Am. Exp. Travel Related Services Co. v. Hollenbach, Civil Action No. 3:08-58-DCR.

• Citation: 630 F.Supp.2d 757
• Decision Date: 15 June 2009
• Docket Number: Civil Action No. 3:08-58-DCR.
• Parties: AMERICAN EXPRESS TRAVEL RELATED SERVICES COMPANY, INC., Plaintiff, v. Todd HOLLENBACH, in his Official Capacity as Treasurer of the Commonwealth of Kentucky, Defendant.
• Court: United States District Courts. 6th Circuit. United States District Court of Eastern District of Kentucky

630 F.Supp.2d 757

AMERICAN EXPRESS TRAVEL RELATED SERVICES COMPANY, INC., Plaintiff, v. Todd HOLLENBACH, in his Official Capacity as Treasurer of the Commonwealth of Kentucky, Defendant.

Civil Action No. 3:08-58-DCR.

United States District Court, E.D. Kentucky, Central Division, at Frankfort.

June 15, 2009.

COPYRIGHT MATERIAL OMITTED

Byron Riggs Lewis, Kathryn V. Eberle, Timothy J. Eifler, Walter L. Sales, Stoll, Keenon & Ogden, PLLC, Louisville, KY, Paul Christopher Harnice, Sarah Jackson Bishop, Stoll Keenon Ogden, Frankfort, KY, for Plaintiff.

Angela Christine Evans, Kentucky Attorney General, Stuart W. Cobb, Tad Thomas, Office of Attorney General, Frankfort, KY, for Defendant.

MEMORANDUM OPINION AND ORDER

DANNY C. REEVES, District Judge.

At issue in this case is whether K.R.S. § 393.060(2)¹, violates the Due Process, Takings, and/or Contract Clauses of the United States Constitution. Plaintiff American Express challenges this legislation as an attempt to unconstitutionally misappropriate or interfere with its property and contract interests in traveler's check funds. Defendant Hollenbach disagrees with this assertion and contends that the statute in issue does not violate any of the constitutional provisions identified by American Express.

After considering the parties' arguments, the Court concludes that American Express has met its burden of establishing that the statute in issue is arbitrary and capricious and violates the Due Process Clause of the United States Constitution. Therefore, the Court will grant the relief requested by American Express. [Record No. 41] The Defendant's motion for summary judgment will be denied.

I. Discussion

American Express does not charge a fee for issuing traveler's checks to its customers. The ability to offer this service gratis derives from profits earned on the traveler's check funds. American Express keeps the proceeds from the sale of a traveler's check until the purchaser or holder in due course redeems it. During that time, American Express is able to generate investment profit from the proceeds.

Traveler's checks have no expiration date, but every state has legislation presuming that the checks are abandoned after fifteen years. This time period was has been recommended by the National Conference of Commissioners on Uniform State Laws, in enacting and revising the Uniform Unclaimed Property Act on numerous occasions since 1954. Once the checks are outstanding for fifteen years, a state's abandoned property law requires the bank to notify the state and remit the extant funds. In Kentucky, the fifteen-year presumptive abandonment period was contained in K.R.S. § 393.060, an abandoned property law, until 2006, when the Kentucky General Assembly amended the statute to shorten the period to seven years.

Kentucky's attempt to shorten the abandonment period has already faced judicial scrutiny. After the statute was enacted in 2006, American Express filed suit in Franklin Circuit Court, challenging the shortened seven-year period. The state court ruled in favor of American Express based on the legislature's failure to enact the law according to proper notice and publication procedures. However, it declined to address the amendment's constitutionality. [Record No. 8, Exhibit C] Kentucky's General Assembly proceeded to enact virtually the same amendment—a seven-year presumptive abandonment period—during the next legislative session. American Express then filed suit in this Court on July 28, 2008, alleging that K.R.S. § 393.060(2), as amended, violated the Kentucky Constitution, the Due Process Clause of the 14th Amendment, the Contract Clause of Article 1, Section 10, of the United States Constitution, and the Takings Clause of the 5th Amendment. [Record No. 1]

After this Court dismissed the state law claims pursuant to the doctrine of sovereign immunity, the Plaintiff moved for summary judgment on its remaining federal constitutional claims. Treasurer Todd Hollenbach then filed a cross-motion for summary judgment. Both motions have been fully briefed and argued and are ripe for review.

A. Due Process Claim

American Express does not specify whether its due process claim is procedural or substantive in nature. Instead, it asserts that K.R.S. § 393.060 violates the Due Process Clause because it arbitrarily extinguishes its property interest in traveler's check funds. The Plaintiff's requested relief is for the Court to declare the legislation unconstitutional. Thus, its argument will be analyzed as a question of substantive due process. See Eidson v. State of Tenn. Dept. Of Children's Servs., 510 F.3d 631, 635-636 (6th Cir.2007).

