Estes v. U.S. Department of the TreasuryEstes v. U.S. Department of the Treasury
cludes that NAFA is not entitled to an injunction pending appeal or while its members transition to the new rules. The likelihood of success on the merits prong weighs heavily against NAFA. Moreover, the new rules were adopted to protect retirement investors from conflicted advice and potential losses to their retirement savings. Enjoining the rule would delay this protection. It would also interfere with the implementation of three regulations that were lawfully adopted after nearly six years of study, public comment, and consideration. See, e.g., In re Medicare Reimbursement Litig., 309 F.Supp.2d 89, 99 (D.D.C. 2004) (agency “compliance with applicable law constitutes a separate, compelling public interest.“). And, even though members of NAFA will incur significant, unrecoverable costs if the rules take effect, NAFA has failed to carry its heavy burden of showing that its members are “certain” to sustain injuries that are so extraordinary that preliminary relief is warranted even though this Court has rejected NAFA‘s claims on the merits and others will likely sustain losses if the rules are enjoined. The Court, accordingly, concludes that the overall balance of equities tips decidedly against granting preliminary relief.
CONCLUSION
Plaintiff‘s motion for an expedited decision, Dkt. 50, is hereby GRANTED, and its motion for an injunction staying the April 10, 2017 partial applicability date is DENIED.
SO ORDERED.
Thomas David Zimpleman, U.S. Department of Justice, Washington, DC, for Defendants.
CHRISTOPHER R. COOPER, United States District Judge
Table of Contents
I. Background ...22
A. United States Savings Bond Program ...22
B. State Attempts to Redeem Bonds by Escheat...23
C. Kansas‘s Title-Escheatment Statute and Redemption Efforts...25
D. The Rulemaking...26
E. Procedural History...27
II. Legal Standards...27
III. Analysis...27
A. Whether the Rule Constitutes an Unacknowledged Policy Change...27
1. Whether the Possession Requirement is a Policy Change...28
2. Whether the Discretionary Aspect of the Rule is a Policy Change...30
3. Whether Other Apparent Inconsistencies Invalidate the Rule...31
B. Whether the Rule is Otherwise Arbitrary and Capricious...34
1. Whether Treasury Adequately Weighed Evidence of State Unclaimed Property Programs...34
2. Whether the Rule is Based on an Erroneous Interpretation of Property Law...35
3. Whether the Rule Arbitrarily Discriminates Against State Owners ...36
C. Whether the Rule Was Promulgated in Violation of the Appointments Clause ...36
1. Whether Plaintiffs Waived Their Appointments Clause Challenge...37
2. Whether the Fiscal Assistant Secretary is a De Facto Principal Officer ...37
D. Whether the Rule Authorizes the Improper Review of State Judgments...39
E. Whether the Rule Violates the Tenth Amendment...40
IV. Conclusion...41
MEMORANDUM OPINION
In the throes of the Great Depression, President Franklin D. Roosevelt and Treasury Secretary Henry Morgenthau, Jr., set out to create a public debt program that would both stimulate the nation‘s faltering economy and renew the confidence of average American investors badly shaken by the collapse of the private banking system. United States Department of Treasury, A
Plaintiff Ron Estes, Treasurer of the State of Kansas, and four fellow state treasurers, challenge a rule promulgated by the United States Department of the Treasury (“Treasury“) governing the circumstances under which Treasury will honor payment requests from states for U.S. savings bonds they purport to own through their own escheatment statutes. See Regulations Governing United States Savings Bonds (“Rule“), 80 Fed. Reg. 80,258 (Dec. 24, 2015). Plaintiffs contend the Rule violates the Administrative Procedure Act (“APA“) because it capriciously abandons prior Treasury policy, arbitrarily avoids considering key evidence, and rests on an erroneous understanding of property law. They also claim the Rule violates various constitutional and jurisdictional principles.
Plaintiffs have fairly pointed out inconsistencies between certain of the Rule‘s rationales and certain of Treasury‘s prior informal statements. But they cannot show what they must—that Treasury departed from a clear policy without adequate explanation. Plaintiffs’ other challenges also fail, for the reasons elaborated below. The Court will, accordingly, uphold the Rule and grant summary judgment for Treasury.
I. Background
A. United States Savings Bond Program
Under the Constitution, the federal government has the enumerated power “[t]o borrow Money on the credit of the United States.”
The general rule that registration determines ownership is subject to some exceptions, including that Treasury will recognize some—but not recognize other—“judicial determination[s] on adverse claims affecting savings bonds.”
B. State Attempts to Redeem Bonds by Escheat
The Rule adds to these regulations. It addresses the circumstances under which Treasury will permit states to redeem savings bond proceeds in accordance with state escheatment laws. Escheat is “a procedure with ancient origins whereby a sovereign may acquire title to abandoned property if after a number of years no rightful owner appears.” Texas v. New Jersey, 379 U.S. 674, 675 (1965). Prior to the challenged rulemaking, Treasury‘s regulations did not specifically address the validity of state escheat proceedings as they related to bond ownership. The Department did, however, address that subject through informal policy guidance.
