INSIGHT: Holders in the Middle—Expanding Statutory Interpleader to Unclaimed Property

As a matter of federal common law, a state has the primary right to escheat unclaimed intangible property if the last known address of the owner is in that state, as shown on the books and records of the holder of the property. See
Texas v. New Jersey. If there is no last known address, the corporate domicile of a corporate holder then has the right to escheat the property.

These federal common law rules often lead to only a single state having a claim to unclaimed property, but sometimes multiple states have conflicting claims to the same property. Historically, these interstate conflicts have been resolved by the U.S. Supreme Court through its original jurisdiction over disputes between states. These are the familiar trio of Texas v. New Jersey, Pennsylvania v. New York, and Delaware v. New York, as well as the ongoing Arkansas v. Delaware, Docket Nos. 22O145 & 22O146 ORG.

Under the Supreme Court’s current jurisdictional statute, the court’s original jurisdiction over interstate disputes is also its exclusive jurisdiction, so no other court can hear these types of cases. 28 U.S.C. Section 1251(a). Unfortunately, original jurisdiction is not an ideal process to resolve unclaimed property disputes, and is particularly problematic for holders, for several reasons:

• First, only a state can invoke original jurisdiction, so it is not available to holders. Unlike a holder, the states have no incentive to invoke the Supreme Court’s jurisdiction until conflicting state claims are actually being asserted, as opposed to when there exists a risk of conflicting claims arising. And while holders can bring an action in federal district court or state court, typically the holder can assert claims only against a single state in the action, rather than all potential state claimants to the property, because it cannot obtain jurisdiction over all states in most instances.

• Second, original jurisdiction is at the Court’s discretion. The Court has limited room on its docket for all cases, so only the most significant unclaimed property disputes can reach the Court.

• Third, interstate unclaimed property disputes are ill-suited to original jurisdiction. Unclaimed property disputes only involve the states’ indirect right to hold property for safekeeping, unlike the prototypical original jurisdiction cases that involve issues at the core of state sovereignty, such as interstate water allocation, see, e.g., Florida v. Georgia, and land boundaries, see, e.g., New Jersey v. New York, unclaimed property disputes only involve the states’ indirect right to hold property for safekeeping.

• Fourth, since the Court is the court of first instance in original jurisdiction, it does not receive the benefits of being able to review lower court decisions. For example, the Court cannot wait for an issue to percolate through the lower courts. Additionally, both holders and states suffer from the lack of lower court guidance.

Fortunately, there is a procedural mechanism that could be modified to allow interstate unclaimed property disputes to be resolved in the first instance by federal district courts: statutory interpleader. 28 U.S.C. Section 1335. This proposed mechanism, referred to in this article as “unclaimed property interpleader,” follows from the Supreme Court’s suggestion that federal district courts may be an appropriate forum to resolve interstate unclaimed property disputes. See Western Union Tel. Co. v. Pennsylvaniaex rel. Gottlieb.

This article provides a short overview of interpleader, explains how statutory interpleader could apply to unclaimed property disputes, explores the pros and cons of modifying statutory interpleader to resolve unclaimed property disputes, and proposes draft legislative language to amend the federal interpleader statute to allow unclaimed property interpleader.

Overview of Interpleader

Interpleader is a procedural device that allows a person (known as the stakeholder) to initiate an action in court to determine which of several parties (known as claimants) with competing claims has a right to property. The claimants then must “litigate among themselves to determine which, if any, has a valid claim” to the property. 20 Charles Alan Wright & Mary Kay Kane, Federal Practice & Procedure Deskbook Section 79 (2d ed. rev. 2019).

Interpleader provides several benefits to a stakeholder, but perhaps the greatest benefit is protection from multiple liability. As interpleader allows a single court to determine all claims to the property, the stakeholder does not have the risk of having multiple courts ordering it to turn over the same property to multiple claimants.

To allow interpleaders with claimants in multiple states, Congress enacted the federal interpleader statute, which provides federal district courts with jurisdiction to hear interpleaders involving multiple claims to property worth more than $500 when the claimants to the property are of diverse citizenship. See id. In order to give a single court the power to resolve all claims to the property, the statute allows a federal district court hearing a statutory interpleader to issue nationwide service to all claimants, dispensing with the normal territorial restrictions on service. Compare 28 U.S.C. Section 2361 with Fed. R. Civ. P. 4(k).

