January 17, 2006 Dear Madam:

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January 17, 2006
Dear Madam:
You have the following question: Does the interest earned on the utility deposit charged
by the city for certain utility services belong to the utility or to the customer?
As you yourself have apparently discovered, there are no Tennessee statutes or cases
governing that question. As far as I can determine, there is only one case in other jurisdictions on
that question. That case concluded that the interest on the security deposit belongs to the
customer. Cases cited in that case for the proposition that “interest follows the principal” may
support that conclusion.
In Blumburg v. Pinellas County, 836 F.Supp. 839 (M.D. Florida 1993), the U.S. District
Court for the Middle District of Florida stated the express question: “....whether an applicant for
utilities who pays a deposit to a governmental entity is entitled to the interest which accumulates
on the deposit”? The applicant has a property interest in the interest from the deposit, and the
government’s taking of the interest constitutes a taking under the Fifth Amendment to the U.S.
Constitution. The Court pointed to the U.S. Supreme Court case of Webb’s Fabulous Pharmacy,
Inc. V. Beckwith, 449 U.S. 155 (1980), in which that Court had found legal a fee “for services
rendered” by court clerks, but illegal the retention by the court clerk of interest from an
interpleader fund a state appropriation of “private property.” Both were levied under state law.
“As in Webb’s,” declared the Court, “the deposit money collected by the Defendant from utility
customers is also private property, and not the property of Pinellas County.” [At 844] Webb’s,
continued the Court, stands for the proposition that:
the earnings of a fund are incidents of ownership of the fund itself
and are property just as the fund itself is property. 449 U.S. at 164
[parallel citations omitted by me.] Plaintiff’s correctly assert that
under common law, the ownership of interest follows the
ownership of principal.... [At 844]
The Court rejected Pinellas County’s argument that utility customers agreed to the
“confiscatory ordinance” by failing to protest the policy at a public meeting held on the
ordinance, or by signing up for utility services. But under basic contract law, reasoned the Court,
there can be no contract without mutual assent. Given the monopoly that existed in the provision
of water service, that residents must as a matter of law consume, the utility’s customers didn’t
“freely agree” to take that service. Moreover, continued the Court:
January 17, 2006
Page 2
The record contains no evidence as to whether Plaintiffs or other
utility customers ever received a copy of the Pinellas County Water
System Manual, and the Court notes that nowhere in the newspaper
advertisements were the policies containing retention of interest
mentioned. The record contains no evidence of any written
agreement between Plaintiffs and Defendant which would factually
support Defendant’s allegations of an agreement. Although the
customer, by requesting service, agrees to abide by the rules and
regulations of the water system, this does not mean that Defendant
is at liberty to pass rules and regulations which violate
constitutional protection of its customers. [At 845] [Emphasis is
mine.]
That language indicates that even if the utility had promulgated a policy of retaining
interest security deposits, that retention would not have been legal.
Other cases stand for the proposition that in the absence of a statute authorizing a
government entity to retain the interest on deposits the interest is owned by the owner of the
principal, and that the government appropriation of the interest is a taking under the Fifth
Amendment to the U.S. Constitution. See, for example, Phillips v. Washington Legal
Foundation, 524 U.S. 156 (1998); Washington Legal Fund v. Texas Equal Access, 94 F.3d 996
(5th Cir. Ct. App. 1996); Brown v. Legal Foundation of Washington, 538 U.S. 216 (2003); West
American Insurance Company v. Dutt, 591 N.E.2d 356 (Ohio. App. 1990).
The question of whether the state owned the interest earned on unclaimed property arose
in Canel v. Topinka, 793 N.E.2d 845 (Ill. App. 2003). Section 15 of the Illinois Uniform
Unclaimed Property Act provided that:
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
claims stock and mutual funds after July 1, 1993, may be paid to
the owner.
The Court, reasoning that the Illinois Uniform Unclaimed Property Act was a custodial
rather than an escheat statute, held that when the state treasurer returned the stock at issue to its
owner but retained the dividends from the stock, a “taking” had occurred.