In 1952, for example, Treasury issued a bulletin which incorporated a letter from the Secretary of the Treasury to the New York State Comptroller regarding whether the state might “receive payment of certain United States securities of which it is not the registered owner.” A.R. 1. The bonds wеre in the possession of the state, and registered in the name of an individual who had passed away at a state mental institution without heirs. Id. Under these circumstances, where the state did not have title to the bonds in question, the Secretary declined the Comptroller‘s request for payment. The Secretary noted, however, that “the Department [would] pay one who succeeds to the title of the bondholder,” since such payment would be regarded as “to the bondholder in the person of his successor or representative.” A.R. 3. Although not specified by regulation, the Secretary explained that “the Department recognizes the title of the state when it makes claim based upon a judgment of escheat.” Id.
Three decades later, Treasury repeated the same position in a letter to the Kentucky Secretary of Revenue under similar circumstances—i.e., regarding abandoned bonds in the state‘s possession. A.R. 5 (September 1983 Treasury Letter). “[C]laims by States for payment of United States securities,” the Department wrote, “will be recognized only where the States have actually succeeded to the title and ownership of the securities pursuant to valid escheat proceedings. The Department does not recognize claims for payment by a State acting merely as custodian of unclaimed or abandoned securities and not as successor in title and ownership of the securities.” Id. And beginning in 2000, Treasury included the following exchange on the Department‘s Q&A webpage: In response to a question regarding whether a state can “claim the money represented by securities that a state has in its possession[, such as] savings bonds that it‘s gotten from abandoned safe deposit boxes,” Treasury stated that it would recognize such claims for payment “where the States have actually succeeded to the title and ownership of the securities pursuant to valid escheat proceedings.” A.R. 781.1
Treasury‘s position was challenged and upheld in court. Treasurer of New Jersey v. Dep‘t of the Treasury, 684 F.3d 382 (3d Cir. 2012). The Third Circuit concluded “that the federal statutes and regulations pertaining to United States savings bonds preempt the States’ unclaimed property acts insofar as the States seek to apply their acts to take custody of the proceeds of the matured but unredeemed savings bonds.” Id. at 407. In particular, the court reasoned that the states’ escheatment efforts—which “specif[ied] that matured bonds are abandoned ... if not redeemed within a time period as short as one year after maturity” and which would have potentially complicated redemption procedures—conflicted with Congress‘s and Treasury‘s “goal of making the bonds ‘attractive to savers and investors.‘” Id. at 407-09 (quoting Free, 369 U.S. at 669).
In a brief submitted to the Supreme Court in opposition to certiorari, Treasury—represented by the Solicitor General—identified the failure to transfer actual title as an important deficiency in the states’ custody-escheatment statutes: “[Treasury] has long advised the States that to receive payment on a U.S. savings bond a State must complete an escheat
C. Kansas‘s Title-Escheatment Statute and Redemption Efforts
Soon following the Treasurer of New Jersey litigation, Kansas proceeded to test—with Treasury and then in court—the validity of its own title-escheatment statute, passed in 2000. See H.B. 2648, 2000 Kan. Sess. Laws ch. 125 (codified at Kan. Stat. §§ 58-3979 & 58-3980) (A.R. 1233-34). The Kansas statute differed from the previously litigated “custody” escheatment regime in one key respect: It conveyed to the state title, not merely custody, of bonds deemed abandoned. In 2013, Kansas State Treasurer Ron Estes requested payment from Treasury in the amount of $876,836.18 for bonds in the state‘s possession and escheated in accordance with the statute, and an additional $151.8 million for escheated bonds not in its possession. A.R. 200-03. Treasury agreed to redeem the bonds in Kansas‘s possession, but not the absent bonds, explaining that its interpretation of the applicable regulations “allow[ed] some state escheatment claims, but only when the state possesses the savings bonds in its claim.” A.R. 298-99.
Kansas then filed suit in the Court of Federal Claims, seeking to compel Treasury to honor its payment requests on the bonds it did not possess. A.R. 784-822. Treasury moved to dismiss Kansas‘s contract-based claims for lack of jurisdiction, and moved to dismiss the entire case for failure to state a claim. As for jurisdiction, the Department took the position that Kansas was not the owner of the bonds in question, and so there was no implied or express contract between the state and Treasury which could form the basis for jurisdiction in the Court of Federal Claims. See
On the merits, the question was whether Treasury‘s regulations required it to recognize Kansas‘s claims based on the state‘s title-escheatment statute. As mentioned above, escheatment proceedings were—at the time—nowhere mentioned in the regulations, so the dispute centered upon whether Kansas‘s claim qualified as a “claim against an owner of a savings bond ... established by valid, judicial proceedings ... as specifically provided in this subpart.”
