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Delaware Loses its Latest Grab for Purported Unclaimed Property | Blank Rome LLP

Delaware has kept a tight grip on its lucrative source of funding for abandoned and unclaimed property for nearly 60 years. Another finger in that grip was loosened by Delaware’s recent US Supreme Court loss, when Pennsylvania, Wisconsin and Arkansas defeated Delaware’s claim to certain prepaid money transfer instruments after being deemed abandoned.

The facts: The instruments in question were agent’s checks and counter checks sold under a brand name as prepaid money transfer instruments that the payee can present for payment. The unclaimed property/instrument holder that has expired according to the model specified in Texas versus New Jersey, 379 U.S. 674 (1965). That is, the two-stage cascade rule of expropriable property rights, iethe holder must deposit proceeds of discontinued financial products (1) “in the state of the creditor’s last known address, as evidenced by the books and records of the debtor,” if that state has an estates safekeeping law, and (2) if the first rule applies fails, “to the incorporation state of the debtor”. Pennsylvania vs. Delaware598 US ___, Slip op at 3 (2023), citing Texas379 US at 680-682 (explaining the cascading rule and that the debtor entity holding the funds is the “holder”).

Several states claimed that the instruments are protected by a federal safe harbor fairness rule for certain financial instruments to get to the purchase address, which stems from Congress’ acknowledgment that records of the instrument purchaser’s or payee’s address are often not maintained and that the address of the place of purchase is retained (Federal Disposition of Abandoned Money Order and Traveler’s Checks Act (often referred to as “FDA”), 12 USC § 2501). The instrument holder rightly claimed it only had to cheat the monies once, paid the amounts in court, and left states to argue over who had the better claim.

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The decision: The case centered on whether the instruments were of the type expressly listed by the FDA or were sufficiently “similar” to the instruments listed to receive fairness protections of place of purchase. The US Supreme Court found that the FDA specifically enumerated instruments and used the broad word “similar” to include other instrument types not specifically enumerated. It argued that Congress enacted the fairness rule to avoid record-keeping pitfalls that would be inherent in the instruments themselves and allow founding states to receive a windfall. The court ruled that the instruments are sufficiently similar to listed instruments to also receive protection, fall under the FDA and be paid to the state of the place of purchase. The court stated: “If a financial product works like a money order –ie, [a prepaid instrument to transmit money to a payee] and …would unjustly accrue exclusively to the incorporation State of the corporation holding the funds under ours [Texas rule] due to gaps in records, then it is sufficiently “similar” to a money order to be put under FDA jurisdiction.” Pennsylvania vs. Delawareslip op. at 22.

take that away: The US Supreme Court stated many years ago that the US Constitution’s Due Process Clause protects a holder from having to convert funds more than once. Intangible property is not easily located, became a source of friction over where to cheat, and forced the question of whether a basic rule of trust was required, leading to two-tieredness Texas Rule that defaults to the founding state when the owner addresses are unknown. Delaware’s very high rate of incorporation made it an unintended beneficiary of the US Supreme Court’s two-tier cascade Texas Rule. Congress stopped this injustice in relation to certain financial instruments and “similar” instruments where the owner’s address is not part of normal records but the company records the place of purchase. Pennsylvania vs. Delaware reminds us that: (1) States hate acts of Congress that limit their reach (e.g., PL 86-272); and (2) the FDA’s Fairness Safe Harbor is interpreted broadly and can become very powerful as our modern world of payment options evolves.

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