Delaware and Temple Inland Settle – Questions to Remain Unanswered

In late June, 2016 a Delaware federal court issued a decision ruling that Delaware’s unclaimed property audit and estimation practices “shock[ed] the conscience” of the court and likely violated the due process rights of Temple Inland (a Delaware company being subjected to an unclaimed property audit on Delaware’s behalf by a private auditing firm).  While the court’s holding was big news in the unclaimed property industry and signaled potentially seismic changes in the way unclaimed property audits are conducted, the real work was left to be done:  the Court expressly left open the issue of how Delaware’s violations were to be remedied.

Even with this important step left to be taken, the holder community was understandably excited that — finally — there would be some answers concerning (a) the interplay between estimation and availability of records; (b) the proper methods for calculating and sourcing historical unclaimed property liabilities; and (c) the retroactivity of Delaware’s estimation authority.

Well, it seems that we will have to wait a little longer.  According to a an Associated Press story in Saturday’s Chicago Tribune, the parties in the Temple Inland case reached a settlement resolving the matter in full.  According to a joint-motion to dismiss the case filed by the parties on Friday, Delaware and Temple Inland have “entered into a voluntary settlement agreement that fully and finally resolves all claims, including all claims that were asserted, or that could have been asserted, in the case and therefore the matters in dispute between Plaintiff and Defendants have been resolved.”

Accordingly, while the Temple Inland case showed that courts are willing ask the hard questions about Delaware’s unclaimed property audit practices, it ultimately left those questions unanswered.

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Charging Money for Free Information (On Both Sides of the World)

The Sydney Morning Herald (Australia) recently posted an article outlining how various companies in Australia seek to make money by repackaging otherwise public information at increased prices. According to the article, profit-minded Aussies are charging for public information relating to unclaimed property, ancestry records, government reports — sometimes at a significant profit.

The experience here in the U.S. is no different, particularly with regard to unclaimed property.  Agreements with so-called “finder firms” are allowed in many states, pursuant to which the finder agrees to assist a claimant with obtaining his or her money from the state in exchange for a percentage fee.

Of course, states generally charge no fees for searching, claiming and receiving unclaimed property that they hold for the benefit of the rightful owner.  Accordingly, finder firms (might) provide you with expertise or time (i.e., the they will deal with the the claim process so you don’t have to).  They are NOT, however, providing you with access to the money; the underlying funds belong to the owner and is (or shortly will be) claimable directly from the state without the involvement of a finder firm.

Everyone is free to spend their time and money how they wish, and everyone has their own individual balance of what is worth doing and what is worth paying someone else to do.  Just know what you are paying for.  In the case of unclaimed funds and finder firms, it is (maybe) time and expertise, not access, that you are buying.

Temple Inland Scores Win in Estimation Suit Against Delaware — How Big Remains to Be Seen

In 2014, Temple Inland filed a lawsuit against the State of Delaware, challenging the results and methodology of an unclaimed property audit performed by that state.  As part of a 2008 audit, the State of Delaware assessed Temple Inland unclaimed property liabilities for a 22 year time period, allegedly because of Temple Inland’s failure to maintain records (notwithstanding the fact that no Delaware law requires a holder to keep such records).  After availing itself of the state’s administrative appeal process, Temple Inland filed a lawsuit in feeral  challenged the state’s use of estimation in the audit context, arguing that the technique (1) was preempted by the Supreme Court’s Texas v. New Jersey decision; (2) violated Temple Inland’s rights under the Due Process Clause of the Constitution; (3) represented an unconstitutional “taking” of Temple Inland’s property; and (4) violated the ex post facto clause of the Constitution.

Initially, both parties moved for a quick knockout — Temple Inland sought a preliminary determination that the use of estimates was completely prohibited by the U.S. Supreme Court’s decision in Texas v. New Jersey, while Delaware asked the court to dismiss the suit in its entirety.  In March 2013, the court denied both those arguments, allowing the case to continue.

Later both parties moved for summary judgment (a ruling providing that there is no need for a trial because one party is right as a matter of law) on the remaining claims that estimation was barred by the Due Process Clause, represented an unconstitutional taking of Temple Inland’s property, or violated the ex post facto clause.  The court ruled on those motions yesterday.

