that the right of escheat is a right of succession, rather tha[n] an independent claim to the property escheated. The result of that is this: ‘The State’s right is purely derivative; it takes only the interest of the unknown or absentee owner.’”) (internal citations omitted); State ex rel. Marsh v. Neb. State Bd. of Agric., 350 N.W.2d 535, 539 (Neb. 1984) (“Both parties agree that the State’s rights under the UDUPA are strictly derivative, and therefore the uniform act is distinct from escheat laws and the State acquires no greater property right than the owner. The State may assert the rights of the owners, but it has only a custodial interest in property delivered to it under the act.”); State v. American-Hawaiian S.S. Co., 101 A.2d 598, 609 (N.J. Super. Ch. Div. 1953) (“[T]he State’s right is wholly ‘derivative’ of the right of the owner.”); In re Steins Old Harlem Casino Co., 138 F. Supp. 661, 666 (S.D.N.Y. 1956) (“The state’s right of escheat is the right of an ultimate heir; it does not assert a separate claim to the fund but stands in the shoes of those so-called unknown creditors who are deemed to have abandoned their claims. Such creditors, by diligence, can cut off the rights of other claimants, and the state, standing in their shoes, has the same right.”); Petition of Abrams, 512 N.Y.S.2d 962, 968 (Sup. Ct. 1986) (“The State, in asserting the right of escheat, stands in the shoes of the rightful claimants, and is entitled to reclaim the funds as abandoned property.”); S.C. Tax Comm’n v. Metro. Life Ins. Co., 221 S.E.2d 522, 524 (S.C. 1975) (“The Commission’s rights under the act are derivative. It succeeds, subject to the act, to the rights of the abandoned property’s owners. It takes only the interest of the absent or unknown owner.”); Presley v. Memphis, 769 S.W.2d 221, 224 (Tenn. Ct. App. 1988) (“The state acts under the statute to protect the rights of the property owners. Any rights and obligations of the state in the property are derivative of the rights of the owners of the property.”); Melton v. Texas, 993 S.W.2d 95, 102 (Tex. 1999) (“Once property is presumed abandoned, the comptroller assumes responsibility for it and essentially steps into the shoes of the absent owner.”) (internal citations omitted); State v. Texas Elec. Serv. Co., 488 S.W.2d 878, 881 (Tex. Civ. App. 1972) (“[T]he State of Texas has no greater right to enforce payment of claims through an escheat proceeding under Article 3272a than was possessed by the owner of the claim.”); State v. Tex. Osage Royalty Pool, Inc., 394 S.W.2d 241 (Tex. Civ. App. 1965) (adopting “the elementary rule that the State cannot acquire by escheat property or rights which were not possessed at the time of the escheat by the unknown or absent owners of such property or rights”); S. Pac. Transp. Co. v. State, 380 S.W.2d 123, 126 (Tex. Civ. App. 1964) (“[T]he State in escheating such claims did not acquire any better or greater right to enforce the claims than was possessed by the former owners. The State cannot acquire by escheat property or rights which were not possessed at the time of escheat by the unknown or absentee owners of such property or rights.”); State Dep’t of Revenue v. Puget Sound Power & Light Co., 694 P.2d 7, 11 (Wash. 1985) (“[T]he State’s right is purely derivative and therefore no greater than the owner’s”).

[84]             Delaware, 507 U.S. at 499.

[85]             Id. at 502 (emphasis added).

[86]             239 U.S. 356, 370 (1915).

[87]             Barker v. Leggett, 102 F. Supp. 642, 644–45 (W.D. Mo. 1951). See also Hamilton v. Brown, 161 U.S. 256 (1896) (escheat involves the regulation of succession to property).

[88]             Delaware, 507 U.S. at 499.

[89]             2016 Act, § 610(a). See also 1981 Act, § 29(a); 1995 Act, § 19(a).

[90]             333 U.S. 541 (1948).

[91]             Id. at 546.

[92]             Id. at 547.

[93]             Id. at 545.

[94]             Id. at 546.

