OCTOBER TERM, 1992
Syllabus
DELAWARE
v. NEW YORK
ON EXCEPTIONS TO REPORT OF SPECIAL MASTER
No. 111, Orig. Argued December 9, 1992-Decided March 30,1993
Most of the funds at issue are unclaimed dividends, interest,
and other securities distributions held by intermediary banks,
brokers, and depositories in their own names for beneficial owners
who cannot be identified or located. New York escheated $360
million in such funds held by intermediaries doing business in that
State, without regard to the beneficial owner's last known address
or the intermediary's State of incorporation. After Delaware
initiated this original action against New York, alleging that
certain of the securities were wrongfully escheated, the Special
Master filed a report recommending that this Court award the right
to escheat to the State in which the principal executive offices of
the securities issuer are located. Both Delaware and New York
lodged exceptions to the report.
Held: The State in which the intermediary is incorporated
has the right to escheat funds belonging to beneficial owners who
cannot be identified or located. Pp. 497-510.
(a) Under the primary and secondary rules adopted in
Texas v.
New Jersey, 379 U. S. 674, 680-682,
reaffirmed in
Pennsylvania v.
New York, 407 U. S. 206, and
reaffirmed in this case, the Court resolves disputes among States
over the right to escheat abandoned intangible personal property in
three steps. First, the Court must determine the precise
debtor-creditor relationship, as defined by the law that created
the property at issue. Second, because the property interest in any
debt belongs to the creditor rather than the debtor, the primary
rule gives the first opportunity to escheat to the State of the
creditor's last known address, as shown by the debtor's books and
records. Third, if the primary rule fails because the debtor's
records disclose no address or because the creditor's last known
address is in a State whose laws do not provide for escheat, the
secondary rule awards the right to escheat to the State in which
the debtor is incorporated. Pp. 497-500.
(b) Because the bulk of the abandoned distributions at issue
cannot be traced to any identifiable beneficial owner, much less
one with a last known address, these funds fall out of the primary
rule and into the secondary rule. P. 500.
(c) Intermediaries who hold unclaimed securities distributions
in their own names are the relevant "debtors." Issuers cannot be
considered "debtors" once they make distributions to intermediaries
that are record
491
owners, since payment to a record owner discharges all of an
issuer's obligations to the beneficial owner under the Uniform
Commercial Code, which is the law in all 50 States and the District
of Columbia. Instead, an intermediary serving as the record owner
is the "debtor" insofar as it has a contractual duty to transmit
distributions to the beneficial owner. Unlike an issuer, it remains
liable should a "lost" beneficial owner reappear to collect
distributions due under such a contract. The Master thus erred in
concluding that the issuer is the relevant "debtor," and Delaware's
and New York's exceptions in this regard are sustained. Pp.
500-505.
(d) Precedent, efficiency, and equity dictate rejection of the
second major premise underlying the Master's recommendation: his
proposal to locate a corporate debtor in the jurisdiction of its
principal domestic executive offices rather than in the State of
its incorporation. This
sua sponte proposal would change the
Court's longstanding practice under
Texas and
Pennsylvania. Moreover, as the Court recognized in
Texas,
supra, at 680, the proposal would leave too much for decision
on a caseby-case basis. The mere introduction of any factual
controversy over the location of a debtor's principal executive
offices needlessly complicates an inquiry made irreducibly simple
by
Texas' adoption of a test based on the State of
incorporation. Finally, the proposal cannot survive independent of
the Master's erroneous decision to treat the issuers as the
relevant "debtors." The arguably arbitrary decision to incorporate
in one jurisdiction bears no less on a company's business
activities than the equally arbitrary decision to locate its
principal offices in another jurisdiction, and there is no inequity
in rewarding a State whose laws prove more attractive to firms that
wish to incorporate. Thus, Delaware's exception to the Master's
proposal in this regard is sustained. pp. 505-507.
(e) New York's exception to the Master's application of the
primary rule is overruled. New York contends that many of the
disputed funds need not be escheated under the secondary rule
because a statistical analysis of the relevant transactions on the
books of the debtor
brokers reveals creditor brokers,
virtually all of whom have New York addresses. This proposal rests
on the dubious supposition that the relevant "creditors" under the
primary rule are other brokers, whereas this Court has already held
that "creditors" are the parties to whom the intermediaries are
contractually obligated to deliver unclaimed securities
distributions. Moreover, the exception must fail because the Court
rejected a practically identical proposal in
Pennsylvania,
supra, at 214215. On remand, however, if New York or one of the
other claimant States can prove on a transaction-by-transaction
basis that the creditors who were owed particular distributions had
last known addresses within
492
Syllabus
its borders or can provide some other proper mechanism for
ascertaining those addresses, that State will prevail under the
primary rule, and the secondary rule will not control. Pp.
507-509.
(f) To depart from the Court's interstate escheat precedent by
crafting different rules for the novel facts of each case would
generate much uncertainty and threaten much expensive litigation.
