Opinion ID: 803222
Heading Depth: 2
Heading Rank: 2

Heading: State-Law Claims and the Supremacy Clause

Text: Inasmuch as we have determined that sovereign immunity does not bar this action and that the District Court had constitutional and statutory jurisdiction we finally reach the substantive aspects of the case. We start this discussion by recognizing that although this case is essentially a dispute over the application of federal law, the States‟ claims arise from their attempt to enforce their unclaimed property acts against the Federal Government. The Government asserts that these claims run afoul of the Supremacy Clause of the Constitution in art. VI, cl. 2, which provides that the Constitution and laws in pursuance of it “shall be the supreme Law of the Land.” State laws may violate the Supremacy Clause in two ways. Under the doctrine of federal preemption, state laws are invalid if they “conflict with an affirmative command of Congress.” North Dakota v United States, 495 U.S. 423, 434, 110 S.Ct. 1986, 1994 (1990) (citing Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 6 L.Ed. 23 (1824)). And under the doctrine of intergovernmental immunity, states may not “regulate the Government directly or 1984). In view of First Jersey Securities we see no reason to believe that even without regard for federal court intervention through the exercise of removal jurisdiction or Supreme Court appellate review, the New Jersey courts would have entertained this action if the State of New Jersey had initiated the case in the New Jersey Superior Court and named the Federal Defendants as defendants. Of course, a result that the States did not have any forum in which to bring their claims surely would have been inconsistent with the intent of Congress in adopting the 1976 APA amendments. 49 discriminate against it.” North Dakota, 495 U.S. at 434, 110 S.Ct. at 1994 (citing McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 425-37, 4 L.Ed. 579 (1819)).
Federal preemption doctrine “provid[es] Congress with the power to preempt state legislation if it so intends.” Roth v. Norfalco LLC, 651 F.3d 367, 374 (3d Cir. 2011) (internal quotation marks and citation omitted). There are three types of preemption: express preemption and two types of implied preemption, field preemption and conflict preemption. Farina v. Nokia Inc., 625 F.3d 97, 115 (3d Cir. 2010) (citing Hillsborough Cnty. v. Automated Med. Labs., Inc., 471 U.S. 707, 713, 105 S.Ct. 2371, 2375 (1985)). There is express preemption when a federal enactment contains language that is explicit about its preemptive effect. See St. Thomas-St. John Hotel & Tourism Ass‟n v. Gov‟t of the V.I., 218 F.3d 232, 238 (3d Cir. 2000). There is field preemption when Congress has regulated an area so pervasively that it has not left room for state regulation. See United States v. Locke, 529 U.S. 89, 111, 120 S.Ct. 1135, 1149 (2000). There is conflict preemption when compliance with both state and federal law is impossible, “or where state law erects an „obstacle to the accomplishment and execution of the full purposes and objectives of Congress.‟” Farina, 625 F.3d at 115 (internal quotation marks omitted). Moreover, “[w]here Congress has delegated the authority to regulate a particular field to an administrative agency, the agency‟s regulations issued pursuant to that authority have no less preemptive effect than federal statutes.” Fellner v. Tri-Union Seafoods, LLC, 539 F.3d 237, 243 (3d Cir. 2008). Although courts define the 50 categories of preemption separately the categories are not “rigidly distinct. Indeed, field pre-emption may be understood as a species of conflict pre-emption: A state law that falls within a pre-empted field conflicts with Congress‟ intent . . . to exclude state regulation.” English v. Gen. Elec. Co., 496 U.S. 72, 79 n.5, 110 S.Ct. 2270, 2275 n.5 (1990). There are two guiding principles of preemption jurisprudence. “„First, the purpose of Congress is the ultimate touchstone in every pre-emption case.‟” Wyeth v. Levine, 555 U.S. 555, 565, 129 S.Ct. 1187, 1194 (2009) (quoting Medtronic, Inc. v. Lohr, 518 U.S. 470, 485, 116 S.Ct. 2240, 2259 (1996)). Second, we are guided by a “presumption against preemption,” Roth, 651 F.3d at 375 (citing Deweese v. Nat‟l R.R. Passenger Corp., 590 F.3d 239, 246 (3d Cir. 2009)), because we assume “that the historic police powers of the States [are] not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress.” Levine, 555 U.S. at 565, 129 S.Ct. at 1194-95 (quoting Lohr, 518 U.S. at 485, 116 S.Ct. at 2250) (internal quotation marks omitted). However, the presumption against preemption does not apply where Congress has adopted the statute claimed to have preemptive effect to apply in a field that “the States have [not] traditionally occupied.” Buckman Co. v. Plaintiffs‟ Legal Comm., 531 U.S. 341, 