States Lose Round in Fight With Federal Government Over Unclaimed Savings Bonds
Federal Appeals Court Rules In Laturner v. United States That U.S. Treasury Not Required to Turn Over Unknown Matured Savings Bonds
Back in April, we noted an uptick in state legislation providing states with the ability to take "title" (i.e., ownership) - not just custody - of unclaimed federal savings bonds. This was and is a marked departure from most state unclaimed property law regimes which are ostensibly designed to hold property in trust for the rightful owner so that the owner may claim it in perpetuity. Under these new laws, while the state "may" returned unclaimed escheated bonds to the original owner (provided the owner jumps through the necessary procedural and evidentiary hoops) the state is under no obligation to do so.
As one reader (Hey, we have readers!!) pointed out, this is arguably "necessary" in light of federal regulations providing that the U.S. Treasury will only turn over unclaimed savings bonds to the states if they obtain title to the bonds. See 31 CFR 315.88. But while it may be the case that the state has to take title in order to take custody of the bonds, that doesn't answer the question of why the state has to take custody of the bonds at all. After all, for property held by the federal government, the traditional rationales of the unclaimed property laws -- the need to keep property safe for the owner and preventing private holders from getting a "windfall," -- do not apply. There is no reason to believe that property being held by the federal government is in any way less likely to be be claimed by the owner. To the contrary, the owner of a savings bond is very likely to look first to the federal government to make good on the bond, and the bonds never expire. Likewise, there is no private company getting a windfall on outstanding matured federal savings bonds - the property continues to be held by the federal government.
Instead, it seems clear that this is just a revenue-raising exercise for the states. And while raising state revenue may very well be a legitimate legislative purpose, it belies the oft-asserted notion that state unclaimed property laws are solely about consumer protection. Federal savings bonds do not expire - the owner always retains the right to reclaim the matured bond principal and interest from the federal government, provided that he or she complies with the regulations of the bond program. Accordingly, the transfer of bonds from the federal government to the states does not appear to serve any interest of the holder.
Generally, the states may obtain the principal and interest due on unclaimed savings bonds only if those bonds are in the state's possession (for example, if bonds are included in safe deposit items escheated to the state). A recent case decided by the United States Court of Appeals for the Federal Circuit, dealt with efforts by Kansas and Arkansas to compel the federal government to turn over all matured and dormant bonds held by the federal government for Kansas or Arkansas residents, "estimated to be worth hundreds of millions of dollars." After the federal government refused -- on the grounds that the states were not in possession of the bonds -- the states sued the federal government in the U.S. Court of Federal Claims. That court intially ruled that the states were entitled to escheat the unclaimed bonds and the federal government appealed.
On appeal, the United States Court of Appeals for the Federal Circuit reversed the lower court's order, holding that the federal government had no obligation to turn over the proceeds of bonds that are (presumably) still in the possession of the rightful owner. The Court of Appeals did so on two independent grounds: "federal preemption" (the concept that validly enacted federal laws take precedence over conflicting state laws) and the derivative rights doctrine (the concept that the state's rights with regard to unclaimed property are "derivative" of the owner's rights - no more, and no less).
With regard to federal preemption, the Court gave an overview of the doctrine, and noted that "Federal law of course governs the interpretation of the nature and rights and obligations created" by U.S. government savings bonds. In particular, the Court noted, federal law confers upon those bond holders the right to keep their bonds after maturity. See 31 U.S.C. 3105(b)(2)(A). As such, the Court held that any state law inconsistent with the federal right to maintain ownership of bonds after maturity (such as the Arkansas and Kansas laws whereby the state takes away that ownership right after maturity) were preempted by federal law and thus invalid.
The Federal Circuit also rejected the states' claim for the bonds on the separate grounds of the derivative rights doctrine. As noted by the Court, it was undisputed that "even if Federal law recognized them [i.e., the states] as the rightful bond owners, they could have no greater rights than the original bond owners." Under federal law, in order to redeem a bond, the owner must have either (a) possession of the bond; or (b) the bond serial number. Accordingly, because the states had neither possession of the bonds or the serial numbers, the states could not claim the unredeemed bonds.
Given the relatively few reported decisions relating to unclaimed property, the Federal Circuit's decision in Laturner is an important precedent for several reasons. First, the Court's reasoning with regard to the derivative rights doctrine is an important reaffirmation that the states' rights with regard to unclaimed property are no greater than the rights of the original owner - a concept which states have increasingly attacked in litigation, regulations, and unclaimed property audits. Second, the Federal Circuit's application of federal preemption to the unclaimed property laws has potentially many other parallels in federal law.
The Laturner decision, however, is probably not the end of the story. As the opinion notes, the states' next step is likely to file a "Freedom of Information Act" request with the U.S. Treasury, demanding disclosure of the serial numbers of the unclaimed bonds. Assuming the states get that information, they likely will try to redeem the bonds themselves without regard to whether the original bonds are still in the owners' possession.