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Kolton v. Frerichs

United States District Court, N.D. Illinois, Eastern Division

September 16, 2016

ANTHONY D. KOLTON and S. DAVID GOLDBERG, individually and on behalf of classes of all others similarly situated, Plaintiffs,
MICHAEL W. FRERICHS, Illinois State Treasurer, Defendant.



         This matter comes before the Court on the motion of Defendant Michael W. Frerichs (“Frerichs”), in his official capacity as the Illinois State Treasurer (the “Treasurer”), to dismiss, Dkt. 15, the Class Action Complaint (the “Complaint”), Dkt. 1, of Plaintiffs Anthony D. Kolton (“Kolton”) and S. David Goldberg (“Goldberg”), individually, and on behalf of classes of all others similarly situated (collectively, “Plaintiffs”) pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). Dkt. 15, at p. 1. For the reasons set forth below, Frerichs's motion is granted under Rule 12(b)(1). The Court lacks subject-matter jurisdiction; consequently, it does not reach the merits of the case, nor does it rule on Frerichs's motion to dismiss under Rule 12(b)(6).


         For purposes of the instant motion, the following well-pleaded allegations derived from the Complaint are accepted as true. Ed Miniat. Inc. v. Global Life Ins. Grp., Inc., 805 F.2d 732, 733 (7th Cir. 1986); Dilallo v. Miller & Steeno, P.C., et al., No. 16 C 51, 2016 WL 4530319, at *1 (N.D. Ill. Aug. 30, 2016). The Court draws all reasonable inferences in favor of Plaintiffs and construes all allegations in the light most favorable to Plaintiffs. Id.

         The Illinois Uniform Disposition of Unclaimed Property Act, 765 ILCS § 1025/1, et seq., (the “Act”), pertains to personal property held by a third party (the “holder”). Dkt. 1, at p. 1, ¶ 2. Holders include, but are not limited to, banks, corporations, or public utilities. Id. The Act aims to “reunite owners with their property, ” and to permit the State of Illinois (the “State”), instead of the holder, to use the property prior to such a reunion. Id. at p. 4, ¶ 10.

         Under the Act, personal property is “presumed abandoned” if its owner has not written to the holder regarding the property, or has not otherwise indicated interest in the property. Id. at p. 1-2, ¶ 2, p. 3-4, ¶ 10; see 765 ILCS § 1025/2. For private holders, the owner has five years to indicate an interest, and for government holders, the owner must act within a seven-year period. Id. If a holder determines that it possesses “presumed abandoned” property, it must then attempt to notify the owner. Dkt. 1, at p. 4, ¶ 11; see 765 ILCS 1025/11. If the owner does not claim his or her property, the holder is required to deliver it to the Treasurer's, Frerichs's, custody. Dkt. 1, at p. 2, ¶ 2, p. 4, ¶ 11; see 765 ILCS 1025/13. While in his custody, Frerichs has “a reasonable time” to sell tangible property at a public sale for the highest bid. Dkt. 1, at p. 4, ¶ 11. To sell securities or commodities, Frerichs may engage “a suitable broker or sales agent.” Id. Frerichs continues to hold the “presumed abandoned” property, and proceeds from the sale thereof, in custody for the owner. Id. At any time, the owner may reclaim his or her property from the State. Id. The “presumed abandoned” property, or proceeds, and its earnings also fund state programs. Id. at p. 2, ¶ 2.

