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Estes v. U.S. Department of Treasury

United States District Court, District of Columbia

November 28, 2016

RON ESTES, Treasurer of the State of Kansas, et al ., Plaintiffs,
v.
U.S. DEPARTMENT OF THE TREASURY, et al ., Defendants.

          MEMORANDUM OPINION

          CHRISTOPHER R. COOPER United States District Judge.

         Table of Contents

         I. Background .................................................................................................................... 3

         A. United States Savings Bond Program .............................................................................. 3

         B. State Attempts to Redeem Bonds by Escheat .................................................................. 4

         C. Kansas's Title-Escheatment Statute and Redemption Efforts ......................................... 7

         D. The Rulemaking ............................................................................................................. 10

         E. Procedural History ......................................................................................................... 11

         II. Legal Standards ........................................................................................................... 11

         III. Analysis ......................................................................................................................... 12

         A. Whether the Rule Constitutes an Unacknowledged Policy Change .............................. 12

         1. Whether the Possession Requirement is a Policy Change ............................................. 13

         2. Whether the Discretionary Aspect of the Rule is a Policy Change ................................ 17

         3. Whether Other Apparent Inconsistencies Invalidate the Rule ....................................... 18

         B. Whether the Rule is Otherwise Arbitrary and Capricious ............................................. 22

         1. Whether Treasury Adequately Weighed Evidence of State Unclaimed Property Programs ................................................................................................................... 23

         2. Whether the Rule is Based on an Erroneous Interpretation of Property Law ............... 25

         3. Whether the Rule Arbitrarily Discriminates Against State Owners .............................. 27

         C. Whether the Rule Was Promulgated in Violation of the Appointments Clause ............ 28

         1. Whether Plaintiffs Waived Their Appointments Clause Challenge ............................... 28

         2. Whether the Fiscal Assistant Secretary is a De Facto Principal Officer ...................... 29

         D. Whether the Rule Authorizes the Improper Review of State Judgments ...................... 32

         E. Whether the Rule Violates the Tenth Amendment ........................................................ 34

         IV. Conclusion .................................................................................................................... 36

         In the throes of the Great Depression, President Franklin D. Roosevelt and Treasury Secretary Henry Morgenthau, Jr., set out to create a public debt program that would both stimulate the nation's faltering economy and renew the confidence of average American investors badly shaken by the collapse of the private banking system. United States Department of Treasury, A History of the United States Savings Bonds Program 4-5 (1991). What they devised would later help finance World War II and the country's post-war expansion, and ultimately become the world's widest-held security: the United States savings bond. Id. Backed by the full faith and credit of the federal government, savings bonds are one of the safest investments available: They can be redeemed upon presentation by the registered owner, with an almost-guaranteed assurance of full payment, at any time after they mature. But what happens when a state takes title to a bond that it deems to have been abandoned by the owner? May it redeem the bond and keep the proceeds? That is the question underlying this case.

         Plaintiff Ron Estes, Treasurer of the State of Kansas, and four fellow state treasurers, challenge a rule promulgated by the United States Department of the Treasury (“Treasury”) governing the circumstances under which Treasury will honor payment requests from states for U.S. savings bonds they purport to own through their own escheatment statutes. See Regulations Governing United States Savings Bonds (“Rule”), 80 Fed. Reg. 80, 258 (Dec. 24, 2015). Plaintiffs contend the Rule violates the Administrative Procedure Act (“APA”) because it capriciously abandons prior Treasury policy, arbitrarily avoids considering key evidence, and rests on an erroneous understanding of property law. They also claim the Rule violates various constitutional and jurisdictional principles.

         Plaintiffs have fairly pointed out inconsistencies between certain of the Rule's rationales and certain of Treasury's prior informal statements. But they cannot show what they must-that Treasury departed from a clear policy without adequate explanation. Plaintiffs' other challenges also fail, for the reasons elaborated below. The Court will, accordingly, uphold the Rule and grant summary judgment for Treasury.

         I. Background

         A. United States Savings Bond Program

         Under the Constitution, the federal government has the enumerated power “[t]o borrow Money on the credit of the United States.” U.S. Const. art. I, § 8, cl. 2. “Pursuant to this grant of power, the Congress authorized the Secretary of the Treasury, with the approval of the President, to issue savings bonds in such form and under such conditions as he may from time to time prescribe[.]” Free v. Bland, 369 U.S. 663, 667 (1962) (citing the predecessor to 31 U.S.C. § 3105). In particular, Congress authorized the Secretary, among other things, to define “the conditions, including restrictions on transfer, to which [savings bonds] will be subject, ” and to set the “conditions governing their redemption.” 31 U.S.C. § 3105(c)(3), (4). These regulations provide that “[r]egistration is conclusive of ownership, ” 31 C.F.R. § 315.5(a), and as permitted by statute, they do not fix any time limits for the redemption of savings bonds after maturity. See 31 U.S.C. § 3105(b)(2) (“The Secretary may prescribe regulations providing that . . . owners of savings bonds may keep the bonds after maturity.”).