If the States are dissatisfied with the outcome of a particular
case, they may air their grievances before Congress, which may
reallocate abandoned property among them without regard to the
Court's rules. P. 510.
Exceptions sustained in part and overruled in part, and case
remanded.
THOMAS, J., delivered the opinion of the Court, in which
REHNQUIST, C. J., and O'CONNOR, SCALIA, KENNEDY, and SOUTER, JJ.,
joined. WHITE, J., filed a dissenting opinion, in which BLACKMUN
and STEVENS, JJ., joined,
post, p. 510.
Dennis G.
Lyons argued the cause for plaintiff.
With him on the briefs were
Charles M. Oberly III, Attorney
General of Delaware, J.
Patrick Hurley, Jr., Deputy Attorney
General, and
Kent A. Yalowitz.
Jerry Boone, Solicitor General of New York, argued the
cause for defendant. With him on the briefs were
Robert
Abrams, Attorney General, and
Robert A. Forte, Assistant
Attorney General.
Bernard Nash argued the cause for intervenors State of
Alabama et al. With him on the briefs were
Andrew P. Miller,
William Bradford Reynolds, Judith E. Schaeffer, Dan Schweitzer,
Daniel E. Lungren, Attorney General of California,
Roderick
E. Walston, Chief Assistant Attorney General,
Thomas F.
Gede, Special Assistant Attorney General, and
Yeoryios
C.
Apallas, Deputy Attorney General, and by the Attorneys
General for their respective States as follows:
Jimmy Evans
of Alabama,
Charles Cole of Alaska,
Winston Bryant of
Arkansas,
Robert A. Butterworth of Florida,
Michael
J. Bowers of Georgia,
Warren Price III of Hawaii,
Roland
W Burris of Illinois,
Linley E. Pearson of Indiana,
Bonnie Campbell of Iowa,
Robert T. Stephan of Kansas,
Chris Gorman of Kentucky,
Richard Ieyoub of Loui-
493
siana, Michael E. Carpenter of Maine, Mike Moore of Mississippi,
William L. Webster of Missouri, Marc Racicot of Montana, Frankie
Sue Del Papa of Nevada, John P. Arnold of New Hampshire, Robert J.
Del Tufo of New Jersey, Nicholas J. Spaeth of North Dakota, Lee
Fisher of Ohio, Susan B. Loving of Oklahoma, Ernest D. Preate, Jr.,
of Pennsylvania, James E. O'Neil of Rhode Island, Mark Barnett of
South Dakota, R. Paul Van Dam of Utah, Jeffrey L. Amestoy of
Vermont, Kenneth 0. Eikenberry of Washington, Mario J. Palumbo of
West Virginia, and Joseph B. Meyer of Wyoming.
James F. Flug, Martin Lobel, Frank J.
Kelley,
Attorney General of Michigan,
J. Joseph Curran, Jr.,
Attorney General of Maryland,
John Payton, Corporation
Counsel of District of Columbia,
Charles L. Reischel, Deputy
Corporation Counsel, and
Lutz Alexander Prager, Assistant
Deputy Corporation Counsel,
Don Stenberg, Attorney General
of Nebraska, and
Dale A. Comer, Assistant Attorney General,
filed briefs for intervenors State of Michigan et al.
A brief for intervenors State of Texas et al. was filed by
Dan Morales, Attorney General of Texas,
Will Pryor,
First Assistant Attorney General,
Mary R. Keller, Deputy
Attorney General, and
James A. Thomassen and
Jeffrey A.
Coryell, Assistant Attorneys General,
Grant Woods,
Attorney General of Arizona, and
Gail H. Boyd, Assistant
Attorney General,
Gale A. Norton, Attorney General of
Colorado,
Raymond T. Slaughter, Chief Deputy Attorney
General,
Timothy M. Tymkovich, Solicitor General, and
Maurice Knaizer, Assistant Attorney General,
Richard
Blumenthal, Attorney General of Connecticut, and
William
J.
Prensky, Assistant Attorney General,
Larry
EchoHawk, Attorney General of Idaho, and
Theodore v:
Spangler, Jr., and
Lawrence G.
Sirhall, Jr.,
Deputy Attorneys General,
Hubert H. Humphrey III,
Attorney General of Minnesota, and
Alan Gilbert, Assistant
Attorney General,
Tom Udall, Attorney General of New Mexico,
and
Guru Terath Singh Khalsa,
494
Assistant Attorney General,
Lacy H. Thornburg, Attorney
General of North Carolina,
Andrew A. Vanore, Jr., Chief
Deputy Attorney General,
M. Ann Reed, Senior Deputy Attorney
General, and
Douglas A. Johnston, Assistant Attorney
General,
Charles S.
Crookham, Attorney General of
Oregon,
Jack L. Landau, Deputy Attorney General,
Virginia
L. Linder, Solicitor General, and
William R. Cook,
Assistant Attorney General,
T. Travis Medlock, Attorney
General of South Carolina,
Ray N.