The Court Rules Against Delaware on Due Process Claim, Leaves Remedy Open

The court began its substantive opinion with a section titled “Delaware’s Dependence on Unclaimed Property Revenue.”  While none of the following facts will be particularly startling to unclaimed property professionals, seeing them acknowledged by a federal judge is notable.  In  particular, the court recognized:

  • Unclaimed property represents Delaware’s third largest revenue source;
  • In 2007, Delaware transferred over $350 in unclaimed property to the general fund, but only returned $20 million to owners; and
  • It is estimated that 90% of the property collected by Delaware is owner-unknown property (meaning it will likely never be paid out to its rightful owner).

Against this backdrop, the court evaluated whether Delaware’s use of estimation was consistent with its obligation to provide Temple Inland with due process of law.  As the court noted, the key protection of the due process clause is to prevent “arbitrary” government action.  Under the relevant caselaw, the court recognized, action by a government agency like the Delaware Department of Finance is deemed to be arbitrary when it “shocks the conscience” of the court.  While noting that no clear precedent existed for the court to determine whether any of Delaware’s individual actions met this threshhold, the court concluded that “in combination, defendants’ executive actions shock the conscience.”

In particular, the court singled out the following actions for criticism:

  • The fact that Delaware attempted to avoid the three or six year statute of limitations (which does not apply where no report has been filed) by not requiring negative reports and by not (apparently) keeping copies of reports filed by holders;
  • That Delaware never gave the holder notice that it must keep records of unclaimed property compliance (Delaware has no unclaimed property records retention statute) then tried to capitalize on the lack of such records to justify its estimation practices;
  • Delaware’s attempt to impose the estimation statute retroactively;
  • The mechanics of the estimation process itself.  In particular, the he court intimated that Delaware may not properly take custody of estimated sums where the underlying liabilities upon which those estimates are based relate to amounts owed in other states.  Specifically, the court explained that “[I]f the property in base years shows an address in another state, then the characteristic of that property has to be extrapolated into the reach back years;” and
  •  The potential for double liability if other states estimate the same period.

While the court ruled that this conduct amounted to a violation of Temple Inland’s due process rights, it did not decide the appropriate remedy.  Instead, it deferred to Delaware for suggestions, explaining that “[i]t is defendants who are best able to know which remedy will be the most palatable in its anticipated efforts to normalize the enforcement of its unclaimed property laws.  Thus, the court will defer its decision on the subject of an appropriate remedy until another day.”

The Court Defers the Takings Clause Claim

The court made no final decision on the “taking” claim.  Pursuant to the Fifth Amendment (made applicable to the states by the Fourteenth Amendment) a state may not take private property for public use without just compensation.  Temple Inland argued that, by demanding estimated property in the context of an unclaimed property audit, the state was impermissibly taking Temple Inland’s property for public use.  The court rejected the absolute nature of this argument.  While the court recognized that an inaccurately performed estimate could result in the taking of a holder’s property, the court held “reasonable” estimation, in and of itself, did not represent an unconstitutional taking of a holder’s property.  Noting that the parties had not yet presented evidence on whether the estimation at issue was “reasonable,” the court deferred a decision on this issue.

The Court Rejects the Ex Post Facto Challenge

The court found in favor of Delaware on the ex post facto cause claim.  The Constitution’s ex post facto clause (Art. I, Sec. 10) prevents states from retroactively punishing an act that was not prohibited at the time of the act.  As the court recognized, however, violations of the ex post facto clause have generally only been found in connection with criminal statutes, or civil statutes that operate as criminal punishments.  Because the court found that the estimation provisions of Delaware’s unclaimed property law were civil, not criminal, in nature it rejected this claim.

The Temple Inland decision is no doubt a big win for the unclaimed property holder community that, for years, has been complaining about Delaware’s overly aggressive and at times seemingly arbitrary estimation practices.  That said, the Court has expressly left open the issue of how Delaware’s violation is to be remedied.  Until the court’s ruling is given some practical effect, it is unclear just how much of a game changer this ruling will be.

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Arizona to Take a Closer Look at Contingent Fee Audits

A few days ago, the Governor of Arizona signed House Bill 2343 into law.  The legislation makes some welcome and well-meaning changes to the way that unclaimed property audits (including, specifically, contingent fee audits) are conducted.  For example, the legislation provides that all holders will receive a “notice of rights” (1) making clear that the Department of Revenue makes all final decisions “that any unclaimed property is reportable;” (2) setting forth appeals procedures; (3) notifying holders where they can file complaints regarding auditor conduct; and (4) contact information for designated employees.

