- The U.S. Supreme Court ruled in February that unclaimed MoneyGram checks should go to the state in which they were purchased and not the company’s place of incorporation, Delaware.
- A Delaware official estimated the checks provided Delaware about $20 million. Unclaimed property accounts for 6% of Delaware’s budget.
- The next phase of the case is determining how much back pay Delaware owes the 30 other states involved in the dispute.
When money is left behind in abandoned bank accounts, checks that haven’t been cashed, insurance policies and unused gift cards those companies, after a certain period of time, have to report it to the state.
But which state?
A 1965 Supreme Court case Texas v. New Jersey established that the first priority for reporting “unclaimed property” is the state of the debtor’s last known address. But if the companies don’t know that address, the property reverts to the company’s state of incorporation.
This rule and the practice of states seizing unclaimed property leads to a small line item on the budgets of most states. But in Delaware, it contributes hundreds of millions to the budget each year, allowing taxes to remain relatively low.
It’s a side effect of the state’s status as America’s corporate capital. There are about 1.8 million companies incorporated in Delaware, including about two-thirds of Fortune 500 companies. When their financial products go unused across the globe, Delaware demands they be remitted to the First State.
In 2023, it’s projected that unclaimed property will contribute $394 million to the state’s $6.2 billion budget (accounting for about 6%). In previous years, unclaimed property seizures by Delaware have totaled more than $500 million and funded more than 10% of the state budget.
Delaware’s abandoned property claims are the subject of regular legal challenges. Other states have accused Delaware of making unfair claims and failing to make a strong enough effort to return unclaimed property to owners.
After more than seven years of litigation, a case brought against Delaware by Pennsylvania and 29 other states was tried before the U.S. Supreme Court last year. The case was a battle over MoneyGram agent checks and teller’s checks and whether Delaware as the state of incorporation or the challenging states as the places of business had the right to claim them.
On the final day of February, the court ruled against Delaware. The decision will cost Delaware hundreds of millions in back pay to the winning states. It will also sacrifice whatever it would gather in future years from MoneyGram checks (which are declining in use). Pennsylvania Treasurer Stacy Garrity estimated in September that Delaware could owe $400 million.
“This case is about returning to what Congress said should happen [to unclaimed property],” Pennsylvania Chief Counsel Christopher Craig said. “It shouldn’t be to balance the budget of one state.”
An argument in favor of unclaimed property reverting or “escheating” to state governments is an argument against allowing banks and other companies to retain control. If the companies kept the property they could sweep that money into their income, state proponents say. Giving all abandoned property to the state also provides one-stop shopping for those looking to recover property.
Every state has an unclaimed property office that is supposed to work to return the property to its rightful owners. If it’s not claimed, the property is supposed to go toward the benefit of the community it’s derived from.
Some states keep unclaimed property in a separate fund until it is returned to its owner. In Delaware, it goes into the general fund and recoveries are paid out as they are received.
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What happens next
The Supreme Court conducted the case in two stages: first a liability stage and second a damages stage.
After ruling in favor of the challenging states, the case now returns to a special master appointed to the case to determine how much money Delaware wrongly claimed must returned to the states in the lawsuit. Lawyers on both sides will be haggling over how far back Delaware’s liability stretches, how much each state is owed and whether Delaware owes interest and damages.
“It’s fairly complicated because the place of purchase data does not sit with Delaware,” said Delaware State Escheator Brenda Mayrack said. “Delaware has paid out a significant amount of claims on this property, so all of this data has to be reconciled.”
In 2018, MoneyGram started placing its unclaimed property in an escrow account to await the court’s decision. Pennsylvania estimates the company put $94 million in that account plus an additional $10-$15 million in another escrow account between 2016 and 2017.
Craig said Pennsylvania estimates Delaware collected between $250 and $300 million from MoneyGram checks since the early 2000s.
Mayrack said Delaware collected about $20 million from MoneyGram each year prior to the case.
How will Delaware be affected long-term
Mayrack emphasized that the scope of the Supreme Court’s decision was limited.
The case hinged on whether certain MoneyGram products including agent checks and teller’s checks were “sufficiently similar” to a money order. The checks require a purchaser to prepay the amount of the check and a fee that MoneyGram holds until the payee presents the check for payment.
Because the court found the checks were “sufficiently similar” to money orders they are to be governed by a 1974 Congressional act called by the Disposition of Abandoned Money Orders and Traveler’s Checks Act (FDA) rather than the common law established by the Texas v. New Jersey decision.
Congress passed the FDA so that money orders and similar written checks would escheat to the state in which the check was purchased.
The rules that place most types of unclaimed property in Delaware remain intact. The court also did not rule on the definition of a money order or similar written check as the advocacy group Unclaimed Property Professionals Organization requested in an amicus curiae brief.
“This decision impacts a specific type of property that is issued by one company,” Mayrack said. “The impact of this particular decision is limited.”
Craig did not speculate on whether the MoneyGram case would open Delaware up to other unclaimed property legal challenges, but was critical of Delaware’s practices.
“What MoneyGram and Delaware have been doing was to virtually guarantee that unclaimed property never goes to the community,” he said.
In recent years, unclaimed property has accounted for a smaller percentage of the state budget.
Part of the reasoning for the decline is that Delaware hasn’t received any MoneyGram property since the company starting directing it to the escrow account. Delaware has also been returning more property to owners through a number of initiatives including a system that runs state income tax data against Delaware’s unclaimed property database. If a hit is found, Delaware cuts a check up to a certain amount or invites the person to file a claim.
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In the last three years, the program has resulted in $3 million going automatically back to Delawareans, Mayrack said.
But Delaware still relies on unclaimed property more than any other state.
The loss of MoneyGram revenue will be factored into future revenue forecasts by the Delaware Economic and Financial Advisory Council, which are relied on by the governor and state lawmakers. They will also have to figure in the back pay once the special master rules.
“We have to keep this decision as a reminder that it is always kind of at risk to this type of a decision,” Mayrack said.
Contact Brandon Holveck at bholveck@delawareonline.com. Follow him on Twitter @holveck_brandon.
