Estes v. United States

In the United States Court of Federal Claims
No. 13-1011C
Filed: August 20, 2015
)
RON ESTES, Treasurer of the State of )
Kansas, )
) RCFC 12(b)(1); RCFC 12(b)(6);
Plaintiff, ) U.S. Savings Bonds; 31 C.F.R. § 315.20;
) “Valid, Judicial Proceedings”; Title-Based
v. ) Escheat; Breach of Contract; Third-Party
) Beneficiary; Fifth Amendment Taking
THE UNITED STATES OF AMERICA, )
)
Defendant. )
)
)
J. Brett Milbourn, Walters, Bender, Strohbehn & Vaughan, P.C., Kansas City,
KS, with whom was David Charles Frederick, Kellogg, Huber, et al.,
Washington, DC, for Plaintiff.
Kenneth David Woodrow, with whom were Stuart F. Delery, Assistant Attorney
General, Robert E. Kirschman, Jr., Director, and Steven Gillingham, Assistant
Director, Commercial Litigation Branch, Civil Division, United States
Department of Justice, Washington, DC, for Defendant. Theodore C. Simms, II,
Bureau of Fiscal Service, U.S. Department of Treasury, Washington, DC, Of
Counsel for Defendant.
OPINION AND ORDER
KAPLAN, Judge.
In this action, Plaintiff Ron Estes, Treasurer of the State of Kansas (“Kansas” or “the
State”), requests an award of damages equal to the matured value (plus interest) of all lost,
stolen, destroyed or otherwise abandoned U.S. savings bonds that are registered to individuals
with last known addresses in Kansas. According to Kansas, it has succeeded to ownership of
these bonds by virtue of a state court judgment in which title to the bonds escheated to the State
under the Kansas Disposition of Unclaimed Property Act, Kan. Stat. Ann. § 58-3979 (West
2000).
In its complaint, Kansas states its belief that the value of the abandoned bonds is in
excess of $151 million. It asserts a number of causes of action, including, among others, breach
of contract, equitable estoppel, and Fifth Amendment takings. Kansas also seeks an accounting
of the benefits to which it claims entitlement, including serial numbers, addresses, and other
information that would identify those bonds registered with last known addresses in the State of
Kansas.
Before the Court is the government’s motion to dismiss for lack of jurisdiction under
Rule 12(b)(1) of the Rules of the Court of Federal Claims (“RCFC”) and for failure to state a
claim under RCFC 12(b)(6). For the reasons that follow, the government’s motion under Rule
12(b)(1) is DENIED. Its motion to dismiss pursuant to Rule 12(b)(6) is GRANTED IN PART
AND DENIED IN PART.
BACKGROUND
I. The United States Savings Bond Program
Pursuant to its power “[t]o borrow money on the credit of the United States” under
Article I, section 8, clause 2 of the Constitution, Congress has delegated authority to the
Secretary of the Treasury (“the Secretary”), with the approval of the President, to issue savings
bonds, the proceeds of which may be used “for expenditures authorized by law.” 31 U.S.C. §
3105(a); Free v. Bland, 369 U.S. 663, 666-67 (1962). The statute gives the Secretary the
authority to prescribe regulations governing, among other things, the bonds’ investment yield,
maturity period, redemption, ownership and transfer. See § 3105(b)-(c). These regulations
appear in Title 31 of the Code of Federal Regulations, Parts 315, 353, and 360.1
Section 315.5 provides that the person to whom a bond is registered is the owner of the
bond. 31 C.F.R. § 315.5(a) (“Registration is conclusive of ownership.”). The regulations do not
impose any time limits for bond owners to redeem the savings bonds that are the subject matter
of this case. Therefore, owners can present them for payment at any time. See 31 U.S.C. §
3105(b)(2)(A) (authorizing the Secretary to promulgate regulations providing that “owners of
savings bonds may keep the bonds after maturity”). As of 1989, and at least up through 2012,
the Department of the Treasury (“Treasury”) was receiving claims of $7,000 to $10,000 a day for
payment on savings bonds that had matured many years earlier. Treasurer of N.J. v. U.S. Dep’t
of Treasury, 684 F.3d 382, 388 (3d Cir. 2012).2
1
Savings bonds are issued in various Series, designated by letters of the alphabet. Part 315 of
Title 31 of the Code of Federal Regulations governs Series A, B, C, D, E, F, G, H, J, and K. Part
353 governs Series EE and HH. Part 360 governs Series I. In general, the corresponding
sections of each part—e.g., §§ 315.5, 353.5, and 360.5—are identical. The bonds at issue in this
case are Series E, A-D, F, G, H, J, and K, and therefore are subject to Part 315. Compl. ¶ 44.
2
The relevant statutes and regulations do not contain provisions for locating owners of matured
but unredeemed bonds. In 2000, the Treasury Department created a “Treasury Hunt” website,
which provides information on matured but unredeemed Series E bonds issued after 1974 in a
database searchable by Social Security Number. Treasurer of N.J., 684 F.3d at 388-389.
2
Section 315.15 provides that savings bonds are “not transferable and are payable only to
the owners named on the bonds, except as specifically provided in these regulations and then
only in the manner and to the extent so provided.” 31 C.F.R. § 315.15. This case concerns the
interpretation of the Secretary’s regulations governing the redemption of bonds by parties other
than their registered owner. In particular, 31 C.F.R. § 315.20(b) provides that:
The Department of the Treasury will recognize a claim against an owner of a
savings bond and conflicting claims of ownership of, or interest in, a bond between
coowners or between the registered owner and the beneficiary, if established by
valid, judicial proceedings, but only as specifically provided in this subpart.
Section 315.23 specifies the evidence required to establish the validity of the
judicial proceedings.
II. States’ Unclaimed Property Statutes and Their Claims for Payment on Savings
Bonds
Historically, at least as early as the 1950s, states have sought to recover the proceeds
from matured but unredeemed savings bonds pursuant to their unclaimed property statutes.
Treasurer of N.J., 684 F.3d at 390. Most of these state statutes have been based on the Uniform
Unclaimed Property Act (“Uniform Act”). Id. at 389. Under the Uniform Act, a state may
acquire rights to abandoned property if the last known address of the apparent owner is in the
state.3 Uniform Unclaimed Property Act § 4 (1995), available at
http://www.uniformlaws.org/shared/docs/unclaimed%20property/uupa95.pdf.
The Uniform Act is rooted in the common-law doctrine of escheat, Treasurer of N.J., 684
F.3d at 389, under which “[s]tates as sovereigns may take custody of or assume title to
abandoned . . . property.” Delaware v. New York, 507 U.S. 490, 497 (1993).4 Under the
Uniform Act—and consequently, under many states’ unclaimed property acts—“the State does
not take title to unclaimed property, but takes custody only, and holds the property in perpetuity
for the owner.” Uniform Unclaimed Property Act prefatory note. As explained in greater detail
below, however, the Kansas statute at issue in this case, as amended in 2000, allows the State to
take title as well as custody to unclaimed U.S. savings bonds, based upon a state court judgment.
In 1952, Treasury issued Bulletin No. 111, setting forth its position with respect to “state
statutes purporting to vest abandoned property, including United States securities, in certain State
3
To register a savings bond, the owner completes a registration form, on which the owner
identifies his or her address at the time of registration. Treasury initially kept registration records
for Series E savings bonds on paper but later converted the paper records to microfiche.
Treasury is currently in the process of digitizing those records. Compl. ¶ 46.
4
“At common law, abandoned personal property was not the subject of escheat, but was subject
only to the right of appropriation by the sovereign as bona vacantia. [Supreme Court] opinions,
however, have understood ‘escheat’ as encompassing the appropriation of both real and personal
property. . . .” Delaware v. New York, 507 U.S. at 497 n. 9 (internal citations omitted).