In addition to these changes, the new legislation also signals that Arizona is taking a fresh look at the use of contingent fee audits, and whether there are any practical alternatives.  The law requires the Department of Revenue to issue a Request for Information by the beginning of next year to “explore the feasibility of contracting for audits . . . that are not directly or indirectly contingent on the auditor recovering unclaimed property.”  This is obviously an important issue to the holder community.  Because the audit firm’s payment at the end of an unclaimed property audit is generally calculated as a percentage of reportable property “identified” by the auditor, it is in the auditor’s financial interest to take aggressive and novel positions intended to increase the amount due.  That is not to suggest that all audit firms do so, but the incentive alone is enough to cause many in the holder community to question the fairness of impartiality of these audits.  Hopefully, this is a first step in Arizona to formulating an audit process designed to locate unclaimed property actually due to the state, no more and no less.

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Friday Lost + Found: Show Me State Searches, Sunshine State Slowdown, Audit Webinar

Missouri Legislature Passes Life Insurance Bill . . . . — The Missouri legislature recently passed House Bill 2150, which would require insurance companies to compare policy information against the Social Security Administration’s Death Master File on a semiannual basis.

. . . .While Florida Insurers Seek to Block Bill — In the same vein, WMFE is reporting that a group of insurers has filed suit in Florida state court seeking to prevent retroactive provision of a law that requires them to undertake DMF searches back to 1992.

UPPO Audit Webinar — The Unclaimed Property Professionals Organization (UPPO) is hosting a webinar on compliance efforts and avoiding audits.  Among the topics to be covered are state amnesty programs, completing state unclaimed property questionnaires, and fine-tuning compliance procedures.  Further information and sign-up details can be found at the UPPO website.

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Friday Lost + Found: California’s Audit Haul, Delaware Faces Threats, AARP Says “Open Your Mail”

California Unclaimed Property Audits Bring in Over $1B Per Year — The Lake Arrowhead, California Mountain News has an article about a recent speech given by California State Treasurer John Chiang.  In addition to discussing the state budget, new technology initiatives, and “his perspective on the ‘American Dream,'” Treasurer Chiang gave some information relating to his time as the State Controller.  As reported by Mountain News, Treasurer Chiang claimed that California’s unclaimed property program was “broken” when he took over as Controller, and that his focus on “high profile audits brought in $9.3 billion” during his time in office (or about $1.2 billion per year).   To put that number into some perspective, $1.2 billion per year is more than the GDP of at at least 17 countries.

Delaware Online Chronicles Threats to Delaware’s Revenue — In Delaware Online there is an editorial by Harry Themal which outlines some of the “clouds on the horizon” with regard to Delaware’s future financial outlook.  Along with many of the same problems that plague other states, the article specifically notes Delaware’s vulnerability to fluctuations in revenue from abandoned property and the possibility of future lawsuits (as suggested by Justice Alito’s comments in Taylor v. Yee).  As Mr. Themal notes, “[e]scheat has netted Delaware half a billion dollars – an eighth of the budget – so court rulings could be deadly.”

AARP:  “Open Your Mail!”The AARP recently posted an article entitled “Abandoned Funds May be at Risk” which sounds the alarm over the speed and relative ease with which some states declare investment accounts and securities as “abandoned” property.  While many investors favor a “buy and hold” or similar passive investment strategy, the article notes that investors need to stay in contact with financial institutions (and open their mail) to prevent funds from being deemed “abandoned.”

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Oklahoma Supreme Court Affirms Dismissal of Suit Challenging State’s Unclaimed Property Program as “Ponzi Scheme”

Recently, the Supreme Court of Oklahoma issued a decision in Dani v. Miller, an attempted class action suit challenging Oklahoma’s Unclaimed Property Program as a “Ponzi Scheme.”  In that case, an Oklahoma resident filed a number of constitutional and common-law challenges to the Oklahoma Unclaimed Property Act and its administration.  In particular, the plaintiff was challenging Oklahoma’s practice (shared by nearly all the states) of only holding a portion of unclaimed property to pay out claims, while using the rest for state revenue.  As the Oklahoma Supreme Court explained:

“[T]he UUPA contemplates and accounts for the fact that not all owners of abandoned property will seek to recover it.  The UUPA therefore creates a system where a reserve is maintained in the Unclaimed Property Fund to pay approved claims and the remainder is deposited to the General Revenue Fund for use by the state.”

