The U.S. Supreme Court ruled unanimously Tuesday that Delaware wrongfully grabbed hundreds of millions of dollars in unclaimed funds from customers of international payments giant MoneyGram, under the old legal doctrine of escheat.
"Abandoned financial products should escheat (revert) to the state of the creditor's last known address" and not merely to the state where the company that prepared them happens to be incorporated, according to the decision, written by Justice Ketanji Brown Jackson.
The penalty is still being decided. The case could cost Delaware as much as $400 million, according to Pennsylvania State Treasurer Stacy Garrity. That would pressure the state's $5 billion annual budget, and potentially its status as one of just four states that don't impose a retail sales tax.
Pennsylvania was a leader among several states that sued to stop Delaware's practice of taking the cash, in violation of a federal law assigning unclaimed money orders to the state in which they were sold. Pennsylvania's share would amount to as much as $19 million, Garrity's office calculated.
Texas-based MoneyGram's Agent Checks and Teller's Checks are favored by immigrants and others sending money into and out of the United States for onetime transactions. Like old gift cards, travelers' checks, stock options and bank accounts, they sometimes go unpaid for years, leaving them vulnerable to eventual seizure by state governments, at least until owners or their heirs realize they can try to reclaim the funds.
What this ruling means for Delaware
Delaware relies far more than others on unclaimed-property seizures, which it hopes will net nearly $400 million this year alone, by exploiting its status as a favorite state for business incorporations.
Delaware government expects to spend about $5 billion in all this year, mostly from income taxes and corporate fees.
The state has already projected that escheat will provide a declining share of the state's income in future years, but it has not budgeted for large, retroactive payments.
"Escheat" derives from the old English practice of saving buried treasure for the king.
Fees assessed on the million-plus U.S. companies that make their home in Delaware to take advantage of the state's business-friendly courts and ownership rules, plus aggressive escheat of unclaimed funds in accounts at several hundred Delaware-incorporated financial companies, together make up more than one-third of Delaware's tax collections.
That income has helped Delaware remain one of just four states that charge no retail sales taxes on store or online purchases. (Delaware, like Philadelphia, does charge retailers a separate gross-receipts tax on sales, which consumers don't see.)
The ruling
Delaware had argued that MoneyGram Agent Checks and Teller's Checks weren't really money orders because they were sold under other names.
But the justices found that they met the legal standard to be treated as money orders, since the law assigning payment to the states where they were written applies to payments that are "like" money orders, whether or not they use that term.
"The Supreme Court went out of its way to knock down every one of Delaware's arguments" to collect "this unlawful windfall," said Christopher Craig, chief counsel for Garrity's office.
"This is a clear ruling," said Michael Lurie, a tax partner at the Philadelphia office of law firm Reed Smith, who represented private firms that collect escheat taxes for other states in early phases of the litigation.
"The exact amount of damages remains for the special master to address," Lurie added. The court had appointed tax scholar Pierre Leval as special master, though it rejected some of his pre-decision advice.
"Delaware wants a limit" on how far back it will have to repay the MoneyGrams it seized, Lurie added. "If not, they may have to dig into their coffers. They don't charge a sales tax, so their complaints may fall on deaf ears, if they turn their pockets out and say they have no money."
He added that there is still "ambiguity" about whether some other kinds of unclaimed payments, including cryptocurrency, belong to the states where they were created, or the states where their creators were set up.
Lurie noted the legal principal of escheat only appoints the states as receivers for the cash so they can take "temporary custody to do the public good." In other court cases, Delaware has been scolded in federal court in Philadelphia for making it tough for people who lose their money to escheat to get it back. The state has said it improved its process for finding account owners in recent years.
MoneyGram clients are often migrant workers seeking to send cash to their families back home. But Delaware representatives told the court that MoneyGram checks that were the focus of this case were often used for larger payments, such as sending money to purchase property in the U.S.
Reaction in Delaware
"Delaware is disappointed in the ruling," which is unlikely to return more unclaimed MoneyGram checks to consumers, said Brenda Mayrack, the state's chief escheator. She added that calculating the penalty Delaware may have to pay, involving data from many sources, "may be complex and take some time."
"I don't think it will take nearly as long" to decide penalties, as the years of Supreme Court litigation that ended with Tuesday's decision, said Joshua Voss, partner at Philadelphia-based law firm Kleinbard LLC, who represented Pennsylvania. He said a 2016 audit showed Delaware had lifted about $250 million from MoneyGram in recent years. Since then, MoneyGram has paid an additional $92 million in an escrow account to await the court's decision. The states have asked for that money, plus interest and damages.
"So $300 million to $400 million is now going to be returned to 30 or so states involved in this suit, where the money originated, where the true owners lived, so they can get it restored to them, or at the least it will go to public services there," Voss added.
Asked whether an escheat burden, alongside other tax and revenue pressures, would force Delaware officials to impose the retail sales tax they have long resisted, Charles Elson, a Delaware-based finance professor and governance scholar who teaches corporate law at the University of Pennsylvania, responded: "That would be very unpopular."
