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February 21, 1956

Application of the PEOPLE OF THE STATE OF NEW YORK to obtain an order directing payment of monies paid into this Court to the credit of the following proceedings: In the Matter of STEINS OLD HARLEM CASINO CO., Inc., Bankrupt

The opinion of the court was delivered by: KAUFMAN

During the years 1916 to 1943 certain moneys were paid into Registry of this Court during the pendency of eighty different proceedings, of which 74 were bankruptcy matters, 5 were equity receivership proceedings, and 1 was a criminal proceeding in which money was deposited to be returned to its lawful owner. In all eighty matters, the persons who were adjudicated as lawfully entitled to the deposited funds never made claim to the money, and in each case, the funds were forwarded to the United States Treasury in Washington D.C., pursuant to 28 U.S.C. § 2042. They were there deposited to the credit of the United States with the proviso that any claimant entitled to such money could, on petition to the depositing court, notice to the United States Attorney and full proof of his right thereto, obtain as order directing payment to him.

In October, 1953, New York State, (hereinafter called the State), brought suit in the Supreme Court of the State of New York, County of New York, seeking to have the funds declared escheated to the State pursuant to Article XII of the New York Abandoned Property Law, McK.Consol.Laws, c. 1, § 1200 et seq., which provides specifically for the escheat of property paid or deposited in federal courts. Pursuant to the provisions of this Article, the State named as defendants in the case all last known and unknown owners or claimants to the funds involved, and service was effected on these claimants by publication. *fn1" On June 21, 1955, the Supreme Court decreed the money escheated to the State of New York by default, not one of the claimants having appeared or answered. Basing its claim of right on this decree, New York now petitions this Court for an order pursuant to 28 U.S.C. § 2042 directing the Treasurer to pay over to the State the money deposited in these eighty actions.

The United States (hereinafter called the government) has contested the granting of this petition, setting forth three reasons why New York is not entitled to the funds. (1) The New York Supreme Court had no jurisdiction to declare the funds escheated because the res is in Washington hence beyond its territorial and jurisdictional limits. (2) Dealing specifically with the unclaimed funds in the 74 bankruptcy matters, § 66 of the Bankruptcy Act, 11 U.S.C.A. § 106, sets up a method of distribution of such funds which completely and exclusively occupies the field, and either New York's Abandoned Property Law must be interpreted to exclude the escheat of such money, or it is invalid because in conflict with federal law. (3) Regardless of the source of the moneys on deposit, the particular default judgment relied upon here is void because the mode of service by publication which was utilized denied due process to known claimants and did not conform to the requirements of the New York statute itself.

 Taking these government contentions in order, I come first to the question of whether the presence of the fund in Washington is a bar to the state escheat proceeding. It is conceded by the government that the fact that money is in the possession of a federal court does not in itself operate as a jurisdictional bar to the State's escheat proceeding. This point was authoritatively settled in favor of the states in United States v. Klein, 1938, 303 U.S. 276, 5, S. Ct. 536, 82 L. Ed. 840, in which Pennsylvania escheat laws similar to those involved herein were attacked as unconstitutional. In that case, as here, the federal government held deposited money as a stakeholder ready to pay it over to the persons lawfully entitled to it upon proof of their ownership and order of the proper district court. The Supreme Court pointed out that the state's decree of eschest was not founded upon possession but was at most an adjudication on the title of the unknown claimants, and it held that neither the federal statute nor the nature of the suit in the district court precluded transfer or change in the interests of the unknown claimants. Although the particular fund was in Washington and beyond the state's territorial jurisdiction, and although several of the unknown claimants were non-residents, the Court refused to pass upon whether these factors would operate to invalidate the escheat proceeding, as those questions were not yet before it. However, in United States v. Klein, 3 Cir., 106 F.2d 213, certiorari denied, 1939, 308 U.S. 618, 60 S. Ct. 295, 84 L. Ed. 517 (a later case dealing with the same fund) that precise question was raised and decided adversely to the government. Carrying the Supreme Court's earlier reasoning to its logical conclusion, the Court of Appeals for the Third Circuit pointed out that since possession was unnecessary for the state's escheat proceeding, the fact that the fund was in Washington did not present any obstacle, because control over the res still rested with the district court in Pennsylvania, which court could order payment. The Third Circuit's ruling has since remained unchallenged, and in the escheat cases coming after it, only passing mention has been made of the fact that the particular fund involved was situate in Washington. See e.g. In re Vulcan & Reiter Co., D.C.S.D.N.Y.1948, 80 F.Supp. 286; In re Raabe, Glissman & Co., D.C.S.D.N.Y.1947, 71 F.Supp. 678; In re Van Schaick, D.C.S.D.N.Y.1946, 69 F.Supp. 764. These precedents are further supported by analysis of the Supreme Court's ruling in the first Klein case. To hold that the location of the fund in Washington is a bar to state escheat proceedings would be to reduce to nothing the states' right to escheat funds deposited in federal courts which was confirmed by that decision, since unclaimed funds are normally forwarded to the Treasury after five years, whereas most state escheat statutes require a longer waiting period before the presumption of abandonment. I thus find against the government on its first contention.

 I come now to the question of whether the moneys deposited in the bankruptcy proceedings are beyond the reach of the state because of federal pre-emption of the field. The bankruptcy funds were deposited pursuant to Sec. 66 of the Bankruptcy Act, 11 U.S.C. 106, which provides:

 'Unclaimed moneys

 'a. Dividends or other moneys which remain unclaimed for sixty days after the final dividend has been declared and distributed shall be paid by the trustee into the court of bankruptcy; and at the same time the trustee shall file with the clerk a list of the names and post-office addresses, as far as known, of the persons entitled thereto, showing the respective amounts payable to them.

