Unclaimed property and due process: justifying "revenue-raising" modern escheat.

Date01 November 2011
AuthorGregory, Teagan J.

States have long claimed the right to take custody of presumably abandoned property and hold it for the benefit of the true owner under the doctrine of escheat. In the face of increasing fiscal challenges, states have worked to increase their collection of unclaimed property via new escheat legislation that appears to bear little or no relation to protecting the interests of owners. Holders of unclaimed property have raised substantive due process challenges in response to these modern escheat statutes. This Note contends that two categories of these disputed laws--those shortening dormancy periods and those allowing states to estimate a holder's unclaimed property liability in the absence of creditor records--are logically consistent with the legitimate state interest in reuniting owners with their abandoned property and therefore do not violate due process.

TABLE OF CONTENTS INTRODUCTION I. THE DUE PROCESS CHALLENGE TO "REVENUE-RAISING" UNCLAIMED PROPERTY LAWS A. The Due Process Challenge: American Express B. Looking for the Proper Rationale II. THE REVENUE-RAISING JUSTIFICATION PROBLEM III. THE PROPERTY INTEREST JUSTIFICATION PROBLEM A. Three Property Interest Theories B. Common Holder-Owner Relationships Create a Property Interest for the Holder C. A Holder's Property Interest in Unclaimed Property Is Extinguished upon Abandonment IV. THE REUNIFICATION ANSWER A. The Financial Security Connection B. The Early Notification Connection C. The Common Holder Connection D. The Record-Keeping Connection CONCLUSION INTRODUCTION

What do Mick Jagger, Ben Bernanke, Steve Jobs, and the New York Yankees have in common? The State of California is holding lost money that belongs to each of them. (1) In fact, the same is true of approximately eight million individuals and businesses in that state. (2) Lest one think that this is a situation peculiar to the Golden State, the numbers are similarly impressive on the East Coast--Delaware alone expects to collect over $400 million in unclaimed property in 2012 (3)--and on a national scale. (4) From the child who forgets to spend a gift card received several birthdays ago to the employee who never gets around to cashing her final paycheck, unclaimed property can spring up nearly anywhere, and surprisingly little ever makes its way back into the hands of its owners. (5) How is such a system possible?

Understanding how states have come to collect such large sums of money requires some basic knowledge of what precisely unclaimed property is. Unclaimed property may be described as accounts or items held by one party (the "holder") but belonging to a second party (the "owner") who has not acted to exercise control over the accounts or items for some extended period of time. (6) Such property can take the form of inactive bank accounts, uncashed payroll or dividend checks, stocks, travelers checks, and even unredeemed gift cards and refunds. (7) Though the relevant statutes vary, all states (8) claim the right to consider property "abandoned" after it has been dormant for some period of time (the "dormancy period"), (9) to seize this abandoned property, and to hold it in a custodial capacity for the benefit of the true owner ("modern escheat"). (10) However, the Due Process Clause of the Fourteenth Amendment constrains a state's ability to interfere with private property, (11) and some courts have expressed skepticism over the constitutionality of certain unclaimed property statutes that appear to be focused more on generating revenue ("revenue-raising statutes") (12) than on returning the property to its actual owners ("reunification"). (13)

This Note contends that two categories of revenue-raising statutes do not violate the Due Process Clause of the Fourteenth Amendment because they are logically related to the government interest in reunification. These two categories are (1) those statutes that shorten dormancy periods, accelerating a state's collection of unclaimed property, (14) and (2) those statutes that permit a state to estimate a holder's unclaimed property liability incurred over a longer period of time by sampling a shorter period. (15) Part I introduces the concept of escheat, notes the significance of revenue-raising unclaimed property laws, and details a recent holder-initiated substantive due process challenge to such an escheat statute, which has raised the specter of challenges to similar unclaimed property laws. Part II considers and dismisses one potential justification for such laws. It concludes that courts should avoid simply characterizing escheat statutes as revenue-raising mechanisms, since these laws are unable to satisfy the due process requirements applied to tax statutes and because such characterization risks undermining public trust in the legislative process. Part III considers and partially dismisses another potential justification--that holders, as debtors and not actual owners, do not have the recognized property interest in escheated funds necessary even to raise a due process claim. It contends that holders often do have such a property interest but notes that this interest may sometimes be extinguished prior to escheat. Finally, Part IV argues that courts should nevertheless uphold revenue-raising escheat laws, as they are rationally related to the legitimate government interest in reuniting owners with their abandoned property.


