September 2009 State Tax Return Volume 16 Number 3 Ohio Supreme Court Breaks from the Pack and Finds that Ohio Must Pay Claimants Interest on Unclaimed Funds Phyllis J. Shambaugh Columbus 614.281.3824 pjshambaugh@jonesday.com The Ohio Supreme Court recently struck down the provision in Ohio s Unclaimed Funds Act ( UFA ) that prohibited the payment of interest to claimants of unclaimed funds. 1 Reversing the court of appeals, the court held that withholding the interest earned on these funds constituted a taking in violation of the Ohio Constitution. This decision is a break from several state-court rulings holding that the states refusal to pay interest to claimants was not unconstitutional. 2 Ohio s Unclaimed Funds Act The purposes of the UFA are: 1. To protect the property rights of the True Owner 3 of funds and to reunite the True Owner with the funds; 2. To provide a centralized contact location for potential owners of unclaimed funds; and 3. To relieve the Holder 4 of liability for unclaimed funds. 5 Funds become unclaimed if the True Owner fails to contact the Holder for the period of time prescribed by the UFA. At the time the unclaimed funds report is filed, the 1 Sogg v. Zurz, 121 Ohio St. 3d 449, 905 N.E.2d 187 (Ohio 2009). 2 See, e.g., Morris v. Chiang, 77 Cal. Rptr. 3d 799 (Cal. Ct. App. 2008); Cwik v. Topinka, 905 N.E.2d 300 (Ill. App. Ct. 2009); Hooks v. Kennedy, 961 So.2d 425 (La. Ct. App. 2007); Rowlette v. State of North Carolina, 656 S.E.2d 619 (N.C. Ct. App. 2008); Smolow v. Hafer, 959 A.2d 298 (Pa. 2008). 3 The True Owner is a person or entity with a legal or equitable interest in property held by another. 4 The Holder is any person, including a corporation or other entity, which is in possession of property that is owed to another. 5 See Ohio Department of Commerce, Division of Unclaimed Funds, http://www.com.ohio.gov/unfd/faq.aspx (sites herein last visited [August 11,] 2009).
Holder must remit 10 percent of the funds to the Director of Commerce, who may deposit the funds into the state treasury or into an income-bearing account with a financial institution such as a bank or investment company. 6 The director may allow the Holder to retain the remaining 90 percent of the funds, provided that the Holder deposits the funds into an income-bearing account and agrees to pay the state interest. 7 Unlike most unclaimed property statutes, the UFA does not explicitly declare that unclaimed funds are presumed abandoned. In fact, the UFA uses the term abandoned only when referring to potential designations of property made by another state under the laws of that state. 8 Ohio Rev. Code 169.08(D) was amended effective July 26, 1991, to state that [i]nterest is not payable to claimants of unclaimed funds held by the state. That amendment also allows the Department of Commerce to retain 5 percent of the funds paid to a claimant as an administrative fee. The Ohio Supreme Court Holds That Ohio Must Pay Interest Accrued on Unclaimed Funds Factual and Procedural Background Wilton Sogg filed a claim with the Ohio Department of Commerce, Division of Unclaimed Funds ( Division ), on behalf of his mother s estate. The Division paid Mr. Sogg s claim but deducted from his payment all interest earned on the funds after July 26, 1991, as well as the 5 percent administrative fee. Mr. Sogg filed a class-action lawsuit seeking recovery of interest due not only to him but to all claimants who were denied interest on their payments of unclaimed funds. The trial court examined the text and purposes of the statute and concluded that unclaimed property is not deemed abandoned under the UFA. 9 The trial court held that Ohio s refusal to pay interest to claimants violated the Takings Clauses of both the Ohio and U.S. Constitutions. 10 The court of appeals reversed the trial court, concluding that Ohio s actions were constitutional because unclaimed property is essentially abandoned property under the UFA. 11 Similarities between the UFA and other states unclaimed property statutes 6 Ohio Rev. Code 169.05(A). 7 Id. 8 The UFA does not consider funds to be unclaimed if they may be claimed as unclaimed, abandoned, or escheated funds under the laws of [another] state. Ohio Rev. Code 169.04. 9 Sogg v. White, 139 Ohio Misc. 2d 58, 61-62 (Ohio Ct. Com. Pl. 2006). 10 Id. at 73. 11 Sogg v. Dir., Ohio Dept. of Commerce, 2007-Ohio-3219 at 28. 2
influenced the court of appeals decision. In the court of appeals view, these similarities were: The stated purposes of the unclaimed property statutes; The criteria for declaring property to be unclaimed; and The procedures for providing notice and reporting unclaimed funds to the state. The Ohio Supreme Court Agrees With the Trial Court: Ohio Must Pay Interest The Ohio Supreme Court agreed with the trial court that the UFA was not intended to treat unclaimed funds as if they had been abandoned, forfeited, or escheated. 