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Court Holds State Retention of Interest on Unclaimed Funds Violates Actual Owners’ Private Property Rights

2007-1452.  Sogg v. Zurz, Slip Opinion No. 2009-Ohio-1526.
Franklin App. No. 06AP-883, 2007-Ohio-3219.  Judgment reversed and cause remanded to the trial court.
Moyer, C.J., and Pfeifer, Lundberg Stratton, O'Connor, O'Donnell, and Cupp, JJ., concur.
Lanzinger, J., concurs in judgment only.
Opinion: http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2009/2009-Ohio-1526.pdf

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(April 8, 2009) In a 7-0 decision announced today, the Supreme Court of Ohio overturned as unconstitutional a provision of state law declaring that interest earned by the state on unclaimed funds “is not payable” to the true owners of those funds if the owners subsequently claim them.

The Court’s decision, authored by Justice Paul E. Pfeifer, reversed a ruling of the 10th District Court of Appeals and reinstated a class action lawsuit filed by a group of claimants who recovered moneys from the state’s unclaimed funds account, but did not receive any of the interest that was earned on those funds while they were in the state’s possession.

Under Chapter 169 of the Ohio Revised Code, referred to as the Unclaimed Funds Act (UFA), property becomes “unclaimed funds” when the owner has not generated any activity involving that property for a specified period of time. Financial institutions and other public and private holders of unclaimed funds are required to report such property to the Ohio Department of Commerce, Division of Unclaimed Funds. The statute requires the state to hold such funds in custody for the owners’ benefit, and to take prescribed actions including regular publication of legal notices in newspapers listing the names of owners of unclaimed property and explaining how they can file a claim to recover those funds. Unclaimed funds never become the property of a financial institution or other holder, and never become the property of the state. 

Once funds have been identified as unclaimed, the statute requires that holders either forward them to a state trust fund or deposit them in an interest-bearing account, and requires that all interest earned by such accounts must be forwarded to the Department of Commerce. The department is authorized to invest unclaimed funds in its possession and the interest those funds accrue. The law also authorizes the state to expend earnings from those investments to cover expenses of the unclaimed funds program and for other public purposes.

In this case, while serving as executor of his mother’s estate, Wilton Sogg filed a claim with the unclaimed funds division for the return of two separate amounts held in his mother’s name: a claim payment from a medical insurer and a dividend payment from a bank. Sogg received a check from the division for $320.72, which represented the total of the two amounts, including interest earned through July 26, 1991, minus a 5 percent administrative fee. The amount that Sogg received did not include interest earned after July 26, 1991, because R.C. 169.08(D) was amended effective July 26, 1991, to provide that “(i)nterest is not payable to claimants of unclaimed funds held by the state.”

Sogg filed suit in the Franklin County Court of Common Pleas seeking recovery of interest that had been earned on the unclaimed funds during the period since July 1991. He sought and was granted certification as the representative for the class of “[a]ll persons or entities who filed, or will file, claims for unclaimed funds with the Defendant (that is, with the Division of Unclaimed Funds of the Ohio Department of Commerce), and who have recovered unclaimed funds but not been paid interest on such funds for any period after July 26, 1991.” Sogg’s amended complaint alleged that R.C. 169.08(D) “is unconstitutional and void because it denies the protection of the property owner’s private property rights afforded by Art. I, Section 19 of the Ohio Constitution and the Fifth and Fourteenth Amendments to the United States Constitution.”

Sogg entered a motion for summary judgment which was granted by the trial court based on its finding that when the state retains interest earned on unclaimed funds, it engages in an unconstitutional “taking” of private property. The state appealed. On review, the 10th District Court of Appeals reversed the trial court’s grant of summary judgment, concluding that unclaimed funds are abandoned property and, therefore, that the state’s retention of interest “does not constitute a taking that requires compensation.” Sogg sought and was granted Supreme Court review of the 10th District’s ruling.

Writing for a unanimous Court in today’s decision, Justice Pfeifer said the 1991 amendment to the UFA declaring that interest on unclaimed funds “is not payable” to the owners of those funds was “breathtakingly bold and strikes at the core of the concept of private property because, at a stroke, the General Assembly severed the link between the owner of an asset and the income produced by that asset.”

In rejecting the court of appeals’ holding that unclaimed funds held by the state are “abandoned property” and therefore subject to government taking of interest earned on that property without compensation, Justice Pfeifer wrote that no language in the statute supports that conclusion. “The UFA does not use any form of the words “forfeited,” “abandoned,” or “escheated” except in referring to the laws of other states. ... Nothing in the UFA indicates that the General Assembly intended to treat unclaimed funds as if they had been abandoned, forfeited, or escheated. The court of appeals relied extensively on three cases in other states to conclude that pursuant to the UFA, ‘unclaimed property is essentially abandoned property.’  We find this reliance unpersuasive because, as the court of appeals candidly acknowledged, the ‘UFA does not contain a presumption of abandonment as do the statutes at issue in Indiana, Louisiana, and Pennsylvania.’ ... Furthermore, ‘(f)orfeitures are not favored by the law. The law requires that we favor individual property rights when interpreting forfeiture statutes.’ ... We conclude that the General Assembly has not plainly legislated that unclaimed funds are or can be deemed abandoned property.”

Quoting from earlier Supreme Court decisions interpreting Section 19, Article I of the Ohio Constitution, Justice Pfeifer wrote that the legislature’s authority to enact laws restricting private property rights is limited to instances in which ‘the interests of the general public require its exercise and the means of restriction [are not] unduly oppressive upon individuals.’ He added that laws restricting private property rights ‘must be impartial in operation and not unduly oppressive upon individuals, must have a real and substantial relation to their purpose, and must not interfere with private rights beyond the necessities of the situation.’” Finding that the provision of the UFA at issue in this case did not comply with these criteria, Justice Pfeifer wrote, “We conclude that the first sentence of R.C. 169.08(D) violates Section 19, Article I, Ohio Constitution, as to interest earned on unclaimed funds for which a claim is ultimately submitted.”

With regard to the time period for which the plaintiffs may seek to recover interest the state earned on their unclaimed funds, the Court held that the four-year time limit prescribed by R.C. 2305.09 for claims seeking “the recovery of personal property, or for taking or detaining it” should apply. “We

 consider this the appropriate statute of limitations because this case and the UFA are concerned with the recovery of personal property,” wrote Justice Pfeifer. “Accordingly, Sogg may recover interest earned on his property in the four years preceding the date of his claim. ... We remand to the trial court to determine the method to be used to determine how much interest is owed to each claimant.”

Justice Pfeifer’s opinion was joined by Chief Justice Thomas J. Moyer and Justices Evelyn Lundberg Stratton, Maureen O’Connor, Terrence O’Donnell and Robert R. Cupp.  Justice Judith Ann Lanzinger concurred in judgment only.

William C. Wilkinson, 614.469.3266, for Wilton Sogg and other owners of unclaimed funds.

Benjamin C. Mizer, 614.466.8980, for the Ohio Department of Commerce.