Unclaimed Property Priority Rules Established in Texas v. New Jersey
Texas v. New Jersey 379 U.S. 674 (1965) is the decision issued by the U.S. Supreme Court that established the modern unclaimed property priority rules.
The case was an original jurisdiction case brought by Texas against New Jersey, Pennsylvania, and the Sun Oil Company.
The question was which state had the right to escheat the property held by Sun Oil Company. The property was various small debts from 1,730 small creditors for a total of $26,461.65, aged seven to forty years.
Sun Oil did not dispute that it owed the debts and that they were subject to escheatment. However, Sun Oil wanted certainty in its payment of unclaimed property and to be protected from double liability.
This protection from double liability, sought by Sun Oil, is a theme you will see in present day cases dealing with estimations and extrapolations.
Unclaimed Property Priority Rules
The Texas v. New Jersey case established that the first priority is to the state of the debtor’s last known address. This has become known as the first priority rule for reporting unclaimed property.
In the absence of the debtor’s last known residence, the property shall be escheated to the creditor’s state of incorporation. This is now known as the second priority rule for reporting unclaimed property.
Why Reporting Priority Rules Needed to be Established
It has always been the case that the state where the property resided was able to take possession of abandoned land or other physical property. However, intangible financial assets presented a problem.
Where does an account or a debt reside? Where is it physically located?
Prior to this case, there was no federal laws on escheatment to govern which states were entitled to claim unclaimed property held by corporations. Nor were the states able to establish any kind of interstate compact to govern escheatment and they did not have the constitutional power to force other states to abide by another’s laws.
Other Options Presented
When this Sun Oil dispute was brought to the U.S. Supreme Court, the Court handed off the case to a Special Master to hear evidence and issue a report for the Court.
The states and the Special Master presented four options for a final rule of applicability.
- “Most Significant Contacts” – Texas proposed that the state with the most significant contacts to the property shall have the exclusive right to escheatment. This rule was discarded because the Court felt that there would be continuous dispute, and thus litigation, over what the “most significant contact” for property was and thus which state could escheat the property. This was a subjective test that would require court intervention on each and every disputed item.
- “Debtor’s Domicile” – New Jersey countered with the proposal that the exclusive right shall be with the debtor’s domicile. While this was attractive to the Court as simple to apply, the Court found that the result would be too advantegous to a state where the debtor happened to incorporate itself.
- “Debtor’s Principal Place of Business” – Meanwhile, Pennsylvania countered that the property should be escheated to the debtor’s principal place of business. While Sun Oil was incorporated in New Jersey, the principal offices were in Pennsylvania. While this was attractive to the Court because the debt had more actual connections to Pennsylvania where the business was conducted, rather than New Jersey were the company was incorporated, the Court still felt that this would lead to uncertainty over the debtor’s principal place of business, similar to the creditor’s most significant contact test. This also had the strange effect of changing a company’s liability to a state’s asset (the right to escheat).
- “Creditor’s Last Known Address” – Florida jumped in with a proposal that the right to escheat should go the “creditor’s last known address, as shown by the debtor’s books and records.”
Why The Creditor’s Last Known Address Won
The Court said it best, so let’s take a look at the quote straight from the case (emphasis added):
Adoption of such a rule involves a factual issue simple and easy to resolve, and leaves no legal issue to be decided. It takes account of the fact that, if the creditor, instead of perhaps leaving behind an uncashed check, had negotiated the check and left behind the cash, this State would have been the sole possible escheat claimant; in other words, the rule recognizes that the debt was an asset of the creditor. The rule recommended by the Master will tend to distribute escheats among the States in the proportion of the commercial activities of their residents. And, by using a standard of last known address, rather than technical legal concepts of residence and domicile, administration and application of escheat laws should be simplified. It may well be that some addresses left by vanished creditors will be in States other than those in which they lived at the time the obligation arose or at the time of the escheat. But such situations probably will be the exception, and any errors thus created, if indeed they could be called errors, probably will tend to a large extent to cancel each other out. We therefore hold that each item of property in question in this case is subject to escheat only by the State of the last known address of the creditor, as shown by the debtor’s books and records.
A Second Priority Rule
After establishing the first priority rule, the Court recognized that there would be property where the debtor’s books and records did not have a record of an address or where the state does not provide for escheat of the property owed them.
In both cases, the Court decided, that the state of corporate domicile would be the proper state for the debt to escheat to, provided that another state could later claim the property upon proof of the last known address within its borders.
[T]he State of corporate domicile should be allowed to cut off the claims of private persons only, retaining the property for itself only until some other State comes forward with proof that it has a superior right to escheat.
The Court thought that the second priority rule would be invoked “with comparative infrequency,” and was “conductive to needed certainty” for these situations where the creditor’s last known address was not available.
Little did they realize that the ensuing decades would result in a litigation boom on exactly what were the limits of the state of incorporation in unclaimed property.
Full Case Available from Justia: Texas v. New Jersey, 379 U.S. 674 (1965)
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