Stevens, Chief
Deputy Attorney General, and
Ronald W Urban, Deputy Attorney
General,
Charles W Burson, Attorney General of Tennessee,
and
Michael W Catalano, Deputy Attorney General,
James E.
Doyle, Attorney General of Wisconsin, and
Burneatta
Bridge, Assistant Attorney General,
Mary Sue Terry,
Attorney General of Virginia,
Stephen D. Rosenthal, Chief
Deputy Attorney General,
Gail Starling Marshall and
Mary
Yancey Spencer, Deputy Attorneys General, and
E. Suzanne
Darl ing, Assistant Attorney General. *
JUSTICE THOMAS delivered the opinion of the Court.
In this original action, we resolve another dispute among States
that assert competing claims to abandoned intangible personal
property. Most of the funds at issue are unclaimed securities
distributions held by intermediary banks, brokers, and depositories
for beneficial owners who cannot be identified or located. The
Special Master proposed awarding the right to escheat such funds to
the State in which the principal executive offices of the
securities issuer are located. Adhering to the rules announced in
Texas v.
New Jersey, 379 U. S. 674 (1965), and
Pennsylvania v.
New York, 407 U. S. 206 (1972), we
hold that the State in which the intermediary is incorporated has
the right to escheat funds belonging to beneficial owners who
cannot be identified or located.
*Briefs of
amici curiae were filed for Midwest Securities
Trust Co. et al. by
Michael Fischer and
Ilene Knable
Gotts; and for the Securities Industry Association et al. by
Judith Welcom.
495
I
This case involves unclaimed dividends, interest, and other
distributions made by issuers of securities. Such payments are
often channeled through financial intermediaries such as banks,
brokers, and depositories before they reach their beneficial
owners. By arrangement with the beneficial owners, these
intermediaries frequently hold securities in their own names rather
than in the names of the beneficial owners; as "record owners," the
intermediaries are fully entitled to receive distributions based on
those securities.1 This practice of holding securities in "nominee
name" or "street name" facilitates the offering of customized
financial services such as cash management accounts,2 brokerage
margin accounts,3 discretionary trusts,4 and dividend reinvestment
programs.5 Street name accounts also permit changes in beneficial
ownership to be effected through book entries rather than the
unwieldy physical transfer of securities certificates. See Brown,
The Shareholder Communication Rules and the Securities and Exchange
Commission: An Exercise in Regulatory
1 An individual investor who opts to retain record ownership of
a security will receive distributions directly from the issuer.
This case does not concern transactions of this sort.
2 In a cash management account, the broker holds, rather than
distributes, dividends and interest paid on a customer's
securities. The customer withdraws funds through a check-like
negotiable instrument and receives interest on held funds,
typically at a rate higher than that offered on passbook savings
accounts and negotiable-order-of-withdrawal accounts.
3 In a brokerage margin account, the broker holds the customer's
securities as collateral against any margin debt generated by the
customer's stock market transactions. Dividends and other
distributions may be credited against a customer's margin debt to
the broker.
4 In a discretionary trust, the financial institution as trustee
enjoys the discretion not to distribute current income but rather
to accumulate it for further investment.
5 In a dividend reinvestment program, the beneficial owner
authorizes the broker to use dividends to purchase additional
shares and fractional shares.
496
Utility or Futility?, 13 J. Corp. L. 683, 688-691 (1988). The
economies of scale attained in the modern financial services
industry are epitomized by the securities depository, a large
institution that holds only the accounts of "participant" brokers
and banks and serves as a clearinghouse for its participants'
securities transactions. Because a depository retains record
ownership of securities, it effectively "immobilizes" the
certificates in its possession by allowing its participants to
trade securities without the physical transfer of certificates.
Most of the equity securities traded on the New York Stock Exchange
are immobilized in this fashion. See App. to Report of the Special
Master B-2. Cf. Securities and Exchange Commission, Division of
Market Regulation, Progress and Prospects: Depository
Immobilization of Securities and Use of Book-Entry Systems 4
(1985).
The intermediaries are unable to distribute a small portion of
the securities to their beneficial owners.6 When an intermediary
claims no property interest in funds so held, they become
escheatable.7 Between 1985 and 1989, New York escheated $360
million in funds of abandoned securities held for more than three
years by intermediaries doing business in New York, without regard
to the last known address of the beneficial owner or the
intermediary's State of incorporation. N. Y. Aband. Prop. Law § 511
(McKinney 1991). See Report of Special Master 10, n. 9. Alleging
that certain of these securities were wrongfully escheated,
Delaware sought leave in 1988 to initiate an original action in
this Court against
6 Approximately 0.02% of funds distributed through
intermediaries cannot be traced to their beneficial owners. This
low percentage nevertheless accounts for a very substantial amount
of escheatable property. See Report of Special Master 10, n. 9.
