Opinion
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
San Francisco County Super. Ct. No. CGC-05-439933
NEEDHAM, J.
California’s Unclaimed Property Law, or UPL (Code Civ. Proc., § 1500 et seq.), sets forth a comprehensive procedure under which certain types of unclaimed property escheat conditionally to the state, which then holds that property as a custodian until it is reclaimed by the rightful owner. (Fong v. Westly (2004) 117 Cal.App.4th 841, 844 (Fong).) Historically, the payment of a property owner’s claim has included interest for the period the property was held by the state. (§ 1540, former subd. (c).)
Further undesignated statutory references are to the Code of Civil Procedure.
In 2003, the Legislature amended the UPL to provide that when an owner files a claim to recover unclaimed property or the proceeds from its sale, “[n]o interest shall be payable on any claim paid under this chapter.” (§ 1540, subd. (c); Stats. 2003, ch. 228, § 8 (AB 1756), effective August 11, 2003.) We conclude that this provision, which allows the state to retain interest generated on unclaimed property, is not an unconstitutional taking of private property without just compensation. (U.S. Const., 5th & 14th Amends.; Cal. Const., art. 1, § 19.) We affirm the trial court’s order granting summary judgment in favor of respondent the State of California (the State).
I. Statutory Background
States as sovereigns have the power to take custody of or assume title to abandoned personal property. (See Delaware v. New York (1993) 507 U.S. 490, 497.) Most of them, including California, have enacted unclaimed property laws. (Louisiana Health Service v. Tarver (La. 1994) 635 So.2d 1090, 1092.) Under California’s UPL, certain types of personal property, including bank accounts and securities, will escheat to the state when the owner fails to take enumerated steps during a period of time to indicate continued active ownership, such as increasing or decreasing the amount on deposit or corresponding with the holder of the property. (See § 1513; Fong, supra, 117 Cal.App.4th at p. 845.)
The UPL has two objectives: (1) protecting unknown property owners by locating them and restoring their property to them, and (2) giving the state, rather than the holders of the unclaimed property, the benefits of its use until it is claimed. (Harris v. Verizon Communications (2006) 141 Cal.App.4th 573, 575; Fong, supra, 117 Cal.App.4th at p. 844.) It does not operate as a true escheat, because the title to the property does not pass to the state under its provisions. (Id. at p. 844.)
The UPL requires various business organizations—such as financial institutions, corporations, banks and insurance companies—to annually report and deliver to the State Controller’s Office a list of all customer property on which there has been no activity for a set period of time, usually three years. (See, e.g., §§ 1513, subd. (a), 1515, subd. (a), 1516, subd. (a), 1530.) The unclaimed property is at the same time transferred to the Controller, who assumes custody and is responsible for its safekeeping. (§ 1532, 1560.) The owner of the property must be notified by publication of the escheat. (§ 1531.)
The money or property transferred to the state’s custody under the UPL is placed in the Unclaimed Property Fund (UPF), a separate fund maintained by the Controller in the State Treasury. (§§ 1313, 1314, 1564.) Property other than money may be sold by the Controller, subject to certain notice requirements. (§§ 1531, 1563.) “When property other than money is delivered to the State Controller under this chapter, any dividends, interest or other increments realized or accruing on such property at or prior to liquidation or conversion thereof into money, shall upon receipt be credited to the owner’s account by the State Controller. Except for amounts so credited the owner is not entitled to receive income or other increments on money or other property paid or delivered to the State Controller under this chapter. All interest received and other income derived from the investment of moneys deposited in the Unclaimed Property Fund under the provisions of this chapter shall, on order of the State Controller, be transferred to the General Fund.” (§ 1562; see also § 1318.)
A person asserting ownership of unclaimed property held by the State may file a claim to the property or the net proceeds from its sale. (§ 1540, subd. (a).) When the Controller grants the claim, the property or the net proceeds are returned to the owner. (§ 1540.) Under current law, the owner is not entitled to recover any interest that might have been earned on the property during the period it was held by the state. (§ 1540, subd. (c).)
II. Procedural History
On March 29, 2005, plaintiffs Dorry Coppoletta and Georgette Gutierrez filed a class action against the State and Steve Westly, as State Controller, for claims arising under the UPL. Their second amended complaint, filed October 24, 2005, named the State as the sole defendant and asserted that its failure to pay interest on claims paid out of the UPF was a taking of private property without just compensation in violation of the federal and state constitutions. (U.S. Const., Amends 5, 14; Cal. Const., art. I, § 19.)
