Category: pending legislation

Delaware Unclaimed Property Legislation on the Fast Track

The unclaimed property community is abuzz regarding new legislation in Delaware that is being touted as a fix for the numerous deficiencies and questionable practices that a federal court vigorously criticized last summer.  The new legislation — Senate Bill 13 — is intended to fix the problems identified by U.S. District Court Judge Gregory M. Sleet in Temple Inland v. Cook, as well as to adopt some of the new proposals set forth in the Revised 2016 Uniform Unclaimed Property Act.

Some of the highlights of the proposed legislation include:

  • a uniform due diligence requirement;
  • more clarity on what information constitutes a last-known address;
  • notice to the owner by the State Escheator for certain types of property;
  • clearer standards for determining when a debt has been discharged;
  • a 10 year record retention provision;

While these are all welcomed potential developments, what really has the unclaimed property community intrigued are the provisions relating to audits.  In particular, a 10 year period of limitation on the state’s audit rights (except for cases of fraudulent or willful misrepresentation), and a provision limiting the state’s use of estimation to those periods where statutorily required records are not kept.  Even more notable is a potential provision impacting audits that are already underway.

For any audit commenced on or before July 22, 2015 (except for certain securities examinations where estimations are not being used) the holder under audit may exercise the option of converting the audit into a review under the Secretary of State’s Voluntary Disclosure Agreement (VDA) program, and limit the period under audit to 10 report years from the date of the original audit notice.

The legislation, introduced on January 12, has already passed the Senate and been approved by the House Administration Committee and is currently on the “Ready List” (meaning that it is ready for debate by the full House).

 

Florida Senate Bill 970 — Will Florida Expand the Use of Estimation?

One of the most controversial issues surrounding unclaimed property audits is estimation — the use by auditors of statistical sampling and extrapolation to calculate a holder’s historical unclaimed property liability in years that there are no researchable records available. Holders and states dispute, among other things, when such estimation is appropriate, how it should be performed, and whether estimation can be used at all when not specifically authorized by statute. Estimation has been a commonly contested issue arising in litigation between holders and states, and is one of the issues hotly contested in connection with the proposed revision of the Uniform Unclaimed Property Act.

While states, auditors, holders, and holder advocates dispute a number of issues with regard to estimation, until now they all agreed on at least one thing: that unclaimed property liabilities for “estimated” years (where actual records were not reviewed) were all payable to the holder’s state of incorporation. As you may recall from our post about unclaimed property jurisdictional rules, unclaimed property generally gets turned over to the state where the owner’s last-known address is located. Where the holder has no owner-address information, unclaimed property gets reported to the holder’s state of incorporation. Using that same logic, estimated liabilities (which, being a simple calculated liability are by definition not associated with owner names) have historically been escheatable only to the holder’s state of incorporation.

Recently introduced legislation in Florida seeks to change all that. Florida House Bill 783 / Senate Bill 970 proposes to amend the audit provisions of the Florida Unclaimed Property Act to provide:

If the records of the holder that are available for the periods subject to this chapter are insufficient to permit the preparation of a report of the unclaimed property due and owing by a holder, or if the holder fails to provide records after being requested to do so, the amount due to the department may be reasonably estimated, regardless of whether the holder is incorporated, formed, or organized in this state.

In other words, the proposed legislation not only expressly authorizes Florida’s auditors to estimate the liabilities of holders incorporated in states other than Florida, but it also provides the auditors with the authority to estimate “the amount due to the department” (i.e., Florida). That runs contrary to most auditors’ current practices, and is likely to cause significant disputes among the states, as most states clearly instruct that all estimated property gets reported and delivered to the holder’s state of incorporation. While holders may be concerned by this development, it is really the private auditing firms that run the risk of being forced to try to reconcile multiple state demands for the same property.

The legislation is currently in committee in both the Florida House and Senate.

Missouri Considers “Holder Friendly” Additions to Unclaimed Property Laws

Last week, a unclaimed property bill was introduced in the Missouri House of Representatives that would make significant, and holder friendly, changes to the Missouri Unclaimed Property Act. According to the El Dorado Springs Sun, which recently posted an article about the proposed legislation, the Missouri Chamber of Commerce & Industry is backing the bill, claiming that it “would take Missouri from the bottom four states in the rankings to one of the top 10 states for fair treatment of business unclaimed property.”

