Arkansas Auditor Andrea Lea has failed to submit sufficient proof, at least for now, to show her office is entitled to ownership of an unknown amount of federal savings bonds that a new state law allows Arkansas to claim, a Pulaski County circuit judge has ruled.
Judge Alice Gray's findings, released Tuesday, reflect concerns the judge expressed last week about Lea's request to be granted title to federal bonds that meet the state's definition of abandoned under the new law.
The auditor's lawyers have estimated the value of the unclaimed bonds at $151 million, but that amount is based on Arkansas' percentage of the U.S. population. They told the judge last week that they don't know how many bonds could be at issue nor how much they're worth.
The total amount of unredeemed bonds nationally is $16 billion, the lawyers said in court filings.
Even if Gray had granted Lea's motion, the state would still have to pursue its claim on the bonds in federal court.
Gray's decision, which took effect Monday, does not have to be the judge's final word.
Lea can continue to pursue the ownership matter with the judge, who stated in her decision that she would be willing to reconsider her ruling if Lea can show that the auditor's office has made an effort to find the owners as described in the state's Rules of Civil Procedure.
Reached for comment about what Lea will do next, John Ahlen, her legal counsel, said it's too early to say whether the auditor will continue to seek a favorable ruling.
Lea and her advisers are studying the judge's ruling, he said, and waiting to see whether the U.S. Treasury Department adopts a rule that the auditor's attorneys say would block the state's effort to claim abandoned bonds.
The auditor, a state constitutional officer, is charged by law with administering Arkansas' unclaimed-property program.
The program has about $220 million in unclaimed property, which can include bank accounts, stock dividends, unpaid wages, utility deposits -- even things like jewelry, coins, baseball cards and stamps left behind in safe-deposit boxes.
The auditor's office reports on its website that it has possession of at least 1,000 federal bonds, some dating back to World War II.
The new state law that took effect last month gives the state the authority to take ownership of all federal bonds deemed to be abandoned, whether or not the auditor physically possesses them.
Lea's lawyers -- the McMath Woods firm of Little Rock, Cooper & Kirk of Washington, D.C., and Kessler, Topaz, Meltzer & Check of Radnor, Pa. -- had sought an expedited ruling, warning that a new U.S. Treasury regulation that could take effect as soon as today is designed to stymie Arkansas from claiming bonds it deems abandoned.
The Treasury Department cannot claim the bonds for the federal government, but its proposed rule would keep Arkansas from getting them, they warned.
The bonds never expire or lose their value.
Gray stated in her decision that she cannot transfer bond ownership to the state without authorities first trying to notify affected owners or at least trying to find out who those affected would be, particularly since she lacks evidence or case law that shows she has the authority to do so.
There was no proof the auditor tried to reach out to bondholders, the judge said.
Lea's attorneys had argued that the auditor's office is far superior to the Treasury Department about finding owners of unredeemed bonds.
The auditor has a better search program on her website, annually publishes a list of owners of unclaimed property and regularly advertises the program as the Great Arkansas Treasure Hunt, they told the judge.
"Based on the record before it, the court cannot reasonably conclude that plaintiff has made a diligent inquiry to determine the identity and/or whereabouts of the owners of the savings bonds that are affected by this lawsuit," Gray wrote. "There has not been an attempt to ascertain the identity of the opposing party."
In her 16½-page ruling, the judge wrote that she thinks Lea's attorneys have wrongly described the situation as a "fight" between Arkansas and the federal Treasury Department when the parties who would actually be affected would be the individual bondholders.
The ruling states that the bondholders might be denied their right to due process if Gray gives ownership to the state.
"The court believes the matter is between the State of Arkansas and the current bondholders," she wrote. "Nothing suggests that the Department of the Treasury is seeking title to the savings bonds."
The auditor also had sought permission to try to notify affected owners through an advertising effort, known as a "warning order" published in the Arkansas Democrat-Gazette, once the judge transferred title of the bonds to the state.
The Treasury Department asserts in the Federal Register that its proposed rule on unclaimed bonds codifies its authority on federal bonds regarding state laws governing abandoned property, known as escheatment. The agency states that it has previously relied on federal court precedent to define its authority.
The regulation is designed to prevent what Arkansas wants to do, which is classify bonds that meet certain criteria as abandoned, including bonds that the state does not possess, according to the agency's description.
Arkansas' new bond abandonment law, Arkansas Code 18-28-231 and passed by the General Assembly this year, allows the auditor's office to designate a federal bond as abandoned if it's not redeemed within seven years.
Bonds become eligible to be claimed by the state five years after they reach maturity, according to the statute. After that period, the auditor has two years to find the owner.
If the bonds remain unclaimed, the auditor has six months to start court proceedings to gain title of the bonds. If no one submits a valid claim on the bond during that process, it can then be judged as abandoned and deposited into the unclaimed property fund, the statute states.
Bondholders can claim their money even after that if they can prove ownership, but they must pay the state's expenses before collecting, according to the law.
Language in the statute that appears to give the auditor the authority to refuse to reimburse owners once the bond has been ruled abandoned and turned over to the auditor did give the judge some pause at last week's hearing.
Gray noted in her ruling that the auditor took five days to submit a sworn statement to the court that Lea would return bonds to owners who can prove their claim without charging them anything for it, at least until expected federal litigation over bond ownership is concluded. The state's legal fees are expected to be 10 percent of the bonds' value.
"Although the statute says that the auditor 'may' return the property to bondholders who prove ownership, I will return title to any bondholder who makes such a showing," Lea's affidavit states.
"Should any individual come forward while that order is in place and provide sufficient proof that they are the actual owner of an abandoned savings bond subject to the order, I would provide a letter indicating that the state consents to the return of title to the bondholder within 24 hours of making such a showing."
The auditor also stated that she will return the bond at full value to those owners, even though the law allows her to withhold the state's cost for taking ownership.
"Because the expenses incurred so far in this litigation are not yet final, I would not deduce any of those expenses from the proceeds due anyone who comes forward while the temporary ... order is in effect or who proves ownership during the pendency of any action that I bring to recover the proceeds of the bonds, including an action in the Court of Federal Claims."
A Section on 08/19/2015