Any person aggrieved by a decision of the Controller under the UPL “may commence an action, naming the Controller as a defendant. . . .” (§ 1541.) Given our resolution of the merits of this appeal, we need not decide whether the State is properly named as the sole defendant in this case.
According to the allegations in the second amended complaint, the State had paid a number of claims made by plaintiff Coppoletta, who was the owner of over $500,000 in various securities accounts that had been held in the UPF since 1999. Plaintiff Gutierrez had been notified by the State that she would receive a payment of $255.03 for a bank account that had been held in the UPF since 1990. Although the State had earned interest on these funds while they were in the UPF, no interest was paid or designated to be paid on plaintiffs’ claims.
The State filed a motion for summary judgment on several grounds: (1) the facts alleged in the second amended complaint did not state a cause of action for an unconstitutional taking of property; (2) the claims were barred by the doctrine of sovereign immunity; (3) the State was immune from suit under sections 1541 and 1566, subdivision (b); (4) the UPL does not create a trust in plaintiffs’ favor; (5) plaintiffs were not statutorily entitled to interest on their unclaimed property; (6) plaintiffs were not entitled to equitable relief because legal remedies were adequate; and (7) plaintiffs’ claims were barred by the statute of limitations. A hearing on the motion was scheduled for May 24, 2006.
Section 1541 provides, “Any person aggrieved by a decision of the Controller or as to whose claim the Controller has failed to make a decision within 180 days after the filing of the claim, may commence an action, naming the Controller as a defendant, to establish his or her claim in the superior court . . . .” Under section 1566, “(a) When payment or delivery of money or other property has been made to any claimant under the provisions of this chapter, no suit shall thereafter be maintained by any other claimant against the state or any officer or employee thereof for or on account of such property. [¶] (b) Except as provided in Section 1541, no suit shall be maintained by any person against the state or any officer or employee thereof for or on account of any transaction entered into by the State Controller pursuant to this chapter.”
Plaintiffs did not file opposition to the motion for summary judgment. On May 10, 2006, the date the opposition was due (§ 437c, subd. (b)(2)), they filed a complaint in the Federal District Court, Northern District of California, which alleged the same claims presented in the case now before us. On May 11, one day after the opposition was due, plaintiffs served a request for dismissal without prejudice of the state court action. On the date of the hearing on the motion for summary judgment, the State appeared telephonically and asked the court to rule on the merits notwithstanding the dismissal. The court took the matter under submission and entered summary judgment in favor of the State on May 31.
After learning of the court’s ruling, plaintiffs filed a motion seeking relief from default under section 473. The court granted the motion for the limited purpose of allowing plaintiffs to argue why the State had not met its initial burden of showing why summary judgment should be granted. A new hearing was held, and the trial court again granted summary judgment on January 24, 2007. The court noted in its written ruling that plaintiffs could not dismiss their action after the time for filing opposition had expired because to do so would frustrate the summary judgment statute. It concluded the State was entitled to judgment in its favor as a matter of law based on: (1) sovereign immunity; (2) the Eleventh Amendment of the United States Constitution; (3) statutory immunity under section 1566; (4) the lack of any taking by the State; and (5) the lack of any trust relationship between the State and plaintiffs that would entitle them to interest on their money.
III. Discussion
A. Superior Court’s Jurisdiction to Grant Summary Judgment Following Plaintiffs’ Request for Dismissal Without Prejudice
Plaintiffs argue that because they filed a request for voluntary dismissal before the summary judgment motion was heard, the superior court lacked jurisdiction to enter judgment in favor of the State. We disagree.
Section 581, subdivision (b) provides: “An action may be dismissed in any of the following instances: [¶] (1) With or without prejudice, upon written request of the plaintiff to the clerk, filed with papers in the case, or by oral or written request to the court at any time before the actual commencement of trial, upon payment of the costs, if any.” Subdivision (c) of the same section provides: “A plaintiff may dismiss his or her complaint, or any cause of action asserted in it, in its entirety, or as to any defendant or defendants, with or without prejudice prior to the actual commencement of trial.”
