Delaware may be required to return $250 million in escheated property

Escheatment is the process by which a state can take custody of abandoned assets or accounts. [1] If the asset or account lacks a physical body (meaning, it is not located in an identifiable place), multiple states may have an arguable claim to the assets. [2] In these instances, numerous legal questions arise. One question is, what types of assets or accounts should be treated like a standard money order under the Disposition of Abandoned Money Orders and Traveler’s Checks Act of 1974 (Federal Disposition Act or FDA)? Another question (which relies on the first) is, in the case of abandoned money orders, to which State should the property be escheated? The Supreme Court case Delaware v. Pennsylvania, 589 U.S. __ (2023) (in the first majority opinion authored by Justice Ketanji Brown Jackson) resolves these questions.

MoneyGram, a money-transferring business, is one of the biggest transferring companies in the world, and it is incorporated in the State of Delaware. MoneyGram sells four similar payment instruments: Retail Money Orders, Agent Check Money Orders, Agent Checks, and Teller’s Checks. [3] Like money orders, these instruments are prepaid products purchased in cash by a person and payable to a specific payee. If the check or money order is not cashed by the recipient and not refunded to the purchaser, the funds might eventually become subject to escheatment. In the opinion, Agent Checks and Teller’s Checks are referred to as “Disputed Instruments .”In Delaware v. Pennsylvania, the Supreme Court analyzed the Disputed Instruments and reviewed its decisions in prior similar cases.

Prior to the passage of the FDA, common law rules determined escheatment. The common law rules were established in several Supreme Court cases. In Texas v. New Jersey, 379 U.S. 674 (1965), Western Union Telegraph Co. v. Pennsylvania, 368 U.S. 71 (1961), and Pennsylvania v. New York, 407 U.S. 206 (1972), the Supreme Court established default and secondary rules for determining the appropriate State for escheatment. The default rule was that assets should be escheated to the State of the payee’s (creditor’s) last known address, with the secondary rule that the assets should be escheated to the payor’s (debtor’s) State of incorporation. With these rules, the Court attempted to distribute funds more evenly and not permit some states to have an unfair windfall of abandoned assets. The FDA was passed two years after the Pennsylvania v. New York decision and attempted to codify the escheatment rules established by the Supreme Court in its earlier decisions.

The FDA established escheatment rules that superseded the prior Supreme Court rulings in applicable situations. The FDA provides that “[w]here any sum is payable on a money order, traveler’s check, or other similar written instrument (other than a third party bank check) on which a banking or financial organization or a business association is directly liable,” the primary escheatment rule is the place-of-purchase rule that Pennsylvania had proposed” [2]. The FDA’s legislative history explains the reasons for resolving the escheatment debates. Congress found that the cost of maintaining and retrieving addresses of the purchaser of money orders and traveler checks caused an “additional burden” to commerce that was deemed unnecessary since it was determined that most of the purchasers reside within the State of purchase of such instruments [2]. For this reason, the FDA changes the default and secondary principles established by the prior cases and implements the new rule that escheatment would be to the State where the instrument was purchased. [2]

MoneyGram’s position in Delaware v. Pennsylvania is that the escheatment of Retail Money Orders and Agent Check Money Orders should differ from the escheatment of Agent Checks and Teller’s Checks. Though there is little information on why MoneyGram treats these instruments differently, MoneyGram argues that Retail Money Orders and Agent Check Money Orders should be escheated as money orders under the FDA. Still, Agent Checks and Teller’s Checks should be treated as third-party bank checks and therefore be exempt from the FDA. The Court explains that “MoneyGram considers two of the four products Retail Money Orders and Agent Check Money Orders—as falling within the scope of the FDA, so it gives the abandoned proceeds of those particular instruments to the States of purchase in accordance with §2503. But MoneyGram treats Agent Checks and Teller’s Checks (collectively, the Disputed Instruments) as governed by the common law instead of the FDA” [2].

The Supreme Court held that all four MoneyGram instruments are money orders covered by the FDA, and escheatment should be to the State of the purchaser in all cases. In making this determination, the Supreme Court found, “First, the Disputed Instruments are similar to money orders in function and operation. The FDA does not define a “money order,” so the core features of that instrument are gleaned from a consideration of the “‘ordinary, contemporary, common meaning’” of the term.”[2]. Additionally, the Supreme Court found that “the Disputed Instruments are similar to the ‘money orders’ that the FDA targets because they inequitably escheat in the manner that the text of the FDA specifically identifies as warranting statutory intervention.”[2].

Finally, the Supreme Court found that “the FDA regulates “money orders” (however that term is ordinarily defined) not just for the sake of regulating those particular financial instruments, but because inequitable escheatment occurs under our common-law rules if financial instruments do not have address information that can facilitate distribution to the State of entitlement when they are abandoned, and the entities issuing and selling money orders often do not keep adequate records.” The Supreme Court concluded that “in short, the FDA’s text provides a solution for the problem of the inequitable distribution of escheats, and that solution expressly eschews requiring entities like Western Union to keep adequate records”[2].

This decision will have a material impact on the escheatment of abandoned funds for unclaimed money orders. Because of this decision, Delaware may now be required to return as much as $250 million in escheated property that it collected under the prior rules [4].