The proposed bill addresses three issues frequently requested on holder wish-lists for unclaimed property administration.  In particular, the proposed legislation would provide the following features:

  • Business-to-Business Exemption — Bill 1075 would create a business-to-business exemption for items between business associations that have an ongoing customer relationship.  Specifically, the proposed exemption provides that items “issued to a business entity or association as part of a commercial transaction in the ordinary course of a holder’s business shall not be presumed abandoned if the holder and such business entity or association have an ongoing business relationship.”
  • Three Year Statute of Limitations — One of the most frequent holder complaints about state unclaimed property laws is the fact that the audit period can go back many years, if not decades.  The proposed Missouri legislation, by contrast, would limit the enforcement statute of limitations, in most cases, to three years from the date of filing the report.
  • Appeals Process — Finally, the bill would create an appeals process to allow holders to challenge adverse determinations made by the Administrator.

The bill is still in the very early stages of consideration.  We will continue to follow its progress as updates are warranted.

Well, That’s Different — Illinois Considers Lengthening Dormancy Periods

In recent years, there have been a number of instances where states have proposed (and sometimes ultimately enacted) laws to change the “dormancy period” for various types of property.  For those still new to unclaimed property law, the dormancy period is the statutorily defined period of time before a “holder” (the entity in possession of the property) may hold it before it must be reported and delivered to the state.  For example, if a state prescribes a three year dormancy period for bank accounts, that generally means that if the account owner engages in no activity in the bank account (e.g., deposits, withdrawals) for three years, the bank must report and deliver the property to the state.

 Because shortening the dormancy period has the effect of allowing the state to take custody of unclaimed property sooner, states have frequently resorted to shortening the dormancy periods for unclaimed property to generate more revenue.  For example, Michigan shortened the dormancy period for nearly all property types from 5 years to 3 years.  According to the Michigan House Fiscal Agency this change was projected to result in increased revenue to the state in excess of $200 million.

 Against this backdrop, it is little surprise to see that there is a bill pending in the Illinois General Assembly that, if enacted, would change the dormancy period for most property types.  But, there’s a twist – House Bill 5823 would actually lengthen the dormancy period for most property types under Illinois law, from 5 years to 8 years.  There is no accompanying legislative report or recommendation (as yet) explaining the rationale for the proposal, but the longer dormancy period would conceivably cut down on the amount of non-unclaimed property that gets swept up into state coffers.

Aggregate Reporting Under the Microscope in California

Under most state unclaimed property laws, there exists a mechanism called “aggregate reporting” whereby the holder of the funds is permitted (or in some states, required) to report and remit items under a specific dollar amount (usually $50) in one lump sum, without providing owner name and address information.  As we’ve discussed previously in this space, while aggregate reporting reduces administrative burden on the holder and on the state, that process is arguably inconsistent with the primary purpose of the unclaimed property laws — to try and reunite owners with their missing funds.  Obviously, to the extent that the state does not have identification information for the owner of the funds, the state cannot search for that owner or take any action to return the funds.

A recent situation in California demonstrates this problem.  According to a report by CBS 13 Sacramento, a fifteen year old California resident learned that his $30 savings account was turned over to the state by his bank because of a lack of activity.  When he and his family went to search for the funds, however, they state was unable to locate the account.  They eventually contacted CBS 13 consumer investigation reporter Kurtis Ming, who learned that since 2007 California brought in more than $68 million in funds without owner name and address.  Ultimately, the bank – not the state – gave the money back to its customer, but the story isn’t over yet.

California Assemblymember Bonnie Lowenthal has authored a bill to close this unclaimed property “loophole” and would require holders to report owner-identification information for all amounts, regardless of size.  Assembly Bill 212 would remove the provisions of California unclaimed property law that permit balances of less than $50 to be reported in the aggregate, and would also require holders to send notice to all owners of unclaimed property — regardless of the balance.  The bill is currently before the Assembly Judiciary Committee.
 

