Due Diligence Requirements Satisfy Due Process in Minnesota

Court OrderIn 2015, several unclaimed property owners filed a lawsuit, seeking class action status, against Minnesota and their unclaimed property program. The owners alleged that the state was seizing private property and using it for the state's benefit without any meaningful effort to locate the rightful owners. Further, the owners alleged that the state failed to give adequate notice and thereby violating the Due Process Clauses of both the state of Minnesota and the United States Constitutions. Finally, not paying interest, they said, was a violation of the Takings Clauses of both Constitutions. This week, a Minnesota appellate court overturned a lower court's failure to dismiss the case.

On December 10, 2015, the district court denied the state's motion to dismiss the case, saying that there was a due process claim due to insufficient notice and a takings claim, since there was no interest paid on money put to public use. In subsequent proceedings, the parties moved to certify three questions and the state Court of Appeals responded. First, are the owners entitled to interest after it was delivered to the state? Second, did the delivery of property violate the owners' due process rights?

Important and Doubtful Questions

The Court found that these questions were important and doubtful. The owners alleged that the state holds approximately $606 million in unclaimed property for "at least ten of thousands" of owners. The answers would also affect every citizen that has property in a financial institution or other holder that could potentially be remitted to the state. As this was a case of first impression, there was not precedence in Minnesota common law to address these questions. In a survey of cases from other states, there appears to be divergent opinions on these topics. This determination gave the state the chance to appeal the motion to dismiss under Minnesota civil procedure rules.

Consequences of Neglect

The State relied on U.S. Supreme Court case Texaco, Inc. v. Short, 454 U.S. 516 (1982), where mineral interests automatically lapsed after being unused for twenty years and reverted to the surface owner. The Supreme Court said that they have "never required the State to compensate the owner for the consequences of his own neglect." Obviously, the owners do not like this precedent and argued that the unclaimed property laws are different from the use-it-or-lose-it mineral rights laws in Texaco, saying that unclaimed property laws were intended to preserve the property rights.

The Minnesota Court found persuasive a 2016 Oklahoma Supreme Court case Dani v. Miller. The Oklahoma court said that Texaco "conclusively rejected the notion that legal termination of ownership rights in abandoned property constitutes a taking entitled to just compensation." Oklahoma went on to recognize that the unclaimed property laws do not extinguish the rights of the owners, distinguishing the unclaimed property law from the Indiana mineral interest law in Texaco. But the state's custody of the abandoned property is "attributable to the inattention or abandonment of the owners" just like in Texaco and that no taking occurs.

Since the owners did not raise a use argument in their complaint, the court found that such arguments at this stage were not proper in this case.

The Court concluded that the Minnesota unclaimed property laws did not constitute a taking nor are owners entitled to interest on property remitted to the state. In a footnote, the Court left open the question on whether the state must pay interest on interest-bearing accounts.

Due Process Claims

Due process has received a lot of attention recently from unclaimed property practitioners. Recently, the U.S. Supreme Court signaled that they might be willing to take a case on whether the notice requirements, or lack thereof, were sufficient under the due process requirements of the United States Constitution. Due process has also been a central theme in the lawsuits filed by holders challenging the Delaware audit process (Temple-Inland, Office Depot, Marathon)

Here, the Minnesota Court found that there was no violation of due process. First, the owners were not deprived of their property interest. At all times, the owners are able to make a claim to retrieve the property from the state. Thus, the property was only transferred from one holder to another.

Second, the court said that even if the owners were deprived of their property interest, the unclaimed property law provides adequate notice to the owners. In Texaco, the law itself, after reasonable opportunity for the public to familiarize itself with the law, was sufficient notice to the owners. Further, due to the nature of unclaimed property, the Oklahoma court in Dani and now the Minnesota court recognized that communicating notice directly to the owner may be difficult. Minnesota requires holders to send due diligence notices prior to reporting, requires the state to make public notice, and keep a record available for public inspection. The state also makes this information available on Missing Money, as part of a multi-state effort to make owners aware of their unclaimed property available for claims.

Each of the owners seeking to represent the class received notice in some fashion, whether a due diligence letter that went ignored, on a state sponsored website (Missing Money), or from a family member or lawyer.

To satisfy due process, the Court says that there must be "notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections." The Court said that the common law cases do not require actual notice but rather require notice "reasonably calculated" to inform the parties. The requirements under the Minnesota unclaimed property law satisfy the due process requirements.

Read Full Opinion: Hall v. Minnesota 62-CV-15-2112 (PDF)

Your Unclaimed Property Compliance Program

Barganier has long stressed the importance of due diligence in your corporate unclaimed property compliance program. If you fail to satisfy the due diligence requirements, you leave the door open for a host of bad consequences, including:

  1. State indemnity laws may not apply to property that has been reported to the state. This is vitally important for property that may change in value over time, such as securities or mineral interests.
  2. Your company may become the target of a wrongful escheatment lawsuit by owners that did not receive notice prior to reporting.
  3. Angry customers that do not want to deal with state claims processes.
  4. Potential audits and subsequent penalties for failing to comply with the due diligence requirements.
  5. Investor lawsuits after state action, resulting in disclosure of audit workpapers and other confidential information

Not only are the letters required by 49 (and probably soon to be 50) state laws, they are a best business practice. In addition to avoiding the bad consequences above, you may find that the letters are an opportunity to regain a lost customer. Customers will often take a credit against a future purchase or resume use of a lost bank account.

If you have questions about implementing due diligence requirements in your unclaimed property program, please contact Patricia Barganier or Kimberly DeCarrera at Barganier and Associates.

See Also:
How Reporting Unclaimed Property Can Help Your Company
Delaware Relies Heavily on Unclaimed Property Budget Process
Audit Defense Starts with Compliance