WASHINGTON - Attorneys for Massachusetts will argue before a federal appeals court in Boston today that the Federal Deposit Insurance Corp. must turn over millions of dollars in unclaimed deposits to the state treasury.

The FDIC, at today's argument, will draw a decidingly different picture, telling the U.S. Court of Appeals for the First Circuit that a federal law clearly gives the agency title to those funds.

Massachusetts is challenging the FDIC's decision to retain the unclaimed deposits from 36 failed institutions, arguing that the local Abandoned Property Statute requires the agency to release the $3 to $5 million.

If Massachusetts succeeds, it could pave the way for other states to claim more than $200 million in abandoned deposits held now by the FDIC.

"It is a significant issue because it affects almost all states," Massachusetts Assistant Attorney General Thomas O. Bean said.

The amount at stake isn't "petty cash," said Ira H. Parker, a former FDIC attorney who handled this issue.

"Certainly there are other states interested in this," Mr. Parker said, "and, there is at least one law firm trying to get other states interested in it."

But, the states first need to defeat the FDIC, which argues in its brief that the federal Unclaimed Deposits Amendment Act overrules state law, and requires the agency to retain the deposits.

That's not the only hurdle, according to the FDIC. People who fail to collect their insured deposits from the agency after 18 months receive a stake in any recovered assets. Depositors would lose those rights, however, if the money went to the state, the FDIC said.

The agency also raised a technical argument, saying an appellate court cannot hear the case until the FDIC creates a formal appeals process. Until then, the order is not final, and thus the appeals court cannot hear it.

California and Connecticut raised similar claims at the trial court level, and lost. This is the first appellate court to hear the issue.

Mr. Bean argued that the FDIC's regulation-which states that unclaimed deposits belong to the agency-does not apply. The reason: there are no unclaimed funds in question because Massachusetts is asserting control over the deposits.

So, the FDIC must turn over the funds to the state, which is acting as a fiduciary agent on behalf of its residents. The state then can seek out the depositors and issue them refunds, Mr. Bean said.

If the depositors do not come forward, the state keeps the money.

FDIC attorney Edward J. O'Meara referred all questions to the FDIC's press office, where a spokeswoman declined to comment.

William F. Sheehan, a partner at Shea & Gardner who follows failed bank issues, said the battle only covers banks that became insolvent before 1993.

"Cases arising in the future will be governed by the Unclaimed Deposits Amendment Act of 1993," Mr. Sheehan said. "In that case, unclaimed funds go into the state's custody for 10 years. At the end of the period, if the funds are unclaimed, the money goes to the federal government."

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