Applying Statutory Interpleader to Unclaimed Property

With just minimal amendment (laid out in the draft legislative language in Section 5 of this essay), the federal interpleader statute could solve the problem presented by many unclaimed property disputes, namely, that “such a controversy cannot be satisfactorily handled by a state court in the state where either claimant [i.e., the states] resides, because a state court lacks the personal jurisdiction over the non-resident claimant which is necessary to bind all parties.” Zechariah Chafee, Jr., Federal Interpleader Since the Act of 1936, 49 Yale L.J. 377, 377 (1940); c.f. Western Union Tel. Co. v. Pennsylvania ex rel. Gottlieb (1961) (observing that state courts cannot provide “a full hearing and a final, authoritative determination” regarding interstate escheat because they have “no power to bring other States before them.”). With these modifications, a holder would be able to commence an interpleader with the states with potential claims to unclaimed property rather than needing to deal with each state’s claim on a piecemeal basis or wait for the states to initiate an original jurisdiction claim in the Supreme Court.

In his 1982 dissenting opinion in Cory v. White, Justice Powell drew a roadmap for the use of federal statutory interpleader to resolve interstate disputes that affect a private party’s property. Justice Powell suggested that if multiple states assert claims for the same property in a way that would violate due process if all were successful, the case could be brought within federal interpleader jurisdiction consistent with Ex parte Young. Although a holder could sue for declaratory or injunctive relief in a non-interpleader action, any such relief would bind only a single state defendant.

Justice Powell’s dissent in Cory v. White addressed multiple taxation based on residency, but his roadmap is just as applicable to unclaimed property. The Supreme Court has already held that allowing multiple states to escheat the same property without providing protection from other states’ claims violates due process. Western Union. Therefore, under Justice Powell’s reasoning in Cory v. White, the claim should be within federal statutory interpleader jurisdiction.

Of course, Justice Powell’s dissent was a dissent. The majority opinion in Cory v. White held that allowing statutory interpleader involving states (or state officials) violates the Eleventh Amendment, which protects states against suits for money damages in federal court.

However, the Eleventh Amendment is not an absolute barrier to unclaimed property interpleader. Congress can abrogate states’ Eleventh Amendment immunity by invoking powers granted to Congress by subsequent constitutional amendments. See Fitzpatrick v. Bitzer. Section 5 of the Fourteenth Amendment provides that “Congress shall have the power to enforce, by appropriate legislation,” the other provisions of the Fourteenth Amendment. U.S. Const. amend. XIV, Section 5. And because multiple escheat of the same property violates the Due Process Clause of the Fourteenth Amendment,Congress can abrogate Eleventh Amendment immunity to allow unclaimed property interpleader.

Furthermore, Article III of the Constitution does not dictate that the Supreme Court’s jurisdiction over interstate disputes is exclusive. While the Supreme Court’s current jurisdictional statute provides the Court with exclusive jurisdiction over interstate disputes, 28 U.S.C. Section 1251(a), Congress could amend the statute to make this part of the Court’s original jurisdiction concurrent rather than exclusive. See Ames v. Kansas.

Potential Benefits of Unclaimed Property Interpleader

There are several potential benefits of amending the interpleader statute to allow unclaimed property interpleader.

First, unclaimed interpleader would allow holders to interplead states as soon as it becomes apparent that states could have conflicting claims to the same property. In this way, a holder could test a state’s spurious claim to property at the outset rather than needing to wait for a significant interstate dispute to develop. See Tittle v. Enron Corp.

Second, interpleader is nondiscretionary, meaning that every interstate unclaimed property dispute can be heard, rather than just the ones with enough at stake to fit within the Supreme Court’s discretionary original jurisdiction. This would also relieve a portion of the Supreme Court’s workload. Although some of this work would be shifted to district courts’ dockets, explicitly providing district courts with interpleader jurisdiction should reduce the resource-intensive litigation over federal jurisdiction and abstention.

Third, federal district courts are well-suited to address interstate unclaimed property disputes. The unique nationwide service provision of the federal interpleader statute would allow the district court to issue a judgment that is binding on all claimants, rather than just on a single state. Additionally, the rules of civil procedure apply in interpleader, so discovery and motions practice would be streamlined instead of requiring attention from the Supreme Court or a special master.

