State v. Western Union Financial Services, Inc – 6/3/2009

June 5, 2009

Arizona Supreme Court Holds That State Lacks In Rem Jurisdiction To Issue Warrants Seizing Money Transfers Sent From Other States to Mexico.

As part of its law enforcement efforts against human smuggling and drug trafficking, the State obtained a warrant for the seizure of person-to-person wire transfers made through Western Union, initiated in twenty-eight states other than Arizona to certain locations in Sonora, Mexico.  The State’s affidavit in support of the warrant application alleged that many of these out-of-state transfers involved funds from racketeering activities in Arizona, although the affidavit did not identify any specific person, property, or transactions.

After an evidentiary hearing, the superior court quashed the warrant, holding that the court lacked jurisdiction to seize transfers from other states to Sonora, that the State failed to show probable cause regarding any particular transfer, and that the warrant violated the Commerce Clause.  The Court of Appeals vacated, holding that because Western Union was subject to general personal jurisdiction in Arizona, “its debts [in the form of electronic credits in its system] can be considered within this state for purposes of in rem jurisdiction.”  Therefore, the appeals court held that the Attorney General could seize transfers that were neither to nor from a person in Arizona.

In a 4-1 decision, the Arizona Supreme Court reversed.  The Court concluded that in rem jurisdiction could only be justified if the property subject to the warrant was present within Arizona.  Thus, the “primary question” was whether “a money transfer sent from a state other than Arizona to a recipient in Sonora, Mexico” is “located within this state for purposes of in rem jurisdiction.”

The State argued that Arizona could seize the out-of-state transfers, relying on the “Harris fiction” “that a debt follows the debtor and is located wherever the debtor can be found.”  See Harris v. Balk, 198 U.S. 215 (1905). The State contended that because Western Union was located in and subject to jurisdiction in Arizona, so were the “debts” or “electronic credits.”

The Court rejected the State’s arguments.  First, the Court distinguished Harris factually, analogizing Western Union to a courier “who has agreed to deliver a package containing cash from Colorado to Mexico.”  Arizona courts could not exercise in rem jurisdiction over the package while it was outside Arizona, even though Western Union is subject to personal jurisdiction in Arizona.  Second, the Court explained that while Harris may have once been useful for determining quasi in rem jurisdiction, it has since been replaced by the “minimum contacts” analysis.  Finally, the Court held that funds from a wire transfer initiated in another state by a non-resident and transmitted to another non-resident in a foreign country were not “present” in Arizona, even though Western Union was subject to general personal jurisdiction in Arizona, and even if the funds allegedly resulted from illegal conduct in Arizona.

Judge Espinosa dissented, reasoning that the electronic credits existed wherever Western Union was located because a recipient could “go to any Western Union station and instantly receive the money.”   He wrote that, as a fact of Western Union’s business, “the funds must be at that location, both conceptually and physically.”  He further argued that because significant parts of the smuggling and drug operations took place in Arizona, Arizona was likely the only state with sufficient contacts to the electronic credits, and thus had the power to exercise in rem jurisdiction over them.

Justice Hurwitz authored the majority opinion in which Chief Justice McGregor, Justice Ryan, and Justice Bales all joined.  Vice-Chief Justice Berch recused herself; Judge Espinosa, sitting by designation, dissented.