When property is abandoned in the US and the rightful owner is nowhere to be found, the funds are remitted to the government and held there until a claimant comes forward. The concept is simple enough, however, there are often scenarios where it is unclear which government should get the funds! Is it the state where the transaction took place, the state where the owner is believed to be located, the state where the holder is incorporated, or the state where the holder’s primary business location resides?
The U.S. Supreme Court established two unclaimed property priority rules with its Texas v. New Jersey decision in 1965:
- First Priority Rule: Abandoned property must be escheated to the state of the owner’s last known address, as determined by the holder’s books and records.
- Second Priority Rule: The property is paid to the state of corporate domicile if the owner’s address is incomplete or unknown, or if the owner’s last known address is in a state that does not provide for escheat of the property owed.
The definition of “corporate domicile” has been a source of confusion for how to handle unincorporated holders. The state of “corporate domicile” can be interpreted as the state of organization or formation of the entity, on the other hand it could be its principal place of business.
This confusion can often make it difficult for owners to determine where their assets are, and in some cases they may end up somewhere other than they expect!
To make things slightly more complicated, there are exceptions to these rules for some asset types:
- Following a 1972 decision in Pennsylvania v. New York prompting the Disposition of Abandoned Money Orders and Traveler’s Checks Act of 1974 (Act), money orders, traveler’s checks and similar written payment instruments other than third-party bank checks are escheated to the state where the money order or traveler’s check was purchased. If that information is not available, it escheats to the state where the holder’s primary place of business is located.
- In the 1993 case of Delaware v. New York concerning unclaimed securities distributions held by intermediary banks, brokers and depositories, it was determined that the intermediary—not the issuer—is considered the holder. Thus, under the second priority rule, the intermediary’s state of corporate domicile receives the unclaimed property.