Delaware v. New York

1993-03-30

Headline: Ruling limits which State can claim unclaimed securities payments, holding that the State where the intermediary is incorporated may take such funds, affecting brokers, issuers, and investors nationwide.

Holding: The Court held that when beneficial owners of securities distributions cannot be identified or located, the State where the intermediary bank, broker, or depository is incorporated has the right to take custody of those unclaimed funds.

Real World Impact:

Lets intermediaries’ incorporation States claim unclaimed securities distributions.
Shifts large sums toward States where brokers and depositories incorporate.
Requires transaction-level records to overturn secondary claims.

Topics: abandoned property, unclaimed securities, state escheat rules, financial intermediaries, interstate disputes

Summary

Background

The dispute began after New York took custody of large amounts of unclaimed securities distributions that intermediaries—banks, brokers, and depositories—held for beneficial owners who could not be located. Delaware sued, saying some of those funds were wrongfully claimed; the Special Master recommended giving the funds to the State where the issuer’s principal executive offices are located. The case asks which State may lawfully take these abandoned intangible payments.

Reasoning

The Court relied on two earlier rules: first, if a creditor’s last known address appears in the debtor’s records, that State has the primary right to take the funds; second, if no address appears or that State cannot take them, the secondary right goes to the debtor’s State of incorporation. Applying those precedents, the Court rejected the Master’s proposals. It held that the intermediary (the broker, bank, or depository that holds securities in its name) is the relevant debtor, and the State of that intermediary’s incorporation is the secondary claimant. The Court also rejected New York’s suggestion that statistical sampling could prove most creditors were located in New York.

Real world impact

The decision means many disputed unclaimed distributions will go to the States where intermediaries are incorporated unless another State can prove individual creditors’ last known addresses. The case is sent back to the Special Master so States can try to show on a transaction-by-transaction basis whether a creditor’s last address gives a superior claim.

Dissents or concurrances

Justice White (joined by two colleagues) dissented, favoring the Special Master’s approach and would have upheld the Master’s recommendations as fairer and more equitable.