Mid-Atlantic Minute: Updates from New York, New Jersey & Delaware

There have been a variety of unclaimed property updates up and down the New Jersey Turnpike in the past week, from New York to Delaware.  From North to South:

New York Passes “Finder” Regulation:  Recently, we mentioned that Ohio sent a cease and desist order to an unclaimed property “finder” firm that was allegedly charging people for unclaimed property claim forms (that are available free from the Ohio Department of Commerce website).  As we mentioned, there is no fee to claim property from the state, but most individuals (and even some businesses) that are contacted by property “finder” firms are unaware of that fact.  New York, for its part, is trying to make sure that consumers are educated before entering into agreements with finder firms.  New York Senate Bill 7690 would require all contracts between consumers and finder firms to include contact information for the State Comptroller’s office, as well as the following language in at least 12 point font:

ABANDONED FUNDS HELD BY THE STATE CAN BE OBTAINED DIRECTLY FROM THE OFFICE OF THE STATE COMPTROLLER BY THE OWNER OF SUCH FUNDS WITHOUT PAYING A FEE.  THESE FUNDS ARE HELD INDEFINITELY BY THE OFFICE OF THE STATE COMPTROLLER. 

The bill also reiterates that the maximum amount that can be charged by a finder firm is 15% of the value of the property.  The bill passed the Senate on 6/19 and is now pending in the State Assembly.

More Thoughts on the New Jersey Gift Card Law:  Last week, Governor Christie signed Senate Bill 1928 into law, which revised New Jersey’s 2010 gift card legislation.  Briefly, the bill extended the dormancy period for gift cards from 2 years to 5 years, and delayed implementation of a requirement that retailers obtain zip code information at the point of sale for 4 years.  While many gift card issuers applauded the amendments, not everyone is happy.  According to an article by Andrew Kitchenman in NJBiz the New Jersey Retail Merchants Association (among, presumably, several others) is not happy with the amendments (or, more specifically, the amendments that were made to the amendments right before the bill was put up for a vote).  As we covered here previously (sadly, at great length) the original amendments considered by the State Assembly would have undone the 2010 legislation altogether, removing gift cards from the scope of the unclaimed property act and eliminating the zip code collection requirement.  As Mr. Kitchenman’s article recounts, however, the repealing legislation got watered down to merely delaying legislation during negotiations on the State House floor. 

Opponents of the legislation are not giving up.  According to an article in NJBiz last week, the NJRMA is committed to having at least the zip code collection provisions repealed before they come into effect in 4 years.  Indeed, Assembly Bill 3189 has already been proposed in Trenton, which would (consistent with earlier proposals) completely remove gift cards from the scope of the NJ Unclaimed Property Act.

Delaware Considering Parallel VDA Process:  Delaware is one of many states that has a voluntary disclosure agreement (VDA) process for unclaimed property.  Under a VDA, a holder that is out of compliance with the unclaimed property law comes forward to the state, and agrees to perform an internal review of its own records (often on a relatively expedited basis) to turn over past due amounts.  In exchange for that self-identification and remediation, the state generally offers amnesty in the form of a waiver of interest and penalties that may otherwise be assessed on late reported amounts.  As many in the unclaimed property industry can attest, and as has been widely reported, VDA arrangements with the State of Delaware have historically been fraught with peril.  For starters, in order to perform a VDA with Delaware, the holder has to agree to review its own records for possible noncompliance back more than 20 years to 1991.  As if the prospect of reviewing a fifth of a century worth of records wasn’t enough, the state was unique in its willingness to nonetheless audit a holder who came forward under a VDA.

Perhaps to remedy its reputation, Delaware is considering a one-time amnesty program run outside of normal audit staff in the Division of Revenue.  Specifically, the Delaware legislature unanimously passed Senate Bill 258, which would create a short-term amnesty program under the authority of the Secretary of State.  Under the proposed legislation, which has been sent to the Governor for signature, holders who come forward by June 2013 (and pay outstanding amounts by June 2014) will only have to review records back to 1996.  Holders who come forward by June 2014 (and pay by June 2015) will only have to review records back to 1993.  If the bill passes, interested holders are advised to act fast:  by the express terms of the legislation, holders that receive audit notices from the State Escheator are not eligible to participate in this amnesty program.

Breaking News: New Jersey Legislature Passes Gift Card Bill, Legislation Headed to Governor (Updated)

We continue the seemingly never ending saga of New Jersey’s 2010 gift card legislation.  A brief recap:  In July, 2010 New Jersey passed Assembly Bill 3002, which, among other things, applied the state’s Unclaimed Property Act to gift cards (using a 2 year dormancy period), reduced the dormancy period for travelers’ checks from 15 years to 3 years, and reduced the dormancy period for money orders from 7 years to 3 years.  In addition, the legislation provided that all gift cards, even those for the purchase of merchandise only, would escheat to the state at full face value (the “Face Value Requirement”), required all gift card issuers to collect at least zip code information from the gift card purchasers (the “Zip Code Requirement”), and provided that in the absence of such zip code information, it would be presumed that all gift cards sold in New Jersey were sold to New Jersey residents (the “Location Presumption”).  Got all that?  Good.  Sadly, were not even close to being done with the summary.