7Unlike Depository Trust Company, the two other securities
depositories in the United States "do claim entitlement to certain
securities, interest payments, dividends and distributions that
cannot be accounted for." Brief for Midwest Securities Trust Co. et
al. as
Amici Curiae 2. The issue of these depositories'
"entitlement to the excess funds under their rules" is not before
us.
Id., at 3.
497
New York. We granted leave to file the complaint, 486 U. S. 1030
(1988), and appointed a Special Master, 488 U. S. 990 (1988). We
granted Texas' motion to file a complaint as an intervening
plaintiff, 489 U. S. 1005 (1989), and every State not already a
party to this proceeding and the District of Columbia sought leave
to intervene.
On January 28, 1992, the Master filed his report and
recommendation. Both Delaware and New York have lodged exceptions
to the report, as have four other parties whose motions for leave
to intervene have not been granted by this Court.8 We now sustain
two of Delaware's exceptions in their entirety, one of Delaware's
exceptions in part, and one of New York's exceptions. We also grant
all pending motions to intervene and to file briefs as
amici
curiae, overrule all exceptions not sustained in this opinion,
and remand for further proceedings before the Master.
II
States as sovereigns may take custody of or assume title to
abandoned personal property as
bona vacantia, a process
commonly (though somewhat erroneously) called escheat.9 See,
e.
g., Christianson v.
King County, 239 U. S. 356, 365366
(1915);
Cunnius v.
Reading School Dist., 198 U. S. 458, 469-476
(1905);
Hamilton v.
Brown, 161 U. S. 256, 263-264
(1896). No serious controversy can arise between States seeking to
escheat "tangible property, real or personal," for "it has always
been the unquestioned rule in all jurisdictions that only the State
in which the property is located may es-
8 In a joint brief, Michigan, Maryland, Nebraska, and the
District of Columbia filed two exceptions to the Master's
report.
9 "At common law, abandoned personal property was not the
subject of escheat, but was subject only to the right of
appropriation by the sovereign as
bona vacantia." Anderson Nat.
Bank v.
Luckett, 321 U. S. 233, 240
(1944). See generally 7 W. Holdsworth, A History of English Law
495-496 (2d ed. 1937). Our opinions, however, have understood
"escheat" as encompassing the appropriation of both real and
personal property, and we use the term in that broad sense.
498
cheat."
Texas v.
New Jersey, 379 U. S., at 677. On
the other hand, intangible property "is not physical matter which
can be located on a map,"
ibid., and frequently no single
State can claim an uncontested right to escheat such property.
In
Texas v.
New Jersey, we discharged "our
responsibility in the exercise of our original jurisdiction" to
resolve escheat disputes that "the States separately are without
constitutional power ... to settle."
Ibid.lO We adopted two
rules intended to "settle the question of which State will be
allowed to escheat [abandoned] intangible property."
Ibid.
"[S]ince a debt is property of the creditor, not of the debtor," we
reasoned, "fairness among the States requires that the right and
power to escheat the debt should be accorded to the State of the
creditor's last known address as shown by the debtor's books and
records."
Id., at 680-681 (footnote omitted). This primary
rule had the virtue of "involv[ing] a factual issue simple and easy
to resolve," made even simpler by the Court's resort to "last known
address, rather than technical legal concepts of residence and
domicile."
Id., at 681. It also achieved rough equity in
that it "tend[ed] to distribute escheats among the States in the
proportion of the commercial activities of their residents."
Ibid. We recognized, however, that the primary rule could
not resolve escheat claims over "property owed persons (1) as to
whom there is no record of any address at all, or (2) whose last
known address is in a State which does not provide for escheat of
the property owed them."
Id., at 682. For these situations,
we adopted a secondary rule awarding the right to escheat to the
debtor's "State of corporate domicile," subject to the claims of
the State with "a superior right to escheat" under the primary
rule.
Ibid. We characterized the
Texas scheme as "the
fairest, ... easy to apply, and in the
10 See also Western Union Telegraph Co. v. Pennsylvania,
368 U. S. 71, 75
(1961); Standard Oil Co. v. New Jersey,
341 U. S. 428, 443
(1951).
499
long run ... the most generally acceptable to all the States."
Id., at 683.
We reaffirmed
Texas in
Pennsylvania v.
New
York, 407 U. S. 206 (1972).
Texas had involved the
relatively simple case of a debtor that "disclaimed any interest"
in "various small debts ... owed to ... small creditors who ha[d]
never appeared to collect them."
Texas, supra, at 676, 675.
In
Pennsylvania, by contrast, the Western Union Company held
proceeds left unclaimed because Western Union was unable to locate
the payee of a money order or to make a refund to the sender or
because drafts issued by Western Union were not negotiated. See 407
U. S., at 208-209;
Western Union Telegraph Co. v.
Pennsylvania, 368 U. S. 71, 72-73
(1961). Because Western Union did not "regularly record the
addresses of its money order creditors," the primary rule would
rarely apply, and the debtor's State of incorporationWestern
Union's "corporate domicile"-would "receive a much larger share of
the unclaimed funds" under the secondary rule.