[95]             Connecticut Mutual thus did not hold that states can disregard the contractual “due proof of death” requirement in all circumstances. It held only that requiring the reporting of life insurance benefits at the limiting age, or when the insurer has received some notice of death (presumably from, for example, a beneficiary or funeral home), does not impair the contracts in a constitutionally problematic way. In contrast, legislation that eliminates any requirement of notice and requires insurers to affirmatively seek out deaths substantially impairs preexisting contracts—it shifts the burden of establishing death entirely from the beneficiary to the insurer, and thus fundamentally alters the parties’ bargain, a result the court in Connecticut Mutual never contemplated. The 2016 Act is problematic in this respect because it includes provisions that require insurance companies to attempt to validate deaths of insureds if the state identifies the insured as potentially deceased using the Social Security Death Master File.

[96]             Kane v. Ins. Co. of N. Am., Ct. of Common Pleas, Op. at 21 (Jan. 20, 1976).

[97]             See, e.g., State v. Elizabethtown Water Co., 191 A.2d 457 (N.J. 1963) (holding that New Jersey had no right to escheat funds resulting from unrefunded deposits for water utility main construction based on the contract terms among the parties, and noting that “the State’s claims are nonetheless derivative and certainly no broader than the [owners’] claims.”); State v. Sperry & Hutchinson Co., 153 A.2d 691 (N.J. Super. App. Div. 1959), aff’d per curiam, 157 A.2d 505 (N.J. 1960) (holding that the state had no right to escheat the value of unredeemed trading stamps when the contractual terms required a person to obtain a minimum quantity of stamps before they could be redeemed for cash, and the state could not show such minimum quantity was held by any particular owner); Or. Racing Comm’n, 411 P.2d at 63 (holding that an unpresented pari-mutuel ticket that was payable on demand was not “payable or distributable” because the ticket did not become “due” until it was presented).

[98]             Delaware, 507 U.S. at 504.

[99]             Permitting the state to use its escheat laws to override substantive contract conditions also creates significant problems under the full faith and credit clause. For example, consider a contract that is entered into between two parties, and which is expressly agreed to be governed by the laws of a particular state. The governing-law state may be completely different than the state that has the right and jurisdiction to escheat any unclaimed property arising out of that contract. Thus, if the laws of the state governing the contract permit the parties to impose certain conditions between themselves, then any escheat laws of another state that do not respect such conditions will not be giving full faith and credit to the laws of the governing-law state. This effectively allows states to use their escheat laws to “trump” the debtor-creditor laws of other states, which is not permitted by the full faith and credit clause because the state whose laws govern the debtor-creditor relationship has a substantially greater connection than the state whose unclaimed property laws apply to the property at issue. Allstate v. Hague, 449 U.S. 302, 308 (1981) (where there is a conflict between the laws of different states, the full faith and credit clause requires deference to the state with the most significant contacts to the controversy); Nev. v. Hall, 440 U.S. 410 (1979); Home Ins. Co. v. Dick, 281 U.S. 397 (1930); John Hancock Mut. Life Ins. Co. v. Yates, 299 U.S. 178 (1936). Furthermore, if the state that governs the contract is the same as the escheat state, another constitutional problem is created in that the state’s escheat laws then may effectively “amend” the state’s debtor-creditor laws in violation of the single-subject provision of the state’s own constitution. See, e.g., Planned Parenthood Affiliates v. Swoap, 173 Cal. App. 3d 1187, 1196 (1985) (invalidating a budget bill that would have imposed new substantive rules in the Family Planning Act that did not exist under such law); Cal. Labor Fed’n v. Occupational Safety & Health Standards. Bd., 5 Cal. App. 4th 985, 994–95 (1992) (invalidating a budget bill that would have effectively amended the attorney’s fee provisions under Cal. Civ. Proc. Code § 1021.5, creating “substantive conditions that nowhere appear in existing law.”).

