Dormancy periods — the periods after which a state presumes that property has been abandoned by its owner and requires that the property be turned over to the state — have become incredibly short. These periods, once characterized as “long lapses of time,”2 are now as short as three years for many of the most common property types. Owners are routinely caught unaware that states will seize — or have seized — their property. Property that owners believe is safe, sound and protected, earning interest and appreciating in value, often becomes lost or untraceable, its income-generating capacity stripped. The effect of the premature takings is often dire. In this article we will focus on some of the practical and legal implications of shrinking dormancy periods in unclaimed property statutes.
In the early years of unclaimed property law, statutory distinctions in dormancy periods for different types of property were common, based on the realistic understanding that some property was intended by owners to sit untouched and that no presumption of abandonment should arise prematurely. For example, in 1942 Kentucky set its dormancy period at 10 years for bank demand deposits, but at 25 years for bank time deposits.3 Likewise, state courts recognized the wisdom in long dormancy periods for some types of property. In New York the courts had recognized that the length of time before lapsing and the nature of the property were relevant to a constitutional analysis, and that a 30-year dormancy period for bank deposits might well be proper since such deposits are “ordinarily made to remain for a long period of time.”4 Similarly, in declaring unconstitutional Ohio’s Unknown Depositors Law, which defined unknown depositors as those whose bank accounts have gone untouched for seven years, Ohio’s Court of Appeals concluded that it was not a “fanciful notion” for a party to “provide a sum for his future needs...intending to leave it there, to forget it...until some time in the future.”5
However, any statutory presumption of abandonment, even after as long as 30 years, is at best highly questionable. Pennsylvania was the first state — in 1872 — to provide for the escheat of dormant bank deposits, and it initially provided for a 30-year dormancy period.6 In a case upholding the constitutionality of the 1872 Pennsylvania provision, the court noted that half of the depositors accessed their accounts after the termination of the 30-year period.7 Nonetheless, the court upheld the constitutionality on the basis that the “sovereign State has jurisdiction to take charge of apparently abandoned or unclaimed property.”8
Over time, the distinctions in dormancy periods among property types have decreased along with the dormancy periods themselves, with a drastic downward dormancy spiral evident in most, if not all, states. For example, Massachusetts has decreased its dormancy period tenfold for bank accounts from 30 years in 1907 to three years in 1992.9 Delaware reduced the dormancy period for property held by banking organizations from 25 years to seven years in 1985,10 and to five years in 1988.11 New Jersey recently reduced the abandonment period for traveler’s checks from 15 years to three years and for money orders from seven to three years,12 and those reductions are the subjects of litigation pending in the Third Circuit.13 New Jersey reduced the period for demand, savings and time deposits from 10 years to three years in 2002.14
California has steadily reduced the dormancy periods for bank accounts from 20 years in 1913,15 15 years in 1959, seven years in 1977, five years in 1989 and finally to three years in 1990.16 Even the Legislative Director of the California State Controller’s Office had acknowledged that the office is looking at lengthening the escheatment period: “three years appears quite low and we’re looking at what should be the appropriate period before property escheats.”17 In 2007, legislation was proposed in California to increase the dormancy period from three to five years for most property; the legislation was not enacted.18
Just last month, New York’s Governor Cuomo proposed shortening various dormancy periods on various property types from five or six to three years.19
The Memorandum in Support and the Executive Budget Briefing Book leave no question that the reduction is a “revenue action” motivated by the State’s need to balance its budget without raising taxes.20
The National Conference of Commissioners on Uniform State Laws (NCCUSL), also known as the Uniform Law Commission (USL), an association of state tax commissioners on uniform laws, has drafted several model statutes dealing with unclaimed property. The first, the Uniform Disposition of Unclaimed Property Act (UDUPA) issued in 1954, adopted a uniform seven-year presumption of abandonment for all types of property. In their comments to the 1954 UDUPA, the Commissioners said that differing business practices might dictate that other dormancy periods were more appropriate. Savings bank accounts were mentioned as a property type for which a longer period of dormancy might be desirable. In the 1966 revision to the UDUPA, the seven-year presumption was retained for all property types, with the exception of 15 years for traveler’s checks. When NCCUSL overhauled the model act in 1981 to address the ruling by the U.S. Supreme Court in Texas v. New Jersey,21 which dealt with states’ priority rules for laying claim to unclaimed property, the 1981 Uniform Unclaimed Property Act (UUPA) lowered the general seven-year presumption of abandonment to five years, consistent with the “tendency of state legislatures in recent years to reduce dormancy periods.” As the comments to the 1981 UUPA acknowledged, “states have become increasingly aware of the opportunities for collecting...unclaimed money and using the ‘windfall’ unreturned funds as general fund receipts....” The rationale provided for lowering the general dormancy period was that the “current high rate of inflation exacts a severe penalty from one who holds money or its equivalent for extended periods; an inference of loss or abandonment may be drawn more quickly than in 1966 when the value of money was more stable.” In the comments to NCCUSL’s most recent iteration, its 1995 UUPA, the Commissioners noted that “statistical evidence indicates that a period of 15 years continues to be appropriate in the case of traveler’s checks, and seven years in the case of personal money orders issued by express companies.”
