Jurisdictional Limitations on State Claims to Abandoned Property

All fifty states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands have enacted abandoned property statutes that draw their inspiration from the English common law doctrine of bona vacantia. Under that doctrine, the sovereign was allowed to claim certain kinds of personal property as custodian for the rightful owner under the principle that the sovereign had a more equitable claim to the property than the holder of that property did. Similarly, under abandoned property statutes in the United States, businesses (hereinafter referred to as "holders") are required annually to report and deliver to the appropriate state intangible personal property constituting a debt or obligation owed, in the ordinary course of its business, by the holder to the owner for more than the period of time (typically five years) prescribed in the state abandoned property statute (as well as abandoned tangible personal property). In recent years, greater attention has been paid to state abandoned property laws due to the multistate audits conducted by third-party contractors for periods typically going back to the early or mid 1980s. Noncompliance by holders with state abandoned property laws can be attributed to a number of factors, including the broad range of property types and statutory dormancy periods covered by the various state abandoned property statutes. If holders have been complying with state abandoned property laws, it generally has been only for certain commonly understood types of unclaimed property such as payroll and dividend checks. Other types of unclaimed property such as promotional and gift certificates, customer overpayments, and unidentified remittances may not have been reported at all. This increased focus on abandoned property laws is bringing jurisdictional issues to the fore. In Texas v. New Jersey, the United States Supreme Court established priority rules in an effort to ensure orderly reporting of abandoned property and to prevent the "race of diligence" among competing states that was criticized by the dissenting opinion in Standard Oil Co. v. New Jersey. Nevertheless, some state abandoned property administrators and auditors have made the remarkable assertion that any state with due process jurisdiction over the holder may take custody of any property that is presumed abandoned and not yet reported to a state with a higher priority under the rules of Texas v. New Jersey. Just as remarkably, many states contend that holders are obligated to file annual abandoned property reports in any state where the owner of unclaimed property is located, regardless of whether the holder does business or otherwise maintains a physical presence in that state. This article reviews the general requirements of state abandoned property laws and the United States Supreme Court decisions addressing some of these jurisdictional issues. The article concludes that notwithstanding the broadly expressed annual reporting requirements of state abandoned property statutes, those compliance obligations must also satisfy the Due Process Clause and Commerce Clause of the United States Constitution. State abandoned property reporting obligations are arguably no less burdensome on multistate businesses than state sales or use tax collection obligations. Accordingly, under the Supreme Court's analysis in Quill Corp. v. North Dakota, a holder should only be required to file annual abandoned property reports in states where the holder maintains substantial nexus (i.e., physical presence), typically through a place of business, real or tangible personal property or employees, agents or representatives. To the extent that the holder owes payment of unclaimed property to a resident of a state where the holder does not have sufficient nexus to be required to file reports, the holder may be required to report and deliver that property to its state of corporate domicile (generally its state of incorporation) under the priority rules of Texas v. New Jersey. The second jurisdictional issue addressed by this article is the right of a state to claim abandoned property in the absence of claims by other states to that property. This article concludes that the holding of Texas v. New Jersey places distinct jurisdictional limits on state claims to abandoned property, even where only one state currently is claiming custody of the property. Otherwise, the first state to audit the holder would prevail. As long as the holder's records indicate the last known address of the owner of the abandoned property, no other state except possibly the holder's state of corporate domicile should be able to claim custody of the property. Further evidence of jurisdictional overreaching by the states is the so-called "transactional rule" which the states assert authorizes the state where the transaction occurred that gave rise to the abandoned property to claim abandoned property if neither the owner state nor the holder's state of corporate domicile can claim that property. However, even if the transactional rule is valid, it should not allow premature state claims to abandoned property by states contending that states with a higher priority have not yet claimed the property in question.