         Frerichs deposits all of the money received under the Act into the State Pension Fund. Id. at p. 4, ¶ 12; see 765 ILCS § 1025/18. Frerichs, however, is to retain an amount capped at two million, five hundred thousand dollars ($2, 500, 000) to ensure that owners who file approved claims to their property are promptly paid. Id. Property that is submitted to Frerichs in accordance with the Act “earns interest, dividends or other accruals, ” and it is sometimes “held in interest-bearing accounts or instruments.” Dkt. 1, at p. 5, ¶ 14. The State Pension Fund uses such accruals. Id. Under the State Finance Act, 30 ILCS § 105/8.12 (“Section 105/8.12”), all of the reserves held in the State Pension Fund “are to be used for the administration of the Act and for partial payment of the State's required contributions to designated State employee retirement systems.” Dkt. 1, at p. 4, ¶ 13; see 30 ILCS § 105/8.12. In accordance with Section 105/8.12, annually, the General Assembly is to appropriate the monies in the State Pension Fund to state pension systems, to the exclusion of five million dollars ($5, 000, 000). Dkt. 1, at p. 4, ¶ 13.

         The Act is distinct from an escheat statute. Id. at p. 5, ¶ 15. Under an escheat statute, the State may eventually gain title to abandoned property. Id. The Act, in contrast, “is purely custodial in nature.” Id. Title to “presumed abandoned” property under the Act remains at all times with the owner. Id.

         To reclaim his or her property, an owner would file a claim with the Treasurer. Id. at ¶ 16; see 765 ILCS § 1025/20. An owner is entitled only to the property that the holder has submitted to the State-or the proceeds from the sale thereof. Dkt. 1, at p. 2, ¶ 3, p. 5, ¶ 16, p. 6 ¶ 17. He or she is not entitled to “any interest or dividends or other increments that accrue on the property after delivery to the state, ” “the loss of the beneficial use of the property, ” “or use of that property to fund state obligations during the period it is in the state's custody.” Id. at p. 2, ¶ 3; p. 6 ¶ 17; see 765 ILCS § 1025/15 (“When property is paid or delivered to the State Treasurer under this Act, the owner is not entitled to receive income or other increments accruing thereafter, except that income accruing on unliquidated stock and mutual funds after July 1, 1993, may be paid to the owner.”). The Act disallows owners “from receiving interest, dividends or other income or increments on any property that is liquidated or is in a cash account, regardless of the nature of the property.” Dkt. 1, at p. 6, ¶ 19; see Cwik v. Giannoulias, 237 Ill.2d 409, 418-19 (2010). Plaintiffs allege, “on information and belief, ” that “it is the policy and practice of the Treasurer[] not to return to the property owner any income or other increments which have accrued on mutual funds held in custody pursuant to the Act.” Dkt. 1, at 6, ¶ 18. Dividend bearing securities are the exception to the rule: owners are entitled to dividends accrued before the security is sold. Dkt. 1, at p. 2, ¶ 3, p. 5-6, ¶ 17; see Canel v. Topinka, 342 Ill.App.3d 65, 75 (2003), aff'd, 212 Ill.2d 311 (2004).

         The United States Court of Appeals for the Seventh Circuit decided, in Cerajeski v. Zoeller, that “unclaimed property” is distinct from “abandoned property” under the Indiana Unclaimed Property Act, a similar statute to the Act, holding “that the state's confiscation of interest on an interest-bearing account delivered to the State as unclaimed property [is] an unconstitutional taking of a portion of plaintiff's property for which just compensation [is] due.” Dkt. 1, at 7, ¶ 21; 735 F.3d 577, 580 (7th Cir. 2013). In reliance on Cerajeski, on March 29, 2016, Plaintiffs filed the Complaint alleging that Frerichs, as Treasurer of the State of Illinois, violated 42 U.S.C. § 1983 (“Section 1983”) and the Fifth and Fourteenth Amendments to the United States Constitution through his supervision and administration of the Act. Dkt. 1, at p. 1, ¶ 1.

