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Escheating Scandal:

OK, this Ninth Circuit case is not terribly exciting legally, but it's practically useful, and it lets me say "escheating scandal." (No google references for that until now; a poor gag, but mine own.) An excerpt from an earlier, more detailed decision in this litigation:

[The case is filed] by two individuals against the state controller. One, Chris Taylor, a former Intel employee, lives in England and owns 52,224 shares of Intel stock. The other, Nancy Pepple- Gonsalves, a former TWA flight attendant, lives in California, in Riverside County, and owns 7,000 shares of TWA stock. Or at least they did own the stock, before the state took it away.

The state controller took Mr. Taylor's and Ms. Pepple- Gonsalves's stock as "unclaimed property." But these individuals do, in this lawsuit, claim it. The property was treated as unclaimed because for three years these two individuals did not cash dividend checks, respond to proxy notices, or otherwise communicate to the companies in which they owned stock. Intel and TWA provided the State of California with lists of shareholders who were "lost" or "unknown" by these three criteria, as required by law, and issued "duplicate shareholder certificates" to the state. The Controller then sold the stock and deposited the money received in exchange into the state's general fund.

This case is about escheat. Escheat, at common law in England, formerly terminated a tenancy so that on the death of a tenant without heirs, or as a result of a tenant's felony that worked a corruption of the blood, the land escheated to the lord of the fee. Title by escheat "was one of the fruits of and consequences of feudal tenure." "But, as the feudal tenures do not exist in this country, there are no private persons who succeed to the inheritance by escheat; and the state steps in the place of the feudal lord, by virtue of its sovereignty, as the original and ultimate proprietor of all the lands within its jurisdiction." Escheat of tangible or intangible personal property arises from the same conceptual scheme....

The escheat problem, in this case, arises from a new approach used by some state governments, greatly shortening the time before which untouched property is treated as though it had been abandoned, greatly reducing or eliminating notice to the true owner, and ignoring the true owner's pleas. For example, California is taking the flight attendant's stock in her airline on the basis, basically, that she cannot be found, even while she is standing in court shouting, "Here I am! Here I am! Give me my money!" And the State of California turns a deaf ear, pretending it cannot hear her.

The latest decision reverses the district court's denial of an injunction, and suggests, "because the Supreme Court spoke so clearly in Jones v. Flowers, and because we spoke on the precise issues in this case twice -- first in Taylor I and again in Suever v. Connell -- without California taking any action to remedy the constitutional problem with its escheat statute, the district court may wish to consider whether some sort of supervision, such as requirement of court approval of new regulations, is necessary."

Related Posts (on one page):

  1. Escheating Scandal:
  2. Cheating Scandal at Duke Business School:
happylee:
It is nice to see the 9th Circuit take a stand in favor of property rights.

This quote from opinion is interesting and, in my modest opinion, reveals the true nature of "government" in California today:


The state hired agents to threaten companies,
including out-of-state companies, with fines and
penalties, and paid its agents a percentage of the
revenue generated from the seized property.
5.2.2007 3:11pm
happylee:
Having now read (devoured?) the opinion, I am overwhelmed by a feeling of pride to belong to the same profession (calling?) as Mr. William Palmer, counsel for the appellants. As detailed in the opinion, the State of California's rapaciousness led it to not only enact statutes of dubious constitutional standing, but to also disregard even its own meager statutory safeguards by essentially taking property willy-nilly. Unbelievable. Why is this not front-page news? Is Ahnold building a new Versailles?
5.2.2007 3:20pm
b.:
escheaters never win.
5.2.2007 4:05pm
scote (mail):
Good Grief! The references were enlightening and clearly point to a corrupt and greedy state government operating outside the law in a way that is worthy of criminal prosecution, IMO.

I'd had a refund check escheated once but I had no idea that California had turned escheatment into a full time scam in clear violation of the statute. Especially aggrieving is the state's practice of selling property--including stock--upon seizure and ignoring the statuary custodial duty to preserve value for the true owner. Well, that and seizing property without notice!
5.2.2007 4:19pm
Milhouse (www):
For example, California is taking the flight attendant’s stock in her airline on the basis, basically, that she cannot be found, even while she is standing in court shouting, “Here I am! Here I am! Give me my money!” And the State of California turns a deaf ear, pretending it cannot hear her.

This makes me wonder whether Judge Kleinfeld ever studied in a yeshivah. The figure of someone "standing in court and shouting" (עומד וצווח) something contrary to what the law tells us to presume is a common one in Jewish legal jargon.
5.2.2007 4:55pm
Waldensian (mail):

escheaters never win.

