May a Holder's State of Corporate Domicile Claim Abandoned Property Exempted by the Owner's State?

May–June 2007 State Law & State Taxation Corner By John A. Biek May a Holder’s State of Corporate Domicile Claim Abandoned Property Exempted by the Owner’s State? Introduction In the 1965 case of Texas v. New Jersey,1 the United States Supreme Court announced that a holder’s state of corporate domicile (generally its state of incorporation) is entitled to take custody of unclaimed property that the holder owes to persons as to whom the holder does not know their whereabouts or “whose last known address is in a state which does not provide for escheat of the property owed them.”2 When the Supreme Court adopted this secondary priority rule of its Texas v. New Jersey decision, there were a number of states that had not yet enacted abandoned property laws. Today all of the states and the District of Columbia have adopted abandoned property laws, but a number of states have begun to provide exemptions under their abandoned property laws for certain types of property such as gift certifi cates and gift cards3 and property that the holder owes to a commercial customer or supplier.4 This raises the interesting question of whether the secondary priority rule of Texas v. New Jersey authorizes the holder’s state of corporate domicile to step in and claim property that the owner’s state of last known address will not claim because of its exemption. The courts have not yet addressed this issue and arguments could be presented based on language in the Supreme Court’s abandoned property cases for and against such a secondary priority rule claim to property exempted by the owner’s state of last known address. John A. Biek is a Partner in the Tax Prac- However, a careful reading of the Supreme Court’s tice Group of Neal, Gerber & Eisenberg priority rule cases indicates that the holder’s state of LLP in Chicago, Illinois. corporate domicile should not be allowed to escheat ©2007 CCH. All Rights Reserved. 19 State Law & State Taxation items of unclaimed property that have been exempted of the state that is claiming the property from the by the owner’s state of last known address. This issue holder.10 State abandoned property administrators is discussed in detail in this article. know from experience that only a small portion of the unclaimed property delivered to the state is ever likely General Principles of State to be claimed by owners. The remaining portion of the holder’s unclaimed property remittances is typically Abandoned Property Laws transferred to the state’s general revenue fund. All fi fty states and the District of Columbia have enacted abandoned property statutes that require a business Determining Which State Is (referred to as the “holder”) to report and remit to the appropriate state the cash value of intangible personal Entitled to Claim Items of property (a) that constitutes a debt or obligation owed Unclaimed Property by the holder, in the ordinary course of its business, to a payee such as a customer, vendor, employee or In the late 1940s and early 1950s, the United States shareholder (referred to as the “owner”) and (b) that Supreme Court was presented with cases in which has remained unclaimed by the owner throughout states were attempting to require holders to report the “statutory dormancy period” prescribed in the unclaimed property to the state based on the state’s state’s abandoned property statutes.5 Many of these claim that the state had jurisdiction under the Due state abandoned property statutes are based on one Process Clause to apply its abandoned property laws or more of the three “uniform acts” that have been to the holder and the property was presumed aban- drafted by the National Conference of Commissioners doned under those laws. In Connecticut Mutual Life on Uniform Laws.6 All of the state abandoned property Insurance Co. v. Moore,11 the Supreme Court upheld laws are now custodial in nature, meaning that the New York’s right to take custody of unclaimed pay- state’s assertion of a claim to the property does not ments that the defendant insurance companies had cut off the owner’s right to claim the property (which made with respect to insurance policies issued on the would be terminated under “escheat” laws). The state lives of New York residents. Applying a due process takes custody of the unclaimed property in perpetuity analysis, the Supreme Court held that New York had until the owner (or a holder that has reimbursed the jurisdiction to require the insurance companies to owner) comes forward to present a claim to the state report the property to the state because the insur- for payment of the property.7 ance companies were doing business in New York State abandoned property laws serve several pur- and the insureds had been located in New York.12 The poses. One is the objective of reuniting owners with Supreme Court noted that the question of whether their unclaimed property. Another is preventing the another state would also be able to claim the same unjust enrichment or “windfall” that holders would property was not before the Court.13 enjoy if they were allowed to retain property that Three years later, in Standard Oil Co. v. New Jer- they owe to their customers, vendors, employees sey,14 the Supreme Court allowed New Jersey to claim and shareholders.8 The United States Supreme Court custody of unclaimed dividends, wages and vendor explained in Standard Oil Co. v. New Jersey9 that: checks from a holder on the grounds that the holder was incorporated in New Jersey, even though the As a broad principle of jurisprudence rather than holder’s books and records showed that many of the as a result of the evolution of legal rules, it is owners of the unclaimed property were residing in clear that a state, subject to constitutional limita- other states. The Supreme Court again found that the tions, may use its legislative power to dispose of holder had due process nexus with the claimant state: property within its reach, belonging to unknown “[W]e see no reason to doubt that, where the debtor persons. Such property thus escapes seizure by and creditor are within the jurisdiction of a court, would-be possessors and is used for the general that court has constitutional power to deal with the good rather than for the chance enrichment of debt.”15 The Court ruled only upon the constitutional- particular individuals or organizations. ity of New Jersey’s escheat of the property at issue and emphasized that “[t]he claim of no other state to this A third legislative purpose of abandoned property property is before us and, of course, determination statutes is raising revenue that will benefi t the citizens of any right of the claimant state against New Jersey 20 ©2007 CCH. All Rights Reserved. May–June 2007 for the property escheated by New Jersey must await to escheat by the state of the holder’s principal place presentation here.”16 of business because: In Western Union Telegraph Co. v. Pennsylvania,17 the Supreme Court held that the Due Process Clause [A]pplication of the rule Pennsylvania suggests would preclude more than one state from claiming would raise in every case the sometimes diffi cult the same item of property from the holder. However, question of where a company’s ‘main offi ce’ or the issue of which state possessed the superior right to ‘principal place of business’ or whatever it might claim the property was not before the Court, although be designated is located. Similar uncertainties the record established that New York had already would result if we were to attempt in each case escheated some of the funds claimed by Pennsyl- to determine the State in which the debt was cre- vania. The Court ultimately held that Pennsylvania ated and allow it to escheat. Any rule leaving so could not claim the property from Western Union much for decision on a case-by-case basis should because Pennsylvania would not be able to protect not be adopted unless none is available which is the company from the double liability that would more certain and yet still fair.23 ensue if and when New York and other states laid claim to the same property.18 Under the priority rules that the Supreme Court ad- In Texas v. New Jersey,19 the Supreme Court was opted in its Texas v. New Jersey decision, unclaimed fi nally presented with the question of which state had property escheats, fi rst, to the state of the last known the best right to escheat intangible property: “The issue address of the apparent owner of the property, as before us is not whether a defendant has had suffi cient shown in the holder’s books and records.24 The Court contact with a State to make him or his property rights explained that: subject to the jurisdiction of its courts, a jurisdiction which need not be exclusive. [W]e are faced here Adoption of such a rule involves a factual is- with the very different problem of deciding which sue simple and easy to resolve, and leaves no State’s claim to escheat is superior to all others.”20 legal issue to be decided. And by using a New Jersey was claiming the property in its capac- standard of last known address, rather than tech- ity as the state of incorporation of the holder, Sun Oil nical legal concepts of residence and domicile, Company. Pennsylvania contended that it should be administration and application of escheat laws allowed to claim custody of all of the property because should be simplifi ed.25 it was the state of commercial domicile of Sun Oil.

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