347-48, 121 S.Ct. 1012, 1017 (2001) (quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230, 67 S.Ct. 1146, 1152 (1947)). We agree with the District Court that the federal statutes and regulations pertaining to United States savings bonds preempt the States‟ unclaimed property acts insofar as the States 51 seek to apply their acts to take custody of the proceeds of the matured but unredeemed savings bonds. In reaching this conclusion we recognize that there is no federal statute or regulation that expressly preempts the application of the States‟ unclaimed property acts in the way that the States seek to enforce them in this litigation. But it is equally important to recognize that “[f]ederal law of course governs the interpretation of the nature of the rights and obligations created by the Government bonds themselves.” Free, 369 U.S. at 669-70, 82 S.Ct. at 1094 (quoting Bank of Am. Trust & Savs. Ass‟n v. Parnell, 352 U.S. 29, 34, 77 S.Ct. 119, 122 (1956)). Thus, in Free a surviving husband filed an action against a beneficiary of his wife‟s will to determine the parties‟ rights in United States savings bonds that the husband and wife purchased together. The Supreme Court held that Texas law providing that the savings bonds were community property was inconsistent with federal regulations that provide that when either co-owner dies, “the survivor will be recognized as the sole and absolute owner [of the bonds] and thus the federal regulation preempted the Texas law.” Id. at 664-65, 82 S.Ct. at 1091 (quoting 31 C.F.R. § 315.61). While in the case before us the conflict between state and federal law is less stark, we similarly hold that the relevant federal statutes and regulations preempt the States‟ unclaimed property acts. The States‟ unclaimed property acts conflict with federal law regarding United States savings bonds in multiple ways. First, in advancing the goal of making the bonds “attractive to savers and investors,” see Free, 369 U.S. at 669, 82 S.Ct. at 1093, Congress has authorized the Secretary to implement regulations specifying that “owners of savings bonds may keep 52 the bonds after maturity.” 31 U.S.C. § 3105(b)(2)(A).25 The plaintiff States‟ unclaimed property acts, by contrast, specify that matured bonds are abandoned and their proceeds are subject to the acts if not redeemed within a time period as short as one year after maturity. See, e.g., N.J. Stat. Ann. § 46:30B-41.2. Such provisions starkly conflict with savings bonds regulations imposing “conditions governing their redemption.” 31 U.S.C. § 3105(c)(4); see 31 C.F.R. § 315.5(a) (providing that the registered owner of the bond is presumed conclusively to be the owner); § 315.15 (providing that savings bonds are “payable only to the owners named on the bonds, except as specifically provided in these regulations and then only in the manner and to the extent so provided.”); § 315.20(b) (providing that the Department of the Treasury will recognize a claim of ownership or interest in a bond only if “established by valid, judicial proceedings”); § 315.35(a) (providing that payment may be made only to persons entitled to it under the regulations); § 315.39 (providing that the owner of the bond may present it to an authorized paying agent for redemption). The States assert that the “restrictions on „payment‟ in these regulations foreclose only redemption of bonds by persons who are not owners, not application of historic laws governing disposition of property not redeemed by its owner.” Appellants‟ br. at 29. In other words, the States argue that because they 25 The Secretary effectively has allowed owners of savings bonds to keep them after maturity and to earn interest after maturity because the Treasury has extended the bonds‟ original maturity dates and interest accrues during the extension period. See supra note 3. 53 seek only custody of the bond proceeds, their unclaimed property acts will not interfere directly with federal contracts or the regulations regarding redemption. However, those regulations conflict with the outcome that the States seek here. Most critically, application of the States‟ unclaimed property acts would interfere with the terms of the contracts between the United States and the owners of the bonds because, according to the States‟ complaint, they effectively would substitute the respective States for the United States as the obligor on affected savings bonds. See app. at 99 (asserting that “delivery of an Unclaimed Bond to a State . . . will discharge the Treasury from its obligation under the bond,” such that the bond owners may “claim their property from the state”). As the Government points out, the bonds are pledged “on the credit of the United States,” U.S. Const. art. I, § 8, cl. 2, and not on the credit of any individual state. Both bondholders and the United States, who