[100]           See, e.g., State v. Jefferson Lake Sulphur Co., 178 A.2d 329 (N.J. 1962), in which the holder amended its certificate of incorporation to provide that any dividends that remained unclaimed for a period of three years would revert back to it after New Jersey had enacted an unclaimed property law permitting New Jersey to escheat unclaimed dividends after five years. The New Jersey Supreme Court stated that “[e]scheat of unclaimed dividends serves the important public need of providing revenue to be utilized for the common good.” Id. at 336. The court also concluded that a company such as Jefferson Lake that incorporates in New Jersey becomes subject to this public policy, and thus the “[a]lteration of a charter for the avowed purpose of defeating a relevant aspect of the sovereign’s declared public policy cannot achieve judicial approval.” Id. In reaching this conclusion, the court relied on a number of cases holding that a corporation’s charter or bylaws that conflicts with the state’s public policy is void. Thus, because the holder’s charter was amended for the express purpose of avoiding the escheat laws, the court held that the amendment was invalid. See also Screen Actors Guild, Inc. v. Cory, 154 Cal. Rptr. 77 (Cal. App. 1979) (the holder similarly amended its bylaws to provide that unclaimed residuals revert back to the holder after six years); People v. Marshall Field & Co., 404 N.E.2d 368 (Ill. App. 1980) (the holder unilaterally amended the terms of its gift certificates to expire them prior to the dormancy period under Illinois’s unclaimed property laws).

[101]           2016 Act, § 102(24)(C) (including exemptions for “game-related digital content” and “loyalty cards”).

[102]           For example, the optional gift card exemption does not apply to gift cards that expire, which may be a legitimate policy decision to encourage retailers not to use expiration dates, but cannot be justified under escheat principles. In addition, the 2016 Act created additional constitutional concerns by providing that if a state does elect to escheat gift cards, the amount escheatable is cash equal to the unredeemed gift card balance, rather than cash equal to 60 percent of the unredeemed card balance, which was the rule adopted in the 1995 Act to recognize that merchandise and services are sold by retailers at a profit, and that escheatment of the full 100 percent of the card balance would deprive the retailer of its anticipated profits—arguably a violation of the takings clause of the U.S. Constitution. The 2016 Act also included a new penalty that is imposed on “a holder [that] enters into a contract or other arrangement for the purpose of evading an obligation under this [act].” See 2016 Act, § 1205. This was apparently targeted at retailers that set up special-purpose entities (or contract with third parties) to issue gift cards, where the special-purpose entity (or third party) is located in a state that exempts gift cards from escheat (as many large retailers have set up such arrangements). However, companies should be free to structure their affairs in a manner that minimizes escheat liabilities, just as they can structure themselves to reduce tax or other regulatory burdens. This sort of provision appears to allow one state (that decides not to exempt gift cards) to punish a retailer that legitimately relies on an exemption adopted by another state.

[103]           Id. § 208.

[104]           17 C.F.R. § 240.17Ad-17.

[105]           See Lost Securityholders, 1996 WL 475798 (SEC Release No. 37595 Aug. 22, 1996) (expressing concern with the risk that property of lost security holders “is at risk of being deemed abandoned under state escheat laws”).

[106]           2016 Act, § 503.

[107]           See, e.g., Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 315 (1950) (“But when notice is a person’s due, process which is a mere gesture is not due process. The means employed must be such as one desirous of actually informing the absentee might reasonably adopt to accomplish it. The reasonableness, and hence the constitutional validity, of any chosen method may be defended on the ground that it is, in itself, reasonably certain to inform those affected. . . . It would be idle to pretend that publication alone, as prescribed here, is a reliable means of acquainting interested parties of the fact that their rights are before the courts. It is not an accident that the greater number of cases reaching this Court on the question of adequacy of notice have been concerned with actions founded on process constructively served through local newspapers. Chance alone brings to the attention of even a local resident an advertisement in small type inserted in the back pages of a newspaper, and, if he makes his home outside the area of the newspaper’s normal circulation, the odds that the information will never reach him are large indeed.”); Mennonite Bd. of Missions v. Adams, 462 U.S. 791, 798, 800 (1983) (holding that more than publication notice is required and “notice by mail or other means as certain to ensure actual notice is a minimum constitutional precondition to a proceeding which will adversely affect the liberty or property interests of any party . . . if its name and address are reasonably ascertainable.”).

[108]           Mullane, 339 U.S. at 315.

[109]           Jones v. Flowers, 547 U.S. 220, 227 (2006).

[110]           Mullane, 339 U.S. at 315.

[111]           Jones, 547 U.S. at 225 (emphasis added).

[112]           Id. at 229.

