COURT RULES AGAINST 'PARTIAL ESCHEAT' OF DIVIDENDS ON ABANDONED STOCK

August 8, 2003

By Steven P. Garmisa
Hoey Farina & Downes 
sgarmisa@felahfd.com

When state officials hold unclaimed stock as custodians under the Uniform Disposition of Unclaimed Property Act and dividends are paid on the stock before it is reclaimed by the owner, is there a "partial escheat" that lets the officials keep the dividends?

No, according to the Illinois Appellate Court in Canel v. Topinka, 2003 Ill.App. LEXIS 844 (1st Dist., June 30).

The plaintiff reclaimed stock that was held by state officials under the Unclaimed Property Act. But, as provided in section 15 of the act, the officials declined to hand over dividends that were earned on the stock while it was held in custody.

Seeking damages and injunctive relief, the plaintiff filed a class-action complaint alleging state officials deprived him of property without just compensation when they withheld dividends that were paid on this stock while it was held under the act.
The trial judge dismissed the complaint -- ruling that the plaintiff failed to exhaust his administrative remedies and that the case belonged in the Court of Claims.

On appeal, the state confessed this ruling was wrong.

Dropping this defective defense, the defendants switched to the clever argument that the Unclaimed Property Act operates as a partial escheat. As the defendants noted, the government had authority to grab all of the unclaimed stock under an escheat law. So, although the Unclaimed Property Act provides for holding unclaimed stock in custody, the defendants argued that the statute lawfully provides for escheat of dividends paid before stock is reclaimed.

Reaching the constitutional issue, the Appellate Court reversed. As Justice Shelvin Louise Marie Hall explained (with some omissions):

"The complaint alleged that section 15 of the Uniform Disposition of Unclaimed Property Act violated section 15 of the Illinois Constitution. The complaint also alleged that section 15 deprived the plaintiff of his Fifth and 14th Amendment rights under the U.S. Constitution and thus violated [the Civil Rights Act] 42 U.S.C. [sec]1983.

"Specifically, the complaint alleged that, pursuant to section 15 of the act, the defendants retained interest and dividends paid on stock, after the funds and the stock had been claimed by the owners. The complaint further alleged that such taking violated both the Illinois and the U.S. constitutional prohibition against the taking of private property without payment of just compensation."
"The Circuit Court ruled that the plaintiff's remedies were under administrative review and the Court of Claims."

"At oral argument in this case, the defendants conceded that the plaintiff was not required to exhaust his administrative remedies and was not required to seek relief in the Court of Claims."

Expanding on this point, Justice Thomas E. Hoffman's separate opinion explained (with citations omitted):

"Where as here, a party attacks the constitutionality of a statute on its face, he need not exhaust administrative remedies. Further, an action seeking an injunction to restrain a state officer from acting in violation of constitutional law is not an action against the state and may be brought in the circuit court."

Returning to the majority opinion, Hall continued:

"The act provides a procedure whereby certain personal property, presumed abandoned, is placed in the custody of the state for its eventual return to its rightful owner.

"Under the act, persons holding property, presumed to be abandoned under the act, must remit the property to the state, together with certain specified information regarding the owner of the property and the efforts to contact the owner. After the state receives the report and the property, the state then publishes a notice advising that the property has been turned over to the state, to whom all further claims to the property must be directed. Upon payment and delivery of the property, the state 'shall assume custody and shall be responsible for the safekeeping thereof.'

"At issue in the present case is section 15 of the act, which provides as follows: 'When property is paid or delivered to the state treasurer under this act, the owner is not entitled to receive income or other increments accruing thereafter, except that income accruing on unliquidated stock and mutual funds after July 1, 1993, may be paid to the owner.'

"In order to obtain the return of property turned over to the state under the act, an owner submits a claim on a form prescribed by the state treasurer. The state treasurer is required to consider any claim filed but has the discretion whether or not to hold a hearing and receive evidence on the claim. The final decision by the state treasurer with respect to a claim 'shall be subject to judicial review pursuant to the provisions of the Administrative Review Law and the rules adopted pursuant thereto.'