D. The Rulemaking
Meanwhile, in July 2015, after Kansas had filed suit in the Court of Federal Claims but before the Estes I opinion on Treasury‘s motion to dismiss, Treasury published a Notice of Proposed Rulemak-ing (“NPRM“), seeking “to explicitly address state escheat claims to unclaimed savings bonds.” 80 Fed. Reg. 37559, 37560.2 More specifically, the new rule would “define[] the scope of the judicial proceedings covered by [31 C.F.R. § 315.20 and other related regulatory provisions],” and “establish[] a new procedure for states to submit escheat claims under their unclaimed property statutes.” Treasury would now have the “discretion to recognize an escheat judgment that purports to vest a state with title to a [matured but unredeemed] savings bond ... in the state‘s possession” when there is sufficient evidence that the bond has been abandoned. Id. But the proposed rule would not recognize “[e]scheat judgments that purport to vest a state with title to bonds that the state does not possess.” Id.
After a comment period, in December 2015, Treasury promulgatеd the Rule, 80 Fed. Reg. 80,258 (codified at
E. Procedural History
Plaintiffs filed suit in this Court in March 2016. They contend that the Rule is arbitrary and capricious in violation of the APA, that it violates the Constitution‘s Appointments Clause and Tenth Amendment, and that it illegally confers the power to review state court judgments to a federal agency. Treasury moved to dismiss and for summary judgment, contesting each of Plaintiffs’ claims. Plaintiffs cross-moved for summary judgment.3 The Court heard argument on the motions оn November 10, 2016.
II. Legal Standards
When an agency action is challenged under the APA, “[s]ummary judgment ... serves as the mechanism for deciding, as a matter of law, whether the agency action is supported by the administrative record and otherwise consistent with the [relevant] APA standard of review.” Coe v. McHugh, 968 F.Supp.2d 237, 240 (D.D.C. 2013); see also Sec. Indus. & Fin. Markets Ass‘n v. United States Commodity Futures Trading Comm‘n, 67 F.Supp.3d 373, 399 (D.D.C. 2014) (“[T]he general standard for summary judgment set forth in Rule 56 of the Federal Rules of Civil Procedure does not apply to a review of agency actions.“). As relevant to Plaintiffs’ challenges here, the Court will “hold unlawful and set aside [any] agency action, findings, and conclusions found to be ... arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,”
III. Analysis
A. Whether the Rule Constitutes an Unacknowledged Policy Change
Plaintiffs argue that the Rule is arbitrary and capricious on multiple grounds. “The scope of review under the ‘arbitrary and capricious’ standard is narrow and a court is not to substitute its judgment for that of the agency.” Motor Vehicle Mfrs. Ass‘n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). That said, it is the court‘s role to evaluate whether the “agency [has] examine[d] the relevant data and articulate[d] a satisfactory explanation for its action[,] including a ‘rational connection between the facts found and the choice mаde.‘” Id. (quoting Burlington Truck Lines v. United States, 371 U.S. 156, 168 (1962)). Plaintiffs’ main arbitrary-and-capricious challenge is a claim that the Rule marked a change of agency policy, without any acknowledgment of that change.
“Agencies are free to change their existing policies as long as they provide a reasoned explanation for the change.” Encino Motorcars, LLC v. Navarro, 136 S.Ct. 2117, 2125 (2016). In other words, “[a]n agency may not ... depart from a prior policy sub silentio or simply disregard rules that are still on the books,” but must “display awareness that it is chang-ing
Plaintiffs assert that the Rule fails to acknowledge and grapple with two policy changes.4 First, Plaintiffs claim that the Rule‘s possession requirement—that a state have possession of any escheated bond it seeks to redeem—conflicts with Treasury‘s past statements that it would honor payment requests pursuant to title-based escheatment. Pls.’ Mem. Supp. Cross-Motion Summ. J. (“Pls.’ Cross-MSJ“) 18-21. Second, Plaintiffs contend that the discretionary nature of the Rule, which permits Treasury to evaluate whether “the State presents evidence satisfactory to [the Department] that the bond has been abandoned by all persons entitled to payment under Treasury regulations” even when a state has both title to and possession of the bond, 80 Fed. Reg. 80,264, is similarly incоnsistent with past practice. Pls.’ Cross-MSJ 21-22. Neither claim is adequately substantiated by the record.
