When it comes to unclaimed property overreach, when is far too far?

In early June, the Indiana Supreme Court ruled in favor of Tyson Timbs, finding that the state’s seizure of the convicted drug dealer’s infamous Land Rover amounted to an excessive fine, which was therefore unconstitutional.  We first brought the Timbs v. Indiana[1] case to the attention of the unclaimed property community in April 2019, drawing parallels between forfeited property and the use of estimation as a means to penalize holders in unclaimed property audits, after the Supreme Court of the United States held that the protection against excessive fines embodied in the Eighth Amendment applies to the states via the Fourteenth Amendment’s Due Process Clause.  This more recent decision at the state level resulted from the remand of the case so that Indiana could determine, consistent with the U.S. Supreme Court’s opinion, whether the forfeiture of Mr. Timbs’ vehicle was unconstitutionally excessive.  While Mr. Timbs prevailed in proving that the civil forfeiture in his case was grossly disproportionate to the gravity of his crimes, and therefore unconstitutional, forfeitures that threaten private property rights is a troubling trend that is very much alive and unwell.

This spring, a series of lawsuits were filed after the FBI raided U.S. Private Vaults (“USPV”) in Beverly Hills, Calif., seizing hundreds of safe deposit boxes containing the personal property of USPV’s customers.[2]  These customers, according to the warrant, were not under investigation.  Rather, the unsealed warrant supporting the raid authorized the seizure of USPV’s “business equipment” including “nests of safety deposit boxes and keys”.  The warrant expressly prohibited “a criminal search or seizure of the contents of the safe-deposit boxes”.[3]  In its application for the warrant, the federal government maintained that any inventory search would be limited in scope and would be done in order to “look for contact information or something which identifies the owner” and that the search should “extend no further than necessary to determine ownership.”[4]  As such, the warrant that was issued stated that “in accordance with their written policies, agents shall inspect the contents of the boxes in an effort to identify their owners in order to notify them so that they can claim their property.”[5]  The language of the warrant is reminiscent of the states’ obligation to reunite unclaimed property with its owners once reported.  As discussed below, this requirement is also the subject of recent litigation.

Notwithstanding the clear limitations of the warrant, owners of a number of the safe deposit boxes seized are facing a bait and switch scheme in attempting to recover their property.  Federal agents completed their inventory of the safe deposit boxes on March 26, 2021, but the government has retained certain property ever since.[6]  As one example, the owner of one of the safe deposit boxes has both the key to the box in question and a copy of the box’s rental receipt.  The owner can also describe the contents of the box to demonstrate ownership.  Identifying the owner so that they can claim their property is suddenly not enough—having made the identification, the federal government now wants to investigate the owner before returning the property.[7]  In other words, if the owner wants their property, the owner must prove that it is in fact their property and that the property was obtained lawfully in the first instance.  Then maybe the government will return the property.  The government is retaining the property while simultaneously acknowledging that it does not have a search or seizure warrant for the contents of the boxes.[8]  The owners here may be feeling like Mr. Timbs, whose “voyage” to recover his Land Rover was deemed “[r]eminiscent of Captain Ahab’s chase of the white whale Moby Dick”[9] by the state court.

This fact pattern is all too familiar in the unclaimed property community.  Recent cases illustrate that the demands for information in unclaimed property audits continue to be problematic.  The subpoena (a civil version of a warrant) issued by Delaware’s Department of Finance to AT&T Inc. was so overly broad and unreasonable that the Delaware Supreme Court affirmed the Chancery Court’s determination that its enforcement would be an abuse of the court’s discretion.[10]  Further, the Chancery Court found that the state bears the burden of proof “as to the existence and amount of … [unclaimed] property and its abandonment … by showing evidence of the unpaid debt or the undischarged obligation …”[11]  The holder’s obligation is to produce records, not to prove that property is not abandoned.  Rather, the burden is on the state to prove that specific items of property satisfy the presumption of abandonment provided for in the statute.  Holders in audits have been treated like the owners of the USPV safe deposit boxes: prove a negative, or the government will take your property.    

Further, both Univar, Inc. v. Geisenberger et al.[12] and Torsella v. PPL Corp.[13] demonstrate that privacy and confidentiality continue to be at the forefront of unclaimed property audits.  Univar is particularly concerned with protecting its confidential and proprietary information, and PPL has raised concerns about protecting its shareholders’ personally identifiable information (“PII”).  In both cases, the litigating state does not deem audit materials to be public records, barring their release pursuant to a Freedom of Information Act (“FOIA”) request.  Many other states participating in the multi-state audit of these holders, however, would allow such materials to be disclosed pursuant to a FOIA request.  Particularly in the case of PPL, this is a hacker’s dream—Pennsylvania is seeking the name, address, date of birth, social security number, account number, account opening date, date of last transaction, balance, manner of receiving dividends, etc. for each of PPL’s shareholders.  This too may be best described as “a very expensive, onerous and harassing fishing expedition for a school of mythical fish” using government fishermen.[14]  Ironically, both Congress and the Securities and Exchange Commission have acknowledged the danger inherent in the availability of such information, and in its potential for exposure during audits conducted by the federal government, and have retreated from collecting PII.[15] 

But back to Mr. Timbs and his Land Rover in Indiana and the seizures of the safe deposit boxes in California.  In each instance, the government’s taking is not supported by law.  This is analogous to a situation where an unclaimed property auditor selects all checks that the holder voided at least 31 days after issuance, with the instruction to prove that the liability was satisfied, or else the funds will be deemed abandoned.  There is no unclaimed property statute in the nation that provides that a check voided more than 30 days after issuance is considered unclaimed property.  To the contrary, checks voided so close to issuance are undoubtedly being voided in the normal and ordinary course of business.  Further, it would be a violation of a contractual obligation to arbitrarily stop payment on a check that represents a valid liability.  So why are unclaimed property auditors allowed to advance this theory in audits?

