Delaware fights states in abandoned property lawsuits

 

DOVER — Several lawsuits pitting Delaware against a host of other states could result in changes to how unclaimed property is doled out and lead to a major hit to the state’s budget in years to come.

At issue is a form of checks from MoneyGram, a financial transfer company. Two separate lawsuits filed in the U.S. Supreme Court and involving 23 other states will likely determine whether Delaware’s current practice of keeping abandoned checks and the hundreds of millions of dollars it currently claims every year from unclaimed property violates federal law.

Delaware is unique among states in that it derives a significant portion of its revenue from unrecovered assets such as bank accounts, checks and stocks. In the current fiscal year, about $514 million — 13 percent of the state’s total budget — comes from abandoned property. Only personal income tax and the franchise tax are larger sources.

This budget quirk stems from Delaware’s status as a corporate haven. According to the state, more than 1 million

Michael Houghton

Michael Houghton

companies are incorporated here, including more than 60 percent of Fortune 500 businesses. MoneyGram is among the companies formed here, although it operates in all 50 states.

When certain assets go unclaimed after a period of time, Delaware is able to liquidate the property and use the funds in the budget. If the owner later shows up, the state will reimburse him or her, though most property is not recovered.

“It’s a river of money that the states have relied on,” said Michael Houghton, a lawyer at the Wilmington-based law firm Morris, Nichols, Arsht & Tunnell.

According to a court filing from a coalition of 21 states, Delaware has caused “injury and damages” to those states by “depriving (them) of sums of which they are the rightful custodians under state and federal law.”

Litigation

In February, Pennsylvania sued Delaware in the Middle District of Pennsylvania, arguing uncashed money orders from MoneyGram should go back to the originating state rather than where MoneyGram is incorporated. Wisconsin filed a similar suit, and a coalition of states, led by Arkansas and Texas, introduced litigation in the Supreme Court earlier this month over MoneyGram checks.

Delaware “completely disregarded” the 1974 Disposition of Abandoned Money Orders and Traveler’s Checks Act, Texas Attorney General Ken Paxton said in a statement.

The law declares money orders and traveler’s checks are to be remitted to the state where money orders and traveler’s checks were purchased.

According to Mr. Paxton, Delaware owes more than $150 million to the 21 states and another $250 million to the nation’s other 28 states — at least $400 million in all.

In May, after Delaware sought to dismiss the Pennsylvania lawsuit, Pennsylvania submitted it to the Supreme Court instead.

“Obviously we concur with Pennsylvania in that this should be decided at the United States Supreme Court level because this is disagreement between two states and the interpretation of federal law,” Secretary of Finance Tom Cook said last week.

Thomas Cook

Thomas Cook

He believes precedent is on Delaware’s side, citing previous court cases.

In one case, the Supreme Court created priority rules that determine which states handle unclaimed property. What is referred to as the primary rule established that for abandoned property, the state of the owner’s last known address is given control over the asset.

In case where there is no known address, the claim defaults to the state of incorporation for the company in question, in what is known as secondary rule.

According to court filings, MoneyGram judged the 1974 federal law did not apply to official checks, with “specific direction” from Delaware, and escheated them to the First State as a result. MoneyGram could not be reached for comment.

In a filing from Delaware, Attorney General Matt Denn and other lawyers agree that official checks are exempt from the categories laid out by Congress.

The lawsuit from Texas, Arkansas and the 19 participating states contends Delaware and MoneyGram are violating federal law by not sending the checks to the states where they were first bought, although the company argued the 21 states have an issue not with it but with Delaware, court documents say.

While Delaware officials believe secondary rule makes it clear the official checks are being properly sent to the state, the Texas lawsuit alleges that belief is “based on a strained and convoluted reading” of federal law.

Impact

Mr. Houghton, who co-chairs an interstate commission working to change the Uniform Unclaimed Property Act, declined to predict the outcome of the court cases, although he said he expects the Supreme Court’s ruling to be a narrow one that deals solely with official checks rather than all abandoned property.

He did note, however, the court has the ability to object to Delaware’s broader escheating practices, which would spell trouble for the state.

This issue pits Delaware, one of the nation’s smallest and least-populous states, against others much larger and with budgets that make Delaware’s pale in comparison.

“It’s not a secret that many states chafe under a rule that allows Delaware, simply because companies are formed here, to collect hundreds of millions of dollars each year when money is generated by citizens of those states,” Mr. Houghton said.

Sen. Harris McDowell, D-Wilmington, co-chair of the legislative committee that writes the state budget, is optimistic about the lawsuits.

“I think we have long established that Delaware is a nexus for certain transactions at the corporate level,” he said last week.

Senator Harris McDowell by The News Journal/BOB HERBERT.

Harris McDowell III

It is no certainty the Supreme Court will take the case, however. Mr. Cook is hoping for an announcement in that regard by the end of 2016.

Should the court opt not to hear the dispute, Mr. Cook expects the contending states would file at a lower level. There is precedent for the Supreme Court hearing similar disputes, at least one of which involved Delaware.

If Delaware were to lose, “a great deal of fiscal scrambling” would be required, Sen. McDowell said.

For some states $150 million may be a “budgetary rounding error,” Mr. Houghton said, but it represents much more than that for Delaware, and restitution of that amount would likely mean serious cuts to programs and services.

If the court was to rule all abandoned property of this nature has to be paid back or simply that future unclaimed assets must be remitted to other states would be key in the event of a decision going against Delaware.

The latter would be a significant hit but could be planned for. A big one-time payout, however, would do a number to the state budget.

Although it may seem the state would need to change its laws if the court were to rule against it, experts say that is not the case. Such a decision would simply mean Delaware has been interpreting the law incorrectly and would no longer be able to collect some of the unclaimed property it now counts as crucial for its budget.

That, in turn, would force officials to develop new revenue sources or make cuts — or some combination of both.

The issue is a complex one with strong implications for Delaware and many other states. Much remains up in the air at this stage, but there is no doubt many observers are watching closely.

“We should all be aware that there are high stakes,” Mr. Houghton said.

Staff writer Matt Bittle can be reached at 741-8250 or mbittle@newszap.com. Follow @MatthewCBittle on Twitter.

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