Trends in unclaimed property
INSIGHT ARTICLE |
The Unclaimed Property Professionals Organization Annual Conference was held in March in Tampa, Florida. Our summary of three key takeaways includes uniform law provisions, a look-back at Delaware legislation, and trends in litigation.
1. Uniform model unclaimed property laws are trending
Since its finalization in 2016, a handful of states has introduced legislation adopting the Revised Uniform Unclaimed Property Act (RUUPA). None, however, have adopted the model act in whole, choosing instead to selectively adopt certain provisions resulting in great variation among the RUUPA states.
Both Illinois and Tennessee enacted notable holder-unfriendly measures. In Senate Bill 9, Illinois reduced dormancy periods, added a contractual anti-limitations provision and repealed the business to business exemption (B2B) retroactively as applied to transactions as early as Jan. 1, 2010. The retroactive application of the exemption repeal will likely be challenged by holders as a due process violation. In House Bill 420, Tennessee added a contractual anti-limitations provision and a reduction in dormancy periods.
Finalized in January, states updating their unclaimed property codes will also have the option of incorporating provisions from the American Bar Association (ABA) Model Unclaimed Property Act – a second (and competing) uniform model law. The ABA act, while addressing some of the same provisions as RUUPA, takes a different approach on several provisions which have been touted as more holder friendly. Some of these provisions include the inclusion of a de minimis property exemption, a B2B and foreign property exemption, as well as a gift card exemption. Further changes include the elimination of aggregate reporting, changes to the length of the statute of limitations and dormancy periods, abolition of anti-limitations provisions, using estimations only as a penalty when a holder fails to maintain records, limitations of states’ jurisdiction to escheat, more protection for owners of securities and allowing voluntary disclosure agreements (VDA) and consolidated reporting.
Holders should carefully monitor legislation, as states now have the RUUPA and ABA model acts to reference when amending their escheatment laws. Additionally, the National Association of Unclaimed Property Administrators (NAUPA) may also draft a model act, providing yet another unclaimed property model law for states to consider. Holders should carefully monitor and consult with their advisors when filing reports as legislative changes continue to dominate the unclaimed property landscape.
2. A look-back at Delaware Senate Bill 13 one year later
Delaware enacted Senate Bill 13 in 2017, substantially revising the state’s unclaimed property laws following the enactment of RUUPA and the decision in Temple-Inland. Among other provisions, the law shortened the look-back and statute of limitations provisions, established a 10-year record retention requirement and also authorized a “reasonable method” of estimation when records are not retained.
The Delaware Secretary of State’s office finalized regulations in July of 2017, which apply to voluntary disclosure agreement submissions to the Secretary of State’s office. The Department of Finance finalized regulations in October 2017, and they are applicable to unclaimed property audits.
While there are differences in the regulations drafted by each department, the key differences noted are that:
- Penalties and interest are automatically waived under VDAs, but under audit the state escheator assesses penalties and interest, but also has the authority to waive them;
- Under VDA, the holder determines the scope of entities and property types to include, and nothing else may be included without the Department of State’s consent. However, under audit, the state escheator determines the scoping entities and property types, and no additional entities may be scoped without the holder’s consent; and
- VDAs should be completed in two years, but audits may continue to exceed two years to complete.
Holders incorporated in Delaware that have not been audited by the state should consider whether the company should enter into a VDA. Once a holder has received an audit notice, it is then too late to enter into a VDA.
Delaware representatives were also on hand to provide an update on the VDA program since its inception. Currently, over one thousand companies have enrolled in the program with about half of those VDAs completed. Delaware indicated that collections by the state from the VDA program have topped $500 million, and the property types remitted with the highest dollar exposure included securities, followed by account receivable credits and accounts payable checks. Like other states, Delaware is moving toward paperless processing and requiring e-filing of reports starting in 2018.
3. Unclaimed property litigation continues
Over the last year, litigation continued in a number of notable unclaimed property cases. In Bed Bath & Beyond, a decision followed closely by retailers, the retailer filed refund claims for amounts related to merchandise credits that were erroneously escheated. The New Jersey Appellate Division held that the company was entitled to refunds.
In Marathon Petroleum, another important case involving retailers, holders sued to prevent Delaware from auditing “address unknown” gift cards issued by gift card companies that were not incorporated or formed in Delaware. The federal court initially granted Delaware’s motion to dismiss, finding that private parties did not have standing to bring the lawsuit. The plaintiffs appealed, and the court ultimately ruled that private parties did have the jurisdiction to bring the lawsuit and that Delaware can audit “address unknown” property from a non-Delaware entity in order to determine the precise debtor-creditor relationship.
Concluding the last of the major legislative updates, the plaintiffs in Plains All American Pipeline sued Delaware to prevent audit, arguing that the use of a contingent-fee auditor violated due process and the Fourth Amendment. In 2016, the federal district court dismissed the case, finding that it was not ripe for review. In August 2017, the Third Circuit mostly affirmed the federal district court’s ruling, but reversed and remanded the case for the lower court to examine the due-process violation.
At the conclusion of the conference, about a dozen state administrators from across the country, including Delaware, participated in a panel discussion addressing unclaimed property laws and the states’ position on a variety of issues, including annual compliance and audit procedures. Overall, when holders experience issues with annual filings and/or with third-party auditors, the administrators encouraged the holder or their advocate to reach out to the state for a discussion in order to reach a mutual agreement.