U.S. Supreme Court resolves escheat controversy involving states' conflicting claims to abandoned securities distributions.

• Author: Lippman, Michael H.

On Mar. 30, 1993, the U.S. Supreme Court held in Delaware v. New York, 113 S. Ct. 1550 (1993), that the right to escheat funds held by intermediary banks, brokers and depositories on behalf of beneficial owners who cannot be identified or located belongs to the state in which the intermediary is incorporated. As a result, Delaware, instead of New York or any other state, was granted the right to collect hundreds of millions of dollars of unclaimed securities distributions held by brokerage firms doing business in New York but incorporated in Delaware.

The case involved roughly $360 million in unclaimed dividends, interest and other distributions made by securities issuers between 1985 and 1989. By arrangement with the beneficial owners, intermediaries frequently hold securities in a beneficial owner's account in their own names (i.e., as owner of record or nominee). Although the intermediaries generally distribute the large majority of fun receive to their beneficial owners, some of the funds remain undistributed because the beneficial owner's location or identity cannot be determined. Because the intermediary claims no property interest in these funds, they became escheatable to the state.

New York escheated the undistributed funds from abandoned securities held by intermediaries doing business in New York. Delaware contended that it had the right to escheat funds held by intermediaries incorporated in Delaware and filed suit. Because the case involved a controversy among the states, the Supreme Court had original jurisdiction. A Special Master was appointed to hear the case and make recommendations.

The Special Master proposed awarding the right to escheat such funds to the state in which the principal executive offices of the securities issuer are located. Such a result would have spread...