    Escheat was traditionally understood as the "[r]eversion of property ... to the state upon the death of an owner who has neither a will nor any legal heirs." (16) The concept has its roots in Roman law, under which an officer would be appointed to assert the right of the emperor to a decedent's estate when that decedent left no heirs to claim it. (17) In England, the idea was incorporated into the feudal land system, which was itself built on the proposition that the sovereign was the original grantor of real property and therefore had at least an indirect interest in all land. (18) Escheat fit into this structure as the means by which land would revert to the sovereign when a person with fee simple estate in land died without identifiable heirs. (19) In America, the concept of escheat, which applied solely to real property, and the analogous theory of bona vacantia, which applied to personal property, (20) eventually merged (21) and expanded. They were codified in various state statutes. (22)

    Modern escheat is a vastly different legal form but provides a similar practical benefit to the state. Today, most unclaimed property laws allow the government to seize abandoned property and hold it for the benefit of the true owner in a custodial capacity rather than passing title to the crown or state upon an owner's death. (23) However, this caretaking relationship does not erase the government's ability to profit from the abandonment of property. In fact, states stand to gain from even custodial escheat in several ways. Though state governments hold approximately $33 billion in unclaimed property, (24) only a fraction of this amount is returned to its actual owners annually. (25) Recognizing this low rate of reunification, many states simply deposit the collected property into their general funds, in some cases retaining a minimal amount in a separate trust account to address owners' claims. (26) Additionally, some states benefit from those funds that are eventually remitted by claiming the interest earned while in government custody. (27)

    Perhaps understanding the revenue-raising potential of escheat laws, legislatures and state officials have taken steps to increase the collection of unclaimed property. (28) Such efforts have taken the form of both more stringent enforcement of existing statutes (29) and the implementation of aggressive new escheat laws. (30) This latter category includes statutes that shorten the dormancy period that must pass before holders are required to turn over unclaimed property to the state (31) and that authorize estimation of a holder's escheat liability for years past. (32)

    1. The Due Process Challenge: American Express

      A federal district court in Kentucky recently pushed back against ambitious unclaimed property laws, however, seemingly providing a legal roadmap for holders who would seek to challenge revenue-driven escheat legislation. In American Express Travel Related Services Co. v. Hollenbach (American Express I), (33) the district court granted the holder-plaintiff's motion for summary judgment, determining that a Kentucky statute that shortened the dormancy period for uncashed travelers checks from fifteen years to seven years did not satisfy rational basis review under the Due Process Clause of the Fourteenth Amendment. (34) In a later opinion denying the defendant's motion to alter, amend, or vacate the judgment, the district court clarified that "[the statute in question] was not enacted to further a 'legitimate' state interest. Instead, it was enacted to raise revenue for the state." (35) The court thus concluded that, at least in the case of escheat statutes, raising revenue is not a legitimate interest sufficient to meet the requirements of due process. While it has long been observed that unclaimed property laws serve a dual purpose--reunification and providing states with the use of the abandoned property (36)--the district court did not regard the latter function as independently sufficient. (37)

      In May 2011, however, the Court of Appeals for the Sixth Circuit vacated the American Express I decision, holding that Kentucky's shortened dormancy period did not violate substantive due process and remanding the case for consideration of the remaining constitutional challenges. (38) The Sixth Circuit emphasized that the district court applied an improperly strict form of rational basis review and that legislative decisions ought to be accorded greater deference. (39) The appellate court...

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