12 Assuming that the state has the power to assume ownership of unclaimed funds, the court reasoned, it must still make clear when and if it intends to do so because forfeitures are generally disfavored. Since the True Owner neither abandons nor forfeits the unclaimed funds, Ohio s appropriation of the interest earned by those funds is an unconstitutional taking of private property. Ohio s power to take private property is limited by article I, 19, of the Ohio Constitution, which states that [p]rivate property shall ever be held inviolate, and where private property shall be taken for public use, a compensation therefor shall first be made in money, or first secured by a deposit of money. Although the Ohio Supreme Court has held that the State may limit private property rights when necessary for the common welfare, that standard was not met. 13 The court concluded that retaining the interest earned on unclaimed property is not necessary for the common welfare. Thus, because the True Owner is not compensated for the taking under Ohio Rev. Code 169.08(D), the statute violates the Ohio Constitution. Since the court found the statute unconstitutional under the Ohio Constitution, it did not address its status under the U.S. Constitution. In reaching its conclusion, the Ohio Supreme Court chastised the Ohio General Assembly noting the regrettable... necessity for restating such familiar principles in the face of a growing disposition to legislate... regardless of constitutional limitations. 14 12 Sogg v. Zurz, 2009-Ohio-1526 at 8. 13 Norwood v. Horney, 110 Ohio St. 3d 353 (Ohio 2006). 14 Sogg v. Zurz, 2009-Ohio-1526 at 14. 3
The Ohio Supreme Court s Decision Is the Exception, Not the Rule. Other State Courts Have Found That States Are Not Required to Pay Interest to Claimants The Ohio decision is controlled by the UFA s unique language. Forty-four states have adopted one of the four versions of the Uniform Unclaimed Property Act ( Uniform Acts ). 15 Ohio is one of only six states that have not adopted one of the Uniform Acts. 16 All four versions of the Uniform Acts expressly presume unclaimed property is abandoned. This presumption of abandonment has been key to other state decisions considering True Owners objections to a state s refusal to pay interest. Courts in California, Indiana, Louisiana, North Carolina, and Pennsylvania have denied the True Owner s takings clause claim because the event triggering the states custody of the property was the True Owner s neglect and abandonment. 17 These courts noted that the United States Supreme Court has never required a state to compensate an owner for neglect. Only the state s overt act of taking property from an owner will trigger a Takings Clause violation. 18 A Limited Recovery Claimants Entitled Only to Interest Earned in the Four Years Prior to the Claim Although a claimant may now recover interest, the Ohio Supreme Court imposed a four-year statute of limitations. The court rejected the unlimited recovery period suggested by Mr. Sogg and the two-year period put forth by the Director of Commerce. Thus, Mr. Sogg and other claimants due interest can recover only the interest earned on the property in the four years immediately prior to the date of their claim. The Division Owes Me Interest. What Should I Do? Since this case was a class action, it impacts the Division s payment of claims for unclaimed funds not only in the future, but also retroactively. The Division has posted a notice on its web site alerting past claimants that they may be eligible to receive interest. 19 At this time, however, the Division is awaiting further instructions from the court before making any payments to past claimants. The Division will continue to process and make unclaimed-funds payments to qualified claimants. However, it cannot calculate or pay interest until it receives further instructions from the court. Claimants who receive payment of unclaimed funds after 15 The Uniform Unclaimed Property Acts were promulgated by the National Conference of Commissioners on Uniform State Laws in an effort to minimize the differences in unclaimed property laws from state to state. 16 The other five states that have not adopted one of the Uniform Acts are Delaware, Kentucky, Massachusetts, New York, and Texas. 17 Morris, 77 Cal. Rptr. 3d at 759; Smyth v. Carter, 845 N.E.2d 219, 224 (Ind. Ct. App. 2006); Hooks, 961 So. 2d at 432; Rowlette, 656 S.E.2d at 624; Smolow, 959 A.2d at 304. 18 See, e.g., Smolow, 959 A.2d at 303 (citing Texaco v. Short, 454 U.S. 516 (1982)). 19 The Division s notice is available at http://www.com.ohio.gov/unfd/docs/litigationstatus.pdf. 4
April 8, 2009 will be notified by the Division regarding payment of interest. In the meantime, the Division asks any claimants who have moved since receiving their unclaimed-funds payments to notify the Division. This article is reprinted from the State Tax Return, a Jones Day monthly newsletter reporting on recent developments in state and local tax. Requests for a subscription to the State Tax Return or permission to reproduce this publication, in whole or in part, or comments and suggestions should be sent to Christa Smith (214.969.5165) in Jones Day s Dallas Office, 2727 N. Harwood, Dallas, Texas 75201 or StateTaxReturn@jonesday.com. Jones Day 2009. All Rights Reserved. No portion of the article may be reproduced or used without express permission. Because of its generality, the information contained herein should not be construed as legal advice on any specific facts and circumstances. The contents are intended for general information purposes only. 5