In Texas v. New Jersey, the U.S. Supreme Court established the priority rules for unclaimed property.
In Pennsylvania v. New York, the Court reaffirmed those priority rules and refused to make an exception for money orders. (Congress subsequently made that exception for the states.)
In Delaware v. New York, the Court took up whether there should be an exception for unclaimed securities distributions held by intermediary banks for beneficial owners who cannot be identified or located.
The Supreme Court once again reaffirmed the priority rules first established in Texas v. New Jersey.
How to Resolve Disputes Among the States
In Delaware v. New York, the Court lays out a framework to determine how conflicts between the states are to be resolved (at least as the conflicts concern which state gets to claim the unclaimed property from a holder).
This framework is a concise explanation of the unclaimed property reporting priorities.
First, we must determine the precise debtor-creditor relationship as defined by the law that creates the property at issue.
This requirement to define the debtor-creditor relationship harkens back to the Texas case and that the unclaimed property at issue was relatively simple debts owed by Sun Oil.
Second, because the property interest in any debt belongs to the creditor rather than the debtor, the primary rule gives the first opportunity to escheat to the State of “the creditor’s last known address as shown by the debtor’s books and records.”
This is the first priority rule.
Finally, if the primary rule fails because the debtor’s records disclose no address for a creditor or because the creditor’s last known address is in a State whose laws do not provide for escheat, the secondary rule awards the right to escheat to the State in which the debtor is incorporated.
This is the second priority rule.
[N]o State may supersede them by purporting to prescribe a different priority under state law.
States may not change the priority rules.
Applying the Priority Rules to Security Intermediaries
According to the framework laid out above, the first inquiry is to the precise nature of the debtor-creditor relationship.
In the case of a stock intermediary, a company’s stock is listed in the intermediary’s name. The intermediary then has its own books and records that show who the beneficial owner is. This is done to facilitate quicker and easier transfer of trades and other transactions without physical delivery of certificates of stock.
However, on occasion, the records are inadequate to show who the beneficial owner is and the stock becomes unclaimed.
The intermediary has disclaimed ownership interest.
So which state does the stock escheat to?
What is the relationship between an intermediary and the beneficial owner?
The Special Master concluded that the owner in this case would be the company of the stock, not the beneficial owner. And the result is that the stock should go to the company’s state of incorporation.
The Court rejected this premise as an inaccurate description of the precise creditor-debtor relationship. The terms creditor and debtor are not merely descriptive words used as a matter of convenience. Rather, state law creates property, binds persons to honor those rights, and establishes the legal relationships between creditor and debtor.
The intermediaries are the debtors. The beneficial owners are the unclaimed property owners.
Once the creditor-debtor relationship is established, then the states can determine who gets to escheat the property based on the priority rules.
New York Pays Delaware
The case had an estimated liability of $891 million worth of stock and other related property that had previously been escheated to New York.
However, New York and Delaware came to a separate agreement for New York to transfer $200 million to Delaware. The first payment of $35 million was made in January 1994 and the balance was to be paid in five annual installments of $33 million.
Full text available at Justia: Delaware v. New York, 507 U.S. 490 (1993)
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