[113]           See, e.g., Robinson v. Hanrahan, 409 U.S. 38, 40 (1972); Covey v. Town of Somers, 351 U.S. 141, 146–47 (1956).

[114]           780 F.3d 928 (9th Cir. 2015), cert. denied, 136 S. Ct. 929 (Feb. 29, 2016).

[115]           Interestingly, the states have recently become more aggressive in asserting in audits that holders be required to utilize such databases, but have been reluctant to agree to use these resources themselves.

[116]           See Horne v. Dep’t of Agriculture, 135 S. Ct. 2419, 2427 (2015) (the physical appropriation of personal property is perhaps the most serious form of invasion of an owner’s property interest, depriving the owner of “the rights to possess, use and dispose” of the property).

[117]           Tahoe–Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency, 535 U.S. 302, 322 (2002).

[118]           Id.

[119]           317 U.S. 369, 373 (1943).

[120]           261 U.S. 299 (1923).

[121]           See also Cerajeksi v. Zoeller, 735 F.3d 577 (7th Cir. 2013) (ruling Indiana’s failure to pay interest on income-earning bank account was an unconstitutional taking because title of the property did not vest in the state). But cf. Turnacliff v. Westly, 546 F.3d 1113, 1119–20 (9th Cir. 2008) (assuming, arguendo, the owner has a right to interest earned by escheated property, the court ruled that “no further compensation is due . . . because when the Estate abandoned its property, it forfeited any right to interest earned on that property” because “the Estate did not challenge the escheat, per se, of its property to the State”).

[122]           454 U.S. 516, 516 (1982).

[123]           Id. at 530.

[124]           Id. at 519 n.28.

[125]           735 F.3d 577, 582 (7th Cir. 2013).

[126]           It is certainly questionable whether contingent-fee auditors are necessary. A number of states, including California and New York, regularly conduct their own audits. Delaware generally uses contingent-fee auditors, but its voluntary disclosure program—which is essentially a managed audit—is conducted by the state and a private law firm that is compensated on an hourly basis. Most states similarly have voluntary disclosure programs that are run in-house. In any single audit, a contingent-fee auditor may make sense in that it limits the state’s risk that the cost of an audit may outweigh its benefits, but the states audit dozens, if not hundreds, of companies each year, and collectively the states almost certainly pay out more in fees to contingent-fee auditors than they would to employees to conduct these audits directly. http://www.delawareonline.com/story/firststatepolitics/2015/01/22/senate-abandoned-property/22176233/ (contingent-fee audit firm paid over $200 million by a single state over the course of a decade). In theory, contingent-fee auditors should also be more efficient, but that has not been borne out in practice because unclaimed property audits regularly take three to eight years to complete. In the authors’ experience, the audits or VDAs conducted by the states themselves have generally been much more efficient.

[127]           273 U.S. 510 (1927).

[128]           401 S.E.2d 4 (1991).

[129]           49 P.2d 663 (Wyo. 1935).

[130]           Id. at 667, 669.

[131]           No. X07-CV960072560S (Conn. Super. Ct. 2001).

[132]           Id. at 32–33.

[133]           436 S.E.2d 828 (1993).

[134]           Temple-Inland, Inc. v. Cook, 192 F. Supp. 3d 527 (D. Del. 2016).

[135]           Id. at 549.

[136]           Id. at 550.

[137]           Id.

[138]           Id. (emphasis added).

[139]           Id. at 547.

[140]           Id. at 548.

[141]           Id. at 28.

[142]           Id.

[143]           Temple–Inland, 2016 WL 3536710, at *2 (noting that unclaimed property has now become “Delaware’s third largest revenue source, making it a ‘vital element’ in the State’s operating budget.”). Indeed, from 2000–2017, Delaware has escheated over $7.3 billion, but has returned less than 10 percent of that amount to owners.

[144]           http://www.delawareonline.com/story/firststatepolitics/2015/01/22/senate-abandoned-property/22176233/.

[145]           No. 16-3631 (3d Cir. Aug. 9, 2017).

[146]           2016 Act, § 610(b).

[147]           Id. at § 1103.

A longer version of this article is anticipated to be published in the Summer 2018 version of The Business Lawyer.