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US Supreme Court rules unclaimed agent, teller’s checks escheat to state of purchase
March 2023
In brief
The US Supreme Court ruled February 28 that the Disposition of Abandoned Money Orders and Traveler’s Checks Act (Federal Disposition Act or FDA) governs teller’s checks and agent checks, and that unclaimed proceeds of such should escheat to the state of purchase. [Arkansas, et al. v. Delaware, No. 22O146 ORG, Delaware v. Pennsylvania, U.S., No. 22O145, 2/28/23]
Action item: For companies that issue teller’s checks and agent checks, this decision may significantly alter the filing of unclaimed property for Delaware and other states.
Observation: Since the decision narrowly focused on the FDA’s definition of “other similar written instruments,” it may not have far-reaching effects on how holders will be reporting other types of unclaimed property.
In detail
Background
The priority rules established by the US Supreme Court for unclaimed property escheatment provide that (1) first priority belongs to the state of the owner’s last known address as shown by the unclaimed property holder’s books and records; and (2) if the holder’s records disclose no address, second priority belongs to the state in which the holder is incorporated. After the Court established these priority rules, Congress adopted the FDA, providing that certain intangibles (such as sums payable on unclaimed money orders and traveler's checks) escheat to the state of purchase.
MoneyGram Payment Systems, Inc., a Delaware corporation with its principal place of business in Texas, applied the second priority rule to unclaimed teller’s checks and agent checks (disputed instruments) that did not contain the last known address of the purchaser or intended payee. Pennsylvania and Wisconsin subsequently filed a lawsuit against Delaware and MoneyGram in federal district court over the right to escheat the official checks purchased in those states, citing the FDA. Delaware then filed a motion to dismiss the Pennsylvania action for lack of personal and subject matter jurisdiction.
The attorneys general in Arkansas and 29 other states subsequently filed a motion for leave to file a claim with the US Supreme Court, alleging that Delaware retained custody of unclaimed property in violation of the FDA. Delaware then filed a motion for leave to file a counterclaim, petitioning the Court to review the applicable escheat law.
The Supreme Court appointed a special master that issued two interim reports, concluding that:
(1) The disputed instruments were prepaid drafts issued by a financial institution or business association and used by a purchaser to transmit money; the teller’s checks and agent checks “are money orders, or, at the very least, are similar instruments,” and the special master concluded the purchasers likely reside in the state of purchase.
(2) In his second interim report, disputed instruments drawn by a bank as drawer or otherwise in a capacity that renders the bank liable fall within the FDA’s exclusion of third-party bank checks and do not escheat pursuant to the FDA.
For additional information, see Abandoned and Unclaimed Property Quarterly (2/13/23).
Applying the FDA to disputed instruments
The FDA provides that “where any sum is payable on a money order, traveler’s check, or other similar written instrument (other than a third-party bank check) on which a banking or financial organization or a business association is directly liable,” the primary escheatment rule is at the place of purchase if known.
Disputed instruments are “other similar written instruments” under the FDA
The Court found that the disputed instruments are “other similar written instruments” that operate in the same manner as money orders (prepaid) and “escheat inequitably solely to one state under our common-law rules due to the business practices of the company holding the funds” (inadequate recordkeeping of the purchasers’ last known address).
Disputed instruments do not fall under “third-party bank check” exclusion
The Court noted that according to the parties, a “bank check” is drawn on a bank’s own account or by a bank and on a bank (i.e., a bank issues checks from its own bank or uses an account with another bank to write its own checks for payment). Since the disputed instruments are drawn on MoneyGram’s account, the Court determined they do not appear to qualify as bank checks. The Court stated that “neither Delaware nor the special master has provided a persuasive reason for concluding that the disputed instruments are third-party bank checks within the meaning of the FDA.”
Accordingly, the Court adopted the special master’s recommendations in the first interim report that the teller’s checks and agent checks were covered by the FDA and, therefore, would escheat to the state of purchase.
Observation: With this ruling, Delaware potentially stands to lose millions of dollars in escheatment funds. The Supreme Court noted in a footnote that “According to the defendant states, Delaware took $250 million between 2002 and 2017 pursuant to the common law’s escheatment rules with respect to disputed instruments that were purchased across the nation, whereas, if the FDA applied, that state would have been entitled to only about $1 million.”
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