South Dakota and Unclaimed Property

June 12, 2017 | dehs

By Douglas J. Hajek

The FDIC’s December 31, 2016 bank statistics report shows that — at $3.13 trillion — South Dakota has retained first place (slightly ahead of Ohio at $2.96 trillion) for commercial and savings bank assets. To place this in perspective, at year-end 2006 and 1996, South Dakota’s totals were $499 billion and $30.18 billion, respectively. This 100-fold increase over the past 20 years can be attributed largely to two key events: decisions by Wells Fargo, N.A. (2004) and Citibank, N.A. (2011) to designate Sioux Falls as the site of their main offices.

Why It Matters

Being at the top in banking assets is not merely a matter of bragging rights; there are many benefits to have a large bank designating a city in our state as the site of its main office.  One of those benefits is the impact on our state’s unclaimed property receipts.

Origin of Escheat

Laws providing for the escheat of unclaimed property are of ancient origin. Originally applying only to real property, the concept now applies to tangible and intangible property.  As many banks became multi-state organizations, uniform laws were developed to establish which state should have jurisdiction over unclaimed property.  Even as these laws have evolved over time, conflicts arose among states.

Priority Rules

The United States Supreme Court — having been called upon several times to settle conflicts among states over the issue — created unclaimed property priority rules governing the rights of states relative to each other. Under the First Priority Rule, priority is given to the state of the last known address of the owner of the property as shown on the holder’s (i.e., the bank’s) books.  If a last known address cannot be determined, or if the owner’s last known address is in a state that does not provide for escheat of the property, the state where the holder is domiciled can take possession of the property.  This is the Second Priority Rule.

Benefits and Threats

Due to the main office designations of major banks, the Second Priority Rule allows our state to collect tens of millions of dollars in unclaimed property every year.  While this property forever remains subject to the claims of the original owner, these receipts can be and are used to support state government.  The impact of these receipts in South Dakota has been significant — generating receipts (net of claims) of $285 million in the last seven years, or over $40 million per year on average.  The State’s 2017 budget includes $53 million in net unclaimed property receipts.  Yet there are threats to these benefits, such as other states aggressively looking for new forms of revenue by asserting jurisdiction over unclaimed property collected by other states.

The Site of the Main Office

Changing the main office site of a nationwide banking operation is simple, and several factors enter into a bank’s decision on the designation of its main office.  Some factors are outside of our state’s control, such as (a) legal cases limiting the exportation of state usury laws, (b) potential legislation that could lead to a breakup of large banks, and (c) changes in institutional priorities at any particular bank.  However, to the extent these decisions are influenced by a favorable state law and policy, that factor is largely in the hands of the Governor and the Legislature.

Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the State’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.