Delaware, New York State make case for unclaimed funds.

WASHINGTON -- The Supreme Court heard conflicting and sometimes bewildering arguments yesterday in a dispute over abandoned property that could end up costing New York State roughly $800 million.

But the court's disposition of the case, Delaware v. New York, could have significant financial ramifications for the other 49 states and the District of Columbia, all of which are officially involved in the dispute and stand to gain if New York is required to forfeit the money.

Underlying yesterday's court hearing was the issue of how to fairly allocate the millions of dollars held by financial intermediaries for which owners cannot be located.

A special master appointed by the court recommended that when an owner cannot be located, the state of the person's last known address should be entitled to the unclaimed funds.

But when the last known address is nonexistent or is for a financial intermediary such as a broker holding the security for a separate beneficial owner, the master said interest on municipal bonds should be turned over to the state in which the municipality is located. For corporate debt issues, the master said unclaimed dividends should be sent to the state in which the issuing corporation has its principal executive offices.

Dennis G. Lyons, arguing on Delaware's behalf, said the master's recommendations depart from the court's precedents. "The master basically said this was fairer because it spread the money around more." Lyons said. "Not to put too fine a point on it, he basically said too many businesses are incorporated in Delaware."

Under a 27-year-old Supreme Court precedent, unclaimed property for which there is no known last address could be seized by states in which the issuing corporation was incorporated. The rule, Lyons argued, would produce the fairest outcome.

Lyons said Delaware's business climate, which generally is viewed as favorable, is one other states may replicate. "Delaware doesn't have a copyright," he said. "Every state has an equal opportunity to do this sort of thing if that's what they want."

Jerry Boone, New York's solicitor general, also said the master's recommendations were flawed. But Boone said Delaware's position also was lacking, arguing that in cases where unclaimed funds are stuck at financial intermediaries, it would be fairer to have the money revert to New York.

Boone said a large chunk of the unclaimed money that piles up at the Depository Trust Co., a nationwide clearinghouse for securities transactions, is owed to New York brokers, and accordingly should be collected by New York.

In apparent exasperation, Justice Sandra Day O'Connor said "it would be fairer to use court precedents instead of running around writing new rules," while Justice Antonin Scalia said he had an even better idea for promoting fairness.

"If you want to talk fairness and ease of administration, why not make all this payable to the federal government?" Scalia said.

Justice David H. Souter asked whether it would be possible for the justices to determine which legal theory "will arrive at greater equity."

Chief Justice William H. Rehnquist also weighed in, observing that, in the end, the court's ruling is likely to be arbitrary. Rehnquist prefaced a question to one lawyer by saying that "the rules we lay down in these type of cases, and I do mean lay down, are to an extent just made up."

While the case is currently confusing, it began simply in 1988, when Delaware asked the court to decide whether it should be allowed to recover unclaimed money held by brokerage firms incorporated in Delaware but operating primarily in New York.

New York had been claiming the money under its abandoned property law, which mandates that unclaimed money held by corporations operating in the state be turned over to New York after three years. Because Delaware's abandoned property law does not take effect until after seven years, New York was getting all the unclaimed money.

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