March 12, 1992
The Honorable Curtis J. Johnson
Commissioner of School and Public Lands
500 East Capitol Avenue
Pierre, South Dakota 57501-5070
OFFICIAL OPINION NO. 92-03
Management of Escheated Lands
Dear Commissioner Johnson:
You have requested, in your letter dated January 27, 1992, that I give you an official opinion regarding the following subject matter:
FACTS:
A prudent manager would conserve and protect the state's interest in escheated assets for the benefit of common schools.
Article VIII, Section 14 of the South Dakota Constitution addresses protection of trust lands. Escheated property will become trust property with the passage of time. SDCL 21-36-23 provides for the management of escheated property.
Based upon the foregoing facts, you have asked the following questions.
QUESTIONS:
1. Does the Commissioner of School and Public Lands have the right and the obligation to maintain buildings, repair structures and perform other such duties as would be prudent and deemed good management practices?
2. Does the Commissioner of School and Public Lands have the authority to use cash or assets which have been converted to cash in order to maintain the real property?
RE QUESTION NO. 1:
The South Dakota Constitution, Art. VIII, 14, provides as follows:
The Legislature shall provide by law for the protection of the school lands from trespass or unlawful appropriation, and for their defense against all unauthorized claims or efforts to divert them from the school fund.
Art. VIII, 2 of the South Dakota Constitution provides as follows:
All proceeds of the sale of public lands that have heretofore been or may hereafter be given by the United States for the use of public schools in the state; all such per centum as may be granted by the United State on the sales of public lands; the proceeds of all property that shall fall to the state by escheat; the proceeds of all gifts or donations to the state for public schools or not otherwise appropriated by the terms of the gift; and all property otherwise acquired for public schools, shall be and remain a perpetual fund for the maintenance of public schools in the state. It shall be deemed a trust fund held by the state. The principal shall forever remain inviolate, and may be increased, but shall never be diminished, and the state shall make good all losses thereof which may in any manner occur. [Emphasis supplied.]
The Legislature has implemented these and other constitutional provisions by passing SDCL ch. 21-36. It is apparent from Art. VIII, 2 that all escheated property must be placed in the permanent school fund, and remain a part of the principal of this fund forever. In my view, whenever the escheated property becomes permanently the property of the state, it likewise goes into the permanent school fund, and must be treated much the same as other lands donated by the United States for support of the common schools. Indeed, the two types of lands are equated in Art. VIII, 2.
There is a point in time, however, where the escheated property is not a part of the permanent school fund. It would appear that the Legislature has provided, in SDCL ch. 21-36, for a statute of limitations, beyond which the escheated property can no longer be recovered by those who might otherwise be entitled to it. Specifically, SDCL 21-36-24 provides as follows:
In all cases where property has or may be hereafter escheated to the state of South Dakota by proceedings had in any court of this state, any person or persons who may be legally entitled to the same or an heir or heirs of the deceased person whose property was escheated by such proceedings, who was not a party or privy to such proceedings and who had no notice or knowledge thereof, may bring an action against the state of South Dakota for the recovery of such property within ten years from the entry of the decree or the judgment of escheat. [Emphasis supplied.]
In addition, the Legislature has provided for return of escheated property to those claiming it, but there are also limitations upon such return. SDCL 21-36-26 provides as follows:
If judgment shall be awarded the claimant, the court must order the property if not sold, to be delivered to him by the receiver, administrator, or the commissioner of school and public lands, or if it has been sold and the proceeds paid into the state treasury as a part of the school fund, the Legislature shall provide for the payment of the same. No judgment shall be rendered in favor of such person for a sum in excess of the principal received into the school fund, exclusive of interest, rents, and profits; it being the intent of this section that any interest or profits derived from said principal shall be retained in said school fund as compensation for the care and preservation of said property.
This section clearly implies that the escheated property is not a part of the permanent school fund until such time as the period of limitation (ten years) runs, and the property becomes permanently that of the state. If, however, the property, for whatever reason, would be paid into the permanent fund before that time, the Legislature is directed to provide for payment. This is because, pursuant to Art. VIII, 2 of the Constitution, the principal may not be taken out of the permanent school fund for return to any person entitled to it. In addition, the South Dakota Supreme Court has upheld the constitutionality of this section, insofar as it denies rents and profits to persons entitled to escheated property within the limitations period. Nelson v. State, 59 S.D. 410, 240 N.W. 345 (1932).