The right to dismiss prior to the commencement of trial is not absolute. (Cravens v. State Bd. of Equalization (1997) 52 Cal.App.4th 253, 256 (Cravens).) “ ‘[S]ection 581 recognizes exceptions to the right; other limitations have evolved through the courts’ construction of the term “commencement of trial.” These exceptions generally arise where the action has proceeded to a determinative adjudication, or to a decision that is tantamount to an adjudication.’ ” (Ibid.) Thus, while a party may dismiss his or her action without prejudice before the date the opposition to a summary judgment motion is due(Zapanta v. Universal Care, Inc. (2003) 107 Cal.App.4th 1167, 1172-1173), he or she may not wait until the time to file opposition has expired and then file a dismissal in lieu of such opposition. (Cravens, supra, 52 Cal.App.4th at p. 257.)
In Cravens, the court affirmed an order granting the defendant’s motion for summary judgment where the plaintiff failed to file an opposition and instead secured entry of a voluntary dismissal one day before the hearing. (Cravens, supra, 52 Cal.App.4th at pp. 255-256.) It noted that under section 437c, subdivision (b), the failure to file opposition and a separate statement of disputed facts “ ‘may constitute a sufficient ground, in the court’s discretion, for granting the motion.’ ” (Id. at p. 257.) “As we can see from the trial court’s ruling, respondents’ moving papers met their burden of negating appellant’s claims, entitling them to judgment as a matter of law if no issues of disputed fact were raised. Appellant failed to file opposition within the requisite time. At that point, entry of summary judgment in favor of respondents became a formality which appellant could not avoid by the stratagem of filing a last minute request for dismissal without prejudice.” (Ibid.) “[A] plaintiff cannot defeat a defendant’s right to obtain a determination on the merits by simply filing a voluntary dismissal when statutory authority entitles the defense to a final judgment.” (Hartbrodt v. Burke (1996) 42 Cal.App.4th 168, 176 [plaintiff could not avoid adverse judgment by filing voluntary dismissal one day before hearing on terminating sanctions for failure to comply with a discovery order].)
Plaintiffs argue that these authorities are distinguishable because their dismissal was not entered to avoid an inevitable adverse ruling on a dispositive motion. Rather, they had filed an identical action in federal court on May 10, 2006, the date opposition to the summary judgment motion was due, and were simply seeking to have the issues resolved on the merits in their preferred forum. In essence, plaintiffs acknowledge that they filed the dismissal to facilitate their forum shopping. Although a party may elect to proceed in a federal rather than a state forum based on tactical considerations, the trial court did not abuse its discretion in concluding that it would be unfair to deprive the State of a favorable judgment to which it was entitled based on plaintiffs’ eleventh-hour decision to pursue their claims in federal court. (Tire Distributors, Inc. v. Cobrae (2005) 132 Cal.App.4th 538, 544 [applying abuse of discretion standard].)
In a declaration submitted in support of plaintiffs’ motion for relief from default under section 473, their counsel explained that he had not originally filed the case in federal court because he had concluded the Eleventh Amendment gave the State immunity from a takings claim in federal court; however, he subsequently recognized that the decision Taylor v. Westly (9th Cir. 2005) 402 F.3d 924 (Taylor) “conferred jurisdiction . . . on the federal courts.” The decision in Taylor issued on March 29, 2005, the same date that the original complaint was filed in state court and more than a year before the summary judgment proceedings now at issue.
We also note that while plaintiffs were not allowed to file a full-blown opposition in the trial court after it declined to honor their attempted dismissal, they were permitted to argue that the State failed to make the preliminary showing necessary for summary judgment. Moreover, they will not be precluded from fully litigating the substantive issues in this appeal. The crux of their argument—that the denial of interest on their unclaimed property amounts to an unconstitutional taking—is a legal one which we review independently. (See Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 801.)
Having concluded that the trial court properly vacated the dismissal and ruled on the summary judgment motion, we turn to the merits.
B. Takings Claim
The Fifth Amendment of the United States Constitution, as applicable to the states through the Fourteenth Amendment (Palazzolo v. Rhode Island (2001) 533 U.S. 606, 617), provides that private property shall not “be taken for public use, without just compensation.” The California Constitution requires just compensation when private property is “taken or damaged for public use.” (Cal. Const., art. I, § 19.) “By virtue of including ‘damage[]’ to property as well as its ‘tak[ing],’ the California clause ‘protects a somewhat broader range of property values’ than does the corresponding federal provision.” (San Remo Hotel v. City and County of San Francisco (2002) 27 Cal.4th 643, 664.) Apart from that difference, however, the California Supreme Court has construed the state clause congruently with the federal clause. (Ibid.) We do not differentiate between the two in our discussion.