bargained for a federal redemption process that the Federal Government set forth in detail in the relevant statutes and regulations, instead would have to comply with procedures set forth in the various States‟ unclaimed property acts, thus “intrud[ing] upon the rights and the duties of the United States.” See Free, 369 U.S. at 669, 82 S.Ct. at 1094. The federal regulations regarding redemption effectively would be nullified. This change in redemption procedures if the States obtain custody of the proceeds of the matured but unredeemed bonds might not be a small thing from the point of view of an owner of a bond seeking to redeem it. As we explained above, redemption of a matured savings bond is now an uncomplicated process involving little more than a trip to a bank, a venue likely to be familiar to the owner of the bond, with the bondholder 54 dealing with a bank employee with whom he already may be acquainted. On the other hand, though it is possible that the States would designate the same payment agents as the Government now designates if the States obtained custody of the proceeds of the bonds, an owner seeking those funds would have to navigate whatever procedures the States adopted for the owner to receive the funds and those procedures could be more complex than those presently in place under federal law. Moreover, a bondholder‟s effort to recover the funds in a State‟s custody might require the bondowner to deal with what almost certainly would be an unfamiliar state bureaucracy. We simply do not know. The Government also has expressed concerns that a substitution of the plaintiff States as obligors on the bonds could result in the United States being subject to multiple obligations on a single savings bond. Thus, the Government fears that bondholders still would have a contractual right to payment from the United States based on the terms of the bonds even though the various state unclaimed property acts would give bondholders the right to recover the proceeds of property deemed “abandoned” or “unclaimed” from the States. Although the States have indicated that they would indemnify the Federal Government if it was required to make payments on matured bonds to bondholders after the Government delivered the proceeds of the bonds to the States pursuant to their unclaimed property acts, the possible availability of indemnification does not change the fact that application of the States‟ acts in the redemption process significantly would alter that process as 55 contemplated in the relevant federal regulations.26 The States note that the federal statutes and regulations implementing the savings bond program do not include provisions for the disposition of abandoned property, and thus they argue that federal law leaves room for the operation of their unclaimed property acts in this field. However, the bond proceeds are not “abandoned” or “unclaimed” under federal law because the owners of the bonds may redeem them at any time after they mature, and thus Congress has not been silent with respect to the fate of the proceeds of unclaimed bonds. The States‟ efforts to impose the status of “abandoned” or “unclaimed” on the Federal Government‟s obligations only underscores the conflict between federal and state law, in which federal law must prevail. There simply is no escape from the fact that the Federal Government does not regard matured but unredeemed bonds as abandoned even in situations in which a state would do exactly that. Of course, in a preemption analysis 26 We are not predicating our result on a conclusion that honoring a custody-based unclaimed property act might subject the United States to multiple liabilities on a single bond. We decline to speculate on what would happen if a bondholder sought to redeem a bond by presenting it to a Government payment agent and requesting that he be paid the proceeds if the Government already had delivered the proceeds of the bond to a State pursuant to its unclaimed property act. That situation is not before us and, in any event, even disregarding the possibility that the Government might face multiple liabilities on a single bond by complying with a State‟s unclaimed property act, the States‟ unclaimed property acts are preempted. 56 the distinction between the custody of the proceeds of the bonds or physical custody of the bonds themselves is without legal significance. The States seek the transfer of $1.6 billion of federally-held funds to their treasuries together with a substantial realignment of the obligations that the bonds evidence and the procedures for redemption that federal laws and regulations have established. It is clear to us that the federal statutes and regulations are sufficiently pervasive so as not to leave room for the enforcement of the unclaimed property acts to achieve the result that the States seek.