1. Whether the Possession Requirement is a Policy Change
In support of their argument that the possession requirement is a policy change, Plaintiffs cite the informal guidance documents outlined above, each of which emphasizes that a state must have title to—and not merely possession of—the escheated bonds it seeks to redeem. To review, in the 1952 bulletin, the Secretary of the Treasury explained that the Department would not redeem escheated bonds in the state‘s possession where it had only custody of the relevant bonds, but that the “Department [would] pay one who succeeds to the title of the bondholder.” A.R. 3. Treasury wrote a similar letter to the Kentucky Secretary of Revenue in 1983. A.R. 5. Beginning in 2000, on a Q&A web-page
Without a doubt, these various statements establish Treasury‘s long-standing policy that payment requests for escheated bonds will not be honored unless a state has title ownership over those bonds. But the statements do not establish the opposite with respect to possession. That is, they do not express a policy that a state may redeem bonds without possessing them. Indeed, as Treasury points out, Plaintiffs “have not identified a single instance in which [the Department] redeemed a bond that a state did not possess, based on a judgment of escheat.” Defs.’ Reply Mot. Summ. J. (“Defs.’ Reply“) 14. And in all circumstances giving rise to the above policy guidance, the state did have possession of the escheated bonds,5 so there was simply no reason for Treasury—in explaining why the state‘s payment request was deficient—to opine on whether possession, too, was required. In this respect Treasury was no more “inconsistent” than a shopkeeper who one day refuses service to a man with a shirt on the grounds that he is not wearing shoes, and the next day does the same to a man wearing shoes on the grounds that he lacks a shirt.
Put another way, Plаintiffs’ “attempt to infer from [Treasury‘s] silence the existence of a contrary policy fails because [none of the cited correspondence] purport[s] to be a comprehensive review of all conditions that might be placed on” payment for escheated bonds. Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 516 (1994). Rather, Treasury‘s past statements merely offered piecemeal guidance in response to particular problems. For example, the 1952 Treasury Bulletin sought to “throw some light on [a hypothetical] legislative project” by reference to four specific bonds, A.R. 1-2, and the 1983 letter to the Kentucky Secretary of Revenue concluded by noting that if the state were to obtain title to the bond in question, “additional consideration [would] be given [to its] request,” A.R. 5. Accordingly, “the mere failure to address [a possession requirement] hardly establishes an inconsistent policy on the part of [Treasury].” Thomas Jefferson Univ., 512 U.S. at 516.
Lack of possession was simply not a relevant potential deficiency in escheat proceedings until the year 2000, when
2. Whether the Discretionary Aspect of the Rule is a Policy Change
Plaintiffs also argue that the discretionary nature of the Rule, under which Treasury may evaluate whether the state has presented sufficient evidence that the bond in question has been abandoned by its registered owner and has carried out its escheatment in accordance with due process, see Rule at 80,264, reflects an unexplained policy chаnge. The support for this claim is rather thin. Plaintiffs cite Treasury‘s 2013 letter to Kansas agreeing to repay bonds in its possession “in the normal course,” A.R. 297; language in the 1952 Treasury Bulletin that “the Department will pay one who succeeds to the title of the bondholder,” A.R. 3 (emphasis added); and language from the 1983 Treasury Letter stating that “claims by States for payment of United States securities will be recognized only where the States have actually succeeded to the title and ownership of the securities,” A.R. 5 (emphasis added). Pls.’ Cross-MSJ 22. These statements, Plaintiffs suggest, demonstrate that Treasury‘s prior regulations required it to recognize a state‘s escheatment of title.
Yet there are numerous statements in the very same documents Plaintiffs cite to suggest that Treasury has previously recognized its discretion in evaluating whether a state has complied with due process and has put forth sufficient evidence of abandonment in accordance with its escheatment proceedings. See, e.g., A.R. 5 (1983 Treasury Letter) (“If the requirements [of the relevant state title escheatment statute] have been met, please furnish [Treasury] appropriate evidence of such action, and upon receipt, additional consideration will be given to your request.“); A.R. 14 (Treasurer of New Jersey Opposition to Certiorari Memo) (“[T]he Department has long advised the States that to receive payment on a U.S. savings bond a State must complete an escheat proceeding that satisfies due process[.]“). And as Treasury points out, the Department‘s longstanding regulations provide that only “valid” judgments, supported by
In short, there is no persuasive evidence that, prior to the Rule, Treasury followed a no-questions-asked approach to evaluating state escheatment proceedings. Rather than introducing discretion into Treasury‘s policy regarding payment on escheated bonds, the Rule simply elaborated on the standards by which that discretion would be exercised.
3. Whether Other Apparent Inconsistencies Invalidate the Rule
Although the Rule effected no reversals in policy, certain aspects of Treasury‘s reasoning in promulgating the Rule were inconsistent with prior rationales. During the Treasurer of New Jersey litigation, the Department indicated that escheatment proceedings conferring title on a state, so long as they complied with certain due process requirements, were properly recognized as “valid, judicial proceedings” under
These contradictions are not sufficient to render the Rule arbitrary and capricious, however. First, whether Treasury locates its authority to recognize escheated bonds in
proceedings under [31 C.F.R. § 315.20(b)], the final rule [clarifies] that Treasury may review judicial proceedings to determine whether they provided due process, complied with the savings bond regulations, and complied with relevant state law.” Id. As discussed below, see infra section III.B.2, the possession requirement, which is intended to assure sufficient evidence of abandonment, is similarly justified as a prerequisite for determining “valid” escheatment proceedings.
