Florida and South Carolina recently joined an increasing number of states enacting title-based unclaimed property laws in an effort to obtain redemption proceeds from unclaimed United States savings bonds. [Florida H.B. 887, effective July 1, 2015; South Carolina H.B. 3852, effective June 11, 2015]
Adopting substantially identical provisions, the states created a judicial process to determine that title to unclaimed U.S. savings bonds escheats to the states. Obtaining title to the bonds is necessary in order for the state to step into the shoes of the record owner and recover proceeds from the U.S. Treasury.
The legislation in both states establishes that a bond in the possession of the unclaimed property department or registered to a person with a last known address in the state, including a bond that is lost, stolen or destroyed, is presumed abandoned and unclaimed five years after the bond reaches maturity and no longer earns interest. Once the bond is presumed abandoned, a financial institution or other holder must report and remit the bond to the state's custody, if the state is not already in possession of the bond.
The judicial process created by each state permits the unclaimed property departments to bring a civil action to obtain title to bonds that are abandoned and unclaimed. Before an escheat hearing takes place, the state must undertake efforts to notify registered owners, co-owners and beneficiaries of the escheat proceedings through public notice. Owners and beneficiaries may file claims with the court to defeat the state's claim to title or may recover proceeds from the state if the court orders bonds to escheat to the state. With title, the states may petition the U.S. Treasury for redemption of the bonds.
States estimate there is a significant amount of money to be had. According to fiscal analysis of the Florida legislation, Florida is in possession of savings bonds with a face value of more than $1.2 million, and the total amount of unclaimed, matured bonds registered to persons with a last known address in Florida "is estimated to be well over $100 million." In similar analysis, South Carolina estimates about $240 million in bonds may belong to people with a last known address in South Carolina.
Pursuant to Treasury regulations, savings bonds generally are not transferable and are payable only to the owners named on the bonds. Over the years, various states tried to recover the proceeds from matured but unredeemed bonds, but without success. Treasury's long-standing position, as discussed recently in a decision by the 3rd Circuit Court of Appeals, is that it will recognize claims by states for payment if the states have succeeded to the title and ownership of the bonds pursuant to valid escheat proceedings. Treasury does not recognize claims for payment by a state acting merely as custodian of unclaimed or abandoned securities.
In New Jersey v. U.S. Dept. of the Treasury, 684 F.3d 382 (3rd Cir. 2012), seven states (not including Florida or South Carolina) asserted that the Treasury was in possession of approximately $16 billion of matured but unredeemed bonds, of which persons whose last known addresses were within those states own $1.6 billion. The states argued that Treasury should account for and deliver the proceeds of these bonds to the states "for reunification with their owners." Citing the doctrines of federal preemption and intergovernmental immunity, the appellate court affirmed the lower court's dismissal of the case. Under these doctrines, the states do not have the right to enforce their unclaimed property laws against the federal government in order to obtain use of the proceeds of abandoned bonds.
On the other hand, the court noted, Treasury's position, based on its interpretation of savings bond regulations, is that the department will recognize a claim of ownership or interest in a bond if established by valid, judicial proceedings. Treasury, however, has not adopted a rule to that effect in accordance with the Administrative Procedure Act. At least, not yet.
On July 1, Treasury published proposed regulations in the Federal Register to address explicitly state escheat claims to unclaimed savings bonds. If finalized, the regulations may encourage other states to adopt legislation similar to Florida's and North Carolina's, but states are likely to be disappointed with Treasury's position.
The proposed regulations provide Treasury with the discretion to recognize an escheat judgment that purports to vest a state with title to matured and unclaimed savings bonds in its possession when the state presents evidence satisfactory to the Treasury that the bond has been abandoned by all persons entitled to payment. Judgments vesting title to bonds the state does not possess, however, will not be recognized. As a result, a state will not be able to receive payment from the U.S. Treasury for bonds that are lost, stolen or destroyed and registered to a person whose last known address is in the state.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: did Treasury strike the right balance between a state's escheat judgments and the rights of registered owners of bonds not in the state's possession?
Additional discussion of federal preemption in the context of unclaimed property and analysis of the New Jersey decision can be found in 1600-3rd T.M., Unclaimed Property.
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