As noted above, the AT&T decision held that the state is required to prove property is abandoned, as opposed to requiring the holder to prove a negative—that the property is not abandoned.  The court in Temple-Inland v. Cook[16] also found that it was unconstitutional to deem property to be abandoned in this manner.  More recent unclaimed property litigation has focused on the reasonableness of information requests and on the conduct of contingent-fee auditors.  Unclaimed property litigation has yet to challenge the inclusion of checks that were voided in the normal and ordinary course of business, even though it is a common occurrence in audits.  If the cases referenced here are a barometer of legal reasoning, arguments for excluding such checks in determining an unclaimed property liability are likely to be successful.  While the courts may give wide latitude to unclaimed property administrators, they loathe allowing actions which are not definitely authorized by statute, particularly when the actions result in a taking or a penalty that is not commensurate with the alleged offense.  Neither outcome relates to the objective of unclaimed property statutes, namely, reuniting owners with their property. 

This final point seems to be lost in the administration of some unclaimed property statutes.  For over a year, Avaya Inc. (“Avaya”) has been attempting to recover its property that was escheated to Ohio.  Notwithstanding Ohio’s acknowledgment that Avaya is the owner of the funds at issue, the state is refusing to return the property because Avaya cannot provide evidence of the specific transaction that resulted in the unclaimed payment.  This ad hoc requirement instituted by the state is not found in any duly enacted unclaimed property legislation or regulation in Ohio and therefore cannot be supported by law.  While Avaya is in the process of appealing[17] this determination which raises numerous constitutional issues,  it is likely experiencing the same frustration as Mr. Timbs, the owners of the USPV safe deposit boxes, many unclaimed property holders, and Captain Ahab himself that “one most perilous and long voyage ended, only begins a second; and a second ended, only begins a third, and so on, for ever and for aye.”[18]  Here’s hoping that Avaya, like Mr. Timbs and AT&T, sails off into the sunset and not a storm.  

[1] 139 S.Ct. 682 (2019).

[2] See e.g., Coe v. United States et al., No. 2:21-cv-3019 (C.D. Cal. Apr. 7, 2021); Snitko et al. v. United States et al., No. 2:21-cv-4405 (C.D. Cal. May 27, 2021).

[3] Plaintiff’s Motion for Return of Property Pursuant to Fed. R. Crim. P. 41(g), Exh. A, Coe v. United States, No. 2:21-cv-3019 (C.D. Cal. May 3, 2021).

[4] Id. at *11.

[5] Id. at *10.

[6] Mot. for Return of Property Pursuant to Fed. R. Crim. P. 41(g), Coe v. United States at *19.

[7] As argued by the Plaintiff’s lawyer, “the Government is entitled to investigate whomever it wants. But there are two things it cannot do: first, it cannot take or retain people’s property without legal authority just because it intends to investigate them.  And second, it certainly cannot use the threat of unauthorized retention of that property to force people to waive their Fifth Amendment rights by giving the Government leads in its investigation.” Id.

[8] Id. at *18.

[9] Indiana v. Timbs, No. 27D01-1308-MI-92 at *2 (Ind. June 10, 2021).

[10] Delaware, Dep’t of Fin. v. AT&T Inc., No. 2019-0985 (Del. June 1, 2021).

[11] Delaware, Dep’t of Fin. v. AT&T Inc., 239 A.3d 541, 573 (Del. Ch. 2020). 

[12] E.g., Complaint, No. 1:18-cv-01909-MN (D. Del. Dec. 3, 2018).

[13] No. 272 M.D. 2019 (Pa. Cmwlth).

[14] Stahl v. First Pa. Banking & Trust Co., 411 Pa. 121, 126 (1963).

[15] See e.g., Securities and Exchange Commission, Amendments to Forms and Schedules to Remove Provision of Certain Personally Identifiable Information (Apr. 24, 2018) available at https://www.sec.gov/rules/final/2018/33-10486.pdf.  See also H.R. 2039, 117th Cong. (2021) available at https://www.congress.gov/bill/117th-congress/house-bill/2039/text?r=9&s=1. 

[16] 192 F. Supp.3d 527 (D. Del. 2016).

[17] The Unclaimed Property Professionals Organization filed an amicus brief in this case.  A copy of the brief is available at https://cdn.ymaws.com/www.uppo.org/resource/resmgr/advocacy_page/Amicus_Brief_Avaya_Case_Ohio.pdf.

[18] Herman Melville, Moby-Dick59 (Harrison Hayford & Hershel Parker eds., W.W. Norton & Co., Inc. 1967) (1851).