3
officers.” Pl.’s Resp. to Def.’s Mot. to Dismiss [hereinafter “Pl.’s Resp.”] App. 281. The
Bulletin reproduced a letter dated January 28, 1952 [hereinafter the “Escheat Decision”] from the
Secretary to the Comptroller of the State of New York. Pl.’s Resp. App. 281-84; Treasurer of
N.J., 684 F.3d at 390. In that letter, the Secretary explained that Treasury would pay the
proceeds of savings bonds to New York if it actually obtained title to the bonds based upon a
judgment of escheat, but it would not do so if the state merely acquired a right to take custody of
the proceeds. Pl.’s Resp. App. 283-84; Treasurer of N.J., 684 F.3d at 390. The Secretary
reasoned as follows:
“[p]ayment according to [the] explicit terms of [the] regulations is plainly an
obligation of the Government . . . . But even where no explicit reference is made
in the regulations to a particular case, the Department will pay one who succeeds
to the title of the bondholder. This is not regarded as a violation of the agreement,
but, on the contrary, as payment to the bondholder in the person of his successor or
representative. Thus, although the regulations do not mention such a case, the
Department recognizes the title of the state when it makes claim based upon a
judgment of escheat.
Id. App. 283.
More recently, Treasury articulated the same position in a page on its website entitled
“EE/E Savings Bonds FAQs.” Pl.’s Resp. App. 289-90 (providing a screenshot of the FAQs
page). Among a list of frequently asked questions, the page poses the following: “In a state that
has a permanent escheatment law, can the state claim the money represented by securities that
the state has in its possession[?] For example, can a state cash savings bonds that it’s gotten
from abandoned safe deposit boxes?” Pl.’s Resp. App. 290. Treasury’s answer mirrors the
position it stated in the Escheat Decision:
The Department of the Treasury will recognize claims by States for payment of
United States securities where the States have succeeded to the title and ownership
of the securities pursuant to valid escheat proceedings. The Department, however,
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.
Since promulgating its view distinguishing between custody- and title-based escheat
statutes, Treasury has cited it consistently to defeat claims for payment on unredeemed savings
bonds by states with custody-based unclaimed property statutes. See, e.g., Treasurer of N.J., 684
F.3d at 391 (noting the parties’ stipulation that Escheat Decision “‘is defendants’ interpretation
of federal savings bond regulations . . . and reflects defendants’ understanding of existing laws”
and that “the Department has no intention of deviating from the statement”). As recently as
April of 2013, the Solicitor General, opposing the State of Montana’s petition for certiorari
seeking review of the Third Circuit’s decision in Treasurer of New Jersey, observed that: (1) “the
Department [of Treasury] has long advised the States that to receive payment on a U.S. savings
4
bond a State must complete an escheat proceeding that satisfies due process and that awards title
to the bond to the State, substituting the State for the original bondholder as the lawful owner”;
and (2) “given the regulatory prohibition on payment to anyone other than the lawful owner, the
Department has also made clear that it will not make payment to a State on a bond if a State does
not obtain title to the bond but instead merely seeks ‘custody’ of bond proceeds until the
bondholder redeems the bond.” Pl.’s Resp. App. 9.
III. Kansas’s Unclaimed Property Act and Escheatment Proceedings
Prior to 2000, Kansas’s unclaimed property statute allowed the state to take custody of,
but not title to, such property. Pl.’s Resp. 14. In 2000, however, the Kansas legislature amended
the statute specifically to allow Kansas to take title to unclaimed U.S. savings bonds. Id. Thus,
the Kansas Disposition of Unclaimed Property Act now provides:
(a) . . . United States savings bonds which are unclaimed property5 . . . shall escheat
to the state of Kansas three years after becoming unclaimed property . . . and all
property rights to such United States savings bonds or proceeds from such
bonds shall vest solely in the state of Kansas.
(b) Within 180 days after the three years in subsection (a), if no claim has been
filed [with the administrator] . . . for such United States savings bonds, the
administrator shall commence a civil action in the district court of Shawnee
county for a determination that such United States savings bonds shall escheat
to the state. The administrator may postpone the bringing of such action until
sufficient United States savings bonds have accumulated in the administrators
[sic] custody to justify the expense of such proceedings.
(c) If no person shall file a claim or appear at the hearing to substantiate a claim or
where the court shall determine that a claimant is not entitled to the property
claimed by such claimant, then the court, if satisfied by evidence that the
administrator has substantially complied with the laws of this state, shall enter
a judgment that the subject United States savings bonds have escheated to the
state.
5
Under § 58-3935(c) of the Kansas Disposition of Unclaimed Property Act, “[p]roperty is
unclaimed if,”
for the applicable period set forth in subsection (a) [for the specific type of
property], the apparent owner has not communicated in writing or by other means
reflected in a contemporaneous record prepared by or on behalf of the holder, with
the holder concerning the property or the account in which the property is held, and
has not otherwise indicated an interest in the property. A communication by an
owner with a person other than the holder or the holder’s representative who has
not in writing identified the property to the owner is not an indication of interest in
the property by the owner.
5
(d) The administrator shall redeem such United States savings bonds escheated to
the state and the proceeds from such redemption of United States savings bonds
shall be deposited in the state general fund . . . .
Kan. Stat. Ann. § 58-3979.
Pursuant to this statutory scheme, on January 3, 2013, Kansas filed a Petition for
Declaratory Judgment in the district court of Shawnee County, Kansas, requesting “a
determination that all right and legal title in, and ownership of, certain matured, unredeemed
United States savings bonds, which are unclaimed property under the Kansas Disposition of
Unclaimed Property Act, . . . shall escheat to the State of Kansas.” Pl.’s Resp. App. 87 (Petition
¶ 49). Of the bonds referenced in the petition, some were in the physical possession of the
Kansas Treasurer (“Bonds in Possession”), whereas others had been “lost, stolen, destroyed, or
otherwise made unavailable” and thus were not in the possession of the Kansas Treasurer
(“Absent Bonds”). Id. App. 88-89 (Petition ¶¶ 52-53). In Kansas’s estimation, the total matured
value of the Bonds in Possession is $876,836.18, and the total matured value of the Absent
Bonds is approximately $151.8 million. Id.
According to the petition, “extensive efforts were made to identify and verify accurate
addresses of bond owners and to the extent possible reunite [the Bonds in Possession] with their
owners,” but such efforts failed. Id. App. 88. To give notice of the proceedings to the owners
whose interests were implicated by them, the court authorized service by publication. Id. App.
157. On March 29, 2013, the court held a hearing on the petition, at which no bond owner
appeared. Id. App. 166 (Judgment of Escheatment 8). After reviewing the evidence, the court
entered a judgment of escheatment, in which it declared that all rights and legal title to, and
ownership of both the Bonds in Possession and the Absent Bonds, “shall escheat to the State of
Kansas.” Id. App. 167 (Judgment of Escheatment 9).
IV. Requests by Kansas to Redeem the Bonds
On May 13, 2013, Kansas filed a claim with Treasury for redemption of the bonds now
owned, according to the Kansas court’s escheatment judgment, by the State. Id. App. 251-54.
On October 9, 2013, Treasury responded to Kansas’s request with respect to the Bonds in
Possession, informed Kansas of the redemption procedures, and noted that Treasury anticipated
“redeeming [the Bonds in Possession] in the normal course.” Id. App. 276-77. Kansas has since
delivered the Bonds in Possession to Treasury and received the proceeds. Compl. ¶ 82.
On October 16, 2013, however, Treasury denied Kansas’s claim with respect to the
Absent Bonds. Pl.’s Resp. App. 279-80. It explained that “under Treasury’s regulations,
Treasury is bound to its contract with the registered owners of these savings bonds, and would
violate that contract if it redeemed them to a third party.” Id. App. 279. Further, Treasury
observed, “[i]f the registered owner of one of the Absent Bonds were to present that bond,
Treasury would be obligated to redeem that bond.” Id. According to the letter, Treasury
regulations provided that in the absence of an exception or waiver, Treasury could only redeem a
savings bond to its registered owner. Id. It asserted that “[e]scheatment claims by states are not
6
an explicit exception to the conclusive ownership requirements of 31 C.F.R. § 315.5(a).” Id.
