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Delaware May Get Its Knuckles Rapped

illuminated MoneyGram window sign
photo by Mike Mozart

Delaware is a small place, but as the heavyweight in American corporate domicile it likes to throw its weight around – which can be a problem when bigger, more muscular states choose to counterpunch.

Twenty-one jurisdictions, led by Arkansas and Texas, have asked the Supreme Court to hear their complaints about Delaware’s aggressive pursuit of businesses that it claims are holding unclaimed property that should be surrendered to the state. The target in this particular instance is MoneyGram, a company that operates nationwide with a headquarters in Dallas, but which has corporate domicile in Delaware.

Given Delaware’s history of using unclaimed property to fill state coffers, and its halfhearted attempt to address businesses’ complaints about such practices, the MoneyGram situation will not surprise many observers. The argument hinges on the nature of official checks, which are financial instruments for which a buyer pays the face value, plus a transaction fee, for an instrument that can be used like cash, backed by the issuer. If that sounds like a money order or a traveler’s check to you, the 21 attorneys general who serve as the case’s plaintiffs agree. According to the motion filed with the court, the only real difference between an official check and a money order is that the latter is subject to lower limits on its value.

The nature of official checks matters because a 1974 law specifies unclaimed traveler’s checks and money orders should go to the state where the check was purchased, rather than the state where the corporate issuer is domiciled. However, when MoneyGram asked Delaware for guidance as to whether unclaimed official checks should be remitted to Delaware, the state – shockingly – found that they should be. Even after other states approached Delaware to object, Delaware maintained that the law its opponents cited doesn’t apply to official checks.

In separate but related cases, Pennsylvania and Wisconsin sued Delaware in federal court, in February and April respectively, over its efforts to reclaim unused money orders issued within their boundaries. Delaware has moved to sue them both before the Supreme Court, and now Wisconsin has moved to countersue. This resulted in what SCOTUSBlog called a three-way fight over unclaimed property, with Delaware squarely in the middle.

It is all well and good – and unsurprising – that states are pushing back to protect their own financial interests in the tug-of-war over unclaimed consumer purchases. Too bad they don’t have the same interest in protecting the welfare of the small business owners and corporate shareholders who Delaware’s bounty hunters have targeted over accounting mistakes and other bogus “unclaimed” property that can never be claimed because nobody, except the businesses being targeted, ever owned it.

Unlike the states, businesses do not have a constitutional right to take their beef with Delaware directly to the Supreme Court. Most lack the resources to fight a state through its own administrative appeals processes and the lower courts. Even if they have the means to try, they have no guarantee that the high court would hear them anyway.

Delaware continues to look for a parasitic free lunch from businesses that operate mostly or entirely elsewhere. Abandoned property accounts for about 15 percent of the state’s annual income, making it the state’s third-largest source of revenue. The only ways to rein in states like Delaware are for Congress to act and for businesses to go elsewhere to incorporate. Congress is unlikely to act any time soon; if it did move on this issue, my guess is that it would be in conjunction with some bigger project, most likely the authorization many states are dying to get to collect sales taxes from out-of-state businesses.

As for business owners, it is still surprisingly common for venture capital investors to demand that corporations be organized in Delaware before they put up money. Startups that seek outside funding may find themselves with little opportunity to take advantage of states like Nevada and Kansas that offer friendlier tax and regulatory climates, because venture investors (and their lawyers) believe there is too much uncertainty over their legal rights in those jurisdictions. But founders of closely held businesses who do not expect to need outside capital should continue to consider alternatives. Delaware has made it clearly that many of its business-friendly policies come with strings attached.

For the rest of us, who are neither legislators nor entrepreneurs looking to incorporate a new venture, all we can do watch as other states seek to bring Delaware to heel.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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