Cole-Kelly v. Yee

Background

The order addressed three related proposed class actions: Cole-Kelly v. Yee, Coté v. Office of the California State Controller, and Sykes v. Office of the California State Controller. The plaintiffs challenged California’s Unclaimed Property Law under the United States and California Constitutions.

The complaints alleged that unclaimed property is transferred temporarily to the State after it remains inactive for a specified period. The plaintiffs alleged that California uses the property and keeps interest, dividends, earnings, investment returns, and other benefits generated while the property is in state custody, without paying those amounts to the property owners. Their central theory was that the law unlawfully deprived property owners of the property’s “time value,” which the court referred to as interest.

Cole-Kelly asserted claims under the Fifth Amendment, Article I, Section 19 of the California Constitution, and 42 U.S.C. § 1983. The Coté and Sykes complaints asserted related constitutional claims involving the Fifth and Fourteenth Amendments and the California Constitution.

Three-Judge Panel Request

The Cole-Kelly plaintiffs argued that their claims had to be decided by a three-judge district court panel under 28 U.S.C. § 2284. The court rejected that request. It explained that the current statute requires such a panel in specified apportionment cases or when another current Act of Congress requires one. The court found no applicable authority requiring a three-judge panel here and denied the request.

Sovereign Immunity

The defendants argued that the Eleventh Amendment barred claims against California and its agencies and barred claims for money damages against officials sued in their official capacities. The plaintiffs responded that their requests for interest were requests for the return of their property, not damages, and that prospective injunctive relief was not barred.

The court relied on Ninth Circuit precedent holding that state sovereign immunity does not bar claims for return of escheated principal or sales proceeds but does bar claims seeking more than that amount in the form of interest. The court also relied on precedent stating that there was no authority establishing that interest earned by unclaimed or abandoned property belongs to the property owner. It therefore held that the plaintiffs’ claims for payment of interest accrued while their property was in state custody were barred by the Eleventh Amendment.

Constitutional Claims

The court further held that, to the extent any claims were not barred by the Eleventh Amendment, they failed under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not state a legally sufficient claim.

The court concluded that Ninth Circuit law had squarely rejected a compensable Fifth Amendment right to interest earned on unclaimed property that escheats to California and had held that the current version of California’s Unclaimed Property Law is facially constitutional. The court stated that the plaintiffs’ claims were therefore not legally viable under controlling Ninth Circuit law. It also held that the due-process and equal-protection claims were derivative of the same alleged taking and failed for the same reason. The claims under Article I, Section 19 of the California Constitution likewise failed for the same reason.

Disposition

Because the complaints could not possibly be cured by alleging additional facts, the court granted defendants’ motions to dismiss without leave to amend: Docket No. 23 in Cole-Kelly, Docket No. 32 in Coté, and Docket No. 23 in Sykes.

The court terminated as moot the Cole-Kelly plaintiffs’ motion for partial summary judgment, motion to certify a class, and motion to consolidate the related cases and appoint class counsel. The Clerk was directed to enter judgment in favor of defendants and close all three cases. Judge Haywood S. Gilliam, Jr. signed the order on March 13, 2023.