The plaintiffs contended that Oklahoma’s unclaimed property program was a “Ponzi scheme”* because “the reserve is not sufficient to pay all potential (including not-yet-established) claims and new abandoned property is to be used to pay any established claims exceeding the reserve.” The Court rejected this argument on two grounds.  First, the Court held that there was nothing fraudulent or deceptive about Oklahoma’s program as its procedures (including the deposit of funds into the states general revenue) were all disclosed (and in fact, mandated by) state law.  Second, the court explained that “[t]he State is not deceiving new investors to pay valid claims, but rather is paying those claims with abandoned property it would be taking in anyway, per the terms of the UPPA.  [The Act thus] operates in such a manner that even if they must wait, owners of abandoned property with valid claims will always be able to eventually recover their previously presumed-abandoned property.”  (emphasis added).

While the Court’s reasoning seems  sound insofar as it recounts how state unclaimed property programs actually work, notably implicit in the court’s decision — and, in fact, in the operation of the states’ programs themselves — is the idea that the influx of unclaimed property funds will continue forever.  While there may be nothing deceptive or fraudulent in how these programs work, the fact remains that, at least in the first instance, a claimant’s ability to recover his or her property is not a function of the state’s ability to serve as a custodian or caretaker of unclaimed property, but rather its ability to keep that property coming in.

*  A “Ponzi scheme” named after Charles Ponzi, is a fraudulent scheme wherein victims are generally promised a guaranteed return in exchange for an investment, and those investments are used by the fraudster to pay out returns to earlier investors.  Eventually, when the flow of new investments slows or stops, there is no money left to pay returns (or the initial investment) to any investors, and the fraudster has generally taken steps to disappear.  One of the most recent, and well-known, Ponzi schemes was the Madoff Investment Scandal.

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Friday Lost + Found: Airport Accumulations, Bayou Bucks, and Reporting Refresher

Loose Change Adds Up — The UK’s Daily Mail reports that the Transportation Security Administration collected over $750,000 last year at U.S. airports (and over $4.3 million over the last eight years) in loose change and the like left at security checkpoints.

States, They’re Just Like Us — WBRZ in Baton Rouge, Louisiana (home of Mike the Tiger) has an article about the unclaimed property held by the State of Louisiana on behalf of various agencies of . . . the State of Louisiana.  According to the story, some of the $700 million held by the State is owed to various government agencies, many of which are operating under limited budgets.

Upcoming UPPO Webinar on Reporting — On May 18, the Unclaimed Property Professionals Organization is hosting a webinar on the details of unclaimed property reporting.  If you need a refresher in advance of the fall reporting season, signup information is available at the UPPO website.

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Friday Lost + Found: More Fraud Warnings, Insurance Questions . . . is DMF the Answer?

Massachusetts Warns of Fraudulent LettersMassachusetts Treasurer Deborah Goldberg issued a warning that her office has been receiving reports of fraudulent unclaimed property letters seeming to come from the Office of the Commonwealth Treasurer.  As a reminder, states do not charge owners of unclaimed property for searching for and obtaining property from the state.

Life Insurance on Sixty Minutes — CBS’s news program 60 Minutes recently ran a story about life insurers payment practices that is based, in large part, on the mutli-state audits of insurers’ unclaimed property practices.  As a result of those investigations, states have become increasingly more insistent that insurers consult the Social Security “Death Master File” in order to determine when life insurance benefits have become payable.

But Is DMF The Answer? — Though more and more states are requiring DMF searches as part of unclaimed property law or insurance regulatory compliance, some in the industry think that the approach is flawed.  In a recent editorial on InsuranceNewsNet, Michael Babikian voices some of those concerns and offers some alternatives.

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Update on West Virginia Life Insurance Legislation

We recently published a brief post concerning West Virginia legislation relating to the obligation (or not) of life insurers to review the Social Security Death Master File (DMF) to determine when a life insurance policy becomes payable.  After the West Virginia Supreme Court held that life insurers had a duty to periodically ascertain when life insurance policies become payable, a few West Virginia legislators introduced a bill that would largely undo that decision – by specifically providing that “the obligation to pay does not arise until after a claim is made.”

Instead of that legislation, however, the West Virginia legislature recently passed a bill that would make DMF searches a statutory requirement for insurers.  The bill has been sent to the Governor for action.