Moreover, the Treasury letter explained, the exceptions to the ownership requirements of 31
C.F.R. § 315.5(a) set forth in § 315.5(b) for “rights established by valid, judicial proceedings”
include only ownership claims pursuant to a divorce decree (§ 315.22(a)) and claims based on
gifts causa mortis (§ 315.22(b)). Id. App. 279 n.5.
The letter stated that “[i]n the past, Treasury has interpreted its regulations to allow some
state escheatment claims, but only when the state possesses the savings bonds in its claim.” Id.
App. 279-80. Kansas could not redeem the Absent Bonds, the letter concluded, “because it is not
the registered owner of the bonds, nor does it possess them.” Id. App. 280.
V. Kansas’s Claims in This Court
On December 20, 2013, Kansas filed this lawsuit. Its complaint consists of eight counts:
(1) breach of express contract; (2) breach of implied-in-fact contract; (3) breach of fiduciary
duties with respect to express contracts; (4) equitable estoppel; (5) third-party beneficiary
contract; (6) declaratory judgment; (7) Fifth Amendment taking of property for public use; and
(8) action for accounting. Compl. 22-38. For counts I, II, III, IV, V, and VII, Kansas seeks
“damages in an amount equal to the matured value, plus applicable interest, of [the Absent
Bonds]—believed to be in excess of $151,800,000,” as well as “the expense of this action” and
any “further relief that this Court deems just and equitable.” Compl. 24-25, 27-29, 31, 33, 36. In
addition, for Count VI, Kansas requests “that this Court enter an order declaring:”
that Defendants have no right, title, or interest to the Absent Bonds; that Defendant
has wrongfully asserted custody and/or ownership over Plaintiff’s Absent Bonds,
and failed to turn over to Plaintiff required and necessary information regarding the
Absent Bonds, namely serial numbers, addresses, and other information which
would identify those bonds with last known addresses in the State of Kansas; that
Plaintiff, having been awarded all right, title and interest in the Absent Bonds and
their proceeds by valid judicial escheat proceedings, should not be deprived of its
property and Defendant must therefore provide Plaintiff the information necessary
to identify those Absent Bonds registered with last known addresses in the State of
Kansas; that Defendant accept Plaintiff’s presentment and redemption of the
subject Absent Bonds; [and] that Plaintiff be awarded [the damages and costs
specified in Counts I, II, III, IV, V, and VII].
Compl. 35. Finally, for Count VIII, Kansas requests that this Court order the government to
“provide an accounting of the Absent Bonds, namely serial numbers, addresses, and other
information which would identify those bonds registered with last known addresses in the State
of Kansas, and [the] value of the Absent Bonds and their proceeds,” as well as “the expense of
this action” and any other relief. Compl. at 38.
VI. The Government’s Motion to Dismiss
The government has moved to dismiss Kansas’s complaint. It contends that Kansas’s
contract claims, its equitable estoppel claim, and its declaratory judgment claim must be
7
dismissed for lack of subject matter jurisdiction pursuant to RCFC 12(b)(1). Moreover, although
it does not dispute that Kansas’s takings claim falls within this Court’s Tucker Act jurisdiction,
the government contends that this claim must be dismissed for failure to state a claim upon
which relief can be granted pursuant to RCFC 12(b)(6).
The Court held oral argument on the government’s motion to dismiss on October 21,
2014. Subsequent to the argument, the Court requested and the parties filed two rounds of
supplemental briefs. Most recently, on June 30, 2015, the government submitted a Notice of
Proposed Rulemaking, to which Kansas has since responded.
For the reasons that follow, the Court concludes that it has jurisdiction over the claims
in the complaint. Therefore, the government’s motion to dismiss under Rule 12(b)(1) is
DENIED. The Court further finds that Kansas has stated claims on which relief can be granted
with respect to its allegations of breach of contract and a Fifth Amendment taking of property.
On the other hand, it finds that Kansas’s allegations do not support a claim for relief as a third
party beneficiary. Therefore, the government’s motion to dismiss pursuant to Rule 12(b)(6) is
GRANTED IN PART AND DENIED IN PART.
DISCUSSION
I. Standards for Motions to Dismiss
In deciding a motion to dismiss for lack of subject matter jurisdiction, the court accepts as
true all undisputed facts in the pleadings and draws all reasonable inferences in favor of the
plaintiff. Trusted Integration, Inc. v. United States, 659 F.3d 1159, 1163 (Fed. Cir. 2011). The
court may “inquire into jurisdictional facts” to determine whether it has jurisdiction. Rocovich v.
United States, 933 F.2d 991, 993 (Fed. Cir. 1991). The burden of establishing jurisdiction is on
the plaintiff. Trusted Integration, 659 F.3d at 1163.
When considering a motion to dismiss for failure to state a claim under RCFC 12(b)(6),
the court “must accept all well-pleaded factual allegations as true and draw all reasonable
inferences in [the plaintiff’s] favor.” Boyle v. United States, 200 F.3d 1369, 1372 (Fed. Cir.
2000). The motion will be granted when the facts asserted by the plaintiff fail “to raise a right to
relief above the speculative level.” Am. Contractors Indem. Co. v. United States, 570 F.3d 1373,
1376 (Fed. Cir. 2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). In other
words, plaintiff’s claim must be plausible on its face. Twombly, 550 U.S. at 570; Acceptance
Ins. Cos., Inc. v. United States, 583 F.3d 849, 853 (Fed. Cir. 2009). “A claim has facial
plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009) (citing Twombly, 550 U.S. at 556). “Conclusory allegations of law and
unwarranted inferences of fact do not,” however, “suffice to support a claim.” Bradley v. Chiron
Corp., 136 F.3d 1317, 1322 (Fed. Cir. 1998) (citations omitted).
8
II. Subject Matter Jurisdiction
The United States Court of Federal Claims is a court of limited jurisdiction that, pursuant
to the Tucker Act, may hear “any claim against the United States founded either upon the
Constitution, or any Act of Congress or any regulation of an executive department, or upon any
express or implied contract with the United States, or for liquidated or unliquidated damages in
cases not sounding in tort.” 28 U.S.C. § 1491(a)(1) (2012). In addition, the Tucker Act gives
this court limited jurisdiction to grant equitable and declaratory relief, but only when such relief
is “an incident of and collateral to” a money judgment. 28 U.S.C. § 1491(a)(2); Bobula v. U.S.
Dep’t of Justice, 970 F.2d 854, 859 (Fed. Cir. 1992).
A. Contract-Based Claims6
It is well established that savings bonds are contracts between the United States and the
owners of the bonds and that the regulations prescribed by the Secretary constitute the contract
terms. Treasurer of N.J., 684 F.3d at 387 (citing Rotman v. United States, 31 Fed. Cl. 724, 725
(1994)). The government has nonetheless moved to dismiss Kansas’s complaint for lack of
subject matter jurisdiction, arguing that the escheatment proceedings in Kansas state court did
not effect a valid transfer of ownership under Treasury regulations with respect to the Absent
Bonds. See Def.’s Mot. to Dismiss 7-15. Because Kansas is not the owner of the Absent Bonds,
the government reasons, it is not party to the contracts that those bonds represent. Id. Therefore,
the government concludes, Kansas’s claims cannot be “founded . . . upon any express or implied
contract with the United States,” as required for this Court to exercise jurisdiction under the
Tucker Act, § 1491(a)(1). Def.’s Mot. to Dismiss 7-8.
