Finder. Keeper.

by Michael Rato

Some Tips on Unclaimed Property Asset Recovery

An often overlooked aspect of unclaimed property law is the fact that most unclaimed property holders are also unclaimed property owners.  The same data glitches, human errors, and industry practices that result in a company holding unclaimed property can also lead to that company’s unclaimed property being held by the state.  If you are looking to get that money back, here are some considerations for undertaking a corporate unclaimed property asset recovery program.

1.  You Have to Look

The first step in recovering unclaimed property is to look for it.  While some states make meaningful outreach efforts to get unclaimed property back into the hands of owners, not all do.  Companies should not assume that unclaimed property will be brought to their attention by the state.  Instead, companies should affirmatively look for unclaimed property in each of the states where it has a payment address or significant footprint.  Searches can usually be conducted for free through the website of the applicable state’s unclaimed property program.  A link to the unclaimed property programs for all 50 states is available from the National Association of Unclaimed Property Administrators, an affiliate of the National Association of State Treasurers. 

2.  Don’t Forget About Your Past

Some unclaimed property is caused by merger, acquisition, and reorganization activity.  The closing or moving of corporate offices, change of company names, or personnel restructuring efforts can all lead to unclaimed property.  Checks can be sent to closed offices.  Transactions can fail to reconcile because they are in the “wrong” name.  Payments can be returned because a new employee does not know what the payment is for or how to apply it.  Accordingly, when searching for unclaimed property, don’t just search under the company’s current name at its current address.  Search for assets held under former names, for items belonging to corporate predecessors, and in states where the company used to have offices.

Also, keep in mind that the information on the state’s search website is the information provided by the holder during the reporting and delivery process.  So, when performing searches, think about what your customers call your company.  For example, if you work for the Amalgamated Business Company of Delaware, but your customers all call you “ABCDE,” make sure you check that name.  Similarly, if you have a prominent, well-recognized product or brand name that is not necessarily your corporate name but is often used by customers, be sure to check that as well.

3.  It’s Not As Hard As You Think

Once unclaimed property has been located, the next step is to file a claim.  This process is usually straightforward if the funds are held in the current corporate name and address.  Many states allow claims to be filed via the state website, or through an online form supported by additional documentation.  These forms are generally short, self-explanatory, and can generally be done in minutes.  If you do decide to engage a finder firm, make sure that there is a written agreement specifying precisely the scope of the finder’s authorization, whether the company retains the right to file its own claims, and the length of time the finder’s authorization is valid. 

4.  Get Your Docs In A Row

In addition to the claim form, the owner will generally need to provide additional documentation in support of the claim to establish the owner’s identity, the address of record, the relationship with the holder, or that the corporate employee filing the claim has authority to do so.  For some types of property, additional information may be required.  For example, if the property is dormant account assets escheated by a bank, the state will generally ask for a copy of an account statement or other correspondence from the bank that has the account number. 

Things become more difficult where the owner’s name or address does not match the information reported to the state.  This is a common occurrence; indeed, it may be the reason that the property never made it to the owner in the first place.  Keep records reflecting old corporate names and addresses – These can come in handy when attempting to claim property owned by a corporate predecessor or a payment associated with a former address.

While searching for and recovering unclaimed property may be looked at as yet another thing for busy professionals to track and address, it is one of the few compliance initiatives that can actually result in the company receiving, rather than paying, money.  A modest investment of resources can often pay for itself.

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Delaware v. Univar – State Court Enforces Unclaimed Property Subpoena

by Michael Rato

Case Headed Back to Federal Court for Consideration of Constitutional Challenges

The unclaimed property saga arising out of the State of Delaware’s unclaimed property audit of Univar, Inc. took another turn recently when the Delaware Court of Chancery issued a ruling enforcing a subpoena issued by the state. The case is now (probably) headed back to federal court for a consideration of Univar’s constitutional claims.

The story started nearly five years ago, in December 2015, when Univar received notice that it was to be the subject of an unclaimed property audit conducted by Kelmar Associates. After some procedural wrangling back and forth among the state, the holder, and Kelmar, an initial document request was issued in September 2016 seeking four categories of documents: (1) tax returns and related information; (2) apportionment schedules; (3) information relating to certain shared-service and disbursement activity; and (4) information concerning prior unclaimed property audits and voluntary disclosure proceedings.

