SCOTUS Signals Interest in California Unclaimed Property Case

The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.

By Laura Mahoney

March 9 — Although Supreme Court Justice Samuel A. Alito recently signaled that the court is troubled by aggressive state unclaimed property laws, it will be at least a few years before the right case could reach the court, several attorneys told Bloomberg BNA.

In the meantime, practitioners said they hope—but don't expect—that state officials take Alito's critique of a trend among states to shorten escheat periods with minimal notification procedures as a warning that they must do better to reunite people with their property.

Alito's critique came in a concurrence issued with a denial of review in a challenge to California's unclaimed property law (Taylor v. Yee, 2016 BL 58860, U.S., No. 15-169, review denied, 2/29/16).

“What's been great about the concurrence is it has definitely spurred a dialogue,” Diann L. Smith, counsel with McDermott Will & Emery in Washington, D.C., told Bloomberg BNA March 9. “It will take a few years to see if any changes are made.”

Confiscating Assets

Alito said the California law in question allows the state to “confiscate” assets such as forgotten security deposits, uncashed money orders and unused insurance benefits. In recent years, California and other states have shortened the dormancy periods before property can be considered abandoned from as long as 15 years to three, Alito said.

“This trend—combining shortened escheat periods with minimal notification procedures—raises important due process concerns,” Alito said, with Justice Clarence Thomas concurring. “As advances in technology make it easier and easier to identify and locate property owners, many states appear to be doing less and less to meet their constitutional obligation to provide adequate notice before escheating private property.”

Alito said that although the case at hand had a convoluted history that made it a poor vehicle to review the questions he raised, the “constitutionality of current state escheat laws is a question that may merit review in a future case.”

One case to watch was filed in July 2015 in Delaware Chancery Court involving two Belgian scientists who created a new drug to treat Hepatitis B but lost their shares in the biopharmaceutical company they founded when the state escheated the shares and liquidated them three days later (JLI Invest S.A. v. Cook, Del. Ch., 11274-VCN, stayed, 11/10/15).

Making Contact

The plaintiffs allege the company was in regular contact with them, and the state failed to make basic attempts to contact them as is required by law before selling their shares. In addition, the scientists allege state law doesn't allow Delaware to escheat property from foreign persons.

The case has been stayed until the plaintiffs resolve their appeal before the Delaware Tax Appeal Board. The two scientists received $1 million back from the state, but the escheat happened shortly before Merck Co. bought their company. If they still had their shares at the time of the buyout, they would have received a total of $13.7 million.

Ethan Millar, an attorney with Alston & Bird LLP in Los Angeles, who represents the plaintiffs in the Delaware case, said strong facts and sympathetic plaintiffs make it a strong one. A ruling in the Delaware courts in their favor could come long before a Supreme Court ruling.

“I hope we don't have to go all the way to the Supreme Court to get justice,” he told Bloomberg BNA March 8.

Millar also represented the Unclaimed Property Professionals Organization in a motion to file an amicus brief with the Supreme Court in the Taylor v. Yee case.

Contingency Auditors

In his concurrence, Alito didn't mention the trend of states hiring outside auditors to work on a contingency fee basis to review records of asset holders such as financial institutions and identify what they consider to be abandoned property that can be escheated, Jennifer Borden, an attorney with Borden Consulting Group LLC in Boston, told Bloomberg BNA March 8.

The auditors are moving states toward deeming property unclaimed if an account has been inactive for three years, often without contacting the asset holders, Borden said. This is troubling for assets that are held without action for long periods such as retirement accounts or other tax-favored vehicles, or stock that doesn't offer dividends.

Borden represented the Shareholder Services Association and the Securities Transfer Association in a motion to file a brief in support of the plaintiffs in Taylor v. Yee.

Millar and Borden pointed out that the states are willing to use resources such as databases and public records to find people, for example by matching bank records to tax return information to collect unpaid taxes.

“At the same time, if they are willing to use it for that purpose, why can't they use it for the purpose of getting the property back to its owner?” Millar said.

Short of a Supreme Court ruling, rulings in the pending Delaware case or others against state UPL actions could make a difference, Smith said. If the rulings include damages and fees against the states that hurt them financially, the cases could change state rules, she said.

“The concurrence should be a wake-up call,” Smith said.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif. at lmahoney@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

For More Information

The Taylor v. Yee opinion is at http://www.bloomberglaw.com/public/document/Taylor_v_Yee_No_15169_2016_BL_58860_US_Feb_29_2016_Court_Opinion

The JLI Invest S.A. v. Cook complaint is at http://src.bna.com/dev.

For additional discussion of unclaimed property in California and Delaware, see Corporate Income Tax Navigator, at California 14 and Corporate Income Tax Navigator, at Delaware 14.