Although substantive due process claims take on myriad uncertain forms, the Plaintiff has asserted one recognized by the Sixth Circuit: a violation of substantive due process "occurs when arbitrary and capricious government action deprives an individual of a constitutionally protected property interest." Warren v. City of Athens, Ohio, 411 F.3d 697, 707-708 (6th Cir.2005). In other words, the Due Process Clause guarantees a right not to be subject to arbitrary or capricious action on the part of a state exercising its legislative power. See Pearson v. City of Grand Blanc, 961 F.2d 1211, 1217 (6th Cir.1992).

A due process claim is examined under a two-part analysis. First, the interest at stake must be a protected liberty or property interest under the Fourteenth Amendment. If such an interest exists, the court must then consider whether "the deprivation of that interest contravened the notions of due process." Wojcik v. City of Romulus, 257 F.3d 600, 609 (6th Cir.2001). Regarding the first prong, American Express argues that it has a property interest, or "vested right" in these funds, while the Treasurer characterizes the asserted interest as a "unilateral expectation." [Record No. 9, p. 10; Record No. 8, p. 10] Property interests are not created by the Constitution, but are instead created and defined by independent sources like state laws. See Hamby v. Neel, 368 F.3d 549, 557 (6th Cir.2004). Thus, the first prong of the due process analysis requires examination of Kentucky law to determine whether American Express has a legitimate claim of entitlement to the funds obtained from the sale of traveler's checks. See Braun v. Ann Arbor Charter Tp., 519 F.3d 564, 573 (6th Cir.2008) (stating that "[p]roperty rights are created and defined by independent sources such as state law and not by the Constitution").

Kentucky law defines a traveler's check as "an instrument that is payable on demand, drawn on or payable at or through a bank, is designated by the term `traveler's check' and requires a countersignature by a person whose signature appears on the instrument." K.R.S. § 355.3-104. A purchase of a traveler's check is, in effect, a deposit with the financial institution issuing the check. A customer purchases a traveler's check from American Express and the purchase money passes to the bank until the check is cashed, in the same way a deposit remains with a bank until it is withdrawn. The relationship between a bank and depositor is that of a debtor and creditor. A deposit becomes a part of the bank's own funds. The bank then retains an interest in those funds until the money is claimed by the creditor. Ky. Rock Asphalt Co. v. Helburn, 108 F.2d 779, 781 (6th Cir.1940); Anderson Nat'l Bank v. Luckett, 321 U.S. 233, 241, 64 S.Ct. 599, 88 L.Ed. 692 (1944); Scoggan v. Dillon, 252 S.W.2d 35, 37 (Ky.1952) ("The deposit of money in a bank passes title and it becomes part of the assets of the bank with an implied contract that the sum will be repaid upon demand, the relationship of creditor and debtor being created."); Ferguson Enter., Inc. v. Main Supply, Inc., 868 S.W.2d 98, 99 (Ky.App.1993). A bank's property interest in funds from traveler's check is extinguished when the customer uses the traveler's check or when the state's presumptive abandonment period begins. Currently, the presumptive abandonment period in Kentucky is set at fifteen years, as it is in every other state.

As previously noted, American Express issues traveler's checks to its customers free of charge. This business decision was based on the company's reliance on a statutory presumptive abandonment period of fifteen years. With a significantly shortened abandonment period, American Express' decision to offer traveler's checks free of charge would not stand. [Record No. 13, Attach. 2] And because the company enjoys a property interest in these funds until the presumptive abandonment period begins, it is the length of this period that goes to the heart of its due process claim. This leads in to the second prong of the due process analysis: whether shortening the presumed abandonment period violates notions of due process.

It is long-settled that a state, through the exercise of its inherent police power, may take custody of abandoned or unclaimed property in the interests of the unknown or at-large owner. See Provident Inst. for Sav. In Town of Boston v. Malone, 221 U.S. 660, 31 S.Ct. 661, 55 L.Ed. 899 (1911) (holding that states may exercise their supervisory power to take custody of bank savings deposits). However, American Express alleges that changing the presumptive abandonment period from fifteen to seven years has no relationship to when traveler's checks are actually abandoned. The Treasurer attempts to side-step the Plaintiff's argument by positing that the state's sovereign authority to conserve unclaimed property for the benefit of the owner is necessarily accompanied by the "authority to determine at what point property shall be presumed abandoned." [Record No. 8, p. 12] Thus, any changes in the presumptive abandonment period would be within the state's authority and would not constitute a burden on American Express's property interest.

In presuming this boundless authority, the Treasurer misconstrues the holding of Anderson Bank. The pertinent quote...