Pennsylvania,
407 U. S., at 214. In response to this perceived injustice, other
States advocated a rule allowing the State of "the place of
purchase" to escheat under the primary rule. We nevertheless
adhered to our decision in
Texas. The "only arguable"
difference between money orders and the obligations at issue in
Texas lay in the fact that money orders "involve a higher
percentage of unknown addresses." 407 U. S., at 214. We reasoned
that neither this distinction nor the resulting "likelihood of a
'windfall'" for the debtor's State of incorporation would justify
the "carving out [of an] exception to the
Texas rule."
Ibid.
We therefore resolve disputes among States over the right to
escheat intangible personal property in the following three steps.
First, we must determine the precise debtorcreditor relationship as
defined by the law that creates the property at issue. Second,
because the property interest in any debt belongs to the creditor
rather than the debtor, the primary rule gives the first
opportunity to escheat to the
500
State of "the creditor's last known address as shown by the
debtor's books and records."
Texas, supra, at 680-681.
Finally, if the primary rule fails because the debtor's records
disclose no address for a creditor or because the creditor's last
known address is in a State whose laws do not provide for escheat,
the secondary rule awards the right to escheat to the State in
which the debtor is incorporated. These rules arise from our
"authority and duty to determine for [ourselves] all questions that
pertain" to a controversy between States,
Kentucky v.
Indiana, 281
U. S. 163, 176 (1930), and no State may supersede them by
purporting to prescribe a different priority under state law.
III
None of the parties contests the primary rule or the Master's
recommendation that "where the state of domicile of an unlocatable
entitled recipient is known, through finding a last known address,
that state may take custody of the unclaimed distributions." Report
of Special Master 56-57 (footnote omitted)Y The bulk of the
abandoned distributions at issue, however, cannot be traced to any
identifiable beneficial owner, much less one with a last known
address. These funds thus fall out of the primary rule and into the
secondary rule. Consequently, under
Texas and
Pennsylvania, the debtor's State of incorporation should be
entitled to escheat this unclaimed property. The Master's report
concludes, first, that the issuer of securities is the relevant
"debtor" and, second, that the State in which the debtor's
"principal executive offices" are located should be considered the
debtor's State. We reject both of these recommendations.
A
"[W]here the entitled recipient's domicile is undeterminable (no
last known address), but the state of domicile of the
11 New York has filed an exception to the Master's application
of the primary rule. We address this argument in Part IV below.
501
originator of the distribution is known," the Master recommended
that the originator's State be awarded the right to escheat,
"whether or not the originator would have been entitled to receive
the funds back in its own right." Report of Special Master 57.
Because he construed the use of the terms "debtor" and "creditor"
in
Texas and
Pennsylvania as a merely "descriptive
... attempt to identify the relevant parties" rather than
"prescriptive legal commands," Report of Special Master 29, the
Master defined "debtor" as "the last owner of the funds, in the
sense of the last person who had a claim to the funds as an asset
that would appropriately be reflected in the net worth of the
entity in question," id., at 32. In its first exception, Delaware
argues that "the Report's recommendation in this regard does not
comport with the ordinary meaning of the words 'debtor' and
'creditor,' is inconsistent with universally-accepted state and
common law and with the principles underlying the
Texas
rule, and changes the law in an area where the law should be
settled." Exceptions and Brief for Plaintiff Delaware E-4. Delaware
also objects to the Master's failure to "ascrib[e] ... legal
relevance to [intermediaries'] status as record security holders,"
a "fundamental factual error" that effectively treats record owners
"as if they were paying agents."
Id., at E-5. New York's
first exception likewise objects to the Master's use of "the term
'debtor' as 'shorthand' to identify parties with 'debtor
attributes' rather than the obligor of the debt." Exceptions of
Defendant New York 52. We agree with both States and sustain their
exceptions.
We have not relied on legal definitions of "creditor" and
"debtor" merely for descriptive convenience. Rather, we have
grounded the concepts of "creditor" and "debtor" in the positive
law that gives rise to the property at issue. In framing a State's
power of escheat, we must first look to the law that creates
property and binds persons to honor property rights. "Property
interests, of course, are not created by the Constitution," but
rather "by existing rules or under-
502
standings that stem from an independent source such as state
law."
Board of Regents of State Colleges v.
Roth, 408
U. S. 564, 577 (1972). Accord,
e. g., Bishop v.
Wood,
426 U. S. 341,
344-347 (1976);
Paul v.
Davis, 424 U. S. 693, 710-712
(1976). See also
Barnhill v.
Johnson, 503 U. S. 393, 398 (1992)
("In the absence of any controlling federal law, 'property' and
'interests in property' are creatures of state law"). Furthermore,
law that creates property necessarily defines the legal
relationships under which certain parties ("debtors") must
discharge obligations to others ("creditors").