The UUPA’s 1981 premise to support a decrease in the dormancy period — that inflation affects abandonment — is flawed regarding property in interest-bearing accounts, which increases in value despite inflation. Further, if the rate of inflation was truly the justification for reducing dormancy periods, it would follow that when the inflation rate decreases, the dormancy periods would correspondingly increase. Needless to say, with very rare exceptions, the downward spiral in dormancy periods has continued, even in 2009, a deflationary period. Arizona,22 Indiana,23 and New Jersey 24 are states that have recently jumped on the shrinking dormancy period bandwagon, deflation aside.
Constitutional and Practical Implications of Short Dormancy Periods
When dormancy periods were long — that is, 15, 20, or 30 years, justification might have existed for state intervention, given the real likelihood that an actual abandonment had occurred. Now, however, with the short periods in vogue — for example, one, two, and three years — there is scant basis to conclude that the property actually has been abandoned, and escheat statutes may run afoul of constitutional protections to property owners and holders.
Due Process Clause
The U.S. Constitution’s Due Process Clause provides that no state shall “deprive any person of life, liberty, or property, without due process of law.” It is based on the notion that there should be fundamental fairness in states’ dealings with individuals and is often viewed as having both substantive and procedural components. Early U.S. Supreme Court cases recognized that a short dormancy period could violate the Due Process Clause. In Cunnius v. Reading School District,25 the Court upheld a 1885 provision appointing administrators for the estates of those missing and presumed dead after seven years. And while recognizing that the “right to regulate concerning the estate or property of absentees is an attribute, which, in its very essence belongs to all governments,” the Court noted that a presumption of death resulting from the absence from the state of a brief period would violate due process.26 Similarly, in Provident Institution for Savings v. Malone,27 the Court understood that the evaluation of the constitutionality of unclaimed property laws might well turn on the length of the dormancy period: “if the statute had provided that the money should be paid over to the receiver-general if the owner, after a short absence, could not be found, or if the account remained inactive for a brief period, a very different question would be presented.”28
The Takings Clause of the Fifth Amendment to the Constitution provides that no state shall take “private property for public use, without just compensation.” Generally, unclaimed property statutes have been found not to run afoul of the Takings Clause, and some courts have set the bar very high, requiring that a plaintiff must have a property interest that is constitutionally protected to successfully prevail in a Takings Clause case.29
Article I, section 10, clause 1 of the Constitution provides that states cannot pass laws “impairing the Obligation of Contracts.” More than 60 years ago, the Sixth Circuit recognized, regarding the applicability of escheat provisions to national banks, that short limitations periods would negatively affect national banks’ ability to contract.30 Nonetheless, courts have generally sided against holders claiming that short dormancy periods impinge on their right to contract.31
However, when it is the holders that modify contractual rights with their customers after states decrease the dormancy period, courts usually void such provisions as impermissible private escheat provisions, finding the corresponding downward revisions to contract terms an unseemly race to the bottom.32 That seems unfair and contradictory. Parties should remain free to negotiate their contracts without the government’s hands in the parties’ pockets.
Most state courts seem to have viewed as virtually unfettered legislators’ authority to grab other people’s property after short dormancy periods, and do not seem to be too concerned with such minor trivialities as the Constitution.
However, one recent case, from the federal District Court in Kentucky, viewed the legislative impetus in its proper light and refused to sanction the Kentucky legislators’ attempt to raise revenue by decreasing the dormancy periods for uncashed traveler’s checks from 15 to seven years.33
The court held that shortening the dormancy period, without any evidence that the traveler’s checks are actually abandoned after that time, violated the Due Process, Takings, and Contracts Clauses. The court rejected the state’s purported “boundless authority,” noting that:
Here, there is clear evidence that the state legislature enacted the abandoned property law as an effort to raise revenue. “Complete deference to a legislative assessment of reasonableness and necessity is not appropriate [where] the State’s self-interest is at stake. A government entity can always find a use for extra money, especially when taxes do not have to be raised.”34
The shortening was found to impair the certainty in private contracting that underlies the Contract Clause.35 The lower court rightfully noted that the reduction in the dormancy period was a taking — “a forced contribution to governmental revenues.”36 That the revenue generated from unclaimed property is earmarked for noble causes,37 moreover, does not make the taking any less egregious.
