2011 UPPO ANNUAL CONFERENCE
3/6/2011 – 3/9/2011
Federal Preemption John A. Biek, Esq. Neal, Gerber & Eisenberg LLP Diann L. Smith, Esq. Sutherland Asbill & Brennan LLP
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State Unclaimed Property: The Basics • By now, you know the basics: – All 50 states and the District of Columbia have enacted abandoned property laws authorizing the state to claim custody of abandoned or unclaimed property – Unclaimed property is “a fixed and certain interest in intangible property . . .” that remains unclaimed for the requisite period, typically 3 to 5 years • The liability could be owed to any type of payee. • Common examples include employees, vendors or suppliers, customers, and shareholders
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State Unclaimed Property: The Basics • The objectives of state unclaimed property laws are: – Giving the state custody of the property may help reunite the property with its owner – Prevention of “windfalls” to holders; after all, the unclaimed property results from a liability of the holder to the owner – Raising revenue for the citizens of the claimant state 3
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2011 UPPO ANNUAL CONFERENCE
3/6/2011 – 3/9/2011
State Unclaimed Property: The Basics • Texas v. New Jersey priority rules – The fundamental premise underlying the Texas v. New Jersey priority rules is that the Due Process Clause of the Fourteenth Amendment “prevents more than one state from escheating an item of abandoned property” 379 U.S. 674, 676 (1965) – An item of unclaimed property is claimable by (and reportable to): • First, the state of last known address, as reflected in the holder’s business records, of the owner of the unclaimed property 4
State Unclaimed Property: The Basics • If the holder does not have record of the last known address of the owner of the property (or that state does not have unclaimed property laws applicable to the property), then the holder’s state of corporate domicile (generally, the holder’s state of incorporation) gets to claim the property • The 1981 and 1995 Uniform Acts have added a third priority rule, the so‐called “transactional rule,” which authorizes the state where the outstanding liability arose to claim the resulting unclaimed property if neither the state of last known address of the owner of the property nor the holder’s state of corporate domicile will claim custody of the property 5
State Unclaimed Property: The Basics • The holder’s obligation to report and remit items of unclaimed property usually includes due diligence requirements • Benefits to holders of compliance include: – Statute of limitations defenses in most jurisdictions once the holder reports the property – Indemnification by the state against claims to the remitted property by its owner or a higher priority state – Mitigation against high interest and penalties 6
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2011 UPPO ANNUAL CONFERENCE
3/6/2011 – 3/9/2011
Federal Preemption Principles • While state unclaimed property laws apply broadly to outstanding liabilities of a holder, their reach is not unlimited • Some of the strongest holder defenses to having to treat liabilities as unclaimed property are based on the argument that provisions of federal law: – extinguished the liability before the statutory dormancy period had run; or – otherwise authorize the holder to retain the property
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Federal Preemption Principles • The Supremacy Clause of the U.S. Constitution states that: “This Constitution, and the laws of the United States which shall be made in pursuance thereof . . . shall be the supreme law of the land . . . anything in the Constitution or laws of any State to the contrary notwithstanding” U.S. Const., Art. VI, cl. 2. 8
Federal Preemption Principles • Under the Supremacy Clause, “state laws that conflict with federal law are ‘without effect.’” Altria Group, Inc. v. Good, 555 U.S. 70 (2008) (citing Maryland v. Louisiana, 451 U.S. 725 (1981)) • Preemption may be either express or implied, and “is compelled whether Congress’ command is explicitly stated in the statute’s language or implicitly contained in its structure and purpose.” Jones v. Rath Packing 9 Co., 430 U.S. 525 (1977)
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2011 UPPO ANNUAL CONFERENCE
3/6/2011 – 3/9/2011
Federal Preemption Principles • Absent explicit preemptive language (referred to as “express preemption”), Congress’ intent to supersede state law altogether may be inferred because: – “The scheme of federal regulation may be so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it; – “The Act of Congress may touch a field in which the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject;” or – “The object sought to be obtained by federal law and the character of obligations imposed by it may reveal the same purpose.” Rice v. Santa Fe Elevator Co., 331 U.S. 230 (1947)
• This is referred to as “field preemption”
