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.
The dismissal was for lack of subject matter jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(1).
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
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.
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.
Traditionally, constitutional disputes about escheat are between financial institutions and state governments.
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.
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,
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.
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.
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."
The specific allegations in the complaint included the following:
Plaintiffs seek a declaratory judgment, "disgorgement and return of either their stock investment or the return of the reasonable value thereof," money damages, an injunction commanding the Controller to return their stock and to refrain from engaging in future seizures of this sort without notice, and other relief. The complaint asserts, inter alia, violations of the Due Process and Takings Clauses of the United States Constitution, federal securities laws, and the state Unclaimed Property Act.
The district court dismissed all the claims without oral argument on the ground that, under the Eleventh Amendment, the district court had no jurisdiction. Plaintiffs appeal. Our review of a 12(b)(1) dismissal for lack of subject matter jurisdiction is de novo.
Generally, the Eleventh Amendment shields state governments from money judgments in federal courts, and from declaratory judgments against the state governments that would have the practical
I. Return of Seized Property
Ordinarily, the Eleventh Amendment bars a plaintiff from using a lawsuit in federal court to get money damages for wrongful conduct by state officials out of the general fund of the state government.
The California statutes distinguish between "escheat" and "permanent escheat."
This is language establishing a custodial trust. Thus, to the extent that the funds remained in the state's special account, they were being held in trust, rather than being in the state treasury.
Before California escheated property is "permanently" escheated, it is like a car that is towed and held in an impound lot. The car is in the custody of the impounding government, but it is held for its owner, if one turns up. Even if the Controller has paid money over to the general fund of the state, she is required by the California statutes to order it "retransferred" from the general fund back to the "Unclaimed Property Fund" "if it is subsequently determined that such money or ... property is not, in fact, permanently escheated."
The Controller's obligation to order transfer from the Treasurer, if money was deposited in the general fund but is subsequently found not to be permanently escheated,
The complaint does not establish that a permanent escheat determination has been made. Nor, if the averments of the complaint are true, could it have been made. The California procedure for making such a determination has not yet been followed. The procedure requires the Controller to file suit in superior court, and publish repeated notice in newspapers, which notice must include "the name of the owner or claimant and his last known address."
The State of California's sovereign immunity applies to the state's money. Money that the state holds in custody for the benefit of private individuals is not the state's money, any more than towed cars are the state's cars. Thus, where a permanent escheat determination has not yet been made, the state's Eleventh Amendment immunity from suit against it for damages payable from its treasury has no application to escheated property and sales proceeds from escheated property, whether held by the Controller or the Treasurer.
The case at bar differs from Papasan v. Allain.
Because the plaintiffs' money is held in a custodial trust, this case is in line with the circumstances in United States v. Lee,
While reading Lee in isolation suggests that suits for return of property are not barred by sovereign immunity, subsequent case law, in the 120 years since Lee was decided, tempers its force. The most explicit limiting of Lee came in Malone v. Bowdoin.
Thus, Malone preserved the force of Lee for suits in which a plaintiff asserts a claim for return of his property, but it did so only if the claim falls into one of two categories: (1) it must be based on the public official having acted beyond his statutory authority (the "ultra vires exception"
Because we have interpreted plaintiffs' claims as ones for return of property, the threshold requirement for putting this case within the Lee-Malone line of cases applies. Turning to the specific requirements from Malone, we also conclude that plaintiffs' suit satisfies both of the ways in which a claim for return of one's property can fall outside the purview of sovereign immunity. That is, plaintiffs' allegations are that the Controller acted ultra vires by violating clear statutory restrictions and that, regardless of her authority, the manner in which she acted violated due process, making her actions constitutionally infirm.
In interpreting the first of Malone's two ways in which a claim can avoid the effects of sovereign immunity, we have said that "[a] simple mistake of fact or law does not necessarily mean that an officer of the government has exceeded the scope of his authority," and "[o]fficial action is still action of the sovereign, even if it is wrong, if it `does not conflict with the terms of the officer's valid statutory authority.'"
As outlined above, plaintiffs assert many problems with the way in which the Controller took their property. If true, many of these obligations are arguably mistakes or abuses of discretion, but not violations of the scope of the Controller's statutory authority. We need not parse each of plaintiffs' allegations, however, for some of them unquestionably assert violations that, if true, would clearly put the Controller's actions beyond her statutory authority. For example, plaintiffs assert that they and their stock were wholly outside the escheat scheme because they were never actually "lost" as the statute requires.
