FORGOTTEN BUT NOT GONE:
Escheatment of Stored Value
Cards
© Richard L. Field, Esq.
Published in The Electronic Banking Law
and Commerce Report, June 1996, Vol. 1 No. 2, pp. 11-13
Whoever invented the concept could run for president. It's the
closest thing U.S. state governments have to free,
non-voter-threatening, non-tax revenue. The stuff that trickles
in, year after glorious year, to their offices of unclaimed
funds. Call it abandoned property or escheated funds, it's a
politician's dream and it's all around just for the taking. Or is
it?
A VERY SHORT (LONG) HISTORY
The rule of escheat has such a long
history, thought, that not even the most ancient of presidential
candidates could honestly claim paternity. A concise history of
New York's statute was penned by Justice Greenfield in Petition
of Abrams, 134 Misc.2d 841, 512 N.Y.S.2d 962 (Sup. 1986):
Under feudal law, the lord, upon termination of his tenant's tenure of land by reason of treason, banishment, forfeiture, or want of heirs, was presumed to resume his original title to the land by way of escheat. All lands were deemed to be held by the subject either from his mesne lord, or from the king as lord paramount. All held property from the sovereign, either immediately or mediately. 1 Pollock & Maitland, History of English Law, pp. 232-240, p. 351; Kavanaugh v. Cohoes Power & Light Co., 114 Misc. 590, 612-613, 187 N.Y.S. 216. The meaning of escheat has been broadened to include property of every kind and description falling to the sovereign power for want of individual ownership, and the several sovereign states have succeeded to the rights of the king and feudal lords. Matter of Clark, 271 App.Div. 691, 68 N.Y.S.2d 487; Matter of People [Melrose Ave.], 234 N.Y. 48, 136 N.E. 235. As Cardozo, J. declared in the letter case, "Escheat today is not the privilege of one, but the collective right of all when the individual right has failed." (id. p. 53).
Escheat survives today, not merely as a feudal relic, but because ownership abhors a vacuum. Someone must be deemed to have a legitimate claim to ownership of any property, real or personal. "All rights of property, of whatever nature they may be, revert to the People when the owner dies intestate ..." Johnson v. Spicer, 107 N.Y. 185, 196, 13 N.E. 753 [1887], citing Kent's Commentaries, 425, to the effect that "if ownership becomes vacant, the right must necessarily subside into the whole community ..." Escheat was embodied in the state constitution (Constitution of 1894, Art. I, Sec. 10, repealed by amendment Nov. 6, 1962), and its consequences spelled out and codified in the Abandoned Property Law (L.1943, c. 697), the declared policy of which, without surrendering any of the sovereign's rights as to escheat, changed the emphasis from confiscation to custodial protection "for the benefit of all the people of the state". Abandoned Property Law, Sec. 102; In re Menschefrend's Estate, 283 App.Div. 463, 128 N.Y.S.2d 738; aff'd 8 N.Y.2d 1093, 208 N.Y.S.2d 453, 170 N.E.2d 902, cert. den. 365 U.S. 842, 81 S.Ct. 801, 5 L.Ed.2d 808.
In the U.S., abandoned property and escheatment are governed almost exclusively by state laws, such as New York's, which is representative of a number of other state statutes. Socially munificent statutory language notwithstanding, the real issue is money, and states are prepared to go to some lengths to get their hands on it. Over the last thirty years, disputes between states over the right to retain various classes of abandoned property have been decided by the U.S. Supreme Court three times, all as original jurisdiction cases.
The first of these cases, Texas v. New
Jersey, 379 U.S. 674, 85 S.Ct. 626, 13 L.Ed.2d 596 (1965),
addressed escheat of debts owed by Sun Oil Company to its
creditors. The case established the formula for allocating these
revenues: (i) Primary rule--escheat to state of creditor's last
known address; (ii) Secondary rule--if no address, escheat to
state in which debtor is incorporated.
The second case, Pennsylvania v. New York, 407 U.S. 206, 92 S.Ct.
2075, 32 L.Ed.2d 693 (1972), revisited the situation in terms of
unpaid Western Union money orders, for which addresses are
generally not recorded. The court held that the rule in Texas v.
New Jersey nevertheless applied. This result distorted the
equities laid out in the first decision, however, and was soon
overturned by statute, 12 U.S.C. 2501-2503 (effective 1974). As a
result, abandoned money orders and traveler's checks are
specifically subject to federal law for the purpose of allocating
escheated funds among the states. The rule: if the buyer's
address is unknown, escheat to the state where the instrument was
sold.
The third Supreme Court case is Delaware v. New York, 113 S.Ct.