In the Court’s view, the government’s argument—that Kansas was not a party to the
contract because under Treasury’s Regulations it was not the owner of the Absent Bonds—goes
to the merits of Kansas’s contract claims, not this Court’s jurisdiction over them. The Federal
Circuit has long held that a well-pleaded allegation that an express or an implied-in-fact contract
underlies the plaintiff’s claim suffices to confer subject matter jurisdiction in the Court of
Federal Claims. Trauma Serv. Grp. v. United States, 104 F.3d 1321, 1325 (Fed. Cir. 1997)
(citing Gould, Inc. v. United States, 67 F.3d 925, 929 (Fed. Cir. 1995)). See also Do-Well Mach.
Shop, Inc. v. United States, 870 F.2d 637, 639-40 (Fed. Cir. 1989) (“Jurisdiction, therefore, is
not defeated . . . by the possibility that the averments might fail to state a cause of action on
which petitioners could actually recover.” (quoting Bell v. Hood, 327 U.S. 678, 682 (1946)));
Moden v. United States, 404 F.3d 1335, 1340 (Fed. Cir. 2005) (“The forum has jurisdiction to
hear the matter in the first instance—that is, subject-matter jurisdiction existed—as long as the
petitioner asserted nonfrivolous claims” (quoting Spruill v. Merit Sys. Prot. Bd., 978 F.2d 679,
687-88 (Fed. Cir. 1992))). See also Oswalt v. United States, 41 F. App’x 471, 473 (Fed. Cir.
July 12, 2002) (observing that, “[b]ecause plaintiffs alleged contracts with the United States, and
resolution of the jurisdictional issue of privity of contract under the Tucker Act is intertwined
6
As the government did in its motion, the Court refers to the following four of Kansas’s claims
as its contract-based claims: breach of express contract; breach of implied-in-fact contract;
breach of fiduciary duties with respect to express contracts; and action for accounting.
9
with the merits of [plaintiffs’] express and implied breach of contract claims,” the Court of
Federal Claims should not have dismissed for lack of jurisdiction and should have analyzed the
issue as one on the merits).
Here, Kansas’s complaint contains a well-pleaded allegation that there is a contract
between Kansas and the United States. This allegation, moreover, is not frivolous; indeed, as
explained below, Kansas’s allegations give rise to a plausible claim for relief. See Twombly,
550 U.S. at 556. Therefore, this Court has subject matter jurisdiction under the Tucker Act to
resolve Kansas’s contract claims.
B. Third-Party Beneficiary Claim
In moving to dismiss Kansas’s third-party beneficiary claim for lack of jurisdiction, the
government argues that, as a matter of law, Kansas does not constitute a third-party beneficiary
of the savings bond contracts. Def.’s Mot. to Dismiss 16-17. The Court also views this question
as going to the merits of Kansas’s claim, and not the Court’s jurisdiction. Thus, the Court shall
address the government’s arguments with respect to Kansas’s third-party beneficiary claim, like
the government’s arguments with respect to Kansas’s contract claims, in connection with its
determination on the merits.
C. Equitable Estoppel and Declaratory Judgment Claims
The government’s argument that the Court should dismiss Kansas’s equitable estoppel
and declaratory judgment claims proceeds as follows: per the Tucker Act, 28 U.S.C.
§ 1491(a)(2), this Court has jurisdiction over claims for equitable and declaratory relief only
when such claims are “an incident of and collateral to” a claim for money damages; the Court
must dismiss all of Kansas’s claims for money damages either for lack of jurisdiction or for
failure to state a claim upon which relief can be granted; thus, the Court also must dismiss
Kansas’s equitable estoppel and declaratory judgment claims for lack of jurisdiction. Def.’s
Mot. to Dismiss 19-20. The government’s argument for dismissal of Kansas’s equitable estoppel
and declaratory judgment claims, therefore, depends upon a dismissal of all of Kansas’s other
claims. As set forth below, the Court denies the government’s motion to dismiss as to Kansas’s
contract claims and its takings claim. Accordingly, Kansas’s claims for equitable estoppel and
declaratory judgment remain “an incident of and collateral to” claims for money damages, and
the government’s motion to dismiss them pursuant to Rule 12(b)(1) must be denied.
III. Sufficiency of Kansas’s Claims Under RCFC 12(b)(6)
A. Kansas’s Contract Claims
1. The Parties’ Contentions
As the basis for its motion to dismiss Kansas’s contract claims, the government argues
that, under Treasury regulations—and therefore under the savings bond contracts—Treasury was
not required to recognize Kansas’s claims of ownership of the bonds based on the state
10
escheatment proceedings. See Mot. to Dismiss 8, 11. Thus, the merits of the government’s
motion to dismiss for failure to state a claim hinge upon the meaning of the regulations.
The pertinent regulatory provisions are contained at Subpart E of 31 C.F.R. Part 315
(captioned “Limitations on Judicial Proceedings”). Entitled “General,” 31 C.F.R. § 315.20
states as follows:
The following general rules apply to the recognition of a judicial
determination on adverse claims affecting savings bonds:
(a) The Department of the Treasury will not recognize a judicial determination that
gives effect to an attempted voluntary transfer inter vivos of a bond, or a judicial
determination that impairs the rights of survivorship conferred by these regulations
upon a coowner or beneficiary. All provisions of this Subpart are subject to these
restrictions.
(b) The Department of the Treasury will recognize a claim against an owner of a
savings bond and conflicting claims of ownership of, or interest in, a bond between
coowners or between the registered owner and the beneficiary, if established by
valid, judicial proceedings, but only as specifically provided in this subpart. Section
315.23 specifies the evidence required to establish the validity of the judicial
proceedings.
(c) The Department of the Treasury and the agencies that issue, reissue, or redeem
savings bonds will not accept a notice of an adverse claim or notice of pending
judicial proceedings, nor undertake to protect the interests of a litigant not in
possession of a savings bond.
Kansas contends that its claim of ownership of the Absent Bonds pursuant to the state
court escheat judgment is one that 31 C.F.R. § 315.20(b) requires Treasury to recognize because
it is a “claim against an owner of a savings bond” that is “established by valid, judicial
proceedings.” Further, Kansas argues, its claim is one “established by valid, judicial proceedings
. . . as specifically provided” in Subpart E because the state court judgment satisfies the
requirements that 31 C.F.R. § 315.23 (entitled “Evidence”) sets forth for establishing the validity
of judicial proceedings. See Pl.’s Resp. 27-28; see also 31 C.F.R. § 315.23(a) (“To establish the
validity of judicial proceedings, certified copies of the final judgment, decree, or court order, and
of any necessary supplementary proceedings, must be submitted. If the judgment, decree, or
court order was rendered more than six months prior to the presentation of the bond, there must
also be submitted a certificate from the clerk of the court, under court seal, dated within six
months of the presentation of the bond, showing that the judgment, decree, or court order is in
full force.”).7
7
Subsections 315.23(b) and (c), which are not directly at issue in this case, set forth specific
requirements for the recognition of the validity of judicial proceedings in cases involving the
payment of the proceeds of a bond to a trustee in bankruptcy or receiver in equity, as follows:
11
The government, on the other hand, argues that state court escheatment proceedings are
not among the “valid, judicial proceedings” to which section 315.20(b) refers. Def.’s Mot. 12-
13. It focuses on the phrase in that regulation stating that a claim of ownership may be
established by valid, judicial proceedings “only as specifically provided in this subpart.” Id. The
government does not deny that Kansas satisfied the evidentiary requirements set forth in 31
C.F.R. § 315.23 to establish the validity of the state court escheatment proceedings upon which
its claim of ownership is based. Rather, it argues that the regulatory phrase providing that
Treasury will recognize a claim of ownership established through valid, judicial proceedings
“but only as provided in this subpart” means that Treasury will only recognize the specific
categories of judgments that are referenced elsewhere in Subpart E—i.e., the judgments
referenced in § 315.21, entitled “[p]ayment to judgment creditors,”8 and those identified in §
315.22, entitled “[p]ayment or reissue pursuant to judgment.”9 According to the government,
(b) Trustee in bankruptcy or receiver of an insolvent’s estate. A request for
payment by a trustee in bankruptcy or a receiver of an insolvent’s estate must be
supported by appropriate evidence of appointment and qualification. The evidence
must be certified by the clerk of the court, under court seal, as being in full force
on a date that is not more than six months prior to the presentation of the bond.