As for the other category of cases Malone addressed, the plaintiffs' procedural due process claim qualifies for the exception to sovereign immunity for that reason as well. Because this is a constitutional claim for the return of property taken and held in custody by the state, Malone's second exception removes the due process claim from the effects of sovereign immunity. For this claim, plaintiffs need not even show that the Controller exceeded the scope of her statutory authority. Even if her actions were "within those powers" that the statute gives her, sovereign immunity is unavailable "if the powers, or their exercise in the particular case, are constitutionally void."
Thus, plaintiffs' claims meet the requirements of the Lee-Malone exception to sovereign immunity. The plaintiffs seek return of their own property, rather than to
The state invokes Edelman v. Jordan
II. Prospective Relief
The state custodial escheat scheme establishes as well that prospective relief genuinely distinguishable from a damages award is available. An injunction may order the Controller to exercise his or her power under Cal.Civ.Proc.Code § 1347 to order the Treasurer to remit the money back to the Controller for redeposit in the Controller's Unclaimed Property Fund.
The district court was correct in concluding that, to the extent the plaintiffs sought a declaratory judgment that Mr. Taylor's and Ms. Pepple-Gonsalves's shares of stock were unconstitutionally taken from them, and an injunction that the state pay them money to compensate them, the claims would not fall within the Ex parte Young prospective relief exception to the Eleventh Amendment. While some may describe "this retroactive award of monetary relief as a form of `equitable restitution,'"
But not all of the plaintiffs' claims are retroactive requests for money. Plaintiffs' claims for prospective relief include some that really are entirely prospective. The complaint says that the Controller "is unable to locate the proceeds" from the sale of Ms. Pepple-Gonsalves's TWA stock and lists her shares "as permanently misplaced and unpayable." Her claim for an accounting is genuinely prospective, because the court's supervision of a full accounting may determine that the state still has her shares, has not sold them, and is in a position to return them. And because the Controller has statutory authority to order
More broadly, the complaint alleges that the Controller as a matter of regular practice purports to take securities and money from people's bank accounts by escheat without providing them with the sort of notice required by state law, or any sort of notice reasonably calculated to inform them that the state is taking their property. The Controller's own advertisement admits that it is not the notice required by state law, and is instead something "in lieu" of lawful notice. And the Controller has conceded, according to the complaint, that she discontinued trying to find owners, or even listing their names in the published notices of escheat, because she lacked funding, not because the law does not require individualized notice. There is no "lack of funding" exception to the Due Process Clause.
If these facts turn out to be true, prospective relief may be available, both for these two plaintiffs to protect whatever assets they still have and, more broadly, to protect remaining members of the plaintiff class if class certification is achieved. Aside from any monetary relief, the district court could declare the notice practices of the Controller unconstitutional and enjoin the Controller to conform to the state statute on notice, or to whatever other standards were determined to be appropriate. Such relief would fall within the prayer of the complaint and within the Ex parte Young exception to the Eleventh Amendment bar.
III. The Takings Claim
We need not decide the issue of sovereign immunity in the context of a takings claim, since we have already decided that plaintiffs' property has not been taken at all, but has merely been held in trust for them by the Controller. The plaintiffs' suit is not against the state treasury and is merely a suit for the return of their property. Were the money permanently escheated to the state, and therefore no longer held in trust for the plaintiffs, we would be presented with the sovereign immunity question in the context of a takings claim. Since that has not occurred, we express no opinion on whether the Eleventh Amendment would bar such a takings claim against the state.
Because the plaintiffs seek genuinely prospective relief, and because the funds they seek are held by the state as custodian in trust for them rather than as the state's own funds, much as a municipality holds a car towed from an expired parking meter, the complaint should not have been dismissed under the Eleventh Amendment for lack of jurisdiction. The judgment is vacated and the case is remanded for proceedings consistent with this opinion.
VACATED AND REMANDED.
California Relay (Telephone) Service for the Deaf or Hearing Impaired from TDD phones: 1-800-735-2929 and ask for 1-800-992-4647.
This ad is in lieu of CCP 1531 and is in accordance with Chapter 303. Statutes of 1995."