The Supreme Court‟s decision in McCulloch, 17 U.S. (4 Wheat.) at 322, established the bedrock principle that “the States have no power, by taxation or otherwise, to retard, impede, burden, or in any manner control, the operations of the constitutional laws enacted by Congress to carry into execution the powers vested in the national government.” Thus, that famous decision is the source of the doctrine of intergovernmental immunity. We agree with the District Court that the States‟ desired application of their unclaimed property acts would violate the constitutional principles of intergovernmental immunity that “states may not directly regulate the federal government‟s operations or property.” See Arizona v. Bowsher, 935 F.2d 332, 334 (D.C. Cir. 1991) (citing Hancock v. Train, 426 U.S. 167, 178-80, 96 S.Ct. 2006, 2012-13 (1976)). First, in this regard, the unclaimed property acts would interfere with Congress‟s “[p]ower to dispose of and make all 57 needful Rules Acts and Regulations respecting the . . . Property belonging to the United States.” See U.S. Const. art. IV, § 3, cl. 2. On this point, the States argue that the United States no longer has a beneficial interest in the undisbursed proceeds from the matured but unredeemed bonds. But we disagree. In support of their position, the States cite United States v. Klein, 303 U.S. 276, 58 S.Ct. 536 (1938), in which the Escheator of the Commonwealth of Pennsylvania sought to recover funds that a private company owed its bondholders pursuant to a judgment entered by a federal district court. Unclaimed funds were paid into a court registry and later transferred to the United States Treasury under 28 U.S.C. § 852, which at that time provided that when money deposited into the registry of a federal court was unclaimed for five years, it would be deposited with the Treasury, and further provided that “[a]ny person or persons . . . entitled to any such money may . . . obtain an order of court directing payment of such money to the claimant.” The Supreme Court in holding that the State of Pennsylvania could acquire title to unclaimed funds through valid escheat proceedings observed that the United States held the funds for a limited administrative purpose, and did not assert “any right, title or interest” in the funds. 303 U.S. at 280, 58 S.Ct. at 538. Further, 28 U.S.C. § 852 “contemplate[ed] that changes in ownership of the fund may occur, since it provides that after the right to the fund has been finally adjudicated and it has been covered into the Treasury it shall be paid over to any person entitled, upon full proof of his right to receive it.” Id. at 282, 58 S.Ct. at 539. The plaintiff States also rely on In re Moneys Deposited, 243 F.2d 443 (3d Cir. 1957), where we addressed the status of 58 private funds that were not claimed in bankruptcy proceedings and thus were transferred to the United States Treasury for administrative purposes under 28 U.S.C. § 2042, the successor legislation to the statute in issue in Klein. Following Klein, this Court held that Pennsylvania could obtain title to the funds through escheat proceedings because, as in Klein, the United States did not have a beneficial interest in the money deposited in the federal registry. In this case, in contrast to how it obtained the funds in issue in both Klein and Moneys Deposited, the United States did not acquire the funds due on matured but unredeemed bonds through the exercise of an administrative function. Quite to the contrary, the Government acquired the funds from its sale of savings bonds for its own use. Thus, unlike the claimants in Klein and Moneys Deposited, the States here do not seek funds due on privately undertaken obligations, as in Klein, or seek funds in which the Government as custodian never had a property interest as was true in both Klein and Money Deposited. Rather, the States seek to acquire funds that have their origin in debt that the United States incurred to finance the operations of the Government. As did the District Court, we find Bowsher to be persuasive on this point. In Bowsher, 23 states sued the Comptroller General of the United States and the Secretary claiming the right to custody pursuant to their respective unclaimed property acts of money held by the Treasury pursuant to 31 U.S.C. § 1322, which granted the Treasury custody of money that federal agencies owed to persons whose whereabouts were unknown. 