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Federal Preemption Principles • Even where Congress has not completely displaced state regulation in a specific area, state law will still be nullified: – To the extent that “compliance with both federal and state regulations is a physical impossibility” Florida Lime Growers, Inc. v. Paul, 373 U.S. 132 (1963) – When state law “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” Hines v. Davidowitz, 312 U.S. 52 (1941)
• This is referred to as “conflict preemption”
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Federal Preemption Principles • Federal regulations can be just as preemptive of state laws as federal statutes are – A preemptive federal regulation’s force does not depend on express Congressional authorization to displace state law – Where Congress directed a federal agency or administrator to exercise its discretion, the agency’s judgments are subject to judicial review only to determined whether it has exceeded its statutory authority or acted arbitrarily. U.S. v. Skimer, 376 U.S. 373 (1961) 12
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2011 UPPO ANNUAL CONFERENCE
3/6/2011 – 3/9/2011
ERISA Preemption • One of the most well developed federal preemption subjects in state unclaimed property laws is ERISA preemption • Congress enacted the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), to: – Require plans to provide participants with information about plan features and funding – Set minimum standards for participation, vesting, accrual of benefits and funding of plans – Define participant eligibility in a plan, accumulated benefits, vesting and the participant’s right to receive benefits – Simplify and make uniform plan administration across the states where the participants are located 13
ERISA Preemption • ERISA covers the following types of plans: – Pension benefit plans • E.g., 401(k), defined benefit, profit sharing, money purchase, credit balance, pension equity plans and ESOPs – Welfare benefit plans • E.g., medical (including FSAs), dental, life, accidental death or dismemberment, and long‐ term disability insurance plans, severance payment plans, and VEBAs 14
ERISA Preemption • ERISA generally does not cover: – – – – – – – –
Payroll practices Stock options or employer stock purchase plans Deferred compensation/Top Hat plans Cafeteria plans (but not underlying plans) Dependent care assistance plans Most employee assistance plans (“EAPs”) Individual retirement accounts (“IRAs”) Worker’s compensation plans 15
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2011 UPPO ANNUAL CONFERENCE
3/6/2011 – 3/9/2011
ERISA Preemption • ERISA retirement plans may include “forfeiture provisions” that cause unclaimed benefits to revert to the plan to pay future benefits to other plan participants – The Internal Revenue Code generally prohibits the forfeiture of vested retirement benefits – But a special provision allows the forfeiture of retirement benefits for missing participants (provided the benefit is reinstated if the participant is ever located) – Most plan sponsors or administrators adopt procedures for locating missing participants who 16 have not claimed benefits from the plan
ERISA Preemption • If the plan benefits remain unclaimed by the participant, can states escheat them under their unclaimed property laws? • To protect ERISA plan administrators from being burdened by a thicket of inconsistent state laws, Section 514(a) of ERISA, the so called “ERISA Preemption Clause,” provides that ERISA “shall supersede any and all state laws insofar as they now or hereafter relate to any employee benefit plan” governed by ERISA 17
ERISA Preemption • The U.S. Department of Labor has long taken the position that state unclaimed property laws are preempted by ERISA because: – State unclaimed property laws interfere with the administration of claims, which frustrates ERISA’s goals of containing costs and providing uniform administration of claims – Escheating unclaimed employee benefits in funded plans leaves fewer assets in the plan to pay benefits to other participants – Escheating employee benefits in funded plans conflicts with an ERISA fiduciary’s duty to retain and use plan 18 assets for the purposes described in ERISA
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2011 UPPO ANNUAL CONFERENCE
3/6/2011 – 3/9/2011
ERISA Preemption • Two early unclaimed property cases involving unfunded ERISA plans held that there was no ERISA preemption because these were state laws of general application – Aetna Life Insurance Co. v. Borges, (2d Cir. 1989) (while the Connecticut unclaimed property laws had an indirect economic impact on the employer benefit plans, the state’s claim to uncashed checks issued by insurance company (as opposed to the plan sponsor) did not affect the structure, administration or types of benefits provided by the plans) – Attorney General v. Blue Cross & Blue Shield of Michigan (Mich. App. 1988) (escheat was a traditional exercise of statue authority and holder was not an ERISA plan) 19