Nor does the apparent inconsistency in Treasury‘s stated fear of double-payment render the Rule arbitrary and capricious, for the simple reason that this was not the only—or even the primary—basis for the Rule. For one thing, as noted in the Rule, Treasury is concerned not only about the possibility for double-payment on claims, but also about the possibility of “costly litigation.” Rule at 80,259. Even if—consistent with Treasury‘s past statements—honoring a title-escheated bond fully discharges the Department‘s payment obligations, surely it would not extinguish the need for Treasury to engage in litigation or to develop other administrative proceedings in the event of conflicting claims. In other words, even if there is only one lawful оwner of a bond, there must still be a process for determining who that lawful owner is, and it is quite reasonable for Treasury to seek to avoid the costs of that sorting-out process.9
There is also a second reason why any inconsistency in the double-payment rationale is harmless: The Rule was aimed not only at avoiding conflicting claims, but at “protect[ing] the rights of savings bond owners.” Rule at 80,260. Treasury‘s worry was that title-escheatment statutes, like the custody-escheatment statutes discussed at length by the Third Circuit in Treasurer of New Jersey, would “alter the terms of the contracts between the United States and the bond owners,” absent clarifying regulations. Rule at 80,259. Among other concerns, Treasury noted that under some title-escheatment statutes, “bonds are presumed abandoned even if they have not matured and are in the owner‘s possession,” Rule at 80,259; that often, bond owners “are not parties to ... escheat proceeding[s], and may never learn that the state is attempting to claim title over their bonds, especially if they live out-of-state,” id.; that absent due process protections, “savings bond owners would need to monitor state laws, newspapers, and judicial proceedings in states where they may not live in order to protect their rights,” id.; that “[t]he rigor of state efforts to locate bond owners ... would be outside federal control,” id. at 80,260; and that “states may impose burdensome [redemption] рrocesses on former owners who seek payment, and may not pay former owners in full,” id. These concerns are all relevant to the protection of bondholder rights, and to “advancing the goal of making [savings] bonds attractive to savers and investors.” Treasurer of New Jersey, 684 F.3d at 407 (quoting Free, 369 U.S. at 669). The Third Circuit concluded that this rationale was alone sufficient to justify the preemption of state custody-escheatment statutes. Indeed, the court made
Finally, even assuming arguendo a policy or rationale change, there is no APA requirement that a promulgated rule be in harmony with all previous agency litigating positions and policy guidance. What matters is that an agency not “depart from a prior policy sub silentio or simply disregard rules that are still on the books.” Fox Television, 556 U.S. at 514. That did not happen here. During the rulemaking process, Treasury engaged with all of the purportedly inconsistent statements that Plaintiffs now identify. For example, Treasury considered certain commenters’ view that the Rule‘s “waiver” justification contradicted its prior statements regarding the “valid, judicial proceedings” provision, explained that the Rule‘s approach was consistent with most оf Treasury‘s prior statements on the subject, and noted that “[t]o the extent there is any ambiguity in Treasury‘s prior statements on the applicability of [the judicial proceedings subpart] to escheat proceedings, the [Rule] is intended to clarify these statements: [the subpart] does not apply to escheat proceedings.” Rule at 80,262. Accordingly, “[g]iven the care the [Department] took to explain its prior actions,” there is “no basis for concluding that it ‘casually ignored’ prior policies and interpretations or otherwise failed to provide a reasoned explanation for its [Rule].” Cablevision Sys. Corp. v. F.C.C., 649 F.3d 695, 710 (D.C. Cir. 2011) (quoting Dillmon v. Nat‘l Transp. Safety Bd., 588 F.3d 1085, 1089 (D.C. Cir. 2009)).
Nor is the Court persuaded by Plaintiffs’ comparison of this case to Encino Motorcars, where the agency “offered barely any explanation” for an undisputed change in a policy on which there had been “decades of industry reliance.” 136 S.Ct. at 2126. Here, Treasury extensively explained its Rule and its view as to why that Rule did not contradict prior statements. And in light of the fact that Treasury has never honored a payment request for escheated bonds not in a state‘s possession, states cannot reasonably have relied on any purported policy of redeeming absent bonds.10 The Court thus concludes that Treasury
B. Whether the Rule is Otherwise Arbitrary and Capricious
Aside from asserting there was an unacknowledged policy change, Plaintiffs argue that the Rule is arbitrary and cаpricious on multiple other grounds. The Court considers these challenges under the same “narrow” standard of review, State Farm, 463 U.S. at 43, evaluating whether Treasury has “articulate[d] a satisfactory explanation for its action[,] including a ‘rational connection between the facts found and the choice made.‘” Id. (quoting Burlington Truck Lines, 371 U.S. at 168).
1. Whether Treasury Adequately Weighed Evidence of State Unclaimed Property Programs
Plaintiffs complain that Treasury “ignored” certain record evidence demonstrating that states have effective and beneficial unclaimed property programs, and that the Rule therefore arbitrarily failed to establish a “rational connection between the facts found and the choice made.” Pls.’ Cross-MSJ 31-32 (quoting State Farm, 463 U.S. at 43). This assertion cannot be squared either with the Rule itself—in which Treasury directly engages the states’ contention that their unclaimed property programs better equip them to reunite bondholders with bond proceeds—or with a common-sense understanding of title-based escheatment.