1550, 123 L.Ed.2d 211 (1993). It took this hairsplitting process
to the next level, addressing the situation of unclaimed
securities dividends and interest, where the intermediary
securities depository and the securities issuer are in different
states. That case held: (i) escheat to the state in which the
intermediary, having assumed the position of legal obligor, is
incorporated (not located, which was New York's wish), unless
(ii) another state can prove that a creditor's last address is in
that state. Delaware celebrated the decision, and there was
fleeting talk of a tax rebate for Delaware citizens the year the
windfall was received.
THE PREPAID CARD DILEMMA
In this light, it is reasonable to expect that when new products
or technologies appear, they will be scrutinized by state
comptrollers for their abandoned property possibilities.
Interestingly, as of this writing no state appears to have gone
through this exercise with respect to electronic stored value
cards. As you will see, it raises troubling and difficult
prospects.
Bank Cards
When considering escheatment, there are two distinct classes of
prepaid card application. The first are the "bank
cards". Their common feature is that they closely model
official bank checks. The issuer permits value to be stored on
the microprocessor chip embedded in the card, and holds aside
that amount of funds an abeyance account that it controls. After
"negotiation" to a payee, the electronic value is
presented back to the issuer for payment in a more widely
accepted currency, such as bank funds or cash. One might also
call these "redeemable cards".
Any stored value in a bank card that has not been claimed within
a state's statutory time limit is expected to be subject to that
state's abandoned property law for bank accounts and banking
funds (or to be made subject to it, if the current law only
covers paper instruments of this type). If the bank card is made
to fit the federal definition of a "money order" or a
"traveler's check", then that allocation will control.
We might see an interesting twist of the bank card situation in
the case of the Mondex electronic purse. Unique among the
electronic bank card products suggested to date, Mondex does not
necessarily require that the stored value be backed by funds held
by the issuing institution. Instead, Mondex has spoken of its
value being "minted", as legal tender is minted,
perhaps under government sanction. In this "legal
tender" mode, unused Mondex electronic coins may not be
readily escheatable, since there may be no centralized store of
value to be transferred to the state.
Telephone Cards
Which brings us to the second fundamental class of prepaid card
application, the "non-redeemable cards". In deference
to their most important early applications, I will call them
"telephone cards". They could as easily be adapted to
subway and bus systems, gift certificates, or electronic airline
or event ticketing, to name just a few possibilities. While some
of these applications may evolve into the bank card model, I will
focus on those that don't.
The common feature of such cards is that they, like a commodity,
are purchased for a specific underlying use, and are not intended
to be exchanged back for cash. Such cards could be issued to be
used at pay telephones, for example, instead of coins or credit
cards. The card is entered into the phone, and the cost of the
call deducted. Some recent announcements of phone card products
have been made by the U.S. Postal Service (in a joint effort with
American Express) [The New York Times, 17 Nov. 1995, p. A20], and
Bell Canada [Clari.net (Reuters), 10 Jan. 1996]. Or they may
represent the opportunity to reserve an airline seat, or watch a
ballgame or concert. As with the bank cards, a percentage of this
stored value is expected to remain unused as cards are lost,
saved or forgotten.
How does New York law handle this arrangement? In some detail, it
turns out.
Abandoned property in New York is governed by the Abandoned
Property Law. Additional regulations can be found in the New York
Code of Rules and Regulations, Title 2 (Audit and Control),
Chapter IV (Miscellaneous Rules, at 2 NYCRR Parts 113-124.
Various operational and explanatory details are also published
annually by the New York State Comptroller's Office of Unclaimed
Funds, in its Handbook for Reporters of Unclaimed Funds.
Provisions of interest for telephone and other utility companies
include Abandoned Property Law, Sections 102 (declaration of
policy); 103(f) (definition of "utility services");
400-403 (unclaimed deposits and refunds for utility services);
1311 (unclaimed moneys erroneously collected by utility
corporations on account of taxes); 1315 (miscellaneous unclaimed
property); and 1419 (reporting of abandoned property in the
aggregate), as well as related regulations.
One operative provision is Section 1315(1), which reads:
"... [A]ny unclaimed amount for services not rendered or for
goods not delivered, which amount was received ... and owing in
this state ... and which has remained unclaimed by the owner of
such amount for five years, shall be deemed abandoned
property."
Another is Section 400(1): "The following unclaimed moneys
held or owing by ... a telephone corporation ... shall be deemed
abandoned property: ... (b) Any amount paid by a consumer or
subscriber to such a corporation in advance or in anticipation of
utility services furnished or to be furnished by such corporation
which in fact is not furnished ... which shall have remained
unclaimed by the person or persons appearing to be entitled
thereto for two years after the termination of the utility
services ..."
The question is whether the apparently straightforward language
of these sections of the law should control in the case of
telephone cards, particularly where the issuer does not consider
the funds which have been collected and which represent unused
telephone time "unclaimed" by an "owner" who
is "entitled" to them.
