By Angela Adolph, Esq. of Kean Miller LLP
Recent federal court decisions reveal diverging interpretations of how a landmark Supreme Court ruling on the Fifth Amendment’s takings clause affects state administration of unclaimed property. Taken together, the cases expose state governments to uncertainty and litigation risk over the constitutional limits of their authority.
Property, Post-Tyler
The current ambiguity reflects increased national scrutiny of state powers in the wake of the U.S. Supreme Court’s pivotal 2023 decision in Tyler vs. Hennepin County, Minnesota. In that case, the county had seized a residential condominium and sold it for $40,000 to satisfy $15,000 in unpaid property taxes. The former owner sought the $25,000 in residual sale proceeds.
The Supreme Court found that a taxpayer’s compensable interest in property applies to both the property and equity in the form of excess proceeds generated from a forfeiture sale of that asset. The decision clarified that economic value is property subject to the takings clause, which prohibits taking private property for public use without just compensation.
In Tyler, the Supreme Court emphasized that the takings clause protects more than physical possession; it also protects a citizen’s economic value in property. A state cannot deprive a citizen of economic value in property without providing just compensation and meaningful due process protections.
While Tyler examined the limits on the value a state can derive when foreclosing on real estate for tax debt, the case sparked wider scrutiny into how states take and derive value from privately owned assets. That ongoing wave of inquiry has seeped into adjacent areas of state power, including unclaimed property.
Unclaimed Property Division
In 2025, two U.S. circuit courts issued opinions addressing due process and takings challenges to state unclaimed property regimes. Their conclusions differed on whether a state’s custody of unclaimed property triggers constitutional protections.
The divergence creates a meaningful federal split on whether states violate the takings clause when holding unclaimed property in trust until the true owner claims the property, or when the state uses unclaimed property to fund public purposes. The split may be ripe for Supreme Court intervention as courts and states grapple with the reaches and limits of Tyler’s application.
In Knellinger vs. Young, Colorado took and held the plaintiffs’ unclaimed property without compensation. Under the state’s Revised Uniform Unclaimed Property Act, the state’s treasurer takes custody of unclaimed property and holds it “in trust” for owners. Like other states, however, Colorado, uses the in-trust amount for the state’s general fund or to fund specific state programs.
The 10th Circuit held that the plaintiffs plausibly asserted a claim under the takings clause by meeting a four-point test, which requires that: (1) the government takes something; (2) the “something” is property; (3) the plaintiff owns the property; and (4) the property was taken for public use without just compensation.
Citing Tyler, the 10th Circuit reasoned that the state effected a taking when it transferred the plaintiffs’ funds into the unclaimed property trust without compensation, thereby inflicting financial harm and “a classic pocketbook injury.” Finding unpersuasive the state’s principal argument that the plaintiffs failed to sufficiently establish ownership of the disputed property, the 10th Circuit reversed the district court’s dismissal and remanded the suit for further proceedings.
In Garza vs. Woods, the 9th Circuit decided differently. The Arizona residents who brought the suit owned property (primarily money owed to them by various businesses) that Arizona deposited into the state’s unclaimed property fund. Affirming prior binding precedent, the 9th Circuit held that Arizona’s possession of an amount in trust for the benefit of a citizen does not constitute a taking. The court noted the 10th Circuit’s decision in Knellinger but did not seek to differentiate the facts or reasoning in Garza. It is therefore uncertain whether the court would have reached the same outcome in the absence of binding precedent.
Although the Ninth Circuit held that the state’s taking and holding unclaimed property in trust did not trigger a takings-clause claim, it nonetheless reversed the district court’s dismissal of the suit and remanded the case for further proceedings on whether the state violated the plaintiffs’ due process rights by failing to provide adequate notice before placing the plaintiffs’ property in trust.
The divide between the 9th and 10th Circuits reflects a deeper tension in how courts interpret a state’s power to administer unclaimed property in the post-Tyler landscape. Tyler made clear that states may not extinguish or appropriate a citizen’s economic value without satisfying the takings clause. Knellinger extends that reasoning, viewing a state’s assumption of custody and use of unclaimed funds as a meaningful deprivation that can inflict a “pocketbook injury.”
Garza, by contrast, reaffirms the more traditional, custodial model in which the state’s possession does not rise to the level of a constitutional taking.
Viewed together, these cases should inspire new scrutiny on state unclaimed property regimes, which generally rely on sweeping custodial transfers and the diversion of unclaimed funds to public coffers. Unless the Supreme Court intervenes to resolve the split, states may face increasing litigation risk and uncertainty over the constitutional limits of their authority.
For private citizens, the decisions underscore the continuing vitality of Tyler’s core principle: Economic value is property, and the Constitution demands that states respect ownership of it.
Angela Adolph is a partner in the Baton Rouge office of Kean Miller LLP. The firm is the Louisiana member of American Property Tax Counsel, the national affiliation of property tax attorneys. Contact her at angela.adolph@keanmiller.com.