In October 2018, after the holder failed to produce the requested information, Delaware issued an administrative subpoena seeking to compel production. (As those who follow unclaimed property closely may know, in 2017, Delaware enacted a revised unclaimed property law (the “New Law”) which expressly allowed the issuance of such subpoenas. See 12 Del. Code 1171(3)). In response to the subpoena, Univar filed an action in federal court in December 2018 challenging the audit on various constitutional grounds. Delaware, for its part, filed its own action in Delaware state court seeking to enforce the subpoena.

Thus, as of the beginning of 2019, there were two separate litigation tracks concerning the audit; one in federal court, one in state court. Those courts thereafter each issued decisions — primarily on procedural and non-merits matters — seeking to unwind the knot of litigation. In September 2019, the federal court considering the constitutional challenges to the audit held that Univar could proceed with its claims challenging the audit on due process and equal protection grounds, but that the majority of Univar’s claims were not “ripe” for adjudication unless and until the state court entered an order enforcing the subpoena. The federal court thus decided to stay the action until further proceedings took place in Delaware state court.

Those state court proceedings have now been completed. On October 29, the Delaware Court of Chancery issued a Memorandum Opinion enforcing the subpoena and directing Univar to comply. In doing so, the Chancery Court considered, and ultimately rejected, three separate challenges to the subpoena.

First, Univar argued that the Delaware Department of Finance did not have authority to issue the subpoena because the 2017 legislation explicitly authorizing the issuance of subpoenas was enacted after the commencement of the Univar audit. The Court rebuffed that contention, noting that the Delaware legislature appeared to contemplate that such subpoenas could be issued in audits that predated the 2017 law, and that the subpoena itself was issued after the law was enacted. More to the point, the Court concluded that it was “indisputable that the State had the power to issue administrative subpoenas before the New Law went into effect . . . .”

Next, the Court held that Univar’s concerns about confidentiality, though well founded, did not excuse its compliance with the subpoena (though the door was left open for similar challenges in the future). Here, Univar’s argument focused not on Delaware’s audit power, but rather who was exercising that power: a contingent fee auditing firm (Kelmar Associates) working on behalf of Delaware and several other states. While acknowledging that Delaware’s New Law contained statutory privacy protections (see e.g., 12 Del. Code Sec. 1189) Univar argued that these protections would not prevent Kelmar from sharing the information with other states that provided no such protection. In order to avoid this fight, and “[a]pparently recognizing the Court was inclined to impose confidentiality conditions whether the State agreed or not,” Delaware instructed Kelmar to have a separate audit team perform the Univar audit on behalf of Delaware, and to refrain from sharing information with others. The Court concluded that this procedure alleviated Univar’s concerns about confidentiality.

Finally, the Court analyzed Univar’s main substantive argument: that the information requested in the subpoena was “unreasonably broad or burdensome” under Delaware law. The Court began its analysis by setting forth the test used to determine whether the subpoena is enforceable, taken from the U.S. Supreme Court decision in United States v. Powell. Under the Powell test, an administrative agency’s subpoena will be enforced where:

(1) the investigation will be conducted pursuant to a legitimate purpose; (2) the inquiry may be relevant to the purpose; (3) the information is not already within the [agency’s] possession; and (4) the administrative steps have been followed.

Delaware v. Univar, C.A. No. 2018-0884-JRS (Oct. 29, 2020) (quoting United States v. Powell, 379 U.S. 48, 57-58 (1964)).

The Court then applied the Powell test the the specific information sought by the subpoena: tax returns, apportionment schedules, shared service information, and information relating to prior unclaimed property audits. The Court found that all of these requests passed the Powell test, giving particular deference to the state in light of the “early stage” of the audit.

Though the Court ultimately ordered that the subpoena could be enforced, it indicated that it would stay (i.e., delay enforcement of) the order until such time as Univar had its constitutional objections to the subpoena and the audit adjudicated by the federal court.

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Twas the Night Before Fall Reporting

by Michael Rato

Twas the night before Fall Reporting, and all through the firm,
Everyone in unclaimed property was starting to squirm.
Wire transfer instructions were given to disbursements with care,
In the hope that remittance confirmations soon would be there.

In state capitals, Treasurers smiled at the incoming proffers,
Knowing that millions would soon be in the states’ coffers.
Bob was in payables, and me with the CFO,
Was it all out?  Both of us wanted to know.

When down from the Controller there arose such a wailing,
I assumed there must be a late response to a due diligence mailing.
Away to accounting we ran down the hall,
Where Bob and I nearly tripped over the accumulated sprawl.

UP-1s, NAUPA codes, and Holder Reporting Guides,
Covered every flat surface with big stacks besides.
When, what led my stomach to churn and contort,
But hundreds of names that were left off the report.

