Sogg v. White

• Decision Date: 07 August 2006
• Docket Number: No. 04CVG-08-8028.,04CVG-08-8028.
• Citation: 139 Ohio Misc.2d 58,860 N.E.2d 163,2006 Ohio 4223
• Parties: SOGG, Exr., et al., Plaintiffs, v. WHITE, Defendant.
• Court: Ohio Court of Common Pleas

860 N.E.2d 163

139 Ohio Misc.2d 58

2006-Ohio-4223

SOGG, Exr., et al., Plaintiffs, v. WHITE, Defendant.

No. 04CVG-08-8028.

Court of Common Pleas of Ohio, Franklin County.

Decided August 7, 2006.

COPYRIGHT MATERIAL OMITTED

Futterman, Howard, Watkins, Wylie & Ashley, Chartered, John R. Wylie, and Charles R. Watkins; Susman, Heffner, & Hurst, L.L.P., and Arthur T. Susman; Thompson Hine L.L.P., William C. Wilkinson, and Craig A. Calcaterra, Columbus, for plaintiff.

Jim Petro, Attorney General, and William J. Cole and John T. Williams, Assistant Attorneys General, for defendant.

RICHARD A. FRYE, Judge.

Introduction

{¶ 1} This case was certified as a class action under Civ.R. 23(B)(2) in order to determine whether a portion of Ohio's Unclaimed Funds Act is unconstitutional because it results in a taking of private property. Amended in 1991 as a significant alteration to the state's program for handling unclaimed funds that began in the 1960s, the statute in question denies private owners of funds any interest on their money while it is held by the state even though, while in state custody, the funds always remain private property. Beyond retaining the interest earnings, the state also collects a five-percent administrative fee upon funds returned to private owners. Interest earned on the tens of millions of dollars returned to private owners each year¹ is taken by the state to underwrite loans to first-time homebuyers and to be used for other public purposes. For the reasons explained hereinafter, this court concludes that the federal and state Constitutions both require the state to pay interest on unclaimed funds held by the defendant and that the first sentence of R.C. 169.08(D) as amended in 1991 is unconstitutional.

The Factual Record²

{¶ 2} Wilton Sogg is the executor of his mother's estate. Julia Sogg died, leaving unclaimed funds composed of an insurance-policy claim payment of $40.52, reported to the defendant in 1989 by Blue Cross and Blue Shield, plus dividends of $292.86, reported in 1998 by the Bank of New York. Early in 2004, Mr. Sogg made a claim for those funds. A few months later, the state issued a check for $320.72. The plaintiff was paid interest on his mother's Blue Cross and Blue Shield money calculated until July 26, 1991, when the applicable statute was amended to eliminate payment of interest. For the period after that date, the plaintiff received no interest. In addition, a five-percent fee was deducted from the amount returned to cover the defendant's administrative costs. Mr. Sogg brought suit in August 2004.

{¶ 3} Mr. Sogg was certified under Civ.R. 23(B)(2) as a class representative for all those who have recovered unclaimed funds since August 4, 2000, and who were not paid interest on their funds after July 1991. The class certification order was filed February 24, 2006. In a separate decision, the court determined that a four-year statute of limitations is applicable under Ohio law and under Section 1983, Title 42, U.S.Code to the "takings" claims made in this case. Thus, claims by those whose unclaimed funds had been repaid prior to August 4, 2000 (although without interest attributable to the period after July 26, 1991) were time-barred. Their legal injury manifested itself more than four years before this suit began.

{¶ 4} Doug White is Director of the Ohio Department of Commerce. He supervises the Division of Unclaimed Funds within the Ohio Department of Commerce. The division operates an elaborate program to gather funds, keep track of them, and advertise publicly to alert owners that their property is in state custody. According to the recent news release referenced at footnote one, outreach efforts include kiosks at the Ohio State Fair that connect directly to the division's "Online Treasure Hunt" website. Using those computer terminals, the public can determine whether their names are associated with any of the 3.2 million open accounts still waiting to be claimed.

{¶ 5} R.C. 169 sets forth the procedure under which unclaimed funds are collected and distributed by the division. Ohio first adopted the Unclaimed Funds Act in 1967. From fiscal year 1968 through fiscal year 2005, the state controlled almost $1.3 billion as unclaimed property. Over the entire period, the program successfully returned 35 percent of the property to its owners.

