Katherine Cerajeski v. Greg Zoeller

Citations: 735 F.3d 577; 2013 WL 5832328; 2013 U.S. App. LEXIS 22227Docket: 12-3766

Court: Court of Appeals for the Seventh Circuit; October 31, 2013; Federal Appellate Court

Original Court Document: View Document

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Katherine Cerajeski, as guardian for Walter Cerajeski, appeals the dismissal of her lawsuit against Indiana Attorney General Greg Zoeller, challenging the constitutionality of a provision in the Indiana Unclaimed Property Act. The provision allows the state to confiscate private property without compensation to the owner, specifically regarding presumed abandoned property when no communication or indication of interest occurs within a specified period. The Act requires that property holders notify the owner and report to the attorney general, who must attempt to notify the owner via publication if the property remains unclaimed after a year. Owners can reclaim their property, but only the principal amount—any interest earned is retained by the state. Cerajeski's ward had a small, interest-bearing bank account, presumed abandoned after three years of inactivity. Although the account's value did not meet the threshold for additional notice, the bank's compliance with the Act's requirements is unclear. The guardian discovered the account in 2011 and, believing the state would not pay interest upon filing a claim, initiated the lawsuit to seek a declaration of entitlement to the interest owed.

The plaintiff acknowledges the objectives and framework of the Unclaimed Property Act, which aims to mitigate economic losses from unclaimed property by transferring ownership to the state after a specified period—in Indiana, 25 years. This process, known as escheat or bona vacantia, is designed to maximize property value by preventing ownerless goods from being neglected. Indiana also allows the state to take custody of property with unknown owners for a shorter duration, seeking to locate the rightful owner before escheat occurs. The state is permitted to charge fees for custodianship but can only deduct limited costs from the property’s value, which do not appear relevant to the plaintiff's bank account. The statute defines bank accounts as property under Indiana law, making the state's confiscation of interest a taking of the plaintiff's property. An analogy is drawn with a lost apple orchard, where a neighboring farmer’s appropriation of apples without compensating the rightful owner illustrates that ownership entails rights to the fruits of that property. Even if custodianship costs equaled the confiscated interest, it would still constitute a taking under the takings clause, as established in precedents like Koontz and Brown v. Legal Foundation of Washington, which confirmed that government confiscation of financial obligations can be viewed as a taking, paralleling a tax without due process. Indiana could legally escheat the interest after due process, without needing to escheat the entire account.

The Indiana statute allows for a 25-year period of escheat, but the state’s claim to interest after 3 years may suggest a form of partial escheat. The parties were asked to address two questions regarding the constitutional validity of the state's unconditional title to presumed abandoned property and whether any escheat issues arose in the litigation. The state argued that it can seize unconditional title to abandoned property without violating the takings clause or providing compensation, asserting that the Unclaimed Property Act does not constitute an escheat statute. It claims to act merely as a custodian of unclaimed property, which owners can reclaim at any time.

The court's interpretation of abandonment in property law indicates that it involves a voluntary relinquishment of property rights, placing such property back into the public domain for reappropriation. The state can take abandoned property without compensation because there is no owner. However, it cannot claim unclaimed property as abandoned if the owner has not voluntarily relinquished it. The case of Mucha v. King illustrates this point, where a painting missing for 60 years was not considered abandoned, and its rightful heir was entitled to its return.

In this context, the court noted that the individual, Cerajeski, did not voluntarily relinquish his bank account, as he has a guardian, indicating his incompetence to manage his assets. The account was categorized as unclaimed rather than abandoned, meaning it remained in a state of limbo until claimed. The court referenced case law that distinguishes between the state’s custody of property and the rightful ownership of that property, particularly concerning interest earned on said property.

The attorney general's reliance on the Illinois Supreme Court case, Cwik v. Giannoulias, was deemed a misinterpretation. The court clarified that the interest in question was earned by the state after taking custody of the plaintiff’s property, and returning that interest to the owner would create an unjust windfall. This distinction is critical, as prior rulings had established that an owner is not entitled to interest if their property was earning it when taken by the state.

The shares of stock and their associated dividends remain private property of the plaintiff. The attorney general's interpretation of state law, particularly the Unclaimed Property Act, is inconsistent, as he asserts that Indiana does not allow the state to escheat the Cerajeski account until 2031, despite the state taking custody in 2006. This raises the question of how the state can confiscate a portion of the account if it is merely a custodian. Interest accrued on unclaimed property is also considered unclaimed property, which can be claimed by the property owner unless escheated. The Unclaimed Property Act is not an escheat statute for property unclaimed for less than 25 years, indicating that the state lacks the authority to confiscate interest from the account. The document challenges the rationale behind a 25-year escheat term for principal and a much shorter 3-year term for interest, questioning its compliance with the Fourteenth Amendment's due process requirements. The state cannot take private property without compensation, as established in several Supreme Court cases, and must demonstrate that property has been abandoned or is subject to escheat through a judicial or administrative process. The mention of "presumed abandoned" in the Unclaimed Property Act is misleading, as common law defines abandonment as a voluntary relinquishment of ownership. Therefore, the state’s misunderstanding of abandonment underlies its erroneous position regarding the confiscation of the property.

The term "abandoned" in the Indiana statute differs from its common law interpretation, indicating property that is unclaimed rather than genuinely abandoned. Indiana allows escheating of property that has remained unclaimed for 25 years, after which the state can take such property, provided just compensation is rendered to the owner if their identity is known. While the state may charge fees for custodianship and searches, the interest accrued on a bank account is not considered a fee. The purpose of unclaimed property laws is primarily to return unclaimed assets to commerce and protect owners from "lucrative silence," where holders might benefit from inaction regarding unclaimed property. States enforce these laws to prevent the appropriation of unclaimed property by current holders, though such statutes also serve as a revenue source. The Indiana attorney general's pursuit of the property's benefits from an owner possibly unable to manage their assets raises concerns. The judgment has been reversed, and the case is remanded for further proceedings. The plaintiff is entitled to just compensation for the account, while the request for injunctive relief remains uncertain, as equitable relief to prevent the taking of private property for public use may not be available. The district judge will address these issues.