When I asked how this many names could’ve been missed,
I was told they were still working off last quarter’s list.
Quickly, Bob and I each stifled a cry,
Certainly an exemption or two must here apply.

Airline miles? Lottery winnings? Stale B2B credits?
Perhaps just small balances with offsetting debits?
Alas, no, we would be late, and it might be gory,
With penalties and interest (both statutory).

There just wasn’t enough time to report all the names
Relationship codes, amounts less “lawful claims.”
We needed an answer, and the clock was still ticking,
Through each statute and reg, we just kept on clicking.

Then I noticed on the ledger I continued to assess,
All of the amounts listed were $50 or less.
My mood picked right up, and I started to sing:
We’ll just add it all up and report the whole thing!

Aggregate reporting — that was the way!
We’d still get this report out by the end of the day!
We quickly revised, and added, and listed,
Everyone in tax helped, even legal assisted.

When it was ready, we unleashed the whole thing,
Breathing a sigh of relief (at least ’til next spring).
And I said to Bob, as the remittance flew out of sight,
Happy fall reporting to all, and to all a good night!

Unclaimed Property on the Ballot in Louisiana

by Michael Rato

Constitutional Amendment Would Create Unclaimed Property Trust Fund to Pay Claims

You may not have heard, but this year is an election year. In addition to contests at the federal, state, and local level there is a constitutional amendment on the ballot in Louisiana relating specifically to unclaimed property. Louisiana Amendment 7 would create a permanent trust fund expressly earmarked to pay unclaimed property claims. The proposed amendment would require the State Treasurer to annually deposit, into a dedicated fund, net unclaimed property receipts (after deductions for certain expenses and statutory allocations) until such time all of the state’s potential unclaimed property liabilities are funded.

The specific language on the ballot is as follows:

Do you support an amendment to create the Louisiana Unclaimed Property Permanent Trust Fund to preserve the money that remains unclaimed by its owner or owners?

2020 Louisiana Act 38, Section 4.

This amendment results from the settlement of a lawsuit between Louisiana Governor John Bel Edwards and State Treasurer John Schroeder over the use of unclaimed property as general treasury funds. Historically, Louisiana (like most states) has used unclaimed property receipts in excess of claims to fund state expenditures. After a reserve for claims, unclaimed property revenue is transferred from the unclaimed property fund to the state’s general treasury.

In 2019, Treasurer Schroeder refused to make the transfer, arguing that the funds did not belong to the government, but rather to the owners of those funds. The Treasurer also claimed that transfers to the general fund rendered the state unclaimed property program to be temporarily unable to pay claims. (A shortfall that happened again this year). The Governor disagreed, arguing that the use of these funds was expressly authorized by the state legislature. A lawsuit followed, in which the court ruled in favor of the Governor. Shortly thereafter, the two sides reached a deal that provided Edwards with additional funds now in exchange for the creation of a trust to fund future claims.

If it passes, the amendment will go into effect on July 1, 2021.

Update November 4, 2020 — According to KLFY Baton Rouge, the measure passed with 65% of the vote.

Holders: Don’t Forget That You’re Owners Too

by Michael Rato

Unclaimed Property Holders Should Take Another Look at Potential Claims

Before getting to unclaimed property news, just a quick word to our readers (both of you!):  we hope that you and your families are safe and well during these turbulent times. 

The COVID-19 crisis is, first and foremost, a human tragedy.  But even if and when the virus is tamed, and the immediate economic crisis ends, there is expected to be a significant long-term economic disruption as well.  One place where that disruption will be particularly felt is with regard to cash flow and liquidity. For companies operating on a thin margin, every dollar in the door counts.

Accordingly, this is a good time for holders of unclaimed property to remember that they very well may be owners of unclaimed property too. Often, companies do not bother searching for or claiming unclaimed property reported to the states on their behalf, thinking that the process is too cumbersome or not worth the effort.  In these changing economic times, holders would be well advised to rethink that position and at least take a look at what is out there ready for claiming.

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Unclaimed Property Reporting Deadlines Extended due to COVID-19

by Michael Rato

Like other business operations, many holders have found that the COVID-19 crisis has caused a disruption to the process of reporting and remitting of unclaimed property, particularly in those states with a Spring reporting deadline.  While holders should check the relevant state unclaimed property administration website for specific information (and to request an extension if necessary), many states have proactively responded to this disruption by either unilaterally extending the unclaimed property reporting deadline or granting a prospective wavier of late-reporting interest and penalties for a defined period.  Some of the highlights are as follows:

Arkansas – The May 1 annual reporting deadline for life insurance companies had been extended to June 1, 2020.