How can this happen? Lets say a telephone card company puts an
expiration on the card, or has the purchaser agree that
"after X years the right to the funds is cut off and
ownership reverts to the issuer". Most difficult, what if
the issuer distributes the card on the condition that the
purchaser has, from the date of purchase onward, no right or
claim to a refund?
New York's Position
"Owner" means a person having an enforceable
proprietary or vested interest in the fund at the time when the
state takes custody of it (1944 Op. Atty. General 191). Since New
York's Abandoned Property Law is custodial in nature with respect
to personal property, the state takes possession of the abandoned
property "subject to the claims of the property
owners". Presley v. County of Nassau (yes, Elvis), 148
Misc.2d 125, 560 N.Y.S.2d 173, add'd 188 A.D.2d 594, 591 N.Y.S.2d
72 (1992).
New York's Office of Unclaimed Funds has not issued a position on
stored value cards; nor have other states directly addressed the
issue. Only tangential issues have come up so far (for example,
the State of Utah recently raised the question of whether
unredeemed ski coupon payments may be subject to escheatment).
New York's Comptroller has taken a stand on the easier issues. It
takes a position that the presence or absence of an expiration
date is irrelevant to a determination of abandonment. That is,
inactivity for the statutory period triggers the statutory filing
and transfer requirements. If a person subsequently receives the
services to which he is entitled, the entity which has paid the
state may file a claim for reimbursement. (Conversation with
Kevin King, Esq., Office of Unclaimed Funds). Where the date of
abandonment occurs prior to the expiration date, there can be
little argument with this position. But where expiration occurs
first, it may be less certain. For example, no one claims that a
museum's special exhibition tickets, good for admission on one
day only, are subject to escheatment if not used.
The Comptroller also takes the position that private parties
cannot contract in violation of the Abandoned Property Law. The
seminal case on this subject is State of New Jersey v. Jefferson
Lake Sulpher Co., 36 N.J. 577 (1962). In that case, the right to
securities dividends was to have cut off just before they had to
be turned over to the state. The procedure was held to violate
public policy.
Even this position may, possibly, be open to some debate. In
Delaware v. New York, 113 S.Ct. 1550, at page 1554, Justice
Thomas states:
The intermediaries [banks, brokerages, depositories] are unable to distribute a small portion of the securities to their beneficial owners. (fn. 6) When an intermediary claims no property interest in funds so held, they become escheatable. (fn. 7)
fn 7: Unlike Depository Trust Co., the two other securities depositories in the U.S. 'do claim entitlement to certain securities, interest payments, dividends and distributions that cannot be accounted for.' Brief for Midwest Securities Trust Co. and Phila. Depository Trust Co. as Amici Curiae 2. The issue of these depositories' 'entitlement to the excess funds under the rules' is not before us."
But what if the issuer made clear that
what was being sold was the opportunity to make calls, rather
than the calls themselves? The same principle could apply to the
proceeds of unused electronic tickets and gift certificates. A
careful reading of the law leads me to the conclusion that, where
no persons have an enforceable entitlement to the funds, the
state cannot act on their behalf in collecting the funds as
abandoned property. Rather, they are earned income to the issuer
who makes the services available, as promised. Legalities aside,
any other interpretation would have dire effects on the financial
viability of a wide range of existing businesses, from health
clubs to sports teams to Broadway shows. Indeed, all of these
businesses rely on unused tickets, and the extra income they
provide.
I previously mentioned the case of Presley v. County of Nassau.
The decision appears at first blush to require escheatment of
unused telephone card proceeds, but a careful reading leads to
the opposite conclusion. The Presley court held that the
entertainer's estate was not entitled to retain unredeemed ticket
proceeds for a concert cancelled as a result of the entertainer's
death, and that unredeemed proceeds were abandoned property. The
parties initially intended to purchase concert tickets
redeemable, by contract, in the event of cancellation of the
concert. Even though some purchasers chose to retain the tickets
as mementos (their value as memorabilia being greater than their
cash value), the court held that is is the intent of the parties
at the time of purchase that governs.
Conclusion
The most defensible position at this time seems to be that
electronic prepaid cards issued without the right to claim refund
are outside of the scope of abandoned property laws, such as New
York's. However, New York and other states have tended to lean in
the direction of inclusion in the past, and have economic
incentive to do so again. And it may not sit well with some that
a contract that grants a right to funds, then takes it away, can
be against public policy, while one that never grants the right
is not.
Expect the hairsplitting to continue.
____________________
Richard Field is an attorney and
legal consultant in Cliffside Park,
New Jersey. His Internet address
is field@pipeline.com
rlf:1/12/96
-----------------------------
Richard L. Field
Law Office of Richard Field
755 Anderson Avenue, #4A
Cliffside Park, NJ 07010 USA
ph/fax: (201) 941-8015
field@pipeline.com
-----------------------------