Question: I have seen various instances where receivers have requested that funds from returned or uncashed checks from a distribution be redistributed to other claimants or used to pay administrative fees or costs. Is this proper? Can the receiver get in trouble for not simply escheating the funds?
Answer: In California, what a receiver is to do with unclaimed funds is specifically governed by California Code of Civil Procedure § 570. It provides: “A receiver having any funds in his hands belonging to a person whose whereabouts are unknown to him, shall, before receiving his discharge as such receiver, publish a notice in one or more newspapers published in the county, at least once a week for four consecutive weeks, setting forth the name of the owner of any unclaimed funds, the last known place of residence or post office address of such owner and the amount of such unclaimed funds. Any funds remaining in his hands unclaimed for 30 days after the date of the last publication of such notice, shall be reported to the court, and upon order of the court, all such funds must be paid to the State Treasury accompanied with a copy of the order, which must set forth the facts required in the notice herein provided. Such funds shall be deemed to have been received by the State under Chapter 7 (commencing with Section 1500) of Title 10 of Part 3 of this code and may be recovered in the manner prescribed therein.” [emphasis added] Because the statute uses the words “shall” and “must,” it seems pretty clear that the legislature provided that this is the remedy that is supposed to be followed by a receiver when he or she has unclaimed funds. There are no California cases providing that a receiver can vary this procedure and avoid escheating unclaimed funds. Although, to be honest, there are no cases interpreting this statute at all, despite the fact that current language in the statute has existed since 1963 and the escheatment procedure for unclaimed funds held by a receiver was originally adopted in 1913. Underlying the statute is the fact that unclaimed funds in a receivership do not belong to other creditors or to the receiver or his or her professionals. The funds belong to the designated payee and, even if they cannot be located, they should have the
opportunity to possibly receive their funds through the Unclaimed Property Law.
With regard to penalties for non-compliance, that is not completely clear. While § 570 states that the funds once escheated shall be governed by the unclaimed property law (Code of Civil Procedure § 1500 et seq.), the provisions relating to the receiver escheating unclaimed funds is not in the unclaimed property statute. That statute does provide, however, that any person who “willfully refuses” to pay or deliver escheated property to the Controller, as required under the chapter, shall face a fine of not less than $5,000 or more than $50,000. Code of Civil Procedure § 1576(b). However, the statue also provides that “no person shall be considered to have willfully failed to report, pay or deliver escheated property… unless he or she has failed to respond within a reasonable time after notification by certified mail by the Controller’s office of his or her failure to act.” Code of Civil Procedure § 1576(c).
Unlike in California, there is no specific escheatment statute for federal receivers. The closest applicable statute is 28 U.S.C. § 2041 which provides: “All moneys paid into any court of the United States, or received by the officers thereof, in any case pending or adjudicated in such court, shall be forthwith deposited with the Treasurer of the United States or a designated depository, in the name and to the credit of such court.” Because a receiver is an officer of the court, this statute seems to require a federal receiver to escheat unclaimed funds to the Treasurer. Once again, however, there are few cases interpreting the statute and none of them deal with receivers.