Illinois – According to the website of the Illinois State Treasurer, interest and penalties will be waived for up to 60 days after the end of the Illinois declaration of emergency.

Maryland – The April 30 annual reporting deadline for life insurance companies has been extended to July 31, 2020.

Massachusetts – The May 1 annual reporting deadline for life insurance companies has been extended to July 1, 2020.

New Jersey – The annual reporting deadline for life insurance companies has been automatically extended to June 30, 2020.

North Carolina – The annual reporting deadline for life insurance companies has been automatically extended to June 1, 2020.

Pennsylvania – The April 15, 2020 reporting deadline remains in place, but the Department of Treasury’s website provides that the Department will waive all fines, penalties, and interest for property that is reported and remitted to the Department by June 15, 2020.

Note that the foregoing are only the automatic extensions provided by the states. Extensions can also be applied for, on a case by case basis, by contacting the relevant state unclaimed property administrator.

An Offer You Might Not Want to Refuse

by Michael Rato

Delaware Secretary of State Issues VDA “Invitation” Notices

The Delaware Secretary of State’s Office recently sent letters to over 100 companies identified as “likely” out of compliance with Delaware’s unclaimed property laws. The letters “invite” those companies to enroll in Delaware’s Voluntary Disclosure Agreement (VDA) program. Delaware’s VDA is program pursuant to which a company performs a thorough self-review of its unclaimed property reporting history and remits any overdue unclaimed property to the state. That self-review is, in turn, thoroughly reviewed by unclaimed property professionals on behalf of the Secretary of State’s office who may identify additional property, if any, to be reported and remitted. In exchange for performing this self-review, the VDA program provides companies with a waiver of all penalties and interest that the state might otherwise assess on late-reported unclaimed property. In addition, the company and the Secretary of State will generally agree in advance on a methodology for certain contested issues that come up during the review: How far back does the review go? What entities have to be reviewed? What is the process for dealing with periods for which the company does not have researchable records?

The waiver of penalties and interest is the VDA’s “carrot;” now for the “stick”: companies who do not accept the invitation to enroll in the VDA program may be selected for audit by the State. That audit is not a company-controlled, state-checked review, but is conducted by a private auditing firm retained by the state. Those audits tend to be much (much, much) lengthier than a VDA and carry the threat of interest and penalties. In addition, the auditors generally employ more aggressive and controversial audit methodologies, seeking to shift the burden upon the company to prove that items are not unclaimed property, rather than the auditors demonstrating that items are unclaimed property. Indeed, there have been several lawsuits filed in just the past few years challenging the practices used by Delaware’s selected auditing firms. See Univar v. Geisenberger, Case No. 18-cv-01909 (U.S. District Court, D. Del.); AT&T Capital Services v. Geisenberger, Case No. 19-cv-2238 (U.S. District Court, D. Del.); Eaton Corp. v. Geisenberger, Case No. 19-cv-2269 (U.S. District Court, D. Del).

Given the potential audit risk, companies that are incorporated in Delaware should be on the lookout for these notices.  Unfortunately, the letters often do not go to the individual responsible for reporting and remitting unclaimed property at the organization, but rather are generally addressed to a senior executive such as the Chief Financial Officer.  Time to accept the invitation is limited; companies receiving the notice have 60 days from the date the request was made to enroll in the VDA program.  After that, an audit notice may issue.

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Maine Amends Unclaimed Property Law to Exempt “Gift Obligations” Beginning in 2022

by Michael Rato

Amounts deemed abandoned to reduce from 60% to zero over four year period.

On January 30, the Governor of Maine signed Public Law 553, “An Act Regarding the Presumption of Abandonment of Gift Obligations.” Over a four year period, the new law will reduce — from sixty percent to zero — the dollar percentage of “gift obligations” that a holder must report and remit to Maine as unclaimed property.

Pursuant to the Maine Unclaimed Property Act, “gift obligations” (which include most gift certificates and gift cards that are not redeemable in cash) are deemed unclaimed property two years after December 31st of the year in which the obligation is sold or the most recent transaction occurs. Currently, holders of such items are required to report and remit 60% of the outstanding balance of these items as unclaimed property, keeping the remainder as income. Pursuant to the new law, the percentage to be reported will remain 60% for those items with last activity in 2019, but will drop to 40% for those obligations with a last activity in 2020, to 20% for those obligations with a last activity in 2021, and finally to zero for those items sold or last active in 2022 or later.