In announcing the Rule, Treasury clearly acknowledged commenters’ view that “[s]tates should have the role of locating bond owners ... in part because states already have effective unclaimed property programs,” and their concern that “[b]ecause the proposed rule does not allow states to take title to bonds they do not possess ... stаtes cannot assist in locating most owners of matured, unredeemed bonds.” Rule at 80,260. Without denying that some states had effective unclaimed property programs, Treasury nevertheless rejected the conclusion that these programs were the best mechanism for protecting bondholder rights, not only because “[t]he rigor of state efforts to locate bond owners ... would be outside federal control,” but also because “[o]nce in possession of bond proceeds, states [would] have little incentive to locate a bond‘s former owner, particularly if that owner lives in another state.” Id. Citing a provision of the Arkansas legal code, Treasury went on to observe that some “states may impose burdensome [redemption] processes on former owners who seek payment, and may not pay former owners in full.” Id. Treasury concluded by “encourag[ing]” states to “assist in locating the owners of bonds ... through advertising and other methods to persuade their citizens to redeem savings bonds that have matured,” noting that “[t]hese efforts can continue without impairing a bond owner‘s title and rights under the [relevant] savings bond contract.” Id.
This response is eminently reasonable. While states may have a track record, as a general matter, of returning unclaimed property to rightful owners, see A.R. 80-81, they have not presented comparable evidence of sucсess with respect to the title escheatment statutes at issue here. Kansas, for example, purportedly paid out “tens of thousands of dollars worth of claims” after redeeming the bonds it possessed and gained title to under its escheatment statute—but that was out of $876,836.18 total. See Estes I, 123 Fed.Cl. at 79. In other words, the available evidence is not at odds with the conclusions of other courts that the motivation behind title escheatment statutes may be some-thing
2. Whether the Rule is Based on an Erroneous Interpretation of Property Law
Plaintiffs next argue that the possession requirement—i.e., that states must possess the escheated bonds they seek to redeem—is arbitrary and capricious because its rationale is “based on an improper understanding of the law.” Pls.’ Cross-MSJ 34 (quoting Oceana, Inc. v. Penny Pritzker, 26 F.Supp.3d 33, 41 (D.D.C. 2014)). In particular, Plaintiffs say Treasury‘s worry about double-payment on bonds not in a state‘s possеssion is misguided because “Treasury has always maintained that title trumps possession,” and no legal provision grants the holder of a savings bond the right to redeem it where ownership of the bond has been transferred. Id. at 35-36. In other words, Plaintiffs insist, there can be no threat of conflicting ownership claims where a state has title to the bond that is redeemed.
As discussed above, however, see supra section III.A.3, Treasury‘s concern is not merely that there would be more than one lawful owner, but that the process of determining and allocating payment to that proper owner would be “costly.” Rule at 80,259. That is surely a valid concern, as Treasury explained, not only because “a state may attempt to claim bonds that are still in the possession of registered owners,” but also because a “state may ... attempt to claim bonds that are in the possession of another state, where both states have a claim to title under their own state laws.” Rule at 80,259. Where ownership can be determined by registration, see
Plaintiffs contend that “Treasury erroneously fears that the former owner with possession of the proper sаvings bond could make a valid claim for redemption after an escheat judgment transfers title to the State.” Pls.’ Cross-MSJ 35. But Treasury never claimed that possession alone could establish a conflicting ownership claim—in other words, the Department never claimed that possession trumped title. Rather, as Treasury thoroughly explained in its Rule, the possession requirement is material because it evidences abandonment by the original, registered owner:
The proposed rule disallows escheat claims for “unclaimed” bonds that are not in a state‘s possession in part because states cannot produce sufficient evidence that these bonds are abandoned. States typically have little information about bonds that are not in their possession.... The states presumed that the bonds were abandoned based on a deadline in state law, a concept that is alien to Treasury‘s savings bond regulations. In contrast, a state in possession of a bond may be able to show that the
bond is abandoned.... The fact that a state possesses the bond is itself evidence, though not conclusive, that the bond has been abandoned. Such evidence is unavailable when a state does not possess the bonds.
Rule at 80,261. That is, where a bond has been abandoned, there is no real threat of a subsequent conflicting claim of ownership from the former registеred owner. Furthermore, the possession requirement ensures that Treasury will not be faced with conflicting claims from numerous states, since clearly only one state can be in possession of a uniquely identified bond.
