The US Supreme Court (Court) consolidated two cases brought by nearly half of the states arguing that Delaware is unlawfully collecting hundreds of millions in unclaimed and abandoned "official checks" issued by MoneyGram Payment Systems, Inc. (MoneyGram).¹ All of the states involved, including Delaware, invoked the Court's original jurisdiction under the US Constitution since their claims arise from of a disagreement among the states.²

In consolidating the two cases, the Court also granted the parties' motions for leave to file Bills of Complaint and for leave to file counterclaims within 30 days.

Overview of cases: the states' arguments (except Delaware)

MoneyGram is in the business of transferring money: online, in person, to a bank account or mobile wallet, outside the usual banking system to customers throughout the US (and the world). One of MoneyGram's particular ways to transfer money is via "official checks," which the states argue are similar in form and function to money orders. In both cases, the states argue that MoneyGram must remit to them sums payable on unclaimed official checks sold by MoneyGram, when the official checks were purchased in the respective states, under the Disposition of Abandoned Money Orders and Traveler's Checks Act, a federal law (the "Federal Disposition Act").³ MoneyGram, at Delaware's direction, has instead remitted those sums to Delaware, as MoneyGram's state of corporate domicile, deeming the official checks are akin to typical third-party bank checks, and under the general priority rules outlined by the Court in Texas v New Jersey.⁴

The states argue that the Court should resolve the dispute over whether state unclaimed property law or federal law controls. In Pennsylvania v. New York, the Court held that, in the absence of evidence of the address of the owner of an uncashed money order, the state of the holder's corporate domicile had the right to receive the sums owed on the money order.⁵ The states, however, argue that, in 1974, Congress, in response to the holding in Pennsylvania, effectively overturned that ruling by enacting the Federal Disposition Act. According to the states, that law requires the funds from unclaimed MoneyGram official checks to be remitted to the states of purchase, as the official checks are in fact akin to money orders.

The states further argue that, under the Federal Disposition Act, the state where an unclaimed money order, traveler's check or other similar written instrument (other than certain third-party bank checks) is purchased is entitled exclusively to escheat or take custody of the sum payable on such instrument to the extent of that state's power under its own laws to escheat or take custody of such sum.⁶

States participating in the consolidated case are Arkansas, Alabama, Arizona, Colorado, Florida, Idaho, Indiana, Kansas, Kentucky, Louisiana, Michigan, Montana, Nebraska, Nevada, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, Texas, Utah, West Virginia, and Wisconsin.

Overview of cases: Delaware's arguments

Delaware argues that the Court's precedent on which state has priority to claim certain abandoned intangible personal property favors Delaware.⁷ While acknowledging the precedents set in Texas and Pennsylvania regarding priority rules for escheat of unclaimed property, Delaware argues that, when Congress adopted the Federal Disposition Act in 1974, it reversed Pennsylvania's holding for certain types of property — specifically 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 business association is directly liable, and found that the state in which such an instrument was purchased has the exclusive right to escheat or take custody of sums payable on such instruments. If the state in which the instruments were purchased is not known, then unclaimed property associated with such instruments escheats to the state in which the banking or financial organization or business association is incorporated.

Delaware seeks a declaration from the Court that MoneyGram official checks are not 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, and therefore would properly escheat to Delaware. It also seeks a declaration that all future sums payable on abandoned MoneyGram official checks should be remitted to Delaware. For an overview of one of the cases and arguments made by the parties in their petition filed with the Court, see Tax Alert 2016-1057.

Implications

It is unlikely that the Court itself will hear testimony in the case. If the past is any indicator, however, then the Court will likely appoint a master, usually an independent attorney with experience in that area of the law, who will conduct a hearing, request information and ultimately, issue a report to the Court with a recommendation. This process would take place over several months. Thus, a resolution may not be forthcoming in the short-term.

The Court could rule in favor of the other states, therefore requiring MoneyGram to remit unclaimed "official checks" to the state of purchase (based on the Federal Disposition Act). This outcome would demonstrate another setback for Delaware's unclaimed property program against the back drop of a landmark decision from a federal district court in the Third Circuit in which Delaware was lambasted for its unclaimed property audit practices, as well as several other pending cases highlighting Delaware's perceived aggressive unclaimed property audit behavior. Or, the Court could rule in favor of Delaware, requiring MoneyGram to remit unclaimed "official checks" to Delaware as the state of incorporation, finding that the federal statute did not apply. Finally, the Court could once again address the general unclaimed property state priority rules that it has not fully visited since the early 1990s. Regardless, the final resolution of this case could lay to rest an ongoing dispute among the states regarding the priority rules for the escheat of intangible "official checks."

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ENDNOTES

¹ Arkansas et a. v. Delaware, No. 220146, and Delaware v. Pennsylvania and Wisconsin, No. 220145 (U.S. S. Ct. Oct. 3, 2016)(Orders in Pending Cases — Items 145 (Orig.) and 146 (Orig.) — order consolidating cases)

² U.S. Const. Art. III, Section 2, cl. 2; 28 U.S.C. Section 1251(a).

³ 12 U.S.C. 2501 et seq.

⁴ Texas v. New Jersey, 379 U.S. 674 (1965).

⁵ Pennsylvania v. New York, 407 U.S. 206 (1972).

⁶ 12 U.S.C. Section 2503.

⁷ Delaware v. New York, 507 U.S. 490 (1993); Pennsylvania v. New York, 407 U.S. 206 (1972); Texas v. New Jersey, 379 U.S. 674 (1965).