BAKERSFIELD – The U.S. Supreme Court recently denied a petition to review a case related to California's practice of collecting unclaimed property. In the lawsuit, the plaintiffs claimed the state does not give people adequate notice before transferring their assets to the fund, which is overseen by the California State Controller's Office.
The plaintiffs questioned both the state of California’s ability to give enough notice as well as California’s right to take securities.
Millar
“The plaintiffs have concerns with both the escheat of the property and the insufficient notice given prior to the escheat or liquidating the property,” Ethan D. Millar, partner at Alston & Bird LLP, recently told Northern California Record. “The plaintiffs have argued that the escheat and liquidation of the property constitutes a 'taking' that requires California to pay just compensation regardless of whether proper notice was provided. However, if the state had provided proper notice, then the harm to plaintiffs resulting from the liquidation of the property could have been avoided.”
In denying the petition to hear the case, the U.S. Supreme Court in effect supported the 9th Circuit's ruling, which found collecting unclaimed property constitutional.
“The denial of the petition for certiorari means that the 9th Circuit’s decision stands,” Millar said. “However, Justice (Samuel) Alito issued a concurring opinion [joined by Justice (Clarence) Thomas] in which Justice Alito made clear that the reason he concurred in that result was because of the ‘convoluted’ history of the case, and that Justice Alito considered the constitutional issues raised to be ‘important’ ones.”
Millar quoted Justice Alito: “When a state is required to give notice, it must do so through processes ‘reasonably calculated’ to reach the interested party–here, the property owner.”
While a letter to the last-known address of the owner may normally be successful, Millar explained that it is unlikely to be sufficient where that address is known to be invalid, as would be the case for escheated securities (which are only escheated under California law if notices sent to that address by the holder were previously returned as undeliverable).
“Justice Alito further suggests states may need to employ 'advances in technology,' as we stated in our amicus brief on behalf of the Unclaimed Property Professionals Organization, cross-referencing the owner’s name across other databases available to the state, such as tax or real estate records, to meet the constitutional standard,” Millar said.
Millar also explained that Justice Alito suggested that the court may be receptive to a future case raising these issues.
“There are several such cases currently pending,” Millar said. “For example, I am representing two Belgian companies in litigation against the state of Delaware that involves the same issues (as well as additional issues not present in the Taylor v. Yeecase). In that case, our clients’ securities were escheated and liquidated by the state without any notice at all (Delaware’s notice provisions are even worse than California’s), even though Delaware had a record of our clients’ current addresses and could easily have contacted them. The escheat and liquidation resulted in a loss of approximately $12 million in lost appreciation to our clients.”
In the meantime, Millar argues that California residents who own securities will continue to be at risk of suffering substantial losses from the escheat and liquidation of their securities.
“Making matters worse, California’s unclaimed property director has recently made public statements about trying to escheat securities based merely on the lack of affirmative contact by the owner with respect to his or her securities – rather than where mail sent to the owner has been returned as undeliverable, which is another requirement for escheatment under California’s unclaimed property law,” he said.
Millar argues that such issues can become a problem for California citizens who may not always be on top of their securities.
“Escheating based on mere inactivity of the owner will result in far greater escheatment of securities, as many owners hold securities for the long term and so do not regularly 'check in' with their accounts (indeed, most investors are told to 'buy and hold'),” Millar said. “This type of inactivity standard (which is what Delaware has adopted) will therefore greatly increase the risk of escheatment and liquidation of securities.”