935 F.2d at 334. Like the plaintiff States in this case, the plaintiffs in Bowsher argued that they wanted to return the unclaimed property to its true owners, but 59 the court observed that “[w]hen the United States sets aside money for the payment of specific debts, it does not thereby lose its property interest in that money.” Id. The court further stated: The money here is federal money. That various persons have claims against the United States in amounts exactly matching the funds, and intended by Congress to be paid from these funds, does not give those individuals a property interest in the money. Thus, the states‟ plan would amount to direct regulation of federal property. In extracting funds from the Treasury, the states would effectively subordinate federal property to their own laws and appropriate that property, at least for a period, for themselves. Id. Accordingly, the court held that the states‟ plan to take custody of the money violated the doctrine of intergovernmental immunity. We recognize that the States argue that their unclaimed property acts come, in the words of Bowsher, “with a patina of ancient history,” see id. at 335, and that there is a presumption against preemption of laws of such origin. Nevertheless, we see no reason to reach a different result here from that reached in Bowsher. Although the United States must pay holders of matured bonds the sums due on the bonds when the owners present them for payment, until it does so the funds remain federal property, and the Government may use the proceeds from the sale of savings bonds “for expenditures authorized by [federal] law,” 31 U.S.C. § 3105(a). 60 The States argue that instead of following Bowsher we should be guided by the Supreme Court‟s analysis in Connecticut Mutual Life, 333 U.S. at 547, 68 S.Ct. at 686, where the Court held that the State of New York could apply its unclaimed property act to life insurance policies that out-of-state insurers had issued. In rejecting the insurance company‟s argument in Moore that the state law violated the Contract Clause, the Court noted that “[t]he state is acting as a conservator, not as a party to a contract.” Id. Moreover, the Court recognized that New York‟s conservatorship of insurance money was possible because “[f]oreign corporations must obtain state authority to do business, segregate securities, [and] submit to examination and state process.” Id. at 550-51, 68 S.Ct. at 668. But states‟ extensive regulatory powers over corporations operating within their borders, in light of McCulloch, do not and could not have a counterpart in their relationships with the Federal Government, and consequently Connecticut Mutual Life is inapposite here. For similar reasons, we hold that an order compelling the accounting that the plaintiff States request would violate the governmental immunity of the United States. As the District Court observed, the States‟ unclaimed property acts impose “onerous record-keeping and reporting requirements, [and] civil and criminal penalties for failure to comply.” App. at 29; see, e.g., 72 Pa. Cons. Stat. § 1301.11 (describing reporting requirements); § 1301.25 (failure to comply with reporting requirements a criminal offense subject to fine and imprisonment); N.J. Stat. Ann. § 46:30B-93 (subjecting holders of unclaimed property to examination of records by the state administrator); Mont. Code Ann. § 70-9-824 (providing for 61 financial penalties against holders of unclaimed property who fail to report and deliver property to the state administrator). Although the States argue that they only seek relief requiring the Federal Government to comply with generally applicable laws, several of the States have enacted provisions in their unclaimed property acts specifically addressed to property within the possession of the Federal Government. See N.J. Stat. Ann. § 46:30B-41.2 (providing that property where the obligor is a branch of the United States government is presumed abandoned after one year); Ky. Rev. Stat. Ann. § 393.068 (“[a]ll . . . personal property . . . held by the federal government . . . shall be presumed abandoned if remained unclaimed for five years); Mo. Rev. Stat. § 447.532 (property held by an agency of the United States deemed abandoned if unclaimed for three years); 72 Pa. Cons. Stat. § 1301.9 (property held for its owner by any “instrumentality of the United States” unclaimed for five years deemed abandoned). When Congress was considering legislation in the late 1980s that would have required the Federal Government to transfer unclaimed money obtained from various sources — including savings bonds — to the states, the General Accounting Office estimated that tracking owners of such property would cost over $23 million.27 See app. at 185. Although the States assert that they will not seek to enforce civil and criminal penalties in the event the Federal Government fails to comply with their respective acts, even if future State officials adhere to this policy, the fact remains that forcing the Federal Government 27 We are not drawing any inference with respect to the issues in this case from the fact that Congress did not adopt that bill. 62 to account to the plaintiff States for unredeemed savings bonds or their proceeds — regardless of how stringently the States decide to enforce the reporting requirements contained in their respective acts — would result in a direct regulation of the Federal Government in contravention of the Supremacy Clause. This result is not permissible.