To define "debtor" as "the last person who ha[s] a claim to the
funds as an asset that would appropriately be reflected in [his]
net worth," Report of Special Master 32, would convert a term rich
with prescriptive legal content into little more than a description
of bookkeeping phenomena. Funds held by a debtor become subject to
escheat because the debtor has no interest in the funds-precisely
the opposite of having "a claim to the funds as an asset." We have
recognized as much in cases upholding a State's power to escheat
neglected bank deposits. Charters, bylaws, and contracts of deposit
do not give a bank the right to retain abandoned deposits, and a
law requiring the delivery of such deposits to the State affects no
property interest belonging to the bank.
Security Savings
Bank v.
California, 263 U. S. 282, 285-286
(1923); Provident Institution for Savings v.
Malone,
221 U. S. 660,
665-666 (1911). Thus, "deposits are
debtor obligations of
the bank," and a State may "protect the interests of depositors" as
creditors by assuming custody over accounts "inactive so long as to
be presumptively abandoned."
Anderson Nat. Bank v.
Luckett, 321
U. S. 233, 241 (1944) (emphasis added). Such "disposition of
abandoned property is a function of the state," a sovereign
"exercise of a regulatory power" over property and the private
legal obligations inherent in property.
Standard Oil Co. v.
New Jersey, 341 U. S. 428, 436 (1951).
503
Our rules regarding interstate disputes over competing escheat
claims cannot be severed from the law that creates the underlying
creditor-debtor relationships. In
Texas and
Pennsylvania, our examination of the holder's legal
obligations not only defined the escheatable property at issue but
also carefully identified the relevant "debtors" and "creditors."
See
Texas, 379 U. S., at 675-676, n. 4;
Pennsylvania,
407 U. S., at 208-209, 213. In
Pennsylvania, we noted that
Western Union was a "debtor" insofar as it owed contractual duties
to two separate creditors. Western Union was obligated not merely
to deliver a negotiable draft to the sender's payee; if Western
Union could not locate the payee or if the payee failed to claim
his money order, the company was bound to make a refund to the
sender.
Id., at 208-209. Correspondingly, we recognized that
the relevant "creditor" might be either a payee or a sender: "the
payee of an unpaid draft, the sender of a money order entitled to a
refund," or a payee or sender "whose claim has been underpaid
through error."
Id., at 213 (internal quotation marks
omitted).
Moreover, the rules developed in
Texas and
Pennsylvania reflect the traditional view of escheat as an
exercise of sovereignty over persons and property owned by persons.
The primary rule flowed from the common-law "concept of
'mobilia
sequuntur personam,' according to which intangible personal
property is found at the domicile of its owner."
Texas,
supra, at 680, n. 10. Accord,
Pennsylvania, supra, at
217218 (Powell, J., dissenting). See also
Blodgett v.
Silberman, 277
U. S. 1, 10 (1928) ("[I]ntangible personalty has ... a
situs at the domicil of the owner"). In recognizing that "a
debt is property of the creditor,"
Texas, supra, at 680, the
primary rule permits the escheating State to protect the interest
of a creditor last known to have resided there. Reasoning that
"debts owed by" a holder of unclaimed funds "are not property to
it, but rather a liability," we concluded that "it would be strange
to convert a liability into an asset when the State decides to
escheat." 379 U. S., at 680. Cognizant of the
504
creditor's status as owner of intangible personal property, we
awarded the primary right to escheat to the creditor's State.
Conversely, when a creditor's last known address cannot be
determined or the laws of the creditor's State do not provide for
escheat, the secondary rule protects the interests of the debtor's
State as sovereign over the remaining party to the underlying
transaction. Unless we define the terms "creditor" and "debtor"
according to positive law, we might "permit intangible property
rights to be cut off or adversely affected by state action ... in a
forum having no continuing relationship to any of the parties to
the proceedings."
Pennsylvania, supra, at 213 (internal
quotation marks omitted). Cf.
Connecticut Mut. Life Ins. Co.
v.
Moore, 333
U. S. 541, 549-550 (1948) (upholding New York's escheat of
unclaimed insurance benefits only "as to policies issued for
delivery in New York upon the lives of persons then resident
therein where the insured continues to be a resident and the
beneficiary is a resident at ... maturity").
Texas and
Pennsylvania avoided this conundrum by resolving escheat
disputes according to the law that creates debtorcreditor
relationships; only a State with a clear connection to the creditor
or the debtor may escheat. Because the Master failed to identify
the relevant "creditors" and "debtors" by reference to that law, we
now perform this task.
We hold that intermediaries who hold unclaimed securities
distributions in their own name are the relevant "debtors" under
the secondary rule of
Texas and
Pennsylvania. From an
issuer's perspective, the only creditors are registered
shareholders, those whose names appear on the issuer's records.
