Taylor v. Westly

• Decision Date: 29 March 2005
• Docket Number: No. 02-16511.,02-16511.
• Citation: 402 F.3d 924
• Parties: Chris Lusby TAYLOR; Nancy A. Pepple-Gonsalves, Plaintiffs-Appellants, v. Steve WESTLY, in his capacity as Controller of the State of California, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

402 F.3d 924

Chris Lusby TAYLOR; Nancy A. Pepple-Gonsalves, Plaintiffs-Appellants, v. Steve WESTLY, in his capacity as Controller of the State of California, Defendant-Appellee.

No. 02-16511.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted October 10, 2003.

Filed March 29, 2005.

William W. Palmer, Sacramento, CA, for the appellants.

Robin B. Johansen, Remcho, Johansen & Purcell, San Leandro, CA, for the appellee.

Appeal from the United States District Court for the Eastern District of California; Frank C. Damrell, District Judge, Presiding. D.C. No. CV-01-02407-FCD.

Before: CUDAHY,^* BEEZER, and KLEINFELD, Circuit Judges.

KLEINFELD, Circuit Judge.

Persons whose stock was escheated to the state sued to get it back. The district court held that the Eleventh Amendment barred their claims. We disagree.

Facts.

The dismissal was for lack of subject matter jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(1).¹ No material disputes of fact have been asserted as to jurisdiction, and the district court acted on the basis of what the plaintiffs pleaded, so we proceed on the basis of the allegations of fact in the complaint.²

Although this case was filed as a class action, it never reached the point of class certification vel non. As it comes to us, it is by two individuals against the state controller. One, Chris Taylor, a former Intel employee, lives in England and owns 52,224 shares of Intel stock. The other, Nancy Pepple-Gonsalves, a former TWA flight attendant, lives in California, in Riverside County, and owns 7,000 shares of TWA stock. Or at least they did own the stock, before the state took it away.

The state controller took Mr. Taylor's and Ms. Pepple-Gonsalves's stock as "unclaimed property." But these individuals do, in this lawsuit, claim it. The property was treated as unclaimed because for three years these two individuals did not cash dividend checks, respond to proxy notices, or otherwise communicate to the companies in which they owned stock.³ Intel and TWA provided the State of California with lists of shareholders who were "lost" or "unknown" by these three criteria, as required by law, and issued "duplicate shareholder certificates" to the state. The Controller then sold the stock and deposited the money received in exchange into the state's general fund.

This case is about escheat. Escheat, at common law in England, formerly terminated a tenancy so that on the death of a tenant without heirs, or as a result of a tenant's felony that worked a corruption of the blood, the land escheated to the lord of the fee.⁴ Title by escheat "was one of the fruits of and consequences of feudal tenure."⁵ "But, as the feudal tenures do not exist in this country, there are no private persons who succeed to the inheritance by escheat; and the state steps in the place of the feudal lord, by virtue of its sovereignty, as the original and ultimate proprietor of all the lands within its jurisdiction."⁶ Escheat of tangible or intangible personal property arises from the same conceptual scheme.

Traditionally, constitutional disputes about escheat are between financial institutions and state governments.⁷ The issues have traditionally concerned which of several potential claimant states can get the money, or whether the financial institution has a sufficient connection to the state for the state to be entitled to the money. That is about what one would expect, in a situation where the true owner of the money is dead, leaving no descendants who are aware of the asset, and the question is whether the financial institution gets the money or one of several competing state governments. Escheat is, after all, a means of dealing with money where money and property are unclaimed and the person entitled to it is dead or gone, gone to a degree that the person cannot be found and there is no other individual with a good claim.

The escheat problem, in this case, arises from a new approach used by some state governments, greatly shortening the time before which untouched property is treated as though it had been abandoned, greatly reducing or eliminating notice to the true owner, and ignoring the true owner's pleas. For example, California is taking the flight attendant's stock in her airline on the basis, basically, that she cannot be found, even while she is standing in court shouting, "Here I am! Here I am! Give me my money!" And the State of California turns a deaf ear, pretending it cannot hear her.