However, the New Jersey federal District Court chose not to follow the Kentucky federal court’s well-thought-out decision, the New Jersey court refused to issue preliminary injunctions in cases challenging the reductions of the traveler’s check and money order dormancy period.38 Regarding traveler’s checks, despite acknowledging that most states have a 15- year dormancy period and that “it appears that a primary aim of Chapter 25 was to increase the State’s coffers,” the New Jersey court held that the holder was not likely to succeed on the merits of its substantive Due Process, Contracts Clause, or Takings Clause claims.
The holder raised what appear to be valid arguments in support of its position that no legitimate state interest warranted the state’s reduction in the dormancy period with the resulting loss to the holder of its right to earn income from investing the proceeds from sales of the traveler’s checks: (a) there is no evidence that a three-year dormancy period bears a rational relationship to the actual abandonment; and (b) the state’s revenueraising purpose was primary and “does not pass constitutional muster” because it is not a rational purpose. The court cited several purported purposes for the legislation — “‘to protect New Jersey consumers from the commercial dormancy fee practices and to modernize [New Jersey’s] unclaimed property laws,’” and to protect property owners in case the holder declares bankruptcy — and held that the statute would likely survive the substantive due process challenge given the “great deference and the presumption of validity under the rational basis review” afforded the state. The court distinguished Hollenbach on the basis that there the “only reason” for the Kentucky General Assembly to reduce the dormancy period was revenue, while in New Jersey raising revenue was “not the only conceivable basis,” and the property could be used for public good.
As readily acknowledged by New Jersey’s Treasurer, who is responsible for administering New Jersey’s Unclaimed Property Law, “Unclaimed Property is not a tax or an additional liability to businesses. The goal of the Unclaimed Property Office is to recover, record and reunite the property with the rightful owner and/or heirs.”39 However, since the fundamental underlying purpose of the unclaimed property act is to reunite owners with their property, a legislature’s revenue-raising goal is inherently suspect and should be subject to heightened scrutiny, particularly when, as in this case, the decrease in dormancy period negatively affects the contractual rights of the holder. Further, under the court’s reasoning, any action that raises revenue for the public good would be rational.
Despite the evidence that 90 percent of the traveler’s checks that are sold in the state and are uncashed after three years of sale are ultimately cashed, the court focused on the large percentage of traveler’s checks cashed within a year of purchase, 96 percent, and concluded that “it would not be irrational for the Legislature to have determined that the small percentage of the unclaimed three-year old travelers checks are presumed abandoned.” However, once it is established that the 90 percent of the property that would be deemed abandoned under Chapter 25 is not actually abandoned, even under a deferential, rational basis standard, the primary purpose of the abandoned property law is thwarted, and deeming un-abandoned property to be abandoned purely to raise revenue cannot be rational. The percentage of traveler’s checks redeemed within one year is simply not a relevant inquiry to determine whether checks not cashed within three years have been abandoned. Taking the court’s premise to its absurd conclusion, if 99 percent of payroll checks are redeemed within a week, a dormancy period of three weeks would be rational, even if all the checks are cashed within a month.
Protecting owners from traveler’s checks issuers in the event that they declare bankruptcy — another purported purpose asserted by New Jersey to justify the shortened dormancy period — is also a suspect rationale. Taken to its logical extreme, since all businesses can go bankrupt, perhaps all proceeds from the issuance of traveler’s checks (and money orders, SVCs, and so on) should simply be given to the government upon receipt “for protection.” But, although there may be de minimis aspects of consumer protection inherent in unclaimed property law, consumer protection and bankruptcy laws are the proper places to so legislate. Further, given the dire financial straits many states are in, and the talks of late of having Congress provide a mechanism that would allow states to seek bankruptcy protection,40 the protectionist rationale is particularly dubious. Owners may be safer with their property in the keeping of holders rather than states.
The claim that the shrinking dormancy period violated the traveler’s check issuer’s contract rights was also rejected on the basis that the issuer did not have a contractual right to invest the proceeds. However, the parties did agree that the issuer would pay upon presentation and, conversely, the issuer had a right to retain and invest the proceeds on checks not yet presented. By shortening the dormancy period the state does affect the issuer’s contractual rights.
