Does Ohio owe the True Owner 1 of unclaimed funds the interest earned on the unclaimed funds while the unclaimed funds are in the custody of the Department of Commerce (“Department”)? True Owners in Ohio (“Ohio Owners”) unhappy with the Court of Appeals’ answer—NO—appealed to the Supreme Court of Ohio. 2 The Supreme Court agreed to hear the case and will answer this question in 2008.
The Ohio Owners’ protest of the Department’s retention of interest earned on their unclaimed funds comes on the heels of the unprecedented decision by the federal courts in California to shut down California’s unclaimed property program. 3 The California case resulted from the Controller’s practice of selling property, especially stock, upon receipt and without providing adequate notice to the owner. The Controller’s actions caused some owners to lose hundreds of thousands of dollars of appreciation. 4
Ohio’s Unclaimed Funds Act
Ohio’s Unclaimed Funds Act (“UFA”) is supervised and administered by the Department’s Division of Unclaimed Funds. The UFA’s purpose is:
1. To protect the property rights of the owner and to reunite the owner with the funds;
2. To provide a centralized location of contact for potential owners of unclaimed funds; and
3. To provide the holders 5 relief from liability. 6
As with other states’ unclaimed property acts, the UFA requires holders to turn over money to the Department once it becomes unclaimed. Property is unclaimed when the owner of the property has not contacted the holder for a statutorily prescribed period. Once unclaimed, the UFA requires holders to report unclaimed funds to the Department. If a holder is reporting unclaimed funds in excess of $50, the holder may:
1. Remit the entire amount to the Department; or
2. At the Department’s discretion, remit 10% and retain 90%.
If the holder retains 90%, it must deposit the retained amount in an income-bearing account insured by the Federal Deposit Insurance Corporation or U.S. Treasury account as approved by the Department. 7 All interest earned on funds invested by the holder must be delivered to the Department.
The Department deposits all funds that it receives in an income-bearing account. Effective July 26, 1991, R.C. 169.08(D) was amended to provide that “interest is not payable to claimants of unclaimed funds held by the state.” In addition, that amendment allowed the Department to retain 5% of the funds paid to a claimant as an administrative fee.
Mr. Sogg’s Claims Against the Department
Mr. Sogg filed a claim with the Department on behalf of his mother’s estate for unclaimed funds held by the Department. The Department issued a check to Mr. Sogg but deducted interest earned on the unclaimed funds after July 26, 1991 and the Department’s 5% administrative fee.
The Trial Court Found that the Department Was Required to Pay the Owner All Interest Earned on the Unclaimed Funds
The trial court held that the Department’s retention of the interest on unclaimed funds violated the Fifth Amendment of the United States Constitution. 8 The trial court reasoned that since the unclaimed funds remain the property of the Ohio Owners forever, the interest earned on those funds was also private property .9 The court’s decision was based on the long-standing rule of law that interest follows principal, 10 which the trial court held could not be changed by legislative action.
Court of Appeals Finds that Department Not Required to Turn the Interest Over to the Ohio Owners
The Court of Appeals reversed the trial court’s decision, finding that it was the owner’s failure to retain his or her property that caused the owner’s property right to lapse. Since it was the owner’s conduct, not state action, that caused Ohio to take the property, the Court of Appeals found that it was not a taking of private property for public use in violation of the United States or Ohio Constitutions.
The Court’s Decision Does Not Mesh with Constitutional Requirements or the Purposes of the UFA
Both the United States and the Ohio Constitutions prohibit the government from asserting summary authority over private property and require that any deprivation of property comply with constitutional due process requirements. Yet here, the Court of Appeals held that the Department could claim interest on abandoned property, simply through the operation of the UFA. In doing so, the Court of Appeals ignored long-standing United States Supreme Court precedent that holds that a state may not transform private property into public property without compensation. 11 The trial court got it right when it held that to allow Ohio to retain the interest on unclaimed funds would allow it to:
[U]nilaterally dictate the content of – indeed, altogether opt out of – both the Takings Clause and the Due Process Clause simply by statutorily recharacterizing the traditional property law concepts. 12
In addition to violating the United States and Ohio Constitutions, the Court of Appeals’ decision violates the stated purpose of the UFA – to protect the Ohio Owners’ property rights. Instead, the Court of Appeals would allow Ohio to use the UFA for a purpose never intended – to make money for Ohio.
The Ohio Supreme Court has agreed to hear Mr. Sogg’s appeal. 13 We’ll let our readers know what the court decides on this important case