Court Gives Delaware a Windfall : Securities: The ruling on unclaimed stock dividends and bond interest could cost California millions.

The Supreme Court ruled Tuesday that unclaimed stock dividends and bond interest held by bank or brokerage firms can be captured by the state where the firms are incorporated, a decision that could cost the California and New York state treasuries millions of dollars.

The 6-3 ruling is also a costly setback for nearly every state, except tiny Delaware, which offers generous incentives and benefits to firms incorporating there. Fifteen of the nation’s largest brokerage firms are incorporated in Delaware, even though they are based in New York City.

Attorneys for California and 30 other states had urged the justices to rule that the unclaimed funds should return to the states where the stocks or bonds were issued. That approach would have yielded California at least $15 million a year and New York more than $100 million annually, lawyers in the case said.

Now, however, unless Congress intervenes and changes the law, Delaware will emerge with a windfall.

The multimillion-dollar dispute arose because about 0.02% of the nation’s dividends and interest go unclaimed, mostly because stock and bond certificates have been traded and gone unregistered.

But this minuscule percentage results in about a $100-million annual pot of unclaimed funds.

Until 1988, New York officials routinely captured nearly all of this money from Wall Street brokerages and banks. States have the legal authority to claim abandoned property within their territory, and the lost dividends were piling up in New York offices.

But attorneys for Delaware challenged New York’s claim to those funds. When the justices appointed a special master to consider the dispute, other states, including California, jumped in with recommendations on how to resolve the matter.

The special master in this case, Thomas Jackson, former University of Virginia law school dean, adopted the approach favored by most of the states, deciding that the abandoned funds should go to the state where the stocks were issued.

The high court, in an opinion by Justice Clarence Thomas, threw out that recommendation and instead ruled that the funds should go to the state where the brokerages are incorporated, not where they are located. He cited court precedents that said “intangible property” that has been abandoned belongs to the “state of corporate domicile.”

“We’re disappointed. This means that funds which have come from 50 states will now go mostly to two of them,” said Bernard Nash, a Washington attorney who filed briefs on behalf of 30 states, including California.

“California loses a lot of money because of this and we’re going to go to Congress to try to get it changed,” he said.

While New York state will keep a hefty percentage of the funds because the large bank clearing houses are incorporated there, the state may have to repay more than $100 million to Delaware.

The court’s decision in the case (Delaware vs. New York, No. 111) applies retroactively. Delaware officials thus can seek the return of funds that were improperly seized by New York officials in the past.

“We can go as far back as records exist,” said Kent Yalowitz, an attorney who represented Delaware. “We think there is at least $139 million that rightly belongs to Delaware.”

Justices Byron R. White, Harry A. Blackmun and John Paul Stevens dissented, saying that they would have followed the special master’s approach as “more equitable” to all the states.