The court also rejected the holder’s claim that by shortening the dormancy period New Jersey divested it of a property right, that is, the right to invest the proceeds from traveler’s check sales until claimed by the purchasers. The court reasoned that because the purchaser was the owner, the holder did not have a property interest in the profits derived from investing the funds until the purchasers used the checks. However, the court’s reasoning is flawed. Under the court’s narrow view, a leasehold interest held by a person other than the owner of the underlying realty would not have a property interest. Money is property, and an income interest in property is therefore also property. It is also noteworthy that the state itself considers the right to use the abandoned funds “for the common good until claimed by its owner” as a valuable right.41
The federal District Court ruled similarly regarding the shortening of the dormancy period for money orders. All five related cases challenging Chapter 25 are on appeal to the Third Circuit. Significantly, the Third Circuit granted the motions for injunctive relief filed by the traveler’s check and money order issuers, apparently finding that there is a likelihood of success on the merits of the claims made by the issuers challenging the reduction in the dormancy periods. Eventually, the Third Circuit (and perhaps the U.S. Supreme Court) may provide additional guidance on the scope of the Contract and Takings Clauses, and what constitutes a failure to provide substantive due process in the context of shortened dormancy periods. Holders of property should hope that the Third Circuit will follow Hollenbach, will not allow New Jersey’s revenue needs to pervert unclaimed property laws and the Constitution, and will not allow the state to impose an additional liability or tax on businesses — precisely what the Treasurer stated the law is not intended to do — under the flimsy guise of modernization.
Given the unequivocal sole purpose for reducing the dormancy period — revenue — if Governor Cuomo’s recent budget proposal is enacted, challenges to the enactment could be forthcoming.
The Ninth Circuit has also recognized the burdensome practicalities of short dormancy periods and lack of reasonable notice provisions. In addition to the possibility of “permanent deprivation” of their property, property owners need to “constantly monitor their property to avoid escheat, either by devoting significant time to searching the internet themselves, by paying a service to do the same, or by ‘churning’ their property so that it stays active and avoids escheat.”42
One New York court addressed a bank’s handling of security deposits on commercial premises that had remained on deposit for more than 20 years.43 Although the bank alleged that the account would have been deemed abandoned after five years, the New York State Comptroller’s Division of Abandoned Property had no record of the account having being turned over to the state as unclaimed property. The court posed the common sense question:
Why would the person who opens a savings account necessarily add or subtract monies to the amount in the account?... People often open savings accounts solely to have money available for themselves or their family at a future date and do so solely so as to earn a fixed rate of interest paid by the bank.44
The court refused to conclude that the security deposits were unclaimed property since:
Common sense leads to the conclusion that savings accounts of all kinds should be excluded from the definition of unclaimed and ultimately abandoned property. To do so defeats one of the purposes for which people open such an account — to save money for a “rainy day” or some other particular purpose.45
The court also considered the 20-year common-law presumption of payment, that is, a presumption that “‘an unexplained neglect to enforce an alleged right, for a long period, casts suspicion on the right itself.’”46 Although the court concluded that 20 years had not yet elapsed, it noted the decisions in New Jersey and Utah refusing to apply the doctrine to savings accounts. In the New Jersey case, Pagano v. United Jersey Bank, the New Jersey Supreme Court agreed with the Appellate Division that:
“[T]he depositor of funds into a bank savings-account is ordinarily entitled to believe, and does in fact expect, that the deposit is entirely safe, that the funds will be indefinitely available, and that no demand need be taken to protect the right to obtain those funds at any time the passbook is presented.”47
It is simply too common for bank and brokerage accounts to remain activity-free for many years, particularly if the money was deposited or the securities purchased for retirement or for funding a child’s college education. Owners have enough on their busy plates without having to keep up with the accounts they knowingly maintain for use in the beyond-dormancy-period future. A more reasoned and revenue-dispassionate look is needed to assess and determine abandonment periods that actually make sense based on property type and are consistent with the purported goal of protecting the interests of property owners.
Unclaimed property laws have become legislatures’ piggybanks. For most property types, the shortened dormancy periods ignore common sense, and impinge on owners’ and holders’ Constitutional rights. The tendency of courts to rubber-stamp revenue-enhancing legislative action in tough fiscal times is shortsighted and, as applied to the shrinking dormancy periods under unclaimed property laws, contrary to the fundamental purpose of such laws — to reunite abandoned property with its owners. As Justice Louis Brandeis recognized:
Experience should teach us to be most on our guard to protect liberty when the Government’s purposes are beneficent. Men born to freedom are naturally alert to repel invasion of their liberty by evil-minded rulers. The greatest dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning but without understanding.48