Expert Insight: Limiting Exposure - Why Holders Should Understand the Importance of Federal Preemption in Unclaimed Property Law

 Federal preemption of state unclaimed property law is continually evolving, as Congress and federal courts continue to shape this area of law. In this guest post, Brenda R. Mayrack, owner of Mayrack Law LLC in Wilmington, Delaware, outlines “express” and “implied” federal preemption, and presents examples of each. Mayrack will discuss this topic further in her presentation “The Tangled Vine: Federal vs. State Law” at the 2014 UPPO Annual Conference.

Although unclaimed property law is largely a creature of state statutes, administrative regulations, and agency practices, federal laws also intersect or supersede state authorities in several key areas. Holders need to be aware of these junctures to ensure they are complying with all applicable laws and maximizing any opportunities to reduce their overall liability.

The Supremacy Clause of the United States Constitution requires that the U.S. Constitution and federal laws “shall be the supreme law of the land...Anything in the Constitution or laws of any State to the contrary notwithstanding.” As various courts have interpreted and applied the Supremacy Clause, courts have categorized federal preemption as “express” or “implied.” Implied preemption includes “field” and “conflict” preemption. In the unclaimed property arena, there are instances of each type of preemption. 

Holders under audit may be able to use federal preemption arguments to limit the scope of the audit, narrow auditors’ document and information requests, or limit their ultimate liability amount. While complying with annual and ongoing compliance obligations, holders similarly may be able to rely on preemption to avoid reporting certain types of property and thus, reduce their liability. 

Express preemption of a state law by a federal law occurs when Congress expressly states its intent to preempt state law. In the unclaimed property context, the preemption of state unclaimed property laws by the Employee Retirement Income Security Act of 1974 (ERISA) is an example of express preemption. Section 514(a) of ERISA clearly states Congress’ intention that ERISA “shall supersede any and all state laws insofar as they now or hereafter relate to any employee benefit plan” qualified under ERISA. Of course, one must still determine whether a particular plan is ERISA-qualified to determine whether federal law will preempt state unclaimed property laws. 

Implied preemption occurs when Congress does not clearly state its intention that a law supersedes state law. Implied preemption occurs in one of two ways, conflict preemption and field preemption. 

Conflict preemption is a type of implied preemption and occurs when one cannot simultaneously comply with both federal and state law. In the unclaimed property context, “place-of-purchase” presumptions that assign an address to otherwise unaddressed property are an example of conflict preemption. In 2010, New Jersey amended its unclaimed property statutes to, among other things, require gift or stored value cards issuers to collect and maintain at least zip code information from purchasers, and where such information was not recorded, presume that the address of the gift or stored value card owner or purchaser is the place of purchase for unclaimed property reporting purposes. 2010 N.J. Laws. c. 25.5(c). 

After several holders initiated litigation challenging this and other provisions of the law, the Third Circuit Court of Appeals eventually ruled that the “place-of-purchase” presumptions were preempted by the priority rules under federal common law and established by Texas v. New Jerseyand its progeny. 379 U.S. 674 (1965); see also Pennsylvania v. New York, 407 U.S. 206 (1972); Delaware v. New York, 507 U.S. 490 (1993). Because the priority rules require holders to report property without an address to the state of the holder’s legal domicile, a state law, such as the challenged New Jersey “place-of-purchase” presumption, that required holders to report unaddressed property to the state where the card was purchased, necessarily conflicts with the federal priority rules. A holder cannot possibly comply with both the federal priority rules and a state “place-of-purchase” presumption. As such, federal law preempts or invalidates the conflicting state law.

Field preemption   is another type of implied preemption and occurs “if federal law so thoroughly occupies a legislative field as to make reasonable the inference that Congress left no room for the States to supplement it or if the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject.”  PNH, Inc. v. Alfa Laval Flow, Inc., 130 Ohio St.3d 278, 2011-Ohio-4398, ¶ 17 (internal citations and quotations omitted). 

Although courts differ on the exact contours of their interaction with state law, the United States Bankruptcy Code, 11 U.S.C. §§ 101–1532, as amended, and the Federal Rules of Bankruptcy Procedure may present the best examples of field preemption in the unclaimed property context. The United States Constitution empowers Congress to “establish uniform Laws on the subject of Bankruptcies throughout the United States.” U.S. Constitution, Clause 4, Section 8, Article I. Courts have noted that “because of ‘the unique, historical, and even constitutional need for uniformity in the administration of the bankruptcy laws,’ Congress enacted the Bankruptcy Code intending to create a comprehensive, uniform statutory scheme that is under federal control.” PNH, Inc. v. Alfa Laval Flow, Inc., 130 Ohio St.3d 278, 2011-Ohio-4398, ¶¶ 20-21, quotingMSR Exploration, Ltd. v. Meridian Oil, Inc., 74 F.3d 910, 915 (9th Cir. 1996).

For holders emerging from a bankruptcy proceeding, the preemption of state unclaimed property laws by the Bankruptcy Code may provide relief from some claims by states. Courts generally agree that a state cannot participate as a creditor for claims arising from property that becomes abandoned after the filing of the petition because the state had no claim as of the commencement of the case. See, e.g.,Arkansas v. Federated Dep’t Stores, Inc., 175 B.R. 924, 931 (S.D. Ohio 1992).

In contrast, sometimes Congress expressly states its intention not to preempt state laws. In the unclaimed property context, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) specifically directs that the law’s new requirements “shall have no effect on State escheatment laws.” 15 U.S.C.A. § 78-1(g)(1)(C). Holders, particularly in the financial services industry, have had to reconcile the Dodd-Frank Act’s new requirements for notifying and searching for missing security holders with state unclaimed property laws that impose similar requirements.

Some of the various federal laws that impact unclaimed property are decades old, such as ERISA, the Bankruptcy Code, and the Federal Communications Act of 1934. Others are more recent developments, as Congress has attempted to address consumer protection and other regulatory issues presented by new property types, including gift cards and stored value cards, public accounting reforms, and the recent financial crisis, such as Dodd-Frank, the CARD Act, and Sarbanes-Oxley. In other cases, federal laws meant to address issues seemingly unrelated to unclaimed property can affect holders. The Patriot Act and HIPAA are two such examples.

Brenda R. Mayrack, Esq., owner of Mayrack Law LLC in Wilmington, Delaware, has focused her practice on unclaimed property and escheatment law since 2008. Brenda is an active UPPO member and a member of the government relations and advocacy committee. A frequent speaker and author on unclaimed property topics, Brenda is co-presenting The Tangled Vine: Federal vs. State Law at the 2014 UPPO Annual Conference, which will attempt to untangle the complex aspect of unclaimed property compliance that is essential for holders to understand and apply to reduce their overall liability. Brenda has written extensively about unclaimed property on her blog and has contributed to a Bloomberg BNA portfolio about unclaimed property. She was recognized with a UPPO “Shining Star” award in 2013 and was the leader of the winning team at Startup Weekend Delaware 2013, a two-day competition for tech startup companies.

Contact Brenda at , 302-558-6343 or @MayrackLaw.

Register for the 2014 UPPO Annual Conference  to learn more about federal preemption and to attend Brenda’s presentation “The Tangled Vine: Federal vs. State Law.”