         Plaintiffs allege that the Act, by allowing the State to retain interest and other income on unclaimed property, as well as beneficially use the property without paying the owner, constitutes a taking without just compensation. Id. at p. 2, ¶ 4. Frerichs has at all times held and continues to hold property belonging to Plaintiffs in his custody. Id. at p. 2, ¶ 5, p. 3, ¶ 6, p. 8-9, ¶ 24, ¶ 27. Such property is subject to “being claimed by or on behalf of” Plaintiffs. Id. at p. 9, ¶ 27. Plaintiffs are “owners” of property, as defined in the Act. Id. at p. 2, ¶ 5, p. 3, ¶ 6; see 765 ILCS § 1025/1(f). Kolton asserts that his unclaimed property exceeds a value of one hundred dollars ($100). Dkt. 1, at p. 8, ¶ 24. Kolton believes that Bank One delivered his property to the State, and that the State held it in an interest-bearing bank deposit account. Id. While in Frerichs's custody, the State has allegedly used Plaintiffs' property “for public purposes, including by investing the property and earning interest, and otherwise using it to fund the state's operations and programs.” Id. at ¶ 25, p. 9, ¶ 28. Plaintiffs assert that under Sections 1025/15 and 1025/20 of the Act, if Plaintiffs claim their property, Frerichs will return it, but he will not compensate Plaintiffs for the interest accrued and seized by the State, or the State's use of the property while in its custody. Id. at p. 8, ¶ 26, p. 9, ¶ 29. Plaintiffs claim, based on Cerajeski, that the Fifth Amendment protects both “the principal of unclaimed property in the custody of the state, ” as well as “the ‘fruits' of the property, that is, the interest, accruals or other value that attaches to the property or that is associated with the ownership of the property.” Id. at p. 11, ¶ 40. Thus, Plaintiffs allege that they and the purported class members should receive just compensation for the State's taking of the interest or other increases in value of their property, which they claim is in violation of the Fifth Amendment. Id.

         Plaintiffs Complaint contains two counts, each of which outlines multiple prayers for relief. Count I urges this Court to declare: (i) “that the state's use for public purposes of the property delivered to the state under the act is a taking of property;” (ii) “that the proper measure of just compensation is the fair market value of property taken;” (iii) “the standard for Plaintiffs and the members of the Rule 23(b)(2) Class for measuring fair market value;” and (iv) “that Defendant must pay just compensation as determined by this Court to Plaintiffs and members of the Rule 23(b)(2) Class . . . who have filed claims or who file claims after the filing of this action.” Id. at p. 13, ¶¶ C-F. In Count I, Plaintiffs also urge this Court to issue an injunction “to ensure” Frerichs's compliance. Id. at ¶ F. In Count II, Plaintiffs request that this Court award “Plaintiffs and members of the Damages Class just compensation as determined by this Court.” Id. at p. 14, ¶ C. Both Counts I and II urge this Court to decide “that the state's confiscation of interest, dividends or other fruits of the property delivered to the state under the Act and used for public purposes is a taking of property . . . for which the state is required to pay just compensation.” Id. at p. 12, ¶ A, p. 14, ¶ A. Plaintiffs also request that this Court certify this action under Federal Rules of Civil Procedure 23(a), (b)(2), and (b)(3). Id. at p. 12, ¶ A, p. 14, ¶ A; see Caraluzzi v. Prudential Sec., Inc., 824 F.Supp. 1206, 1210-11 (N.D. Ill. 1993) (explaining when a court may consider a motion to dismiss prior to addressing a class certification question). Finally, Plaintiffs ask the Court to award “their attorneys' fees and reimbursement of their expenses, including those provided in 42 U.S.C. § 1988;” as well as any other relief that this Court deems proper and just. Dkt. 1, at p. 13 ¶¶ G-H, p. 15 ¶¶ D-E. Plaintiffs have issued a jury demand for all such triable claims. Id. at p. 15. On June 20, 2016, Frerichs moved to dismiss the Complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and (6). Dkt. 16, at p. 1.


         Federal courts are courts of limited jurisdiction; “they have only the power that is authorized by Article III of the Constitution and the statutes enacted by Congress pursuant thereto.” Bender v. Williamsport Area Sch. Dist., 475 U.S. 534, 541 (1986). Further, “[t]he district courts shall have original jurisdiction of all civil ...

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