(c) Receiver in equity or similar court officer. A request for payment by the
receiver in equity or a similar court officer, other than a receiver of an insolvent’s
estate, must be supported by a copy of an order that authorizes the presentation of
the bond for redemption, certified by the clerk of the court, under court seal, as
being in full force on a date that is not more than six months prior to the presentation
of the bond.
8
Section 315.21 states as follows:
(a) Purchaser or officer under levy. The Department of the Treasury will
pay (but not reissue) a savings bond to the purchaser at a sale under a levy or to the
officer authorized under appropriate process to levy upon property of the registered
owner or coowner to satisfy a money judgment. Payment will be made only to the
extent necessary to satisfy the money judgment. The amount paid is limited to the
redemption value 60 days after the termination of the judicial proceedings. Payment
of a bond registered in coownership form pursuant to a judgment or a levy against
only one coowner is limited to the extent of that coowner’s interest in the bond.
That interest must be established by an agreement between the coowners or by a
judgment, decree, or order of a court in a proceeding to which both coowners are
parties.
(b) Trustee in bankruptcy, receiver, or similar court officer. The Department
of the Treasury will pay, at current redemption value, a savings bond to a trustee in
bankruptcy, a receiver of an insolvent’s estate, a receiver in equity, or a similar
court officer under the provisions of paragraph (a) of this section.
9
Section 315.22 states as follows:
12
“exceptions to § 315.5(a) [the rule stating that registration is conclusive of ownership] by judicial
proceedings include claims of ownership based on a divorce decree (§ 315.22(a)) and claims
based on a gift causa mortis (§ 315.22(b))” but not claims of ownership arising out of an
escheatment judgment because “escheatment actions are not one of the ‘valid judicial
proceedings’ recognized in the regulations.” Def.’s Mot. to Dismiss 12.
Thus, Kansas interprets the phrase “valid, judicial proceedings” in § 315.20(b) as a
catchall category, subject only to the exceptions identified in § 315.20(a) (for judicial
determinations that “give[] effect to an attempted voluntary transfer inter vivos of a bond,” or
that “impair[] the rights of survivorship conferred by [the] regulations upon a coowner or
beneficiary”). Its argument is that the phrase “as specifically provided in this subpart” in §
315.20(b) was not intended to limit the types of judicial proceedings that could confer bond
ownership rights but instead refers to the manner in which the validity of judicial proceedings
must be established. The government, on the other hand, asserts that the otherwise broad term
“valid, judicial proceedings” is narrowed by the “specifically provided” language, with the result
(a) Divorce. The Department of the Treasury will recognize a divorce
decree that ratifies or confirms a property settlement agreement disposing of bonds
or that otherwise settles the interests of the parties in a bond. Reissue of a savings
bond may be made to eliminate the name of one spouse as owner, coowner, or
beneficiary, or to substitute the name of one spouse for that of the other spouse as
owner, coowner, or beneficiary pursuant to the decree. However, if the bond is
registered in the name of one spouse with another person as coowner, there must
be submitted either:
(1) A request for reissue by the other person or
(2) A certified copy of a judgment, decree, or court order entered in
proceedings to which the other person and the spouse named on the bond
are parties, determining the extent of the interest of that spouse in the bond.
Reissue will be permitted only to the extent of that spouse’s interest. The
evidence required under § 315.23 must be submitted in every case. When
the divorce decree does not set out the terms of the property settlement
agreement, a certified copy of the agreement must be submitted. Payment,
rather than reissue, will be made if requested.
(b) Gift causa mortis. A savings bond belonging solely to one individual
will be paid or reissued at the request of the person found by a court to be entitled
by reason of a gift causa mortis from the sole owner.
(c) Date for determining rights. When payment or reissue under this section
is to be made, the rights of the parties will be those existing under the regulations
current at the time of the entry of the final judgment, decree, or court order.
13
that only those claims of ownership that arise out of the types of judicial proceedings explicitly
referenced in Subpart E must be recognized.10
For the reasons set forth in greater detail below, the Court concludes that Kansas’s
reading of the regulatory text is the more persuasive one. By contrast, the government’s position
is inconsistent with the position that Treasury has articulated for over sixty years through
interpretive guidance, statements on its website, and positions taken in litigation as recently as
April of 2013, just one month before Kansas requested payment on the bonds in this case.
Accordingly, the Court concludes that Kansas has stated a claim for relief with respect to its
allegations of breach of contract.
2. The Regulatory Text
To determine the meaning of the regulations, the Court begins with their text. See Chase
Bank USA, N.A. v. McCoy, 562 U.S. 195, 204 (2011). As noted, 31 C.F.R. § 315.20(b) states
that Treasury “will recognize a claim against an owner of a savings bond . . . if established by
valid, judicial proceedings, but only as specifically provided in this subpart.” Subsection (a) of
§ 315.20, in turn, identifies the specific judicial determinations that Treasury will not recognize
(those that give effect to “an attempted voluntary transfer inter vivos of a bond” and those that
“impair[] the rights of survivorship conferred by these regulations upon a coowner or
beneficiary”).
In the Court’s view, the best reading of the phrase “but only as specifically provided in
this subpart” is that it was intended to: (1) preclude the recognition of claims of ownership where
the evidentiary requirements set forth in Subpart E for establishing the validity of judicial
proceedings (§ 315.23) have not been met; and (2) reference the particular requirements,
limitations and/or conditions that Subpart E imposes on the redemption or reissuance of bonds in
the context of the particular types of judicial proceedings that are governed by §§ 315.21 and
315.22.
Thus, there are essentially two ways to read the phrase “but only as specifically provided
in this subpart.” Kansas argues that the word “as” in this context means “in the manner of.”
10
In its first supplemental brief, the government raised for the first time two new bases for
refusing to recognize ownership rights arising out of state court escheatment proceedings: (1)
that such proceedings do not involve a claim against the owner, coowner, or beneficiary of a
savings bond, as required under subsection 315.20(b), because an escheat judgment involves a
proceeding that is brought against the property itself (in rem), and (2) that “[t]o the extent that
Kansas claims title over savings bonds with a co-owner or beneficiary,” such a claim would be
inconsistent with the language of § 315.20(a) “because it would interfere with the rights of
survivorship conferred by Treasury regulations.” Def.’s 1st Supp. Br. 4-5. The Court addresses
these arguments in subsection 3 below, which concerns the apparent inconsistency of the
positions the government has taken both historically and in this matter concerning whether rights
of ownership based on title-based escheatment statutes must be recognized under Treasury’s
regulations.
14
Pl.’s 1st Supp. Br. 12-13, Feb. 16, 2015, ECF No. 29. It contends that “used in the phrase ‘as
specifically provided’ the word ‘as’ describes the manner in which Treasury should determine
the validity of a judicial proceeding, not whether it will recognize a particular proceeding.” Id. at
13. On the other hand, under the government’s argument, the word “as” means “to the extent” or
“if”—i.e. that Treasury will recognize claims based on valid, judicial proceedings only to the
extent that, or if, such recognition is specifically provided for in Subpart E.
The problem with reading the word “as” in the manner the government would read it (to
mean “if”) is that the result would be a construction of the regulations that collides with the well-
established canon of interpretation that holds that regulatory text should not be read in such a
way as to render any portion of the language superfluous. See Glover v. West, 185 F.3d 1328,
1332 (Fed. Cir. 1999) (“[W]e attempt to give full effect to all words contained within [a] statute
or regulation, thereby rendering superfluous as little of the statutory or regulatory language as
possible.”). For if the government is correct that only those categories of judgments specifically
referenced in §§ 315.21 and 315.22 are entitled to recognition, then the exceptions set forth in
subsection (a) of § 315.20 to the general rule recognizing claims established pursuant to valid,
judicial proceedings would be unnecessary.