ERISA Preemption • But the pendulum seems to have swung the other way – In Commonwealth Edison Co. v. Vega (7th Cir. 1999), the Seventh Circuit unanimously held that Illinois was federally preempted from escheating benefit checks issued by a funded retirement plan, because: • The state claim improperly involved the state in a plan administration function • The state claim also would deplete plan assets • Requiring the plan trustee to monitor and comply with 44 state unclaimed property laws would unduly burden the administration of the plan
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ERISA Preemption – In Manufacturers Life Insurance Co. v. East Bay Restaurant and Tavern Retirement Plan (N.D. Cal. 1999), the federal district court applied the Commonwealth Edison “plan asset” analysis to an unfunded plan, and found ERISA preemption, because the state’s escheat claim would deprive the plan of its opportunity to recover a premium refund from the insurance company relating to the unclaimed benefits – Field Assistance Bulletin 2004‐02 (Sept. 30, 2004) (DOL allowed (but did not require) administrators of terminating defined contribution plans to escheat unclaimed benefits “as an option of last resort”) 21
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2011 UPPO ANNUAL CONFERENCE
3/6/2011 – 3/9/2011
Transportation Service Preemption • The federal transportation laws may provide preemption defenses to rail and motor carriers having to report unclaimed “trade payables” and customer credits as unclaimed property • 49 U.S.C. sec. 11705(a) provides that “a rail carrier providing transportation or service subject to the jurisdiction of the [Surface Transportation] Board under this part must begin a civil action to recover charges for transportation or service provided by the carrier within 3 years after the claim accrues” 22
Transportation Service Preemption – Section 11705(a) is part of the Interstate Commerce Act rail carrier provisions, which have generally supplanted the application of state laws to interstate rail carrier service since the early 1900s – 12 U.S.C. sec. 10501(b) provides that “the remedies provided under this part with respect to the regulation of rail transportation are exclusive and preempt the remedies provided under Federal or State law” – Actions by rail carriers for charges for interstate shipments are governed by the limitations period of Section 11705 and not by local time limitations. Strawberry Growers’ Selling Co. v. American Railway Express Co., 31 F.2d 947 (5th Cir. 1929)” 23
Transportation Service Preemption – Deregulation of rail carrier transportation services has not changed the primacy of the federal remedies and limitations periods • G&T Terminal Packaging Co. v. Consolidated Rail Corp., 830 F.2d 1230 (3d Cir. 1987) (while deregulation of rail carriers has decreased the ICC’s role with respect to rate‐ making, this deregulation legislation did not “suggest a Congressional intention to resurrect common law remedies moribund since 1907”)
• 49 U.S.C. sec. 14705(a) provides a similar 18‐ month limitations period on civil actions by interstate motor carrier actions to recover 24 charges for services
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2011 UPPO ANNUAL CONFERENCE
3/6/2011 – 3/9/2011
Transportation Service Preemption • Actions by customers to recover payments or credits from rail or motor carriers are also governed by relatively short federal limitations periods – With respect to rail carrier services, 49 U.S.C. sec. 11705(c) states that “a person must file a complaint with the [Surface Transportation] Board to recover damages . . . within 2 years after the claim accrues” • Aluminum Company of America v. U.S., 867 F.2d 1448 (D.C. Cir. 1989) (claim by a shipper to recover its overpayments to a rail carrier was a “damages” claim subject to the 2‐year limitations period of Section 11705(c))
– 49 U.S.C. sec. 14705(c) provides a similar 2‐year limitations period for customer claims to recover damages from motor carriers 25
Transportation Service Preemption • If the claim by or against a rail or motor carrier for outstanding payments or overpayments is extinguished by federal law after only 18 months to 3 years, most states should be preempted from claiming such property under their unclaimed property laws – In Mason & Dixon Lines, Inc. v. Eagerton, 555 F. Supp. 434 (M.D. Ala. 1982), the federal district court applied a federal preemption analysis to Alabama’s unclaimed property claims to “interline credits” and customer credits on the books of a motor carrier • The interline credits resulted from Mason & Dixon Lines booking credit balances for amounts that it expected to be charged by other motor carriers for the shipment transaction. To the extent charges in carrier invoices did not match the amount Mason & Dixon Lines had anticipated, interline credits might remain on the books 26