"The defendants contend that section 15 does not take the plaintiff's private property without just compensation because the plaintiff does not have any property rights in the dividends earned on abandoned property while in the state's custody. The defendants rely on the principles of escheat and bona vacantia."

Specifically, Hall recounted, "The defendants argue that under Delaware [v. New York, 507 U.S. 490, 497 (1993)], the state has the right to assume title to the whole of the abandoned property. The defendants reason that since the state has the power to require that both the abandoned principal and its subsequent earnings escheat to it, the state has the lesser power to require that only the earnings escheat to it for the period of abandonment."

Rejecting this argument, Hall explained, "It has been held that the act is not an escheat statute, in that it Illinois does not acquire title to abandoned property, but is merely the custodian, and the owner can reclaim the property at any time."

Hall cited People ex rel. Callahan v. Marshall Field & Co., 83 Ill.App.3d 811 (1980), which described the difference between the act and an escheat statute, and quoted the commissioner's prefatory note to the Uniform Disposition of Unclaimed Property Act, the model for the Illinois statute.

"The Uniform Act," the prefatory note reads, "is custodial in nature -- that is to say, it does not result in the loss of the owner's property rights. The state takes custody and remains the custodian in perpetuity. Although the actual possibility of his presenting a claim in the distant future is not great, the owner retains his right of presenting his claim at any time, no matter how remote. State records will have to be kept on a permanent basis. In this respect the measure differs from the escheat type of statute, pursuant to which the right of the owner is foreclosed and the title to the property passes to the state. Not only does the custodial type of statute more adequately preserve the owner's interests, but in addition, it makes possible a substantial simplification of procedure."
The Callahan court further noted that the Uniform Act also gave the state, rather than the holder of unclaimed property, the benefit of the use of such property.

"Nonetheless," Hall continued, "the defendants maintain that whether the act is an escheat law must be determined by the actual operation of the act and that the operation of section 15 of the act is a limited 'escheat' law."

A flaw in this argument is that escheats "are not favored in the law, and any doubt whether property is subject to escheat is resolved against the state." Looking at the way the Unclaimed Property Act functions, Hall concluded, "it is clear that the act does not authorize the state to exercise its 'escheat' powers.

"We conclude that section 15 is not an 'escheat' law and therefore, the state may not use its powers of 'escheat' as a basis for retaining the dividends in this case."

Concurring with this ruling, Hoffman explained:

"I believe that the flaw in the defendants' argument is its failure to recognize that the power which the state exercises over property pursuant to the act is custodial in nature. The act does not provide for the loss of an owner's rights in and to the underlying property which is presumed abandoned pursuant to its provisions; rather, it provides that the treasurer will take custody of the property, be responsible for the safekeeping thereof, and deliver the property, or the proceeds of the sale thereof, to the owner in accordance with the claim provisions set forth in sections 19 and 20 of the act.

"The act places no time limit within which an owner is required to file a claim seeking the return of property held by the treasurer and, as a consequence, the treasurer remains the custodian in perpetuity.

"If the owner does not lose his rights to the underlying property, then I believe that any income earned thereon is also the property of the owner. As the Supreme Court noted in Phillips v. Washington Legal Foundation, 524 U.S. 156, 165 (1998): 'The rule that "interest follows principal" has been established under English common law since at least the mid-1700s.'

"As noted earlier, section 15 of the act provides that the owner of property held by the treasurer pursuant to the act is not entitled to the income or other increments accruing thereon. However, the state cannot, by legislation or otherwise, transform private property into public property simply by abrogating the traditional rule that the earnings on property are incidents of its ownership and are also the property of the owner.

"Since the income or other increments that accrue on property in the custody of the treasurer attach as a property right incident to the ownership of the underlying property, it cannot be taken for public use without, just compensation.

"I conclude, therefore, that the state's retention of the income or other increments accruing on property in the custody of the treasurer under the act pursuant to section 15 is a taking for public use and, in the absence of the payment of just compensation, violates both the Illinois and federal constitutions."

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