         The general rule that registration determines ownership is subject to some exceptions, including that Treasury will recognize some-but not recognize other-“judicial determination[s] on adverse claims affecting savings bonds.” 31 C.F.R. § 315.20. For example, Treasury has “recognize[d] a claim against an owner of a savings bond . . . if established by valid, judicial proceedings, ” such as a claim by a trustee in accordance with bankruptcy proceedings. Id. §§ 315.20(b), 315.21. On the other hand, Treasury has for some time refused to “recognize a judicial determination that gives effect to an attempted voluntary transfer inter vivos of a bond, or a judicial determination that impairs the rights of survivorship conferred by the[] regulations upon a co[-]owner or beneficiary.” Id. § 315.20(a).

         B. State Attempts to Redeem Bonds by Escheat

         The Rule adds to these regulations. It addresses the circumstances under which Treasury will permit states to redeem savings bond proceeds in accordance with state escheatment laws. Escheat is “a procedure with ancient origins whereby a sovereign may acquire title to abandoned property if after a number of years no rightful owner appears.” Texas v. New Jersey, 379 U.S. 674, 675 (1965). Prior to the challenged rulemaking, Treasury's regulations did not specifically address the validity of state escheat proceedings as they related to bond ownership. The Department did, however, address that subject through informal policy guidance.

         In 1952, for example, Treasury issued a bulletin which incorporated a letter from the Secretary of the Treasury to the New York State Comptroller regarding whether the state might “receive payment of certain United States securities of which it is not the registered owner.” A.R. 1. The bonds were in the possession of the state, and registered in the name of an individual who had passed away at a state mental institution without heirs. Id. Under these circumstances, where the state did not have title to the bonds in question, the Secretary declined the Comptroller's request for payment. The Secretary noted, however, that “the Department [would] pay one who succeeds to the title of the bondholder, ” since such payment would be regarded as “to the bondholder in the person of his successor or representative.” A.R. 3. Although not specified by regulation, the Secretary explained that “the Department recognizes the title of the state when it makes claim based upon a judgment of escheat.” Id.

         Three decades later, Treasury repeated the same position in a letter to the Kentucky Secretary of Revenue under similar circumstances-i.e., regarding abandoned bonds in the state's possession. A.R. 5 (September 1983 Treasury Letter). “[C]laims by States for payment of United States securities, ” the Department wrote, “will be recognized only where the States have actually succeeded to the title and ownership of the securities pursuant to valid escheat proceedings. The Department does not recognize claims for payment by a State acting merely as custodian of unclaimed or abandoned securities and not as successor in title and ownership of the securities.” Id. And beginning in 2000, Treasury included the following exchange on the Department's Q&A webpage: In response to a question regarding whether a state can “claim the money represented by securities that a state has in its possession[, such as] savings bonds that it's gotten from abandoned safe deposit boxes, ” Treasury stated that it would recognize such claims for payment “where the States have actually succeeded to the title and ownership of the securities pursuant to valid escheat proceedings.” A.R. 781.[1]

         Then, around 2000, the ground began to shift. For the first time, states sought to redeem bonds-escheated in accordance with newly-passed statutes-that were not in their possession. In 2004 and 2006, for example, a number of states pressed so-called “custody” escheat claims for matured, unredeemed bonds they did not possess but whose registered owners had last-known addresses in the state. Treasury denied the states' claims, on the grounds that “[i]n order for the bonds to be paid . . . the commonwealth [or state] must have possession of the bonds, statutory authority to obtain title to the individual bonds, obtain an order of escheat from a court of competent jurisdiction vesting title in the state to the individual bonds, and apply to the Department of Treasury for payment.” A.R. 106-07 (April 2004 Treasury Letter to Kentucky Treasurer); see also A.R. 114-15 (April 2004 Treasury Letter to Illinois Treasurer) (same); A.R. 124-25 (April 2004 Treasury Letter to North Carolina Treasurer) (same); A.R. 118-19 (May 2004 Treasury Letter to New Hampshire Treasurer) (same); A.R. 102-03 (August 2004 Treasury Letter to South Dakota Treasurer) (same); A.R. 110-11 (August 2004 Treasury Letter to Connecticut Treasurer) (same); A.R. 126-27 (October 2006 Treasury Letter to Chief Counsel for the Florida Chief Financial Officer) (“Payment on a bond may only be made to the owner of the bond upon presentation and delivery of the bond.”).

         Treasury's position was challenged and upheld in court. Treasurer of New Jersey v. Dep't of the Treasury, 684 F.3d 382 (3d Cir. 2012). The Third Circuit concluded “that the federal statutes and regulations pertaining to United States savings bonds preempt the States' unclaimed property acts insofar as the States seek to apply their acts to take custody of the proceeds of the matured but unredeemed savings bonds.” Id. at 407. In particular, the court reasoned that the states' escheatment efforts-which “specif[ied] that matured bonds are abandoned . . . if not redeemed within a time period as short as one year after maturity” and which would have potentially complicated redemption ...


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