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Delaware at high court to test claim on forgotten MoneyGrams

The most corporate-friendly laws in the country make Delaware the legal home of 1.8 million businesses, but does that mean the so-called First State also has first dibs on the unclaimed property those entities generate.

WASHINGTON (CN) — With hundreds of millions of dollars in unclaimed money on the line, the justices of the Supreme Court heard a challenge Monday from 30 states losing out on unclaimed Moneygram checks to Delaware.

Unclaimed property made up 8% of Delaware's revenue, part of a doctrine called escheatment that gives states the right to take over certain unclaimed property.

Like some 1.8 million other companies drawn by the state's business-friendly laws and reputation, Moneygram chose to incorporate in Delaware despite having its headquarters in Dallas, Texas.

As one might expect for the world's second-largest money-transfer company, meanwhile, the unclaimed Moneygram checks that Delaware escheated were sold all over the United States.

Thirty states led by Pennsylvania and Wisconsin took Delaware to court, pointing to the Disposition of Abandoned Money Orders and Traveler’s Checks Act, a 1974 federal law that says sums “payable on a money order, traveler’s check, or other similar written instrument (other than a third party bank check)” would escheat to the state where the instrument was purchased, not the state of incorporation. 

Congress did not define the terms “money order,” “traveler’s check” or “third-party bank check” in that statute, however, teeing up the Supreme Court to to determine now whether a MoneyGram is technically money orders under federal law.

Nicholas Bronni with the Office of the Arkansas Attorney General made the case before the justices Monday on behalf of the challenging states. He argued that, because MoneyGram does not keep addresses of its check purchasers, its instrument is like a money order. And because addresses for payees aren't typically kept for money orders, those instruments escheat to the state of purchase.

“Fifty years later, Delaware claims that it's entitled to the exact same sort of windfall that led to the enactment of the [statute],” Bronni argued Monday.

Neal Katyal with Hogan Lovells argued for Delaware, explaining what the term money order encompassed when Congress adopted the language of the law at issue in 1974. He said the term just referred to specific commercial products labeled “money order,” which were “typically sold to unbanked consumers to pay small debts.” MoneyGram official checks would have been seen in 1974 as “third-party bank checks,” and thus exempt under the statute, Katyal added.

Like a bank check, MoneyGrams are signed by bank employees, and not purchasers. Katyal said this means that uncashed checks would fall within the third-party bank check exception.

In the process of buying an official MoneyGram check, purchasers pay the value of the check to a selling bank, which then forwards the sum to MoneyGram. The buyer can then give the check to their intended payee, who can cash the check at their bank, which will then charge the sum from MoneyGram. If the payee never cashes the check, the money becomes unclaimed property.

Justice Clarence Thomas questioned Katyal’s stance Monday.

“Can you point to any reason in the past while this would be this definition of money order is so narrow?” Thomas asked.

“We don't doubt that there is a way to define money order as broadly as my friends on the other side do. But if you do that, it blows up things like cashier's checks, certified checks — all the stuff that the American Bank Association is warning you about,” Katyal replied.

The lawyer also emphasized that the MoneyGram checks central to the case here are sold only at a bank, while money orders are sold typically at retailers like CVS or Walmart.

“You will have a bank account when you buy them,” Katyal continued of MoneyGram checks adding that the money orders aren't signed by the bank, but the disputed instruments are.

An active participant in her first day hearing arguments on the court, Justice Ketanji Brown Jackson questioned why Delaware should be entitled to unclaimed funds purchased from other states.

“Congress appeared to be trying to override the common law with respect to what happened because it was really concerned about inequitable achievement,” Jackson said, referencing the history of the law.

Bronni meanwhile maintained that MoneyGram checks “function precisely like other money orders, but are marketed differently.” A marketing strategy wouldn’t justify a $250 million windfall, he added.

“MoneyGram is not a third party as that term was used in 1974,” Bronni said. “And MoneyGram's official checks are absolutely not bank checks.”

Chief Justice Roberts pushed back, however, on the argument that marketing strategy alone accounts for the difference between money orders and traveler's checks versus other instruments. 

“Your friend points out that money orders and traveler's checks … they're drawn on an existing bank account, and there's signed by the bank. Now, that seems to be a very different than just a marketing strategy,” he pressed Bronni Monday.

Bronni countered. 

“They admit that it’s a money order, but it lacks all of the things that they say define what a money order is except the label,” he said.

“The impression I got reading your arguments and your friend's argument is that nobody has much of an idea what a third-party bank check is,” Roberts commented.

Jackson questioned Bronni on Monday as well.

“The thing that is a little concerning to me is that if [this federal law] is used to exclude instruments that function like money orders, then we're talking about a huge carveout to a statute that was designed to solve the inequitable escheatment problem in a way that doesn't seem technical or minor,” she said.

Katyal concluded in with a warning Monday about possible repercussions of ruling against Delaware. 

“Can you read the statute the way my friend does? You can,” he said in his rebuttal. “But if you do so, it doesn't make sense of the statute and threatens all sorts of other financial instruments.”

As a interstate dispute, this case fits under the narrow jurisdiction of cases that fall under the Supreme Court’s original jurisdiction

The 2016 case is a rare example where the Supreme Court has original jurisdiction. Leading up to arguments Monday, however, the justices appointed an independent arbiter to conduct a review and issue recommendations. The special master’s report, by Senior Judge Pierre Leval of the U.S. Court of Appeals for the Second Circuit, sided with the 30 states. Leval noted that federal law aims to prevent one state from receiving a large amount of cash because an issuer of certain instruments is incorporated there, “at the expense of many States which then receive no benefit from essentially local transactions.” 

Leval urged the court not to adopt a firm definition of the term “money order” since doing so could indirectly end up affecting other types of financial instruments not at issue in the case.

The other states suing Delaware in the dispute are Alabama, Arizona, California, Colorado, Florida, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Montana, Nebraska, Nevada, North Dakota, Ohio, Oklahoma, Oregon, South Carolina, Texas, Utah, Virginia, Washington, West Virginia and Wyoming.

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