Issuers cannot be considered debtors once they pay dividends,
interest, or other distributions to record owners; payment to a
record owner discharges all of an issuer's obligations. Under
§8-207(1) of the Uniform Commercial Code, which is the law of all
50 States and the District of Columbia, "the issuer ... may treat
the registered owner as the person exclusively ... to exercise all
the rights and
505
powers of an owner." Payment to an intermediary that is the
record owner of securities extinguishes any liability the issuer
might have to the beneficial owner. U. C. C. § 8-207, comment 1, 2C
U. L. A. 341 (1991). The Master acknowledged as much, see Report of
Special Master 25, and none of the parties contends otherwise.
Instead, an intermediary serving as the record owner of securities
is the "debtor" insofar as the intermediary has a contractual duty
to transmit distributions to the beneficial owner. Unlike an
issuer, which discharges all liabilities upon payment to a record
owner, an intermediary remains liable should a "lost" beneficial
owner reappear to collect distributions due under a contract with
the intermediary. The Master thus erred in equating intermediary
banks, brokers, and depositories with the issuers' paying agents,
who owe no duty to beneficial owners but rather bear the
contractual obligation to "return ... unclaimed distributions to
the issuer after a certain period of time." App. to Report of
Special Master B-6. Intermediaries who hold securities in street
name or nominee name are the relevant "debtors" because they alone,
and not the issuers, are legally obligated to deliver unclaimed
securities distributions to the beneficial owners.
B
The Master's recommended disposition of this case rested on a
second major premise: his proposal to locate a corporate debtor in
"the jurisdiction of the entity's principal domestic executive
offices rather than the state of incorporation." Report of Special
Master 49 (footnote omitted). In
Texas and
Pennsylvania, however, we explicitly granted the right to
escheat under the secondary rule to the State in which the debtor
was incorporated.
Texas, supra, at 682;
Pennsylvania,
supra, at 210-211, 212, 223-224. By the Master's own admission,
relying on the location of a debtor's principal executive offices
"change[s] [this Court's] longstanding practice." Report of Special
Master 50. The Master proposed
506
this innovation
sua sponte; no party sought this
alteration of our settled law. Delaware excepts to this
"[d]epart[ure] from the rule of corporate domicile" as
"inconsistent not only with this Court's precedents, but with
fundamental principles of jurisprudence defining the relationship
between the sovereign and its corporate citizens." Exceptions and
Brief for Plaintiff Delaware E-4 to E-5. Finding that the "heavy
burden" that attends a request "to reconsider not one but two prior
decisions" has not been borne,
Walker v.
Armco Steel
Corp., 446 U. S.
740, 749 (1980), we sustain Delaware's exception.
In
Texas, we considered and rejected a proposal to award
the
primary right to escheat to the State "where [the
debtor's] principal offices are located." 379 U. S., at 680.
Although we recognized that "this State is probably foremost in
giving the benefits of its economy and laws to the company whose
business activities made the intangible property come into
existence," we rejected the rule because its application "would
raise in every case the sometimes difficult question of where a
company's 'main office' or 'principal place of business' or
whatever it might be designated is located."
Ibid. Even when
we formulated the
secondary rule, we looked instead to the
debtor's State of incorporation.
Id., at 682. As in
Texas, we find that determining the State of incorporation
is the most efficient way to locate a corporate debtor. Exclusive
reliance on incorporation permits the disposition of claims under
the secondary rule upon the taking of judicial notice. Although "a
general inquiry into where the principal executive office is
located [may] see[m] neither burdensome [n]or complex," Report of
Special Master 49, we cannot embrace a "rule leaving so much for
decision on a case-bycase basis,"
Texas, supra, at 680. The
mere introduction of any factual controversy over the location of a
debtor's principal executive offices needlessly complicates an
inquiry made irreducibly simple by
Texas' adoption of a test
based on the State of incorporation.
507
Even if we were to endorse the Master's redefinition of a
debtor's location, we doubt that his proposal could fulfill its
promise "to distribute the funds [more] fairly among the various
jurisdictions." Report of Special Master 50. The Master sought to
counteract the inequity he perceived in the happenstance that "the
larger, publicly-traded, enterprises that generate the lion's share
of the securities distributions ... are by any standard
disproportionately incorporated in one state."
Id., at 47.
His "principal executive offices" initiative, however, cannot
survive independent of his erroneous decision to treat the issuers
as the relevant "debtors." Because we have already decided that the
intermediaries are the proper debtors under the secondary rule,
this change would simply transfer the bulk of the disputed funds
from Delaware, where many intermediaries are incorporated, to New
York, where many intermediaries have located their principal
executive offices. A company's arguably arbitrary decision to
incorporate in one State bears no less on its business activities
than its officers' equally arbitrary decision to locate their
principal executive offices in another State. It must be remembered
that we refer to a debtor's State of incorporation only when the
creditor's last address is unknown or when the creditor's State
does not provide for escheat. When the creditor's State cannot
assert its predominant interest, we detect no inequity in rewarding
a State whose laws prove more attractive to firms that wish to
incorporate.
Precedent, efficiency, and equity all dictate the rejection of
the Master's "principal executive offices" proposal. We accordingly
adhere to
Texas and
Pennsylvania and award the right
to escheat under the secondary rule to the State in which the
debtor is incorporated.
