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Municipal Technical Advisory Service (MTAS)

Original Author: Hemsley, Sid
Date of Material: 01/17/2006

Utilities--Rates and charges

Interest Earned on Utility Deposit

Reviewed Date: 04/23/2021
MTAS was asked whether the interest earned on the utility deposit charged by the city for certain utility services belongs to the utility or to the customer.

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:

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] 

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 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 seven- year 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 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.


Sidney D. Hemsley
Senior Law Consultant