Executive summary: U.S. Supreme Court finds for the states in unclaimed property decision
On Feb. 28, 2023, The U.S. Supreme Court found in favor of 30 states challenging Delaware’s claim to a product labeled "official checks" offered for sale by MoneyGram. The Court found that federal statutes dictated how the official checks should be escheated, i.e., to the state where the checks are purchased, instead of relying on the ‘priority rules’ established by the Court in the 1965 decision, Texas v. New Jersey, 379 U.S. 674.
US Supreme Court rejects Delaware’s claim to MoneyGram official checks
The U.S. Supreme Court heard its first challenge to unclaimed property law in 30 years in early October. The consolidated cases, Delaware v. Pennsylvania and Wisconsin and Arkansas, et al. v. Delaware, sought to clarify what rules should apply to the escheatment of certain financial instruments. The litigation centered around one key issue: whether MoneyGram’s official checks should be classified as money orders or similar written instruments under the Disposition of Abandoned Money Orders and Traveler’s Checks Act of 1974 (Disposition Act) and requiring escheatment to the state of purchase, or whether the official checks should be classified more similarly to other financial instruments requiring escheatment to Delaware as MoneyGram’s state of incorporation under Texas v. New Jersey.
MoneyGram, a money transfer and payment services company incorporated in Delaware, sells two similar payment instruments: traditional money orders and a product labeled ‘official checks.’ The money orders are generally purchased by a customer from a MoneyGram location. The customer pays a transaction fee and receives the money order for the value of the payment remitted by the customer. At the time of purchase, MoneyGram becomes liable for the value listed on the money order. The purchase of MoneyGram’s official checks operates in a similar manner; however, there are some subtle distinctions. Money orders are sold at retail locations and official checks are sold at financial institutions. Additionally, the instruments differ in value limitations with money orders generally maintaining lower values than official checks. Finally, money orders are signed by the purchaser, whereas official checks are signed by the employee of the financial institution. Both instruments are pre-paid and the funds for the value of the instrument are immediately taken from the customer. MoneyGram is directly liable for paying the value owed on both.
When the value of the official checks became reportable as unclaimed property, MoneyGram treated the checks as outside the scope of the Disposition Act, a federal statute that governs how certain instruments are treated for unclaimed property purposes. The Disposition Act provides that any sum payable on a money order, traveler’s check or similar written instrument, for which a financial institution, banking organization or business association is liable, is escheatable to the state where the instrument was purchased. Instead, MoneyGram treated the official checks as reportable under the second priority rule of Texas v. New Jersey, i.e., the state of incorporation, or Delaware in this case, because MoneyGram did not collect the owner’s address information from the financial institutions that sell the instruments.
In a unanimous decision that rejected Delaware’s claim to MoneyGram official checks, the U.S. Supreme Court concluded that the official checks operate like a money order, i.e., prepaid written instruments used to transmit money to a named payee are sufficiently similar to a money order to fall presumptively within the Disposition Act. Accordingly, the Court held that MoneyGram’s official checks should escheat to the state of purchase under the Disposition Act, not under the priority rules determined in Texas v. New Jersey.
The Court found Delaware’s arguments unpersuasive. Specifically, the Court held that Delaware did not sufficiently explain how the official checks differed from money orders under the statute. Further, the Court’s decision focused, in part, on prevention of a ‘windfall’ to the state of incorporation. The Court explained that the Disposition Act was enacted because for certain instruments like money orders, adequate records of creditor address information were not maintained as a matter of business practice, which meant that the second priority rule mandating escheatment to the state of incorporation always applied. The Disposition Act prevents this windfall by instead adopting a place-of-purchase escheatment as a matter of equity.
The Court has remanded the decision back to the Special Master to determine the liability and respective amounts owed.
Holders that issue money orders or similar instruments should review current procedures in light of the decision. The interplay of the common law priority rules and the Disposition Act often create nuance among a number of categories of unclaimed property. While the Court has provided some clarity to the instruments offered by MoneyGram, new and unique financial instruments may not obviously reflect established rules. Holders of financial instruments are encouraged to review the decision and speak to their unclaimed property advisers with questions.
Most businesses have some form of unclaimed property. Uncashed payroll or vendor checks, customer credits and overpayments, unredeemed gift cards, stock and other securities and dormant bank accounts are just some of the items that could result in an unclaimed property liability. Unclaimed property holders or businesses that have never filed reports or only report limited property types, should speak to an unclaimed property specialist about compliance and mitigation. For more information and insights on unclaimed property, please visit RSM’s Unclaimed Property Portal.