Moreover, the government’s reading of the effect of §§ 315.21 and 315.22 (which posits
that those sections contain an exhaustive enumeration of the particular types of judicial
proceedings that can confer ownership rights) ignores what appears to be their actual purpose: to
address specific considerations and concerns attendant to the types of judgments referenced in
those sections. Thus, section 315.21(a) places limitations on the extent to which Treasury will
recognize claims of bond purchasers at a sale under levy or to an officer authorized to levy upon
the property of an owner to satisfy a money judgment, specifying, for example, that “[p]ayment
will be made only to the extent necessary to satisfy the money judgment” and that “[t]he amount
paid is limited to the redemption value 60 days after the termination of the judicial proceedings.”
And § 315.21(b) specifies that, in contrast, Treasury will pay the proceeds of the bond to a
trustee in bankruptcy, receiver in equity, or similar court officer “at current redemption value,”
but does not authorize the reissuance of the bonds in such circumstances.
Similarly, § 315.22(a) concerns recognition of a divorce decree ratifying a property
settlement that disposes of savings bonds or otherwise settles each spouse’s interest in such
bonds. It prescribes specific rules for the reissuance of a bond in that particular context. Section
315.22(a) also serves the purpose of clarifying that such a decree would not fall within the
language of § 315.20(a), which states that Treasury will not recognize a judicial determination
that gives effect to “an attempted voluntary transfer inter vivos of a bond.” And § 315.22(b)
specifies that Treasury will—upon request—either pay or reissue a savings bond to a person
found by a court to be entitled to such bond as the result of a gift causa mortis.
For these reasons, the Court concludes that Kansas’s reading of the scope of the phrase
“valid, judicial proceedings” contained in the regulations—which includes state court
escheatment proceedings whose validity is established in accordance with section 315.23—is
more persuasive than the government’s. The Court now turns to the question of whether,
notwithstanding this conclusion, it owes deference to Treasury’s interpretation of its regulations,
15
as set forth in this litigation and in its October 2013 letter denying Kansas’s request for payment
on the Absent Bonds.
3. Previous Administrative Interpretation of the Regulations
It is well established that an agency’s interpretation of its own regulations is “controlling
unless ‘plainly erroneous or inconsistent with the regulation.’” Auer v. Robbins, 519 U.S. 452,
461 (1997) (quoting Robertson v. Methow Valley Citizens Council, 490 U.S. 332, 359 (1989)
(quoting Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945))). “[T]his general
rule,” however, “does not apply in all cases.” Christopher v. SmithKline Beecham Corp., 132 S.
Ct. 2156, 2166 (2012). Thus, deference is “unwarranted” where “there is reason to suspect that
the agency’s interpretation ‘does not reflect the agency’s fair and considered judgment on the
matter in question.’” Christopher, 132 S. Ct. at 2166 (quoting Auer, 519 U.S. at 462). The
Supreme Court has withheld deference on this basis, for instance, “when the agency’s
interpretation conflicts with a prior interpretation,” id. (citing Thomas Jefferson Univ. v. Shalala,
512 U.S. 504, 515 (1994)); “when it appears that the interpretation is nothing more than a
‘convenient litigating position,’” id. (quoting Bowen v. Georgetown Hosp., 488 U.S. 204, 213
(1988)); or when it appears that the interpretation is a “‘post hoc rationalizatio[n]’ advanced by
an agency seeking to defend past agency action against attack,” id (quoting Auer, 519 U.S. at
462).
Here, the Court does not believe that the government’s interpretation is “plainly
erroneous or inconsistent with the regulation.” Auer, 519 U.S. at 461. There are ample reasons
to find, however, that the interpretation being proffered in this case “does not reflect the agency’s
fair and considered judgment on the matter in question.’” Christopher, 132 S. Ct. at 2166.
Foremost among these is the fact that the government’s “interpretation conflicts with
[Treasury’s] prior interpretation” of its regulations. Id. (citing Thomas Jefferson Univ., 512 U.S.
at 515). Indeed, this conflict, in conjunction with other inconsistencies within the arguments the
government has made in this litigation, convinces the Court that the position being advanced in
this case is merely a post-hoc rationalization for Treasury’s decision not to honor the Kansas
state court judgment as to the Absent Bonds.
Thus, as described above, in the Escheat Decision, issued in 1952, Treasury rejected the
State of New York’s request to redeem bonds it held pursuant to its custodial escheatment
statute. The Secretary explained that the critical criterion for granting such a request by a state
was that it possess legitimate ownership of a bond. He noted that “even where no explicit
reference is made in the regulations to a particular case, the Department will pay one who
succeeds to the title of the bondholder” and that “[t]his is not regarded as a violation of the
agreement, but, on the contrary, as payment to the bondholder in the person of his successor or
representative.” Pl.’s Resp. App. 283 (emphasis in original). “Thus,” the Secretary observed,
“although the regulations do not mention such a case, the Department recognizes the title of the
state when it makes claim based upon a judgment of escheat.” Id.
Treasury reiterated this view in 1983, in a letter to the Secretary of Revenue of the State
of Kentucky. It stated that “[b]asically, the Department’s position is that claims by States for
payment of United States securities will be recognized only where the States have actually
16
succeeded to the title and ownership of the securities pursuant to valid escheat proceedings.” Id.
App. 285.
This exact statement also had appeared on Treasury’s web site from 2000 until very
recently.11 Id. App. 290. Moreover, the government recently restated and relied on this position
and interpretation of its regulations in litigation, including in briefs filed with the Third Circuit
and the Supreme Court in which the government expressly characterized the position as
representing Treasury’s “considered interpretation of federal law.” See, e.g., id. App. 9.
In the Treasurer of New Jersey case, six states (New Jersey, Montana, Kentucky,
Oklahoma, Missouri, and Pennsylvania) sought payment on savings bonds pursuant to their
custody-based escheatment statutes. In that case, the government told both the Third Circuit and
the Supreme Court that title-based escheatment constitutes a “valid, judicial proceeding” within
the meaning of its regulations. Further, in explaining its position, it made no mention of the “as
specifically provided in this subpart” proviso or of its regulations at § 315.21 or § 315.22.
Thus, in its brief in the United States Court of Appeals for the Third Circuit, the
government observed that “Treasury regulations generally provide that payment on a U.S.
savings bond will be made only to the registered owner” but that “[t]he regulations specify
limited exceptions to this rule, including cases in which a third party obtains ownership of the
bond through valid judicial proceedings.” Brief for Appellees at 6, Treasurer of N.J. v. U.S.
Dep’t of Treasury, 684 F.3d 382 (3d Cir. 2012) (No. 10-1963), 2011 WL 6935510 (citing 31
C.F.R. §§ 315.20(b), 315.23, 353.20(b), 353.23). Significantly, it further explained that “[a]
State may satisfy this ownership requirement ‘through escheat, a procedure with ancient origins
whereby a sovereign may acquire title to abandoned property if after a number of years no
rightful owner appears.’” Id. (emphasis added) (quoting Texas v. New Jersey, 379 U.S. 674,675
(1965)). The Third Circuit agreed with Treasury and ruled against the states, explaining that this
“result does not nullify state escheat laws for, as provided in the federal regulations and as
recognized by the Treasury, third parties, including the States, may obtain ownership of the
bonds—and consequently the right to redemption—through “valid[ ] judicial proceedings.”
Treasurer of N.J., 684 F.3d at 412 (citing 31 C.F.R. § 315.20(b)).
