Tuesday, February 19, 2008, 11:49 PM

COA Rejects Constitutional Challenge to NC Unclaimed Property Act

Today in Rowlette v. State, the Court of Appeals (COA) rejected a "takings" challenge to the North Carolina Unclaimed Property Act (NCUPA). The case concerned interest earned on unclaimed dividends while they were in the State's custody under the NCUPA. The State surrendered the dividends to plaintiffs when they claimed them, but, as provided by the NCUPA, the State retained the interest earned on them. Under the NCUPA, income derived from the investment of funds is distributed annually "to the State Education Assistance Authority for grants and loans to aid worthy and needy students who are residents of this State and are enrolled in public institutions of higher education in this State." N.C. Gen. Stat. § 116B-7(a). Plaintiffs argued that the State's retention of interest, as prescribed by the NCUPA, was an unconstitutional taking. The COA disagreed.

The COA had to distinguish two U.S. Supreme Court cases which involved challenges to a State's IOLTA program. See Phillips v. Washington Legal Found., 524 U.S. 156 (1998); Brown v. Legal Found. of Washington, 538 U.S. 216 (2003). Under the IOLTA program, the State uses interest earned on the property of private individuals held in attorneys' trust accounts; the interest is used to fund legal services for low-income individuals. In the IOLTA cases the Supreme Cort held that "interest income generated by funds held in IOLTA accounts is the 'private property' of the owner of the principal," and that the appropriation of those earnings by the State constitutes a "taking" which triggers the Fifth Amendment. The COA today distinguished the IOLTA cases based on "the unique nature" of the property at issue: the IOLTA cases "dealt with property that unquestionably belonged to identified owners," the COA said, whereas today's case involved "property that is presumed abandoned until a holder or owner makes a claim to the Treasurer."

The COA also distinguished McMillan v. Robeson Cty., 262 N.C. 413 (1964). McMillan seemed particularly apposite, since it dealt with interest earned on unclaimed property. McMillan involved a statute that permitted county clerks of court "to invest or reinvest any moneys representing unclaimed court costs, fees received, and judgment payments and all moneys received and held by him by [the clerk]"; and the statute further said that "[t]he interest . . . received" therefrom "shall be deposited in and become a part of the general fund of the county." When a county clerk sought a declaratory judgment to determine the constitutionality of that statute, the trial court held the statute valid and directed the clerk to deposit the accumulated interest into the general fund. The Supreme Court reversed, stating that "earnings on the fund are a mere incident of ownership of the fund itself," and "[t]he constitutional provision . . . that no person shall be deprived of his property 'but by the law of the land'" -- which is the essentially the "takings" provision of the NC Constitution -- "applies to the earnings in the same manner, and with the same force, it applies to the principal." The COA today said that McMillan didn't address or rely on the constitutional "takings" provisions but instead merely remanded the action to the trial court so that all interested parties could fully develop their claims.

Instead of relying on the language from McMillan, the COA found guidance in Texaco, Inc. v. Short, 454 U.S. 516 (1982), even though, as the COA acknowleged, Texaco involved a State statute that (unlike the NCUPA) transferred private property rights not to a State, but to another private party. Texaco upheld the constitutionality of Indiana's Mineral Lapse Act, which made unused or abandoned mineral interests revert to the surface owner of the property. The COA today found persuasive the Texaco Court's statements that “States have the power to permit unused or abandoned interests in property to revert to another after the passage of time," and that the State isn't required "to compensate the owner for the consequences of his own neglect." Relying on those statements in Texaco, the COA today said that under the NCUPA the State doesn't take possession of property through any overt act on its part; rather, "the State comes into possession of the property as a result of the owner's neglect which causes the property to be unclaimed for the prescribed period of time, and thus deemed abandoned."

The COA's bottom-line holding today: "Due to this unique nature of the property, and since it is the owner's neglect that results in the State's possession of the property, the capture of interest accruing on that property by the State is not a taking, and the State is not required to pay the owner "just compensation."

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