Unhappy with several parts of the legislation, gift card issuers, money order transmitters, and travelers’ check sellers sued the state to challenge the new law.  Specifically, opponents of the legislation challenged New Jersey’s authority to shorten money order and travelers’ check dormancy periods, to apply the Unclaimed Property Act to gift cards, and to enforce the Face Value Requirement, the Zip Code Requirement, and the Location Presumption (more details here).  Initially, a federal court in New Jersey entered an injunction temporarily prohibiting the state from retroactively enforcing the Face Value Requirement or the Location Presumption.  The court declined, however, to prevent application of the 2 year dormancy period for gift cards or the shortened dormancy periods for money orders and travelers’ checks.  Still there?  Great.  Still not done.

Ultimately, the lower court’s decision was appealed to the U.S. Court of Appeals for the Third Circuit in Philadelphia.  That court ultimately upheld most of the lower court’s decision.  Specifically the Court of Appeals held that, as a preliminary matter, the gift card issuers challenging the law had shown that they are likely to succeed on their claim that the retroactive Face Value Requirement unconstitutionally interfered with the sellers’ contract rights and reasonable expectation of making a profit (because generally retailers do not sell $50 worth of merchandise for $50; there is usually a profit margin). The Court also ruled that the Location Presumption was invalid (and thus could not be enforced) because of the Supreme Court’s decision in Texas v. New Jersey.  Thus, cards sold in New Jersey without name and address (more on that later) are still escheatable to the holder’s state of incorporation.  At the same time, the Court ruled in favor of New Jersey on two fronts.  First, the Court ruled that the 2 year dormancy period itself was permissible.  Moreover, the Court held that the law’s requirement that sellers collect name and address information (or at least zip code info) from the purchaser is constitutional.  Hello?  Still getting the story up to speed.  We’re almost at the new stuff.  Really.

While all this legal wrangling was going on, the legislature was also at work trying to improve, amend (or completely undo) the previous legislation.  Industry also got into the act.  In particular, several gift card issuers pulled their products from the shelves in New Jersey, citing an inability or unwillingness to comply with the challenged legislation (including particularly the requirement to collect zip code information for every transaction).

This, in turn, also fomented a public relations battle between the gift card industry and the state.  Basically, the state argued that the gift card retailers were greedy corporate oligarchs bent on stealing innocent citizens’ funds with gift cards designed to suddenly dematerialze without warning.  For their part, the gift card retailers essentially argued that New Jersey wanted to outlaw gift cards entirely, through stiff criminal penalties, up to life imprisonment, for persons caught using, possessing, or even thinking about gift cards.  (Editor’s note:  This is, perhaps, not a completely accurate recitation of each sides’ respective position, though that seemed to be the gist of it).

ANYWAY:  Earlier this year, the New Jersey Assembly passed a bill that would effectively undo the 2010 legislation, by removing stored value cards from the scope of the New Jersey Unclaimed Property Act, and (re)extending the dormancy periods for money orders and travelers’ checks back to 7 and 15 years, respectively.  That bill then went to the State Senate for consideration.  Earlier today, the State Senate took action with respect to the 2010 gift card legislation.  Given the twists and turns thus far, what do you think that the State Senate did?

A.  Passed the Assembly Legislation As Is
B.  Passed the Assembly Legislation With Some Minor Changes
C.  Voted Down the Assembly Legislation; Gift Card Laws to Remain As Is
D.  None of the above

Congratulate yourself if you chose “D.”  According to the Newark Star-Ledger, the State Senate unanimously passed Senate Bill 1928.  This bill extends the dormancy period for stored value cards to 5 years (up from the current 2) and provides that retail gift cards are escheatable at 60% of the face value (thereby giving retailers the benefit of some profit margin).  The bill also requires issuers to redeem cards in cash if there is a balance of less than $5.  This bill will now (presumably) be considered by the State Assembly.