 'b. Dividends remaining unclaimed for one year shall, under the direction of the court, be distributed to the creditors whose claims have been allowed but not paid in full, and after such claims have been paid in full the balance shall be paid to the bankrupt: Provided, That, in case unclaimed dividends belong to minors, such minors may have one year after arriving at majority to claim such dividends.'

 It is the government's contention that this section gives to the creditors qualifying under subdivision (b) a tontine right to claim their share, i.e., a right completely unlimited in time. Since, under the New York Abandoned Property Law, claimants will have only five years after the escheat to reclaim their lawful title, the government urges that the escheat operates to cut off a federal right, and this the state cannot do. Further, it urges that Congress has occupied the bankruptcy field to the exclusion of all state laws dealing in any manner with bankruptcy rights. It argues that if escheat is allowed, and the funds are turned over to the state, any claimant will thereafter have to vindicate his rights in a state court under state law rather than in a federal forum under federal law.

 I can find no merit in the government's contentions. Dealing first with the government's last argument, there is no indication in the bankruptcy law that Congress intended to prevent qualifying creditors from transferring their interests in the funds; indeed, the very lack of time limitation indicates that it was contemplated that heirs at law and distributees might very well come forward to vindicate former claims, and this has been the practice. *fn2" Such heirs or assignees when making their claim most certainly have had to trace their chain of title through state law. There is no attempt to re-adjudicate the question of who was originally entitled to the funds, but there is a tracing of chain of title from that original federal adjudication. Similar proof under similar law is necessary to reclaim escheated funds. The governments' argument of pre-emption by federal law falls with this reasoning as clearly Congress has made no attempt to regulate the passing of title to these claims, assuming it would have the power to do so. The authorities cited by the government to sustain its pre-emption argument deal with situations where the state sought to adjudicate and regulate bankruptcy rights and they are, therefore, inapposite here.

 The government's chief contention regarding these bankruptcy deposits is that escheat cannot be completely analogized to voluntary transfers or change of title due to death, because it operates to cut off otherwise valid and subsisting rights, and it therefore interferes with the federal statutory scheme of disposition to qualifying creditors. While the argument that 66 gives qualifying creditors a right lasting into perpetuity is superficially sound, it cannot withstand close examination. It has been repeatedly held that the Bankruptcy Act contemplates paying out all the money in these funds, and that a diligent creditor is not limited to his pro rata share, but he can be paid in full out of the fund to the destruction of the rights of other delinquent creditors. In re Searles, 2 Cir., 1948, 166 F.2d 475, 4 A.L.R.2d 1431; In re Gubelman, 2 Cir., 1935, 79 F.2d 976; In re Raabe, Glissman & Co., D.C.S.D.N.Y.1947, 71 F.Supp. 678. In all three of the above-cited cases, the diligent creditor, after filing his claim and serving the other claimants by publication, was allowed to collect all that was due him, even though this entirely dissipated the fund. Certainly, it cannot be contended that these dispositions did not operate to cut off the rights of all other claimants. The state's right of escheat is the right of an ultimate heir; it does not assert a separate claim to the fund but stands in the shoes of those so-called unknown creditors who are deemed to have abandoned their claims. *fn3" Barker v. Leggett, D.C.W.D.Mo.1951, 102 F.Supp. 642, appeal dismissed, 1952, 342 U.S. 900, 72 S. Ct. 295, 96 L. Ed. 674; In re Vulcan & Reiter Co., D.C.S.D.N.Y.1948, 80 F.Supp. 286. Such creditors, by diligence, can cut off the rights of other claimants, and the state, standing in their shoes, has the same right. *fn4" It is interesting to note in this connection that a bill was introduced in the House of Representatives in March 1954 which was aimed in part at curtailing the activities of various attorneys throughout the country who make a livelihood of searching the records of such abandoned funds, and finding and representing 'diligent' creditors. The bill was never reported out of committee.

 Assuming that no diligent creditor should appear, as is often the case, if the state is held not to have power to enter a decree of escheat, the sole alternative would be to have the unclaimed money remain deposited to the use and credit of the United States in perpetuity, and this alternative presents serious constitutional questions. It is a basic property rule that title must rest somewhere, and it is a logical presumption that property unclaimed over a large number of years has been abandoned by its owners; indeed, it is on the logic of this presumption that state escheat laws are based and have been upheld as constitutional. This rule and presumption would combine eventually to give the United States a de facto title to the deposited funds similar to the de jure title acquired by the states in escheat proceedings. Such a result would be contrary to the government's own admission that it is not entitled to receive these funds via escheat and to the Supreme Court's ruling to that effect in United States v. Klein, supra.

 One final point worth mentioning is that this is not the first time a state has sought a Court order directing the withdrawal of such bankruptcy funds pursuant to its rights under judgment of escheat; *fn5" this is, however, the first time the United States has contested such a withdrawal in this District. Granted that courts often overlook points not raised before them, but the cold fact is that federal judges have been granting such applications without indicating doubt as to the states' jurisdiction to proceed in escheat.

 Recently, this practice was attacked in the Western District of Pennsylvania, and the court there upheld Pennsylvania's right to declare such bankruptcy funds escheated, pointing out that there is no conflict between the Bankruptcy Act and the escheat laws, and distinguishing those cases where a dispute existed between the bankrupts or their creditors and the state. In re Moneys Deposited In and Now Under Control of the United States District Court for the Western District of Pennsylvania, D.C.W.D.Pa.1955, 135 F.Supp. 55. I ...

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