WASHINGTON - Claiming that a recent Supreme Court ruling would result in a financial windfall to Delaware and New York State, House Banking Committee Chairman Henry B. Gonzalez last week introduced legislation that would overturn the decision.
The Texas Democrat's bill would target a March 30 ruling by the court in a complicated dispute over which states should be allowed to collect unclaimed dividends and interest held by banks and securities firms. The dispute involves all 50 states and the District of Columbia.
Under the Gonzalez legislation, unclaimed distributions of principal and interest on municipal bonds would be turned over to the state in which the municipality is located. For corporate issues, the bill calls for unclaimed dividends to be sent to the state in which the issuing corporation has its principal executive offices.
"Fairness dictates that unclaimed funds be returned to the state in which they originated," Gonzalez said. "Taxpayer funds of one state should not escheat to the treasury of another state, and the fruits of one state's efforts to generate local economic gain should not be usurped by another state."
"Escheat" is a legal term that defines the rights of states to take custody of, or assume title to, abandoned personal property. Gonzalez said his bill would "restore fairness" to the rules "governing competing claims by states to abandoned intangible personal property."
In the March decision, a 6-to-3 ruling delivered by Justice Clarence Thomas, the justices in Delaware v. New York ruled that when financial institutions hold funds for people who cannot be located, the money must be turned over to the state in which the institutions are incorporated.
Even though many securities firms conduct most of their business in New York, a sizable number are incorporated in Delaware. As a result of the court's ruling, unclaimed funds held by such firms are to be turned over to Delaware. The decision has created a budget headache for New York, though a court-appointed special master is now reviewing whether some of the estimated $360 million at stake was properly taken by New York.
The dispute began in 1988, when Delaware asked the high court to decide whether it should be allowed to recover the unclaimed money held by brokerage firms incorporated in Delaware but operating primarily in New York.
New York had been collecting the money under its abandoned property law, which mandates that unclaimed funds held by corporations operating in the state be turned over to New York after three years. Because Delaware's law does not kick into effect until after seven years, New York was getting all the money.
The Supreme Court agreed to take the case, but turned it over to a special master to sort through the conflicting claims of the two states. As an appellate body, the Supreme Court is not equipped to conduct trials and so appoints a special master in cases without a trial record.
But what began as a relatively simple case between two states mushroomed to include all 50 states and the District of Columbia.
The special master in the case, former dean Thomas H. Jackson of the University of Virginia law school, filed a report with the justices last year saying the money should not necessarily go to either New York or Delaware.
Relying on a legal theory advanced by Texas, Jackson said unclaimed distributions of municipal bonds should be turned over to the state in which the municipality is located. He also recommended that unclaimed dividends of corporate issues be sent to the state in which the issuer has its principal executive offices.
The Supreme Court rejected Jackson's approach, saying it veered from established precedent.
Gonzalez disagreed with the court. His legislation would codify Jackson's recommendations.
When the Supreme Court issues a ruling on a constitutional issue, it has the final say. But when it rules on a federal rule or statute, its decisions can be "overturned" by Congress if lawmakers agree to rewrite the law.
In his opinion for the court majority, Thomas as reminded interested parties of that option. He said that if states do not like the outcome of the case, "they may air their grievances before Congress. That body may reallocate abandoned property among the states without regard to this court's interstate escheat rules."