“Because the Constitution protects rather than creates property interests, the existence of a property interest is determined by reference to ‘existing rules or understandings that stem from an independent source such as state law.’ ” (Phillips v. Washington Legal Fund (1998) 524 U.S. 156, 164 (Phillips).) While constitutionally protected property rights may exist despite statutes that appear to deny their existence, state legislatures can alter substantive property rights through the enactment of rules of general applicability. (United States v. Locke (1985) 471 U.S. 84, 106, fn. 15, 108.) Thus, the Legislature may elect to treat property as forfeited under conditions that common law might not consider sufficient to demonstrate abandonment. (Ibid.)
It is well-settled that no unconstitutional taking occurs when the state exercises its right to take custody of abandoned property under the UPL. (See Fong, supra, 117 Cal.App.4th at p. 853.) “[W]here an owner’s interest in property is transferred to another pursuant to a statute and due to the original owner’s abandonment, the Supreme Court ‘has never required the State to compensate the owner for the consequences of his own neglect.’ ” (Id. at pp. 853-854, citing Texaco, Inc. v. Short (1982) 454 U.S. 516, 530.) “It is the owner’s failure to make any use of the property—and not the action of the State—that causes the lapse of the property right; there is no ‘taking’ that requires compensation.” (Texaco, at p. 530.)
Plaintiffs contend that a taking nonetheless occurs when the State permanently retains the interest earned on monies held in the UPF. They reason that under the UPL, the state assumes custody of, but not title to, property that has been deemed abandoned. Consequently, any interest earned on the property while it is in state custody belongs to the owner, not the state. This, they argue, is consistent with the statutory directives that “Upon the payment or delivery of escheated property to the State Controller, the state shall assume custody and shall be responsible for the safekeeping of the property” (§ 1560, subd. (a)) and “[t]he care and custody of all property delivered to the Treasurer or Controller pursuant to this title is assumed by the State for the benefit of those entitled thereto, and the State is responsible for the payment of all claims established thereto pursuant to law, less any lawful deductions” (§ 1361).
To support their claim, plaintiffs rely on Webb’s Fabulous Pharmacies, Inc. v. Beckwith (1980) 449 U.S. 155, in which the court held unconstitutional a statute allowing a county to retain interest earned on an interpleader fund deposited with the court. The court explained that the “earnings of a fund are incidents of ownership of the fund itself and are property just as the fund is property.” (Id. at p. 164.) Plaintiffs also refer us to Phillips, supra, 524 U.S. 156, in which the court, citing the common law notion that “ ‘interest follows principal,’ ” concluded that interest earned on client money in a lawyer’s trust fund account was the private property of the owner of the principal. (Id. at pp. 156, 165, 172; see also Brown v. Legal Foundation of Washington (2003) 538 U.S. 216, 235-239 [program using interest on lawyers’ trust accounts (IOLTAs) to fund legal services program was a taking under the Fifth Amendment, but no just compensation was due when only funds affected were those that would have earned no more than nominal interest and there was no pecuniary loss to clients].)
There is an important distinction between money held in the UPF and that deposited in interpleader or attorney trust accounts. In the latter two situations, the money is held in trust for the owner, pursuant to a law that required the owners to place their property into a particular fund. Under the UPL, it is the owners’ abandonment of their property, not any action by the state, that results in the transfer of the property to the State and the deprivation of interest during the period it is held. For similar reasons, we find unpersuasive plaintiffs’ reliance on Breda Construzioni Ferroviarie v. Los Angeles County Metropolitan Transportation Authority (1997) 56 Cal.App.4th 1433, 1435, in which the court concluded that a public entity may not retain interest earned on funds it withheld from a prime contractor pursuant to a subcontractor’s stop notice.