{¶ 6} For the first several decades, this program paid interest to owners upon the return of their money. However, a July 1991 amendment to R.C. 169.08(D) eliminated payment of all interest. The statute now explicitly provides, "Interest is not payable to claimants of unclaimed funds held by the state." R.C. 169.08(D). Furthermore, as discussed below, since 1991, the defendant has been statutorily authorized to, and actually does, collect a five-percent administrative charge measured against funds returned to successful claimants.

{¶ 7} The purpose of the Ohio Unclaimed Funds Act is threefold: (1) to protect the property right of the owner and reunite the owner with his or her funds, (2) to provide a centralized contact for potential unclaimed-funds owners, and (3) to relieve holders of unclaimed funds from further legal liability.

{¶ 8} Under Ohio law, money, rights to money, and intangible property are classified as "unclaimed" when the owner has not generated activity for a prescribed period —generally five years, depending upon the type of property — and when the nonowner "holder" of such property cannot locate the owner. All funds that meet the statutory definition of "unclaimed" are placed under the division's control. "Holders" of unclaimed funds may, in the division's discretion, remit ten percent and retain 90 percent of the unclaimed funds. In instances such as these, R.C. 169.05 requires the holder to invest the retained amount into an approved FDIC-insured "income-bearing" account or a U.S. Treasury account. The holder is then required to deliver all earnings realized on such invested funds to the division.

{¶ 9} Marketable securities and other intangible, nonmonetary property delivered into the defendant's custody are sold and converted into cash in accordance with R.C. 169.05(A). Further, while the act does not specifically address tangible items, the division also accepts custody of property left behind in safe-deposit boxes, such as stamp and coin collections. The division inventories the items and establishes accounts for the owners. Tangible items are kept intact until such time as the division elects to liquidate them at auction. The last such auction was held in 1998. Once the items are liquidated, the division treats the proceeds like all other unclaimed funds.

{¶ 10} The division holds unclaimed funds in trust for the owner in perpetuity. Funds and other property never escheat or otherwise become property of the state of Ohio. Concepts of "abandonment" or "escheat" are not a part of the Ohio statutory scheme.

{¶ 11} Funds held by the division are not permitted to sit idle. Many of the funds are actually invested by the state (or by another holder) to accrue interest or other earnings that are eventually paid to the state. Interest-bearing accounts contain the principal funds that are held by the defendant, including the ten percent funds not retained by holders outside state government and the interest paid in to the state that is earned on the 90 percent of funds that the state may elect to leave in private hands. Beyond those income-bearing accounts, a substantial amount of unclaimed money is transferred to finance state programs such as the Ohio Housing Finance Authority ("OHFA"), which obtained $570 million from the pool of unclaimed funds between state fiscal years 1991 and 2005. Those funds were then lent to the public at interest to support housing development in the state. Money so utilized remains subject to recall to repay claims of owners. However, even if the OHFA remits the principal to the division, it never remits any interest received from home loans that the OHFA has made using the unclaimed funds.

{¶ 12} The defendant accounts for operation of the division using three major expense categories: operating expenses, administrative and computer support, and holder mailing and other expenses. Operating expenses include payroll, external auditors, advertising, and equipment. Between fiscal years 1992 and 2005, the division showed expenses of $74.5 million, exclusive of amounts transferred to Ohio's General Revenue Fund. Transfers to the General Revenue Fund of the state are accounted for, within the division, as monetary losses. Between fiscal years 1992 and 2005, as the offset to expenses, unclaimed property held by the division earned $73 million. This figure is, however, exclusive of earnings constructively realized on the hundreds of millions of dollars transferred to the OHFA and to other state programs as well. Using its own peculiar form of bookkeeping, the division asserts that it has operated at a net loss of $1,466,789 since fiscal 1992.

{¶ 13} Insofar as earnings on unclaimed funds are concerned, the division's accounting is materially inconsistent with generally accepted accounting principles ("GAAP") or any other sensible accounting standards. The system used artificially ignores earnings realized from funds transferred to the OHFA simply because, somewhere along the way, someone in authority decided that the OHFA need not account for or pay over the interest it earns on home loans made using unclaimed funds. As of June 30, 2005, the OHFA had returned $316 million to the division. Interest earnings should be imputed to that $316 million, and for many of those years, the statutory interest rate in Ohio was ten percent. Beyond the OHFA, unclaimed funds have also been transferred to the Savings and Loan Assurance Corporation, the Ohio Job Development Fund, and the state General Fund. However, unclaimed funds transferred to destinations other than the OHFA never are returned to ...