She is thought to be dead or gone, despite her obvious liveliness and presence, because she has not cashed a dividend check, sent a change of address to TWA, or sent in a proxy, in five years.⁸ But, many companies do not pay dividends. During the relevant three-year period, Intel did not pay any dividends⁹ so there were no dividend checks to cash. And TWA only paid a dividend to its preferred stockholders.¹⁰ Even when dividends are paid, the dividend checks are often very small and owners of small amounts of stock may forget to cash them or may find it not worth a trip to the bank. As for changes of address, many people do not change their addresses over a three- or five-year period. As for voting their proxies, a very high proportion of shareholders do not bother,¹¹ because it does not make sense for them to spend an hour or two studying a proxy statement to vote their few shares, when they have neither enough stock to make a difference in the election nor enough knowledge to know what difference they would want to make.

Although state law provided for notice to shareholders and an opportunity to claim their supposedly "unclaimed property," the Controller decided that the forms of notice provided for by statute were impractical and unfunded. She decided not to mail notices to shareholders' last known addresses, and not to publish, in newspaper ads, the individual names and property being taken as unclaimed.

Neither of these plaintiffs were really hard to find, nor did they mean to abandon their property. Chris Taylor acquired his stock in Intel because he worked for Intel for a number of years. His wife was general counsel for Intel in Europe. Intel corresponds with him regarding his stock and his pension fund and knows his address. He still has his original stock certificates, but the Controller has rendered them worthless by getting duplicate stock certificates and selling the shares.

Nancy Pepple-Gonsalves worked as a flight attendant for twenty years and invested part of her salary in TWA stock. The company has at all times either known precisely where she was, as with Mr. Taylor, or had the means to readily locate her. Neither of these people were lost, and neither meant to abandon their investments. Because they retained their original stock certificates, and were never notified of the Controller's actions, they had no reason to suspect that their investments were disappearing into the State of California's general fund. The Controller has about $2.7 billion through such escheats. Around $20 million is held as cash, after the stock is sold, to cover claims of persons who make timely claims, and the rest is deposited into the general fund.

This is, as was mentioned above, a new approach to escheat. It used to be, until the seventies, that the period of inaction before the property was deemed "unclaimed" was sixteen years. Now it has been shortened to three years. Also, until 1989, the Bureau of Unclaimed Property published the names of shareholders, whose shares were thought to be unclaimed in newspapers in each county that listed an address for the individual. The Controller also used to maintain a staff, in the 1980's, to find owners and get their property back to them.

Now the Controller just publishes advertisements describing their general practices, under a headline "Your Money?" The text of the advertisement, in full, is in the footnote below.¹² Though the advertisement says what the criterion for taking the property is — "no owner contact with the institution or account activity for three (3) years" — it does not say what property is being taken or from whom. No names of property owners are listed. The ad says: "This money is waiting to be claimed by its rightful owners," but it does not say how long the rightful owners have to claim the money before losing it to the state.

The encouragement to claim one's money is not all it might seem. The Controller, according to the complaint, decided to publish the ads at times, such as just before holidays, when a lot of people would be away, because "her limited staff is unable to handle the large influx of calls generated by advertisements." It is especially interesting that, in a font smaller than the main text, the ad does not claim to comply with the law, but instead admits that it is "in lieu of CCP 1531." The reference is to California Code of Civil Procedure section 1531, which required publication of names and also individually mailed notices to persons with listed addresses.¹³ Thus the Controller is admitting right in her ad that she is violating the law!

The Controller did not follow California's statutory directive regarding how she is supposed to take "unclaimed property." Her intentional violations of the law implicated those provisions that are reasonably calculated to give actual notice to the owners. The reason why, according to a document from the Controller's office attached to the complaint, is that she did not have the money to give the notice required by law. "Funding for both the Locator Unit [that attempted to find owners and return their property] and the publication of names in the newspapers was not available after 1989. In 1994, some publication funding was restored, and the Bureau began placing `block ads' [as quoted above] in newspapers of wide circulation. In November, 1994, the `block ad' covered unclaimed property reports from 1990 through 1993."

According to the complaint, sometimes the...