UPDATED 6/26/2012:  The Assembly passed the same bill later on the evening of June 25.  The bill now goes to the Governor for signature.

Other People’s Money: States Use Unclaimed Property and Accounting "Tricks" To Balance Budgets

The San Antonio Express had a relatively run of the mill article concerning the Lone Star State’s approval of next year’s budget.  Many states are struggling to balance (or cutback) their state budgets, and Texas is no exception.  Generally, to balance the budget, state have to either cut services (which is politically unpopular) and/or raise taxes and fees (which is even less popular).  Texas is taking other short-term approaches to address the immediate problems that may cause even more budget difficulty in the long term.

For example, one of the ways that Texas seeks to increase revenue is by “allowing unclaimed property to revert more quickly to the state.”  In other words, Texas intends to shorten unclaimed property dormancy periods to take custody of more property more quickly.  In particular, the proposed legislation would shorten the dormancy period for utility deposits from three years to 18 months; money orders from seven years to three years; and bank deposits, savings accounts, and matured certificates of deposits from five years to three years.  The legislation will supposedly raise some $277 million in revenue for FY 2013. 

We saw a similar strategy used earlier this year by New York and last year by Michigan.  Of course, this unclaimed property legislation does nothing to actually increase revenue.  It increases the amount of money brought in this year, but necessarily decreases the amounts brought in for the few years after that.  For example, assuming the legislation passes, four years’ worth of money orders will be escheatable at the next reporting deadline.  The year after that, of course, only one year’s worth will be due.  Thus, this strategy is a short term fix at best.  Moreover, states can only rely upon shortening the dormancy period a few times.  Soon, there will be nothing left to cut, unless states decide simply to require all property be paid directly to the state.

On the other hand, perhaps these states believe that the Mayans were right, and that they won’t have to worry about next year’s budget.

The Upcoming Conflict Between Unclaimed Property Law and Consumer Privacy

This week, the Louisiana state legislature will begin to consider House Bill 128, which is a consumer protection proposal that would prohibit merchants from requesting name, address, telephone, or zip code information from any consumer in connection with a cash, gift card or credit card payment.  The Louisiana legislation comes only a few months after the California Supreme Court ruled that a retailer’s request for zip code information in connection with a retail purchase violated state privacy laws. 

Why is this a big deal?  Because some other states, most notably New Jersey, are going in precisely the opposite direction, and trying to require merchants to obtain address (or at least zip code) information in connection with the sales of gift cards.  As more and more gift card issuers seek to capitalize on favorable unclaimed property laws in their states of incorporation, other states – like New Jersey – are pushing back by trying to require gift card sellers to obtain (and retain) name and address information.  While this is generally pitched as a consumer friendly requirement (in that it makes it somewhat more likely* that a gift card owner can reclaim his or her funds), consumer protection laws come in many varieties.  For every citizen who is glad to be able to reclaim a gift card from the state, there are just as many who are annoyed at having to provide personal information at the time of sale, or who are afraid that information isn’t safe when retained by the merchants.

Unless the states reach some sort of consensus on this issues, merchants will be faced with the very real possibility of a patchwork of laws throughout the various states with different (and often conflicting) requirements.

*  Requiring consumer address information makes the property more likely to be claimed from the state if it is ever escheated only if the retailer is required to get complete name and address information.  In New Jersey’s case – where a merchant is only required to obtain zip code information – there is no information for the state to honor reclaims.  Whether requiring zip code only is an accommodation to busy merchants, or a revenue generating measure for the state is an open question for another day.

Breaking News: New York Budget Approval Means Abandoned Property Law Changes Coming Soon

As reported in a variety of sources, including The Daily News, the Albany Times-Union, and  Bloomberg (the financial news site, not the Mayor) New York state legislators reached an agreement with Governor Cuomo regarding the $132.5 billion budget.  As we discussed here previously, the Governor’s initial budget proposal relied upon a variety of changes to the New York APL to increase revenue.

The final budget bill includes a variety of changes to New York’s Abandoned Property Law.  Among the changes are the following:

  • Dormancy period for bank deposits shortened to 3 years (from 5);
  • Dormancy period for property held by courts shortened to 3 years (from 5);
  • Dormancy period for escrows/security deposits shortened to 3 years (from 5).

When the N.Y. Office of Unclaimed Funds publishes guidance concerning the new laws, we will post a link.