Awesome.
5.2.2007 5:12pm
Al Maviva (mail) (www):
And winners never escheat.
5.2.2007 5:17pm
Ben Barros (mail):
Pardon me, but "not terribly exciting legally"? Maybe not to people used to sexy first and second amendment cases, but this seems like a very cool case to me. Then again, I'm a property professor, so that might say more about me than the case.
5.2.2007 5:54pm
scote (mail):
This case really deserves more response. It involves the state conspiring to actively steal people's money and property in plain violation of statute--and doing it in a way that is so pernicious that it has the ability to affect just about anyone, especially anyone who buys and holds stock. The abuse of trust and the violation of clear law is staggering to me.

I'm wondering if the case needs a sexier headline. Escheatment is so esoteric and benign sounding. Perhaps "California caught stealing your parents retirement stock portfolio!" Or, "State guilty of massive stock thefts!" Or some such thing.

Apparently, illegal escheatment is even too obscure to gain the ire of the Libertairian leaning, legally minded here at Volokh Conspiracy! How is that possible???
5.2.2007 6:11pm
Arthur D. Hellman (mail):
Note that all this attention is focused on an opinion that the court designated as "not for publication." If the Ninth Circuit judges had had their way, such opinions could not be cited in any court of the Ninth Circuit. But the Judicial Conference and the Supreme Court rejected the Ninth Circuit's position on non-citation rules.
5.2.2007 7:54pm
David M. Nieporent (www):
I just wanted to clarify something for those people who didn't read the opinion. Some people might think, "Well, they didn't cash dividend checks for three years, so maybe the state was justified in assuming they were lost."

The reason they didn't cash dividend checks was because there were no dividend checks.


As detailed in the opinion, the State of California's rapaciousness led it to not only enact statutes of dubious constitutional standing, but to also disregard even its own meager statutory safeguards by essentially taking property willy-nilly.
Worse than that -- they acted in bad faith even in their inadequate illegal substitutions for those statutory safeguards.

The law required the state to identify the people whose property they were stealing. (Why call it "taking"?) Instead of obeying the law, the state controller published an ad in the paper which said that they were taking lots of people's money. But even that was too risky; she didn't want to take the chance that people would see the ad and try to track down their money. So she deliberately chose to publish the ad at times when nobody would see it, so that they wouldn't call.
5.2.2007 8:08pm
Mark H.:

The reason they didn't cash dividend checks was because there were no dividend checks.


Wow, David N., just wow!

"Is it true you didn't cash a dividend check?"

Yes, but...

"Just yes or no, thank you."
5.2.2007 8:14pm
neurodoc:
Out of semi-idle curiosity...does anyone know how much TWA stock was/is worth? How much in all have the "bounty hunters" collected in escheated property for the state of California?
5.2.2007 8:32pm
Sean M:
Unfortunately, escheaters do prosper.
5.2.2007 8:36pm
Bill Poser (mail) (www):
I'm surprised that the time for property to be considered abandoned is not linked to that for declaration of death of missing persons, traditionally seven years.
5.2.2007 9:51pm
Bill Poser (mail) (www):
California really tries to rip people off. You'd think that if you don't want to register a vehicle you could just not do so. It isn't legal to drive it on public property unregistered, so you have to pay up if you want to use it. Not in California. If you do not notify them in writing that you do not intend to
register for the coming year, they assume that you want to renew and bill you for it. This is not a convenience for you. Once they've billed you, you are (or so they claim - I don't know if people have contested this) liable for the fee (hundreds of dollars) even if you then notify them that you are not registering it. Its a real scam.
5.2.2007 9:56pm
David in NY (mail):
In New York, the state takes unclaimed funds by escheat in five, but you can always get it back by claiming it.

I'm not a big fan of absolute property rights (Ben Franklin had it right), but I'd say that there's a lack of due process here.
5.2.2007 10:32pm
NickM (mail) (www):
My favorite touch is how the state somehow managed to "lose" the proceeds of 7000 shares of TWA stock, leading the state to claim that the owner was not entitled to any funds.

Criminal prosecution for violation of constitutional rights under color of state law, anyone?

Nick
5.3.2007 1:10am
Kevin P. (mail):
Should RICO apply to the State of California?
5.3.2007 9:24am
Larry2:
Kevin's question might have been tongue in cheek, but does anyone know whether RICO has been applied to state employees acting in their official capacity? I've been looking for cases, and I thought some of you here might be able to point me in the right direction.
5.3.2007 2:16pm
Rich Rostrom (mail):
What on earth was California's claim to Taylor's Intel stock, since neither he nor Intel is resident in California? If it was colorably legal for California to escheat Taylor's stock, can California escheat any securities held by anyone anywhere?

ISTM that Taylor has a cause of action against Intel, and Pepple-Gonsalves against TWA, for issuing new certificates for their stock, thus participating in a fraudulent conveyance.

BTW, this suit was argued in 2003, a month before Schwarzenegger became Governor. Unless the abuse continued, he has nothing to do with it. Though if the state opposed the appeal after 2003, that's on his watch.
5.4.2007 4:43am