United States v. Klein

Background

A group of secured bondholders sued in a federal district court to recover money they said a defendant had wrongfully kept. The federal court ordered unclaimed bondholders’ shares paid into its registry, and after five years the funds were deposited in the U.S. Treasury under federal law. The Pennsylvania escheator then sued in state court under amended state statutes to have the money declared escheated to the Commonwealth. The United States intervened and argued the state court lacked power to escheat funds in federal custody.

Reasoning

The central question was whether Pennsylvania law unconstitutionally interfered with a federal court or invaded federal sovereignty by letting a state court declare escheat. The Court explained that a federal court’s exclusive control over property is limited to what is necessary for its proceedings. A state court may adjudicate ownership so long as its decree does not disturb the Treasury’s possession or the federal court’s authority to decide final payment. Because the United States did not assert ownership and the state decree did not purport to remove the money from federal custody, the statutes were held valid as applied.

Real world impact

States may use escheat procedures to determine title to unclaimed funds that originated in federal courts, but federal control over possession and final payment remains. Unknown claimants keep the ability to seek payment in federal court, and any conflict over ownership can be raised when the federal court considers payment.

Dissents or concurrances

Two Justices did not participate in the decision.