It may be that title to a bond and its proceeds is properly vested in only one lawful owner, but that fact alone would not obviate the need for Treasury to engage in costly litigation or administrative proceedings in order to resolve conflicting ownership claims. The Rule is therefore not arbitrary because grounded in legal error.11
3. Whether the Rule Arbitrarily Discriminates Against State Owners
Plaintiffs make the brief argument, which they appear to abandon in their Reply, that by “singl[ing] out claims for payment by State bond owners that have acquired ownership via title escheatment and subject[ing] those claims to additional obstacles and an extra layer of discretionary review” as compared to registered owners, Pls.’ Cross-MSJ 37, the Rule arbitrarily and capriciously “treat[s] similarly situated entities differently [without] support[ing] the disparate treatment with a reasoned explanation and substantial evidence in the record,” id. (quoting Lilliputian Sys., Inc. v. Pipeline & Hazardous Materials Safety Admin., 741 F.3d 1309, 1313 (D.C. Cir. 2014)). But escheatment proceedings are available only to sovereigns, so any rule governing those proceedings’ validity as applied to bond ownership will necessarily “single[] out” states. As Treasury explains, Plaintiffs’ disparate treatment “argument is just another way of saying that [the Department] will not recognize certain redemption requests based on escheat, and the final rule explains in detail why a state court judgment purporting to transfer [a bond] title to the state does not, standing alone, result in a change in ownership under federal law.” Defs.’ Reply (citing Rule at 80,258-60). Because Plaintiffs’ disparate treatment argument merely repackages their other challenges on arbitrary-and-capricious grounds, the argument fails for similar reasons.
C. Whether the Rule Was Promulgated in Violation of the Appointments Clause
Plaintiffs mount another challenge to the Rule under the Appointments Clause of the U.S. Constitution, which distinguishes between principal officers, who must be appointed by the President and confirmed by the Senate, and “inferior” officers, who may be appointed by “the President alone, ... the Courts of Law, or ... the Heads of Departments,” if so provided by Congress.
1. Whether Plaintiffs Waived Their Appointments Clause Challenge
Treasury urges the Court to avoid the merits of Plaintiffs’ Appointments Clause challenge altogether because Plaintiffs did not present the claim during the rulemaking comment period. Defs.’ Mem. Supp. Mot. Summ. J. (“Defs.’ MSJ“) 29-30. It is true that, as a general matter, “a party must initially present its comments to the [relevant] agency during the rulemaking in order for the court to consider the issue.” Tex Tin Corp. v. EPA, 935 F.2d 1321, 1323 (D.C. Cir. 1991). But as Plaintiffs point out, that waiver rule is inapplicable where a party “had no way to raise [an] argument until the [agency] issued its final rule.” Pls.’ Cross-MSJ 25 (quoting CSX Transp., Inc. v. Surface Transp. Bd., 584 F.3d 1076, 1079 (D.C. Cir. 2009)). That exception applies here, where Plaintiffs’ challenge rests on the promulgating official‘s identity, which was only announced with the Rule‘s issuance. Moreover, Treasury concedes that, as a matter of discretion, this “Court certainly has the power to entertain an Appointments Clause challenge that was not [previously] presented to the agency.” Defs.’ Reply 30. That discretion is properly exercised “only in ‘rare cases,‘” Intercollegiate Broad. Sys., Inc. v. Copyright Royalty Bd., 574 F.3d 748, 755 (D.C. Cir. 2009), but those unusual circumstances include challenges “to the very power of the [agency] to act,” Noel Canning v. N.L.R.B., 705 F.3d 490, 497 (D.C. Cir. 2013). Such is Plaintiffs’ Appointments Clause challenge. See Freytag v. C.I.R., 501 U.S. 868, 879 (1991) (exercising discretion to hear an Appointments Clause challenge not raised below, since the Clause protects constitutionally mandated structural interests). For both of the above reasons, the Court will consider the merits of Plaintiffs’ Appointments Clause argument.
2. Whether the Fiscal Assistant Secretary is a De Facto Principal Officer
The Supreme Court “ha[s] not set forth an exclusive criterion for distinguishing bеtween principal and inferior officers for Appointments Clause purposes,” Edmond v. United States, 520 U.S. 651, 661 (1997), but it has issued the following guidance:
Generally speaking, the term “inferior officer” connotes a relationship with some higher ranking officer or officers below the President: Whether one is an “inferior” officer depends on whether he has a superior. It is not enough that other officers may be identified who formally maintain a higher rank, or possess responsibilities of a greater magnitude. If that were the intention, the Constitution might have used the phrase “lesser officer.” Rather, in the context of a Clause designed to preserve political accountability relative to important Government assignments, we think it evident that “inferior officers” are officers whose work is directed and supervised at some level by others who were appointed by Presidential nomination with the advice and consent of the Senate.
Id. at 662-63 (emphasis added). The D.C. Circuit summarized Edmond‘s analysis as “emphasiz[ing] three factors“: (1) the degree of supervision over the officer in question by a principal officer or those in the principal officer‘s supervisory line; (2) whether the officer in question is removable without cause; and (3) whether the decisions rendered by the officer in question are reversible. Intercollegiate Broad. Sys., Inc. v. Copyright Royalty Bd., 684 F.3d 1332, 1338 (D.C. Cir. 2012).