Fourth, allowing district courts to issue decisions in the first instance would provide guidance earlier and allow the Supreme Court to fulfill its normal function as a court of review. Furthermore, in some instances a well-reasoned district court opinion could be enough to resolve numerous similar unclaimed properties controversies.

Potential Objections to Unclaimed Property Interpleader

That said, there are some potential objections that states might raise to allowing unclaimed property interpleader. In our view, though, these objections are not strong enough to outweigh the numerous potential benefits to allowing unclaimed property interpleader.

One potential objection to unclaimed property interpleader is that it may lead to an increase in unclaimed property litigation. However, unclaimed property disputes already exist and are consuming resources in state and federal courts. Allowing unclaimed property interpleader just provides a better forum for these disputes, which would let the parties and the court focus on the merits of disputes rather than wasting resources fighting over jurisdiction.

Another potential objection is that unclaimed property interpleader could enable forum shopping by holders. Venue for a claim brought under the federal interpleader statute is proper in any “judicial district in which one or more of the claimants reside[s],” 28 U.S.C. Section 1397, which means that an unclaimed property interpleader could be brought in any district in any state that has a potential claim to the property. See California v. Azar (“A state is ubiquitous throughout its sovereign borders. The text of the [venue] statute therefore dictates that a state with multiple judicial districts ‘resides’ in every district within its borders.”) Certainly, this would allow some forum shopping, but no more than in most other types of litigation, and the federal venue transfer provision would provide some relief against forum shopping. 28 U.S.C. Section 1404(a). Furthermore, if forum shopping proves abusive, the interpleader venue statute could be modified to curtail the abuse.

Finally, states could object that allowing unclaimed property interpleader interferes with state sovereignty. While this objection has some surface appeal, on further examination it rings hollow. Allowing unclaimed property interpleader does not decrease state sovereignty; instead, it simply shifts a portion of the Supreme Court’s original jurisdiction caseload to federal district courts (just as Congress has already done for the remainder of the Supreme Court’s original jurisdiction). See 28 U.S.C. Section 1251(b).

Draft Legislative Language to Allow Unclaimed Property Interpleader

28 U.S.C. §1335(a) The district courts shall have original jurisdiction of any civil action of interpleader or in the nature of interpleader filed by any person, firm, or corporation, association, or society having in his or its custody or possession money or property of the value of $500 or more, or having issued a note, bond, certificate, policy of insurance, or other instrument of value or amount of $500 or more, or providing for the delivery or payment or the loan of money or property of such amount or value, or being under any obligation written or unwritten to the amount of $500 or more, if (1) Two or more adverse claimants, of diverse citizenship as defined in subsection (a) or (d) of section 1332 of this title, are claiming or may claim to be entitled to such money or property, or to any one or more of the benefits arising by virtue of any note, bond, certificate, policy or other instrument, or arising by virtue of any such obligation; and if (2) the plaintiff has deposited such money or property or has paid the amount of or the loan or other value of such instrument or the amount due under such obligation into the registry of the court, there to abide the judgment of the court, or has given bond payable to the clerk of the court in such amount and with such surety as the court or judge may deem proper, conditioned upon the compliance by the plaintiff with the future order or judgment of the court with respect to the subject matter of the controversy.
. . . .

28 U.S.C. §1335(c) For purposes of subsection (a), states with adverse claims to escheat or take custody of the same property are treated as adverse claimants of diverse citizenship.
Explanation: This provides a federal district court with jurisdiction over unclaimed property interpleader to the same extent that the district court would have jurisdiction over diverse, non-state parties with adverse claims to the same property. As unclaimed property interpleader is a “controvers[y] between two or more states,” U.S. Const., art. III, §2, there is no need for diversity to fall within Article III jurisdiction.

28 U.S.C. §1251(a): The Supreme Court shall have original and exclusive jurisdiction of all controversies between two or more States, except over interpleaders permitted by 28 U.S.C. §1335(a).

Explanation: This creates a narrow exception for unclaimed property interpleader from the Supreme Court’s exclusive jurisdiction over controversies between states.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Sara Lima is a partner and Michael Lurie is an associate in the Philadelphia office of Reed Smith LLP.