IV
We turn, finally, to New York's contention that many of the
disputed funds need not be escheated under the second-
508
ary rule at all. New York concedes that "the creditors of
unclaimed distributions" held by depositories and custodian banks
"are always unknown." Exceptions of Defendant New York 81. It
argues, however, that "reconstruct[ion]" of "the debtor
brokers' transactions" will lead to "creditor brokers that
purchased the underlying securities and were underpaid the
distributions."
Id., at 80 (emphasis added). Because "the
amount of time and resources that would be required to reconstruct
the overpayment transactions would be very considerable," however,
New York "has suggested the use of statistical sampling to prove
that virtually all of the creditor brokers and banks recorded on
the books of debtor brokers in New York have New York addresses."
Ibid.
We overrule New York's exception. As an initial matter, New
York's proposal rests on the dubious supposition that the relevant
"creditors" under the primary rule are other brokers. We have
already held that "creditors" are the parties to whom the
intermediaries are contractually obligated to deliver unclaimed
securities distributions. Accordingly, to the extent that
beneficial owners are the relevant "creditors," New York's
exception is inapposite.
Even if we indulge New York's premise that most creditors of N
ew York brokers are in fact other N ew York brokers, the exception
must fail. As the Master correctly observed: "[N]othing in the
Court's jurisprudence ... suggest[s] that New York can prevail by
making a statistical showing that 'most' [creditor-brokers']
addresses are in New York." Report of Special Master 67. In
Pennsylvania, we rejected a proposal practically identical
to New York's. In that case, because Western Union's records
frequently did not disclose a creditor's identity or last known
address, the debtor's State of incorporation stood to "receive a
much larger share of the unclaimed funds" under the secondary rule.
407 U. S., at 214. The plaintiff States urged us to define the
creditor's residence according to a "presumption
509
based on the place of purchase."
Ibid. Like New York's
proposal, the rule advocated in
Pennsylvania would use a
statistical surrogate instead of the debtor's records to locate the
last known addresses of creditors. That much is clear from the
Pennsylvania dissent's description of the rejected rule as
"a reasonable approximation."
Id., at 221 (opinion of
Powell, J.). New York may object to the cost and difficulty of
culling creditors' last known addresses from brokers' records,12
but in
Pennsylvania, we expressly refused "to vary the
application of the [primary] rule according to the adequacy of the
debtor's records."
Id., at 215. And we decline to do so
here.
Despite our refusal to adopt New York's proposal for statistical
analysis of creditors' addresses under the primary rule, we decline
Delaware's invitation to enter judgment against New York on the
basis of the Master's findings. Exceptions and Brief for Plaintiff
Delaware 85. On remand, if New York can establish by reference to
debtors' records that the creditors who were owed particular
securities distributions had last known addresses in New York, New
York's right to escheat under the primary rule will supersede
Delaware's right under the secondary rule. As we noted in
Texas, "the State of corporate domicile should be allowed to
... retai[n] the property for itself only until some other State
comes forward with proof that it has a superior right to escheat."
379 U. S., at 682. Accord,
Pennsylvania, 407 U. S., at
210-211. If New York or any other claimant State fails to offer
such proof on a transaction-by-transaction basis or to provide some
other proper mechanism for ascertaining creditors' last known
addresses, the creditor's State will not prevail under the primary
rule, and the secondary rule will control.
Id., at 215.
12 New York and other States could have anticipated and
prevented some of the difficulties stemming from incomplete debtor
records, for nothing in our decisions "prohibits the States from
requiring [debtors] to keep adequate address records."
Pennsylvania, 407 U. S., at 215.
510
V
Only by adhering to our precedent can we resolve escheat
disputes between States in a fair and efficient manner. We have
repeatedly declared our unwillingness "either to decide each
escheat case on the basis of its particular facts or to devise new
rules of law to apply to ever-developing new categories of facts."
Texas, supra, at 679. Accord,
Pennsylvania, supra, at
215. To craft different rules for the novel facts of each case
would generate "so much uncertainty and threaten so much expensive
litigation that the States might find that they would lose more in
litigation expenses than they might gain in escheats."
Texas,
supra, at 679. If the States are dissatisfied with the outcome
of a particular 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.
Congress overrode
Pennsylvania by passing a specific statute
concerning abandoned money orders and traveler's checks, §§
601-603, 88 Stat. 1525, 12 U. S. C. §§ 2501-2503, and it may
ultimately settle this dispute through similar legislation.
We remand this case to the Master for further proceedings
consistent with this opinion and for the preparation of an
appropriate decree.
So ordered.
JUSTICE WHITE, with whom JUSTICE BLACKMUN and JUSTICE STEVENS
join, dissenting.
In my view, the Special Master did no violence to our precedents
and has a much superior approach and more equitable result than
does the Court. I would overrule all of the exceptions to the
Special Master's Report, adopt his recommended findings and
conclusions, and issue a decree in accordance therewith.
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