This argument suffers from two critical flaws. First, Plaintiffs’ main point is that Fiscal Assistant Secretary Lebryk “lacked any meaningful oversight or supervision in promulgating the Rule[.]” Pls.’ Cross-MSJ 29. Plaintiffs cite certain of Treasury Secretary Lew‘s public statements to suggest that he was “entirely unaware of the ... rulemaking efforts,” id. at 28, and they discern “no reason to think the [Fiscal] Assistant Secretary obtained approval of the Rule ... by any principal officer,” Pls.’ Reply 14. In other words, Plaintiffs largely take issue with the particular process Treasury utilized in arriving at this particular agency decision. But Appointments Clause challenges are properly structural, not procedural. In evaluating such challenges, reviewing courts do not evaluate the degree of supervision or reversal authority actually exercised by superiors regarding the particular agency decision at issue, but rather the extent to which relevant statutes or regulations provide for such oversight as a structural matter. See, e.g., Edmond, 520 U.S. at 663-64 (citing provisions of the Uniform Code of Military Justice in evaluating the Judge Advocate General‘s oversight of the Coast Guard Court of Criminal Appeals); Intercollegiate, 684 F.3d at 1338-39 (citing various provisions of the Copyright Royalty and Distribution Reform Act of 2004,
A review of the relevant organizational framework, as established by statute and agency directive, makes clear that the Fiscal Assistant Secretary is “inferior” because he has multiple “superior[s],” in the sense that his “work is directed and supervised at some level by others who were appointed by Presidential nomination with the advice and consent of the Senate.” Edmond, 520 U.S. at 662-63. The Fiscal Assistant Secretary “carr[ies] out [only those] duties and powers prescribed by the Secretary,” a principal officer,
Aside from framing its Appointments Clause challenge in procedural rather than structural terms, Plaintiffs also err in presuming that all three of the Intercollegiate factors are to be weighed independently and equally. The Supreme Court has rec-ognized
The Fiscal Assistant Secretary‘s “work is directed and supervised at some level by others who were appointed by Presidential nomination with the advice and consent of the Senate.” Edmond, 520 U.S. at 663. Accordingly, his appointment as an inferior officer was constitutionally valid, and the rule he promulgated was not ultra vires.
D. Whether the Rule Authorizes the Improper Review of State Judgments
As explained above, the Rule permits Treasury to evaluate whether a state has presented sufficient evidence of abandonment, and also whether a state‘s escheatment proceedings comported with due process, as assessed by the Department. See Rule at 80,264. Plaintiffs argue this is “doubly problematic” because it “arrogates what is essentially appellate review of a final state-court judgment to a federal agency with no such authority or competence, in violation of
In response to Plaintiffs’ claim that Treasury is improperly reviewing state judgments, the Department maintains that “is not engaging in judicial appellate review,” but rather is “determin[ing] whether the savings bonds are in fact ‘abandoned’ for purposes of the federal regulations governing the savings bond program.” Defs.’ Reply 41. “A determination by Treasury that it will not pay a particular redemption request based on a state judgment of escheat does not re-verse
Plaintiffs characterize this argument as “semantic,” Pls.’ Reply 21, but the distinction Treasury draws is clearly one of substance. Two bodies of law are at issue: a state law of escheat and a federal law of bond ownership. State court judgments are final regarding the former, but Treasury—by operation of the Supremacy Clause and pursuant to its statutorily-delegated authority, see
Plaintiffs also argue that Treasury has exceeded its authority by reviewing state court proceedings for compliance with due process. But Treasury explains that it does not “purport to reverse a state judgment based on the Constitution‘s Due Process clause.” Defs.’ Reply 43. Rather, looking for “evidence ... that the registered bond owner and others ‘who may have an interest in the bond’ had ‘actual and constructive notice’ of the escheat proceedings” enables the Department to “evaluate its own risk” of a conflicting claim from a “registered bond owner ... who [might] later present [the bond] for payment having been unaware of the pending escheat proceedings.” Id. (quoting Rule at 80,263). In other words, the Rule‘s so-called due process requirements are not aimed at implementing constitutional protections, but at facilitating reliable determinations of abandonment. They ultimately protect the interests of Treasury—both in preventing the risk of conflicting claims for payment (or, at least, litigation over conflicting claims), and in defining the parameters of Treasury‘s contracts with bondholders. For these reasons, the Rule does not cross fundamental jurisdictional lines or engage Treasury in the business of cоnstitutional interpretation and enforcement.
E. Whether the Rule Violates the Tenth Amendment13
Under the Tenth Amendment, “powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.”
The Tenth Amendment applies only to “powers not delegated to the United States by the Constitution.”
IV. Conclusion
For the reasons outlined above, the Court will grant Treasury‘s motion for summary judgment and deny Plaintiffs’ cross-motion. An Order accompanies this Memorandum Opinion.
BISCAYNE CONTRACTORS, INC., Plaintiff, v. James REDDING, Defendant.
Civil Action No. 14-mc-284 (GK)
United States District Court, District of Columbia.
Signed 11/29/2016