Tennessee’s Uniform Disposition of Unclaimed Property Act [TUDUPA] contained in
Tennessee Code Annotated, ' 66-29-101 et seq., applies to unclaimed property held by local
January 17, 2006
Page 3
governments [Tennessee Code Annotated, '' 66-29-103(7) and (8); 66-29-110]. It also
specifically applies to utilities and to utility deposits:
- “Utility”is defined as:
....any person who owns and operates for public use, any plant,
equipment, property, franchise, or license for the transmission,
sale, delivery, or furnishing of electricity, water, steam or gas.
[Tennessee Code Annotated, ' 66-29103(11)]
- “Person” is defined as “any individual, business association, government or political
subdivision....” [Tennessee Code Annotated, ' 66-29-103(8)]
TUDUPA says with respect to utility deposits that:
(a) The following funds held or owing by any business association
or by any utility are presumed abandoned:
(1) Any deposit made by a subscriber with a utility to secure
payment, any sum overpaid, or any sum paid in advance for utility
services, less any lawful deduction that has remained unclaimed ....
for more than two (2) years after the termination of the services for
which the deposit, overpayment or advance payment was made; ....
The TUDUPA was also held not to be an escheat statute in Presley v. City of Memphis,
769 S.W.3d 221 (Tenn. App. 1988). In that case, proceeds derived from ticket sales to an Elvis
Presley concert that was cancelled when Elvis Presley died prior to the concert were held by the
coliseum where the concert was to have been held. The Court said this with respect to the
disposition of the proceeds, including any income derived from the proceeds:
While the statute as it now exists assures that such windfalls
benefit the public rather than individuals, we note that the statute
discourages investment of the unclaimed funds during the sevenyear period prior to the requiring reporting of unclaimed funds to
the state. Any income resulting from such investment passes to the
state with the underlying unclaimed funds. T.C.A. '' 66-29-103, 105, -108, -111.
In summary, pursuant to the Tennessee UDUPA, we hold that the
Coliseum must deliver all of the unclaimed tickets refunds and all
January 17, 2006
Page 4
of the accumulated interest thereon from the treasurer. Further, the
treasurer shall publish the existence of the unclaimed funds and
hold those amounts until such times as they are claimed by the
rightful owners, the ticket holders. [At 225]
Tennessee Code Annotated, ' 66-29-118(b) itself provides that:
(b) When interest-bearing property is paid or delivered to the
treasurer under this part, the owner is entitled to receive interest
accruing thereafter under the following conditions:
(1) Interest will be paid at the stated rate the property was earning
at the time it was turned over to the treasurer; ....
Tennessee Code Annotated, ' 66-29-115(3) also provides that “Property paid or delivered
to the state treasurer shall include all interest, dividends, increments, and accretions due, payable,
or distributable on the day that the property is paid or delivered to the state treasurer.”
Nothing in the TUDUPA nor in Presley expressly requires that the interest on utility
deposits earned while the deposit is in the hands of the utility must be paid over with the deposit
to the state treasurer (as it does for interest held on other kinds of deposits held by private
entities), but that appears to me the implication of the Act. But under Canel v. Topinka a law
which provided that the owner of unclaimed property was not entitled to the interest earned on
that property while in the hands of the state was a “taking.” If the “interest follows the
principal,” would not the same rule apply to interest earned on utility deposits owned by utility
customers while those deposits were in the hands of the utility?
Blumberg v. Pinellas County, which deals directly with the interest earned on utility
deposits holds that the same rule does apply to such proceeds, as does the line of cases that
precede and follow Blumberg in the context of interest on other kinds of deposits and funds. For
that reason, a strong argument can be made that in Tennessee a person who makes a utility
security deposit, and not the utility owns the interest on the deposit. It is an inconclusive
argument that waits on the courts.
Sincerely,
Sidney D. Hemsley
Senior Law Consultant
January 17, 2006
Page 5
SDH/
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