California's unclaimed property system is remarkably different than the other U.S. reporting jurisdictions, requiring a two-step reporting process for holders. This is a direct result of litigation challenging the constitutionality of the state's unclaimed property system. In August 2007, the California legislature enacted legislation that required holders to send a notice to owners, submit a preliminary or notice report to the state who then sent a second notice to owners. Only after owners failed to respond to both letters would the property be remitted to the state. This process was upheld by the 9th Circuit Court of Appeals in what is referred to as Taylor III. This week, the 9th Circuit said that California was not required to search other state databases to find better addresses for pre-escheat notifications sent to owners.
Taylor I: The original complaint was filed by shareholders who were dissatisfied with their shares being sent to the State of California as unclaimed property. They sued, alleging a constitutional lack of sufficient notification prior to escheat. The 9th Circuit reversed a district court's dismissal on 11th Amendment jurisdictional grounds.
Taylor II: The 9th Circuit again reversed the district court after it denied a request for a preliminary injunction. The Court found that the holder notice plus state newspaper notices was not sufficient "to provide notice reasonably calculated . . . to apprise the interested party of the pendency of action and afford him an opportunity to present his objections." The statutory language required that the State give notice pre-escheat. On remand, the district court issued a preliminary injunction against the State Controller, to prevent the office from collecting unclaimed property until further notice could be provided to owners prior to escheat. The state legislature acted, providing for the two-step reporting system that is used today.
Taylor III: The 9th Circuit affirmed the district court's dissolution of the preliminary injunction in wake of the state legislature's action. The Court ruled that the new statutory provisions, at least facially, remedied the constitutional issues from the notice provisions in Taylor II.
The plaintiffs filed a new amended complaint to challenge the notice provisions, as applied by the State Controller. The plaintiffs focused on whether the Controller is required to access other state databases when sending out the owner notification letters after the preliminary report but before the property is remitted. The district court dismissed the case for failure to state a claim. The 9th Circuit agreed.