UPdate Special Issue:
California -
Interest on Unclaimed Property - What Property Owners May Need to
Consider.
Suever v. Connell
The U.S. District Court for the Northern District of
California issued a ruling addressing several issues in the on-going case
regarding the payment of interest on unclaimed property held and/or sold
by the California Controller. Suever v Connell, No. C 03-00156 RS (N.D.
Cal. April 1, 2008). The controller filed an appeal with the U.S. Court of
Appeals for the Ninth Circuit on April 16, 2008.
In Suever, the controller filed a motion to certify an
interlocutory appeal regarding the earlier finding by the U.S. District
Court for the Northern District of California (October 12, 2007) that the
state is required to pay interest when it returns property to an owner.
Procedurally, if a district court finds that its order involves a
controlling question of law about which there is a difference of opinion,
and an immediate appeal may materially end the litigation, a motion for
interlocutory appeal can be certified.
In this case, the controller requested an amendment to the
court's earlier order that the state had to pay interest on property
returned to owners. The U.S. District court found that the conditions for
such an amendment existed, and granted the motion thereby enabling the
controller to appeal the district court's finding.
The controller filed an appeal with the U.S. Court of
Appeals for the Ninth Circuit on April 16, 2008.
Although pending in the federal court system, the
California Court of Appeals has issued its own decision in favor of the
controller in Morris v. Chiang.
Morris v. Chiang
On June 3, 2008, the California Court of Appeals for the
Second District affirmed the trial court's ruling in Morris v. Chiang, No.
B194764 (Cal. Ct. App. 2008), finding that the state's retention of
interest earned on unclaimed property was not an unconstitutional taking
of property without compensation.
The plaintiff filed a class action suit in the trial court
and the trial court decided to rule on the question of liability prior to
certifying the class for a class action suit. Plaintiff argued that under
California's Unclaimed Property Law (UPL), the state was purely a
custodian of the property and title does not transfer to the state. As
such, the retention of interest earned on private funds constituted a
taking without just compensation in violation of the Fifth and Fourteenth
Amendments to the U.S. Constitution and Art. I, sec. 19 of the California
Constitution.
The Controller argued that the state holds title to
escheated unclaimed property until it is claimed, thus the property owners
do not have a property interest requiring compensation while such property
is held by the state.
The appellate court found that under the UPL, the state is
vested with title to unclaimed property subject to the rights of the
claimant, and although title to the unclaimed property is defeasible (by
the property owner), it nonetheless exists. The appellate court held that
"[b]ecause title to plaintiff's property was legitimately vested in the
state during the period in question, she was not entitled to the interest
earned on it. The UPL specifies that such interest shall be paid to the
General Fund."
In addressing the issue of unconstitutional taking, the
appellate court found that the limited transfer of title to unclaimed
property under the UPL are practically and legally attributable to the
abandonment or inattention by the owner and consequently does not produce
an invalid taking. In discussing the ruling by the U.S. Supreme Court in
Texaco v. Short, the appellate court found that prior cases "have treated
unclaimed property as effectively abandoned.with the consequence that
neither custodial escheat of the property nor failure to pay the claimant
interest on it constituted a taking," as is the case here.
Thus, the appellate court found that because the state had
temporary, non-permanent title to the property, the state's retention of
interest earned on unclaimed property was not an unconstitutional taking
without just compensation.
As noted above, the California Court of Appeals has come to
a different conclusion than that of the U.S. District Court in Suever. As
it stands, Morris is not on appeal, while the controller has appealed the
decision in Suever; therefore, unclaimed property owners may want to wait
and see how this issue may be resolved. However, if S.B. 1319 passes, the
interest issue may be resolved for unclaimed property owners.
California Senate Bill 1319
California S.B. 1319, currently in the California
legislature (approved by committee) proposes additional reforms to
California's UPL. The bill is authored by Sen. Michael Machado and
sponsored by California Controller Chiang.
Among other things, S.B. 1319 would amend the current
unclaimed property statute to require California to pay simple interest on
unclaimed property equal to the bond equivalent rate for 13-week U.S.
Treasury bills, or five percent, whichever is lower.
It should be noted that if passed, S.B. 1319 would also
specifically impose a limit on the amount a property owner can recover
from the state for securities sold, to the net proceeds from the sale and
the corresponding interest based upon the net proceeds. The property
owner, by statute, would not be entitled to receive any appreciation in
the market value of the securities occurring after the sale by the
Controller.
Even though S.B. 1319 provides for interest payments,
property owners, especially those with interests in securities, should
remain diligent in claiming their property as the potential loss of
appreciation may be significant.
If passed, S.B. 1319 would apply to all property on deposit
in California's Unclaimed Property Fund as of January 1, 1977.
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addressed in future issues.
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