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Holy Escheat

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  • Posted on: Sep 18 2017

Black’s Law Dictionary has defined “escheat” as “[a] reversion of property to the state in consequence of a want of any individual competent to inherit.”  Many people are aware that money in forgotten bank accounts is frequently deemed abandoned and is escheated to the State, however, the scope of the APL, is significantly broader.

New York’s Abandoned Property Law (“APL”), sets forth various circumstances in which property is deemed to be abandoned and thus escheated to New York State.  Thus, section 102 of the APL, which is the declaration of the policy behind the APL, provides that “[i]t is hereby declared to be the policy of the state, while protecting the interest of the owners thereof, to utilize escheated lands and unclaimed property for the benefit of all the people of the state, and this chapter shall be liberally construed to accomplish such purposes”.

Unclaimed property held or owing by banking organizations is governed by Article III of the APL.  Other provisions in the APL relate to unclaimed deposits and refunds for utility services (Article IV), unclaimed property held or owing for payment to security holders (Article V), unclaimed property held by securities brokers (Article V-A), unclaimed life insurance funds (Article VII), unclaimed condemnation awards (Article X), unclaimed property paid or deposited into federal courts (Article XII), unclaimed or abandoned property in the possession, custody or control of the United States of America (Article XII-A) and various categories of miscellaneous unclaimed property (such as, but not limited to, unclaimed property resulting from the administration of the NYS Vehicle and Traffic Law, uncashed travelers checks and money orders, unclaimed consumer credit balances) (Article XII).

This blog reflects upon Article VI of the APL, which addresses the escheatment to New York State of unclaimed or unknown court funds.  Attorneys and litigants routinely deposit money into court for a variety of reasons pursuant to statute and/or court order.  These deposited funds are subject to section 600 of the APL, which deems, with some exceptions, the following unclaimed property as abandoned: (a) “any monies including the monetary proceeds from the sale of tangible personal property and securities or other intangible property paid into court which … shall have remained in the hands of any county treasurer, or the commissioner of finance of the city of New York, for three years.…”; (b) certain “…monetary proceeds representing any legacy or distribution share to which an unknown person is entitled….”; and, (c) “… monies paid to a support bureau of a family court, for the support of a spouse or child, which shall have remained in the custody of a county treasurer, or the commissioner of finance of the city of New York, for three years….”  The potentially absurd result of the blind application of Article VI of the APL is illustrated by the circumstances of the case discussed below (the true names of the parties having been changed).

ABC Corporation (“ABC”) was the owner of real property in New York State on which it constructed a large building (the “Project”).  The general contractor on the Project (“GC”) was terminated, for cause.  The GC and almost two dozen subcontractors filed mechanics liens approximating $1.8 million (the “Liens”).

In March of 2012, the GC commenced an action to foreclose its lien (the “Lien Foreclosure Action”).  In April of 2012, ABC moved the Court for an order pursuant to section 20 of New York’s Lien Law fixing the amount necessary for ABC to pay into Court to discharge all of the Liens (the “Discharge Motion”).  In May of 2012, the Court granted ABC’s Discharge Motion and directed that upon the deposit of the sum of $1.1 million with the County Clerk (the “Deposit”), the Liens would be discharged.  The Deposit was promptly made and, accordingly, the Liens were discharged.

In the summer of 2016, ABC’s accountants, in conjunction with a routine audit, and in light of the significant amount of the Deposit, wrote to the County Clerk to inquire on the status of the Deposit.  In the County’s response to the request (the “Response”), ABC was advised that in the spring of 2016, the County Clerk deemed the Deposit abandoned and turned same over to the NYS Office of Unclaimed Funds, less a 2% “Treasurer’s Fee” that the County retained for itself (the “Turnover”).   In its Response, the County also advised that it provided notice of the Turnover in a legal advertisement placed in the local press.

The news that the County turned over to New York State as abandoned property the $1.1 million Deposit was met with a resounding “HOLY ESCHEAT”.

While the Turnover appears to be authorized under the APL, the County Clerk’s actions seem to lack sensibility.  The Deposit was made pursuant to an Order of the Court under section 20 of the Lien Law, which provides, in pertinent part, that a deposit made pursuant to that section “shall be repaid to the party making the deposit…upon the discharge of the liens against the property pursuant to law”, that such deposits of money “shall be considered as paid into court and shall be subject to the provisions of law relative to the payment of money into court and the surrender of such money by order of the court” and that orders for the surrender of such deposits to the lienor or depositor “may be made by any court of record having jurisdiction of the parties….”  Thus, the Deposit should have remained in the County Clerk’s possession until further order of the Court.

Further, at the time the Turnover was made, the parties were still actively litigating the Lien Foreclosure Action and the Clerk was aware of the name and address of each and every litigant and their respective counsel.  Nonetheless, the only “notice” of the Turnover was made by publication pursuant to APL section 601(1), which provides that “[o]n or before the First day of February in each year, such county treasurer or the commissioner of finance of the city of New York shall cause to be published a notice entitled: ‘NOTICE OF NAMES OF PERSONS APPEARING AS OWNERS OF CERTAIN UNCLAIMED PROPERTY HELD BY (title of officer).’”  Under the facts of the case discussed herein, it should be apparent that published notice was not the best way to notify known and active litigants that their valuable property was about to be turned over to the State.

Section 1406 of the APL establishes various claims procedures for the return of property deemed abandoned.  In the case discussed herein, upon learning of the Turnover, ABC moved the Court in the Lien Foreclosure Action pursuant to APL section 1406(2) for an order directing New York State to return the Deposit (the “Return Motion”).  Pursuant to Section 1406(2), claims is in the amount of $10,000 or more based on turnovers to New York State pursuant to, inter alia, APL section 600(1)(a), “…may be established only on order of the court which had original jurisdiction of the underlying matter, after service of a notice upon the state comptroller and upon due notice to all parties to the action or proceeding which resulted in the monies being paid into court….”

At the time the Return Motion was made, the Lien Foreclosure Action was still active and the Deposit was still required to be in place pursuant to section 20 of the Lien Law.  ABC was reluctant to have the Deposit returned to the County Clerk because of its prior decision to deem the Deposit abandoned.  Thus, in its Return Motion ABC requested that the Deposit be delivered to ABC’s counsel to be held in an escrow account (as opposed to returning the Deposit to the County Clerk).  The Return Motion was granted and ABC’s counsel retained the Deposit until the matter was resolved and a subsequent court order permitted the delivery of the Deposit to ABC.

Takeaway

Whenever deposits into court are required, a review of the APL should be made to determine whether the circumstances present one in which the deposit may be deemed abandoned after three years and, if so, steps should be taken before the end of three years to ensure that any such deposits are not deemed abandoned pursuant to the APL.

In addition, query whether it might make sense to request that the Court include in any order directing that a deposit be made into court, language prohibiting the County Clerk from deeming such deposit to be abandoned without further order of the court and/or without personally notifying the litigants of such intentions so that prophylactic steps can be taken to prevent such actions by the County Clerk.

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