Supreme Court Clarifies Escheatment Authority of States Over Money-Order-Like Products
On February 28, 2023, the Supreme Court issued an opinion determining which state is entitled to take prepaid funds that a bank, financial organization, or business holds in association with financial instruments that are similar to money orders when those funds are abandoned (i.e., when the financial instrument is not presented for payment within a certain amount of time).
It unanimously held that the financial instrument is similar to a money order if it meets a two-part test: (1) the instrument is prepaid, written and used to transmit money to a named payee and (2) a lack of detailed record-keeping would otherwise result in all of the abandoned prepaid funds held by the bank, financial organization, or business being inequitably taken by a single state, rather than distributed more broadly amongst states. The Supreme Court concluded that under these circumstances, the state in which the financial instrument was purchased is entitled to take the abandoned funds pursuant to the Disposition of Abandoned Money Orders and Traveler’s Checks Act (Federal Disposition Act or FDA, for short) passed by Congress in 1974.
Through the FDA, Congress sought to distribute certain abandoned intangible property fairly throughout the states rather than allow it to be taken, or escheated, by just a few states. Escheatment is the power held by states to take custody of abandoned property physically located within their borders through a process that each state generally establishes by its own laws. However, when abandoned property is intangible and has no physical location within any one state—as is the case with some financial instruments, like money orders—multiple states may have arguable claims to escheat the abandoned property. In an attempt to equitably address this issue between the states, the FDA gives the power to escheat any “money order, traveler’s check, or other similar written instrument (other than a third party bank check)” to the state in which the financial instrument was purchased.
The Supreme Court’s opinion interpreted the FDA in order to resolve a dispute between Delaware and several other states as to whether two financial instruments issued by a payment/money transfer company were similar to money orders or were third party bank checks that would be excluded from the FDA’s reach. The payment/money transfer company called these financial instruments “Agent Checks” and “Teller Checks,” and they are similar in their practical operation: the purchaser prepays the face value of the instrument (plus any fee), and the payment/money transfer company holds the proceeds until the payee presents the instrument for payment. The Supreme Court concluded that because the Agent Checks and Teller Checks meet its two-part test, they are sufficiently similar to money orders to fall within the FDA’s ambit. And although the Court did not determine what a “third party bank check” is, it did reject Delaware’s argument that the two financial instruments were third party bank checks. For these reasons, the Supreme Court concluded that the FDA grants the right of escheatment of the Agent Checks and Teller Checks to the states in which they were purchased and not to Delaware, the state in which the payment/money transfer company is incorporated.