I have found no satisfactory authority allowing sale of the real property prior to the running of the ten year holding period during which claims to the property may be made. SDCL 21-36-26 does provide for what is to occur if a sale is made prior to the end of the ten years but does not itself affirmatively allow such sales; SDCL 21-36-23 provides specifically that the land may be sold "after" the expiration of the right of recovery.
As a practical matter, it would probably not be good legal policy to sell escheated property prior to the expiration of ten years for several reasons. First, the title would be questionable, since your authority to sell is questionable. Second, the recovery process under 21-36-26 would be cumbersome if the land had been sold because a legislative appropriation would be necessary to pay the claimants. Third, you have a duty to maintain the property for potential claimants as well as for the eventual benefit of the permanent fund; converting the property to cash may not be in the best interest of either. Fourth, if the land is retained, there is a good chance that it will appreciate where the value of cash is likely to be eaten away by inflation, which is not in the long term interest of any potential claimant on the permanent fund.
This background is necessary to answer your questions. With regard to Question No. 1, I conclude that the Commissioner of School and Public Lands must manage the property in a prudent manner, and that the Commissioner has both the right and the trust obligation to do so.
This obligation is similar to that of a life tenant to real property. SDCL 21-36-26 makes you analogous a life tenant because it gives you the rents and profits for the holding period or until a claimant recovers the property. A life tenant has the obligation not to commit waste on the property and to maintain it for the remainderman's benefit. Further, although the property, including buildings and structures, is not yet a part of the permanent school fund, SDCL 21-36-23 requires the Commissioner to manage the same, and if it is sold after expiration of the holding period, to do so in accordance with the rules for selling property that is a part of the permanent school fund. SDCL 21-36-23 provides as follows:
Any real estate recovered under the provisions of this chapter shall be surrendered by the receiver, or administrator to the commissioner of school and public lands and shall be leased and managed by him subject to the rights of recovery as provided by this chapter, and after the expiration of such right of recovery may be sold in the manner provided by law for the sale of other school and public lands; provided, that when such real estate is of an appraised value of less than one thousand dollars as determined by the board of appraisal provided for by 5-9-36, and in the opinion of the commissioner it will be to the best interest of the state that the same be sold and converted into money, he may cause the same to be sold upon the notice and in the manner provided in 5-9-36 to 5-9-38, inclusive, for the sale of improvements on public lands and the proceeds therefrom placed by the commissioner in the said special fund provided for in 21-36-22 in case of sale of escheated personal property pending the expiration of the right of recovery as provided in 21-36-24. (Emphasis added.)
I therefore conclude that the escheated property must be managed in essentially the same way that permanent school fund property is managed, except that it may not be sold during the holding period.
I am aware that there are few precedents in the area for management of property with buildings and structures on it. Nearly all of the property held by the State as a part of the permanent school fund is bare agricultural property. Nonetheless, if there were any such property as a part of the school fund, you would be required to prudently manage it in accordance with trust principles as is any trustee. My answer to your first question, therefore, is yes.
IN RE QUESTION NO. 2:
I believe you wish to know whether money generated from the escheated property can be used to maintain that property. I have little difficulty in stating that it may. I draw this implication from SDCL 21-36-26, quoted above, which provides that any income from the property shall be retained as compensation for care and preservation of the property.
In addition, any private or public trustee is required, as a part of his trust, to prudently maintain the property. If the escheated property were already a part of the permanent school fund, it would be my opinion that the income there from would have to be distributed to the common schools in accordance with Art. VIII, 3 of the South Dakota Constitution and SDCL chs. 5-10 and 13-13. It would then be necessary for you to provide for management of the property out of other funds budgeted to you by the Legislature for that purpose, just as you provide for management of all other lands that are a part of the permanent school fund. Because, however, this property is a part of escheated property being held by the State for eventual incorporation into the permanent school fund, and because proceeds of such property are explicitly dedicated to its maintenance by SDCL 21-36-26, I am of the opinion that you may use proceeds of such property for maintenance of this property, as well as other escheated properties that have not yet been dedicated to the permanent school fund.
These funds must be maintained separately from other funds under your control, and transferred to the permanent fund when the escheated property becomes part of the permanent fund. This is similar to the rule that a life tenant, entitled to rents and profits during his or her lifetime, may use income from the land to maintain it. My answer to your Question No. 2, therefore, is yes.
Respectfully submitted,
MARK BARNETT
ATTORNEY GENERAL
MWB:CME:ss
