US Supreme Court to hear Delaware unclaimed property check dispute
States contend checks wrongly escheated to Delaware under federal law
TAX ALERT |
On Oct. 3, 2016, the U.S. Supreme Court agreed to address a challenge to Delaware’s treatment of unclaimed MoneyGram Payment Systems, Inc. (MoneyGram) ‘official checks’ in the court’s original jurisdiction.
In the past few years there have been significant developments regarding Delaware’s unclaimed property procedures. Unclaimed property audits have increased, and legislation was enacted addressing a number of procedural factors concerning audits after a task force found serious concerns regarding the administration of unclaimed property. More recently, a U.S. District Court found that the state’s procedures shock the conscience. (For more information, please read our article, Temple-Inland’s Delaware unclaimed property audit challenge dismissed.) And now, partially due to a multistate Treasury Services Group audit of MoneyGram, 23 states are suing Delaware claiming it over-reached in collecting certain financial instruments similar to money orders. To put into further context, Delaware’s 2017 budget funding is projected to consist of 11 percent unclaimed property—the third largest source of revenue for the state and a larger portion of funds attributable to unclaimed property than any other state.
Unclaimed property is tangible or intangible property that becomes ‘dormant,’ i.e., the property is unclaimed by the owner of the property for a legislatively imposed period of time. Unclaimed property includes items such as bank accounts, vendor checks, payroll checks, unredeemed gift cards and insurance proceeds, among others. All states have imposed obligations regarding unclaimed property compliance, such as dormancy periods and audit procedures.
After the expiration of the dormancy period, state law requires the holder to escheat, or remit, the unclaimed property to the state that administers the unclaimed property law. The state receives the unclaimed property based on a set of ‘priority rules’ established through U.S. Supreme Court case law. Accordingly, unclaimed property is escheated to the state of the owner’s last known address based on the holder’s books and records. If the owner’s address is unknown, the property is remitted to the holder’s state of incorporation, commonly Delaware.
MoneyGram is a money transfer and payment services company incorporated in Delaware. In addition to a number of other services, MoneyGram 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 with 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 operate in a similar manner and the differences between the two instruments are limited. 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. 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.
The value of the instrument is paid by MoneyGram when it is presented for payment. Until that time, MoneyGram is the holder of the value of the official check. Accordingly, MoneyGram maintains large balances of money order and official check value waiting to be distributed to the true owner of the money order or official check each year. A portion of those balances will never be claimed within a certain period of time, and thus, the uncashed instruments become unclaimed property.
Unclaimed property is escheated to the state of incorporation when the address of the owner of the property is unknown. However, not all types of unclaimed property follow the same priority rules. Third-party bank checks are escheated to the state of incorporation, however, money orders, traveler’s checks, or similar written instruments follow priority rules established under the Disposition of Abandoned Money Orders and Traveler’s Checks Act (Disposition Act). The Disposition Act is federal law that provides that any sum payable on a written instrument such as a money order or traveler’s check, for which a financial institution is liable, are escheated to the state where the instrument is purchased. Delaware has historically treated MoneyGram official checks as third-party bank checks, rather than money orders or similar instruments, and therefore, required these checks to be escheated to Delaware.
Essentially, the litigation centers around one issue: whether MoneyGram’s official checks should be classified as money orders or similar instruments under the Disposition Act and should therefore be escheated to the state of purchase, or whether the official checks should be classified as third-party bank checks escheated to the state of incorporation, Delaware.
Pennsylvania and Wisconsin sue first
On Feb. 26, 2016, the Commonwealth of Pennsylvania filed a complaint against the state of Delaware and MoneyGram in U.S. District Court, requesting the court determine that over $10 million of unclaimed MoneyGram official checks are money orders subject to escheat in Pennsylvania. The state of Wisconsin filed a similar complaint in U.S. District Court estimating over $13 million was rightly owed to the state.
On May 26, 2016, Delaware filed a motion in the U.S Supreme Court requesting the court hear the cases on the basis that the U.S. Supreme Court has original jurisdiction over controversies between states. Wisconsin subsequently filed its own motion requesting the U.S. Supreme Court hear the case. Both the Pennsylvania and Wisconsin cases were stayed in U.S. District Court pending the outcome of Delaware’s motion requesting the U.S. Supreme Court hear the case.
Twenty-one states follow suit
On June 9, 2016, and in separate litigation, 21 states, led by the attorneys general in Arkansas and Texas, filed a similar complaint against Delaware in the U.S. Supreme Court. That complaint alleges that over $150 million of MoneyGram official checks should be returned to the states of purchase. The actual amount may potentially be in the several hundreds of millions. The remaining states joining the litigation are Alabama, Arizona, Colorado, Florida, Idaho, Indiana, Kansas, Kentucky, Louisiana, Michigan, Montana, Nebraska, Nevada, North Dakota, Ohio, Oklahoma, South Carolina, Utah and West Virginia.
The U.S. Supreme Court consolidated the Pennsylvania and Wisconsin cases with the challenge by the 21 other states, initially giving the parties 30 days to file answers to the complaints and the counterclaims. Original jurisdiction matters can be complex and require significant time to review because the court is the first court to hear the case, and the only court to hear the case—functioning as the trial court. Due to the number of states involved in regards to a single issue, this will be an interesting case to watch as the litigation unfolds.