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Broker-Dealers: IRA Amendments Require Changes to Escheat Processes

by Michael Rato

Financial institutions holding Individual Retirement Accounts (IRAs) should review their policies in light of the federal Setting Every Community Up for Retirement Enhancement (SECURE) Act, Public Law 116-94.   This legislation, enacted on December 20, 2019, as part of a group of spending bills, is intended to assist Americans in saving for retirement by expanding and enhancing access to retirement plans.  As it pertains to unclaimed property, the new law is significant in that it changes the so-called “Mandatory Distribution Date” – the age by which an account owner must begin taking distributions from an IRA account.  In most states, one of the triggering events for IRA escheatment is “the date . . . specified in the income tax laws of the United States by which distribution of the property must begin in order to avoid a tax penalty.”  Previously, such distributions were required by April of the year in which the account owner reached age 70.5.  Pursuant to the SECURE Act, that threshold has been extended to age 72.  IRA holders should update their procedures accordingly. 

The new rule applies to distributions required to be made after December 31, 2019.

In addition, on January 1, 2020 IRS Revenue Ruling 2018-17 went into effect, generally requiring holders that are reporting and remitting IRA-related property to state unclaimed property funds to report and withhold federal income tax on such assets.  Accordingly, the National Association of Unclaimed Property Administrators has issued guidance detailing precisely how such assets should be reported, and how the impact of any withholding should be reflected, when unclaimed property reports are submitted to the state. 

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2020 Vision

by Michael Rato

A Look at the Year Ahead in Unclaimed Property

Happy New Year! Last year saw a variety of developments in the world of unclaimed property. Today, we take a look ahead at five topics that might be at the forefront of unclaimed property news in 2020.

Audit Disputes & Litigation — 2019 saw a number of challenges to the State of Delaware’s audit practices; most notably, the battle between Univar, Inc. and Delaware in parallel federal and state litigations arising out of a proposed unclaimed property audit. While there were a number of procedural and narrowing decisions in that case, the real substance remains to be litigated. That battle will continue, and it appears that new ones will get underway shortly. In December, AT&T filed a lawsuit against Delaware, challenging the state’s audit practices as a violation of the company’s constitutional rights. Similar challenges were recently filed by Fruit of the Loom and Eton Corporation, both of which are challenging the state’s estimation and extrapolation practices. Substantive decisions in any of these cases will be significant for those undergoing Delaware unclaimed property audits.

Savings Bond Tug of War — Back in October, we summarized the decision of the U.S. Court of Appeals for the Federal Circuit in Laturner v. United States, in which the Court held that the federal government had no obligation to turn over the proceeds of matured, but unredeemed U.S. Savings Bonds to the states as unclaimed property. In particular, the Court ruled that state unclaimed property laws were preempted by federal laws allowing bondholders to keep the bonds after maturity, and that states (like owners) could not redeem savings bonds without presenting either the bond itself, or identifying information relating to the bond. In response, Congressman Ron Estes (who, as a former State Treasurer, knows a thing or two about unclaimed property) has proposed the “Unclaimed Savings Bond Act of 2019” which would amend federal law to allow states to take custody of unredeemed savings bonds and substantially undo the Federal Circuit’s decision in LaTurner. Unsurprisingly, the legislation is strongly supported by the National Association of State Treasurers.

More Adoptions of the 2016 Uniform Act — In 2019, Colorado and Maine joined the ranks of states adopting a variant of the 2016 Uniform Unclaimed Property Act. A number of states have similar legislation in the works which may become law during the upcoming year.

IRA Activity — Securities industry holders will also need to take a look at their programming and practices relating to assets held in Individual Retirement Accounts. In most states, the triggering event for IRA escheatment is “the date . . . specified in the income tax laws of the United States by which distribution of the property must begin in order to avoid a tax penalty.” Previously this was age 70.5, but Public Law 116-94, which was signed into law on December 20, 2019, changes the so-called “Mandatory Distribution Date” (MDD) to age 72. The new rule applies to distributions required to be made after December 31, 2019. Holders will have to update their procedures accordingly.

Oh Canada? — 2020 may also see increased unclaimed property activity outside of the United States. The Canadian provinces of Alberta, Quebec, and British Columbia all have unclaimed property regulations of varying sorts that have been in place for some time. In 2019, New Brunswick proposed legislation that might make it the fourth. The New Brunswick Unclaimed Property Act is currently pending before the province’s Standing Committee on Economic Policy. Similarly, the Manitoba Law Reform Commission has issued a report containing recommendations for an unclaimed property regulatory structure similar to those in other provinces. We will see if any of this proposed legislation develops. Of course, the main event in potential Canadian escheat laws is whether or when Ontario will enact such a law. Perhaps this is the year.