A number of state courts have rejected the arguments now raised by plaintiffs and have held there is no “taking” when the state fails to pay interest on property in unclaimed or abandoned property funds. (Simon v. Wiessman (E.D. Pa. 2007) 2007 WL 2461707, *4-8; Hooks v. Treasurer (La.App. 2007) 961 So.2d 425, 430-433; Sogg v. Ohio Dept. of Commerce (Ohio App. 2007) 2007 WL 1821306, *10; Smyth v. Carter (Ind.App. 2006) 845 N.E.2d 219, 223-225, cert. denied __ U.S. __ [127 S.Ct. 1155] (Smyth); Clark v. Strayhorn (Tex.App. 2006) 184 S.W.3d 906, 914-915, cert. denied __ U.S. __ [127 S.Ct. 508] (Clark).) The common theme of these cases is that an owner who has abandoned his or her property loses the interest that might otherwise be earned on the principal not because of any state action, but because of the initial abandonment of the property. The state has no obligation to invest the money it holds in the unclaimed property fund on behalf of the owner, but if it elects to do so, its decision to retain the interest earned does not amount to a taking. “Until a missing owner asserts a claim, it is wholly appropriate for the Comptroller to use unclaimed property for the benefit of the State instead of allowing a windfall to a private holder or permitting the funds to lie fallow.” (Clark, at pp. 914-915.) We agree.
Plaintiffs argue that a different result is required under California law because the UPL creates a custodial trust in which the state does not assume ownership of either the principal or its attendant interest. This argument finds support in Taylor, supra, 402 F.3d 924, in which the Ninth Circuit Court of Appeals determined that an action to recover stocks that had been transferred to the UPF was not an action against the state for money damages because the stocks were being held in trust for the owner, who was simply seeking a return of the property. And more recently, in Suever v. Connell (N.D.Cal. 2007) __ F.Supp.2d ___ [2007 WL 3010423, * 5-6], a federal district court concluded that the Controller’s failure to pay interest on property held in the UPF was a taking under the Fifth Amendment. “Because the princi[pal] itself at all times remained the property of private individuals and not the state, so too did the interest.” (Id., at p. * 7.)
This issue arose in the context of claim by the State that the federal suit was barred by the Eleventh Amendment, which generally shields state governments from money judgments in federal courts. (Taylor, supra, 402 F.3d at p. 929-930.) Because the court determined that UPF money was held by the state in a custodial trust, an action to recover that money was not a claim for damages, and the Eleventh Amendment did not bar the federal action. (Taylor, at p. 932.)
We are not bound by the decisions in Taylor and Suever and do not agree with the their premise that property in the UPF is held in trust for the owners. (See Southern Cal. Gas Co. v. Occupational Safety & Health Appeals Bd. (1997) 58 Cal.App.4th 200, 205-206.) “While it is true that [the UPL] is not a true escheat act, it is also true that it is not purely custodial in nature. The chief incidents of ownership of property are the rights of possession, of use and enjoyment, and of disposition. [Citations.] Under [the UPL], however, an owner’s failure to exercise his or her right of possession results in a presumption that the property has been abandoned. Once the property has been presumed abandoned and has been remitted to the State by the holder, the State then may, contrary to the owner’s right of disposition, sell the property. A state’s exercise of this incident may have significant consequences. [Citing Fong, supra, 117 Cal.App.4th 841.] The forfeiture of interest and dividends pursuant to [the UPL] also results from the owner’s failure to assert his or her property rights and is a further indication that the Act is not purely custodial.” (Smyth, supra, 845 N.E.2d at p. 223.)
In Morris v. Chiang (2008) 163 Cal.App.4th 752, the Second District similarly concluded that the retention of interest on UPL funds was not an unconstitutional taking. That decision was not yet final as of the date we filed the instant opinion.
The UPL establishes a comprehensive scheme for handling unclaimed property. Though the State is statutorily charged with “safekeeping” the property (§ 1560, subdivision (a)) and must maintain it “for the benefit of” the owner (§ 1361), it is also, by statute, entitled to retain any interest earned while the property is in its possession (§ 1540, subd. (c)). This arrangement is not tantamount to a conventional trust, and it does not obligate the State to invest the property in any particular manner or to pay a return on investments made. Nor does it amount to a constructive trust, which may be imposed only upon proof of wrongful acquisition of the property. (Cf. Campbell v. Superior Court (2005) 132 Cal.App.4th 904, 920.)
Because we conclude that the State’s retention of interest earned on UPF property is not a taking under the federal and state constitutions, we need not consider the State’s other arguments or the alternative bases for the trial court’s order granting summary judgment.
IV. Disposition
The judgment is affirmed. Costs on appeal are awarded to respondent.
We concur. SIMONS, Acting P. J., REARDON, J.
Judge of the Superior Court of Alameda County, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.