The states then filed a petition for certiorari in the case. Then, as described above, the
government’s brief in opposition citing only 31 C.F.R. §§ 315.20(b), 315.23, and 353.23 (and not
mentioning § 315.21 or § 315.22 at all) explained that it “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 that awards title to the bond to the State,” and that this “represents the
Department’s considered interpretation of federal law.” Pl.’s Resp. App. 9 (Brief for the
11
The statement appeared on Treasury’s EE/E Savings Bonds FAQs web page, a screen shot of
which appears at Pl.’s Resp. App. 289-90. At some point during this litigation, however,
Treasury revised this page, and it now omits any mention of escheatment. See
https://www.treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds_eefaq.htm (last
visited Aug. 20, 2015).
17
Respondents in Opposition, Dir. of Dep’t of Revenue of Montana v. U.S. Dep’t of Treasury, cert.
denied, 133 S. Ct. 2735 (2013)).
Despite these unambiguous statements, Treasury claims that it never actually took the
position that its regulations required it to recognize claims of ownership pursuant to an escheat
judgment. See, e.g., Def.’s Reply 5 (calling the argument that Treasury had stated many times in
the past that it would recognize title-based escheatment judgments a “misapprehension of
Treasury’s past statements”). It attempts to reconcile its position in this litigation with its past
statements on the grounds that because those statements “were made in the context of states
claiming title for bonds in their possession,” they “pertain[ed] only to the effect of state
escheatment laws on bonds the state has in its possession.” Def.’s Mot. 13 (emphasis in
original).
This contention is unpersuasive. First, as Kansas points out, the first paragraph in the
Second Amended Complaint in the Treasurer of New Jersey case clearly states that the
unclaimed bonds at issue in that matter were “in the hands of missing owners” and not the states.
Pl.’s 1st Supp. Br. Add. 2. Second, and in any event, even though Treasury had proffered its
interpretation of its regulations in the context of cases in which States were seeking redemption
of bonds in their possession, the rationale Treasury offered for its position—that under the
regulations, “to receive payment on a U.S. savings bond a State must complete an escheat
proceeding that satisfies due process and that awards title to the bond to the State”—is not
limited to circumstances in which a State has the bonds in its possession. To the contrary, that
rationale was based on the understanding that a judgment pursuant to a title-based escheat statute
would serve for purposes of Treasury regulations as a “claim against an owner of a savings
bond” that Treasury would recognize, if “established by valid, judicial proceedings.” 31 C.F.R.
§ 315.20(b).
In that regard, the Court is also not persuaded by Treasury’s argument that possession of
the bonds is uniformly a prerequisite to their redemption under the regulations. Def.’s Mot. to
Dismiss 14 (citing 31 U.S.C. § 3105(b)(2)) (asserting that “Treasury regulations require
presentation and surrender of the bonds as a prerequisite for payment” and that “[p]hysical
surrender ensures that Treasury can close out the bond contract, ensures that the bonds are
legitimate, and prevents double payment on the same bond”). To begin with, the regulations
explicitly provide for the circumstance in which an owner does not possess the bond, such as
when a bond has been lost, stolen, or destroyed. See 31 C.F.R. § 315.25. In such a case,
Treasury “may require a bond of indemnity, in the form, and with the surety, or security . . .
necessary to protect the interests of the United States.” Id. In addition, the regulations provide
that a lost, stolen or destroyed bond “for which relief has been granted” (i.e., which has been
paid) “is the property of the United States and, if recovered, must be promptly submitted to the
Bureau of Fiscal Service . . . for cancellation.” 31 C.F.R. § 315.28(b).
In addition, nothing in 31 C.F.R. § 315.20 states that possession is required where a claim
of ownership is established pursuant to valid, judicial proceedings. To the contrary, the only
reference to a possession requirement that is made in § 315.20 is in subsection (c), which
specifies that the government will not accept a notice of an adverse claim or of pending judicial
proceedings, “nor undertake to protect the interests of a litigant not in possession of a savings
18
bond.” 31 C.F.R. § 315.20(c). This section addresses how Treasury will deal with
unadjudicated claims of ownership. Subsection (b), on the other hand, concerns recognition of
claims of ownership that are no longer in litigation but that have been established pursuant to
valid, judicial proceedings.
Moreover, as the government explained in the Supreme Court brief, the regulatory
prohibition on payment to anyone other than the lawful owner is what prevents double payment
on the same bond, not a requirement of physical surrender. Pl.’s Resp. App. 9. See also id. App.
285 (stating in the 1983 letter that payment to a state that has succeeded to the legal ownership of
the savings bonds “results in the full discharge of the Treasury’s obligation”). If Treasury
recognizes that title to a bond transfers from the original registrant to the state, and if it only
honors claims for redemption of that bond by one who holds title to it, there is no chance that the
government would incur multiple obligations on a single bond.
Finally, the position that Treasury is taking in this litigation is internally inconsistent.
Thus, it has claimed for the first time in the briefing of its motion to dismiss that its decision to
allow Kansas to redeem the Bonds in Possession was based on an exercise of its waiver
authority” under § 315.90(a) of the regulations,12 rather than the rationale expressed in its
Escheat Decision and in the briefs that it filed in the Treasurer of New Jersey litigation. Def.’s
Reply 7. But the letter in which Treasury instructed Kansas on how to proceed in redeeming the
Bonds in Possession said nothing to indicate that Treasury was exercising any waiver authority.
See Pl.’s Resp. App. 276-77. To the contrary, Treasury noted that it would redeem the bonds “in
the normal course,” after it received a certified copy of the Judgment of Escheatment and other
documentation. Id. at 277.
Treasury’s explanation of the basis for its denial of Kansas’s request with respect to the
Absent Bonds has also continued to morph throughout this case. In its October 2013 denial letter
(and in its initial motion to dismiss), Treasury relied upon its newly articulated narrow
interpretation of the “valid, judicial proceedings” language in § 315.20(b). But in its first
supplemental brief, the government argues for the first time that an escheat judgment does not
involve “a claim against an owner of a savings bond” within the meaning of § 315.20(b) because
an escheat proceeding was not against the owner of the bond; it is an in rem proceeding against
the property itself. Def.’s 1st Supp. Br. 5, Jan. 15, 2015, ECF No. 28. This post-hoc rationale is
12
31 C.F.R. § 315.90(a) provides that:
The Commissioner of the Fiscal Service, as designee of the Secretary of the
Treasury, may waive or modify any provision or provisions of these regulations.
He may do so in any particular case or class of cases for the convenience of the
United States or in order to relieve any person or persons of unnecessary hardship:
(a) If such action would not be inconsistent with law or equity, (b) if it does not
impair any existing rights, and (c) if he is satisfied that such action would not
subject the United States to any substantial expense or liability.
19
contrary to the position Treasury has taken in the past and also lacks merit. While an
escheatment judgment is obtained by a proceeding “in rem” (i.e., against the property) the result
of such a judgment is the substitution of the state for the bond’s lawful owner. Thus, an escheat
proceeding may readily be treated as “a claim against the owner of the bond” for purposes of the
Treasury regulations. Indeed, as described above, it has been so treated (at least implicitly) in
Treasury’s prior statements on the issue.
Treasury further argues (again for the first time in its supplemental brief and again
contrary to its historically expressed views) that to the extent that Kansas claims title to savings
bonds for which there exists a coowner or beneficiary, such claims would be inconsistent with 31
C.F.R. § 315.20(a), which provides that Treasury will not recognize “a judicial determination
that impairs the rights of survivorship conferred by these regulations upon a coowner or
beneficiary.” Def.’s 1st Supp. Br. 4. This argument is unpersuasive because once a
determination is made through an escheatment proceeding that the former owner has abandoned
the bond, the State becomes its lawful owner. Therefore, the former coowner or beneficiary no
longer has any rights of survivorship to be impaired.