Transportation Service Preemption • The customer credits resulted from any number of causes, including Mason & Dixon Lines not being able to locate the outstanding invoice relating to the customer’ payment • The district court rejected Mason & Dixon Lines’ federal preemption defense based on the federal limitations period for “overcharge” actions because the court found that these credits did not represent “overcharges” • However, the district court determined, based on the testimony and other evidence presented, that neither the interline credits nor the customer credits represented outstanding liabilities of Mason & Dixon Lines. As a result, none of the credits constituted unclaimed property 27
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2011 UPPO ANNUAL CONFERENCE
3/6/2011 – 3/9/2011
Telecommunications Services • Prepaid phone cards and a number of other telecommunications services include provisions like expiration dates and dormancy service charges that reduce the balance available to the customer over time • This raises the question of whether a state abandoned property administrator could assert the state’s “private escheat” or “anti‐limitations provision” to claim custody of the expired balance on the telecommunications service • The provisions of the Federal Communications Act of 1934 (the “FCA”) should preempt a state from disregarding the terms of the telecommunications service so as to escheat the unused balance, but the law is not fully developed on this issue 28
Telecommunications Services • Prior to 2001, Section 203 of the FCA required long‐ distance telecommunications service providers to file tariffs with the Federal Communications Commission (the “FCC”) setting forth the rates, terms and conditions for their long‐ distance telephone services – Under the common law “filed rate doctrine,” as interpreted by the U.S. Supreme Court in AT&T v. Central Office Telephone, Inc., 524 U.S. 214 (1998), both long‐distance service providers and their customers were bound to the terms set forth in the filed tariff, giving the tariff the force and effect of federal law – Under the filed rate doctrine, state law claims were federally preempted to the extent such claims were contrary to the provisions in the tariff – Grayson v. Worldcom, Inc. (In re Worldcom, Inc.), 2006 U.S. Dist. LEXIS 55284 (S.D.N.Y. Aug. 4, 2006) (breakage on activated or partially used prepaid calling cards were not escheatable because, under the terms of the filed tariffs and the contractual service agreement that governed the 29 calling cards, breakage was not refundable)
Telecommunications Services • Beginning as of July 31, 2001, the FCC no longer requires telecommunications service providers to file tariffs, but the terms and conditions of their service are still set forth in the contract between the service provider and customer • Moreover, Section 201(b) of the FCA still requires that all terms and conditions of the service be just and reasonable, and Section 202(a) of the FCA still prohibits unjust or unreasonable discrimination in charges, practices, classifications, regulations or services 30
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2011 UPPO ANNUAL CONFERENCE
3/6/2011 – 3/9/2011
Telecommunications Services • In Boomer v. AT&T Corp., 309 F.3d 404 (7th Cir. 2002), the Seventh Circuit held that the FCA preempted a state law consumer protection challenge to an arbitration provision in AT&T’s customer service agreement, because, even in the current de‐tariffed regime, Sections 201(b) and 202(a) show Congress’ intention that customers of individual long‐distance carriers receive uniform terms and conditions of service • In Ting v. AT&T Corp., 319 F.3d 1126 (9th Cir. 2003), the Ninth Circuit reached the opposite conclusion, finding that federal preemption went the way of the filed rate doctrine • More recent cases are siding with Boomer, finding state laws to be federally preempted 31
Federal Bankruptcy Preemption •
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Under Arkansas v. Federated Department Stores, Inc., 175 B.R. 924 (S.D. Ohio 1992), In re Drexel Burnham Lambert Groups, Inc., 151 B.R. 684 (S.D.N.Y. 1993), and In re Continental Airlines, Inc., 161 B.R. 101 (Bankr. Del. 1993), the general rules are that: – Where a holder files for bankruptcy, states must file timely proofs of claim regarding property items that are already presumed abandoned as of the petition date, in order to assert a claim to such property against the holder – However, the Bankruptcy Code preempts state claims to: • Pre‐petition unclaimed property items for which the state does not file a timely proof of claim • Pre‐petition property items that are not yet presumed abandoned as of the petition date • Property items arising during the pendancy of the bankruptcy case (these liabilities generally are discharged pursuant to the Bankruptcy Court’s order) Bankruptcy distribution payments not claimed by creditors are usually redistributed under the terms of the bankruptcy plan 32
Questions? John A. Biek, Esq. Partner Neal, Gerber & Eisenberg LLP (312) 269‐8485
[email protected] Diann L. Smith, Esq. Counsel Sutherland Asbill & Brennan LLP (202) 383‐0884
[email protected] 33
©2011 UPPO. All rights reserved.
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