In short, Treasury’s litigating position cannot be reconciled with its prior statements
expressing what it then characterized as its “considered interpretation” of its regulations. Pl.’s
Resp. App. 9. And while an agency is certainly entitled to change its interpretation of its own
regulations (see Perez v. Mortg. Bankers Ass’n, 135 S. Ct. 1199, 1207 (2015)), the Court cannot
conclude that the new position represents the agency’s considered judgment, where Treasury
resists acknowledging that its position has changed, and where the rationale for its position
continues to shift as the litigation itself progresses. Therefore, the Court concludes that the
interpretation of its regulations that is set forth in Treasury’s briefs in this case is entitled to no
deference at all. If anything, deference is due to the interpretation that Treasury expressed for
over sixty years until the instant controversy arose. Accordingly, and for the reasons set forth
above in Part III.A.2, the Court concludes that Kansas’s interpretation of the relevant Treasury
regulations is correct and that it has stated a claim for relief with respect to its allegations of
breach of contract.13
13
On June 30, 2015, the government filed a notice with the Court advising it that on June 26,
2015, Treasury had issued a Notice of Proposed Rulemaking. The proposed regulation adds a
new subpart O, which requires states seeking to redeem bonds to possess the bonds for which
they claim title and to produce evidence that the bonds have been abandoned by all persons
entitled to payment. 80 Fed. Reg. 37,559-01 (proposed July 1, 2015) (to be codified at 31 C.F.R.
§ 315.88). The government appears to argue that this Notice has some bearing on the issues
before the Court in this case; it observes that “[w]hen evaluating the issue of deference, a court
may consider an interpretation formally promulgated in a rulemaking after the controversy or
litigation arose.” Def.’s Notice of Proposed Rulemaking 2, ECF No. 36 (citing Smiley v.
Citibank, 517 U.S. 735, 741 (1996) and Motorola, Inc. v. United States, 436 F.3d 1357, 1366
(Fed. Cir. 2006)). But the Federal Register Notice does not purport to interpret existing
regulations (or a statute, as in Smiley and Motorola); its purpose is to change those regulations to
reflect the position that the government is taking in this case. The Court, therefore, does not
20
B. Third-Party Beneficiary Claim
The Court turns next to Kansas’s third-party beneficiary claim, which the government has
moved to dismiss for lack of jurisdiction but which, as noted above, the Court tests for its
sufficiency to state a claim upon which relief can be granted. With respect to this claim, Kansas
alleges in its complaint that the Treasury regulations “demonstrate the intent of the parties to [the
savings bond] contracts to provide a means of transferring ownership of U.S. savings bonds” and
provide that valid, judicial proceedings are one means of transferring such ownership. Compl. ¶
127. Thus, Kansas alleges, “Kansas falls within the class clearly intended to benefit from the
U.S. savings bond contracts because it is an owner of U.S. savings bonds and it has established
its ownership of the contracts by valid judicial proceedings.” Compl. ¶ 128. According to
Kansas, these allegations demonstrate that “the State of Kansas is a third-party beneficiary to the
subject U.S. savings bond contracts.” Id.
The Court agrees with the government that the facts that Kansas has alleged do not
support a claim of third-party beneficiary status. A third-party beneficiary is not a party to the
contract but rather is one on whom the contracting parties intend that the contract will confer a
direct benefit. Glass v. United States, 258 F.3d 1349, 1354 (Fed. Cir. 2001) (citing German
Alliance Ins. Co. v. Home Water Supply Co., 226 U.S. 220, 230 (1912)). As discussed above,
Kansas has adequately alleged that it has become a party to the savings bonds contracts, but
nothing in its complaint suggests, in contrast, that Treasury and the registered owners of the
bonds entered contracts with the intention of benefitting Kansas. Therefore, the government’s
motion to dismiss is granted with respect to Kansas’s third-party beneficiary claim.
C. Fifth Amendment Takings Claim
The final issue that the government raises in its motion is the sufficiency of Kansas’s
claim that the government’s refusal to allow redemption of the Absent Bonds constituted a taking
without just compensation under the Fifth Amendment. In addition to repeating the argument
rejected above, that Kansas has not gained ownership of the bonds in accordance with Treasury
regulations, the government contends that Treasury’s actions in relation to the savings bonds
contracts were proprietary, and therefore, Kansas’s claim, asserted as a Fifth Amendment taking,
is better treated as one for breach of contract. Def.’s Mot. 19 (citing Hughes Commc’ns Galaxy,
Inc. v. United States, 271 F.3d 1060, 1070 (Fed. Cir. 2001)).
It is well established that “[c]ontract rights are a form of property and as such may be
taken for a public purpose provided that just compensation is paid.” U.S. Trust Co. of N.Y. v.
New Jersey, 431 U.S. 1, 19 n.16 (1977) (citing Contributors to Pa. Hosp. v. Philadelphia, 245
U.S. 20, 23 (1917)). See also A&D Auto Sales, Inc. v. United States, 748 F.3d 1142, 1152 (Fed.
Cir. 2014). As the government argues in its motion, however, the Federal Circuit has observed
that “[t]aking claims rarely arise under government contracts because the Government acts in its
commercial or proprietary capacity in entering contracts, rather than in its sovereign capacity.”
consider the Notice relevant in any way to the proper interpretation of the existing regulations at
issue in this case.
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Hughes Commc’ns Galaxy, 271 F.3d at 1070. “Proprietary government action typically involves
bargaining with private actors for the provision or procurement of goods and services; the action
is deemed proprietary even though the government may enter into the contractual relationship in
pursuit of a larger governmental objective.” A&D Auto Sales, 748 F.3d at 1156. In such cases,
the court of appeals continued, “remedies arise from the contracts themselves, rather than from
the constitutional protection of private property rights.” Hughes Commc’ns Galaxy, 271 F.3d at
1070.
The Federal Circuit clarified this observation, however, in Stockton East Water District v.
United States, 583 F.3d 1344 (Fed. Cir. 2009). Specifically, the court explained that its
statements in Hughes “cannot be understood as precluding a party from alleging in the same
complaint two alternative theories for recovery against the Government, for example, one for
breach of contract and one for a taking under the Fifth Amendment to the Constitution.”
Stockton, 583 F.3d at 1368. “On the other hand,” the court further explained,
it can be understood to mean that, when a case arises in which both a contract and
a taking cause of action are pled, the trial court may properly defer the taking issue,
as it did here, in favor of first addressing the contract issue. It has long been the
policy of the courts to decide cases on non-constitutional grounds when that is
available, rather than reach out for the constitutional issue. See Nw. Austin Mun.
Util. Dist. No. One v. Holder, [557 U.S. 193, 205] (2009). And of course when a
plaintiff is awarded recovery for the alleged wrong under one theory, there is no
reason to address the other theories.
Stockton, 583 F.3d at 1368.
Here, the Court takes instruction from Stockton and finds that dismissal of Kansas’s
claim under the Takings Clause is inappropriate at this stage. Thus, the government’s motion to
dismiss is denied as to this claim.
CONCLUSION
Based on the foregoing, the Court rules on the government’s motion to dismiss as
follows:
1. The government’s motion to dismiss Kansas’s contract-based claims for lack of
subject-matter jurisdiction pursuant to RCFC 12(b)(1) is DENIED.
2. The government’s motion to dismiss Kansas’s claims for equitable estoppel and
declaratory judgment for lack of subject-matter jurisdiction pursuant to RCFC
12(b)(1) is DENIED.
3. The government’s motion to dismiss Kansas’s third-party beneficiary claim,
construed as a motion for failure to state a claim upon which relief can be granted
pursuant to RCFC 12(b)(6), is GRANTED.
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4. The government’s motion to dismiss Kansas’s claim under the Takings Clause of the
Fifth Amendment for failure to state a claim upon which relief can be granted
pursuant to RCFC 12(b)(6) is DENIED.
IT IS SO ORDERED.
s/ Elaine D. Kaplan
ELAINE D. KAPLAN
Judge
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