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.

States Lose Round in Fight With Federal Government Over Unclaimed Savings Bonds

by Michael Rato

Federal Appeals Court Rules In Laturner v. United States That U.S. Treasury Not Required to Turn Over Unknown Matured Savings Bonds

Back in April, we noted an uptick in state legislation providing states with the ability to take “title” (i.e., ownership) – not just custody – of unclaimed federal savings bonds. This was and is a marked departure from most state unclaimed property law regimes which are ostensibly designed to hold property in trust for the rightful owner so that the owner may claim it in perpetuity. Under these new laws, while the state “may” returned unclaimed escheated bonds to the original owner (provided the owner jumps through the necessary procedural and evidentiary hoops) the state is under no obligation to do so.

As one reader (Hey, we have readers!!) pointed out, this is arguably “necessary” in light of federal regulations providing that the U.S. Treasury will only turn over unclaimed savings bonds to the states if they obtain title to the bonds. See 31 CFR 315.88. But while it may be the case that the state has to take title in order to take custody of the bonds, that doesn’t answer the question of why the state has to take custody of the bonds at all. After all, for property held by the federal government, the traditional rationales of the unclaimed property laws — the need to keep property safe for the owner and preventing private holders from getting a “windfall,” — do not apply. There is no reason to believe that property being held by the federal government is in any way less likely to be be claimed by the owner. To the contrary, the owner of a savings bond is very likely to look first to the federal government to make good on the bond, and the bonds never expire. Likewise, there is no private company getting a windfall on outstanding matured federal savings bonds – the property continues to be held by the federal government.

Instead, it seems clear that this is just a revenue-raising exercise for the states. And while raising state revenue may very well be a legitimate legislative purpose, it belies the oft-asserted notion that state unclaimed property laws are solely about consumer protection. Federal savings bonds do not expire – the owner always retains the right to reclaim the matured bond principal and interest from the federal government, provided that he or she complies with the regulations of the bond program. Accordingly, the transfer of bonds from the federal government to the states does not appear to serve any interest of the holder.

Generally, the states may obtain the principal and interest due on unclaimed savings bonds only if those bonds are in the state’s possession (for example, if bonds are included in safe deposit items escheated to the state). A recent case decided by the United States Court of Appeals for the Federal Circuit, dealt with efforts by Kansas and Arkansas to compel the federal government to turn over all matured and dormant bonds held by the federal government for Kansas or Arkansas residents, “estimated to be worth hundreds of millions of dollars.” After the federal government refused — on the grounds that the states were not in possession of the bonds — the states sued the federal government in the U.S. Court of Federal Claims. That court intially ruled that the states were entitled to escheat the unclaimed bonds and the federal government appealed.

On appeal, the United States Court of Appeals for the Federal Circuit reversed the lower court’s order, holding that the federal government had no obligation to turn over the proceeds of bonds that are (presumably) still in the possession of the rightful owner. The Court of Appeals did so on two independent grounds: “federal preemption” (the concept that validly enacted federal laws take precedence over conflicting state laws) and the derivative rights doctrine (the concept that the state’s rights with regard to unclaimed property are “derivative” of the owner’s rights – no more, and no less).

With regard to federal preemption, the Court gave an overview of the doctrine, and noted that “Federal law of course governs the interpretation of the nature and rights and obligations created” by U.S. government savings bonds. In particular, the Court noted, federal law confers upon those bond holders the right to keep their bonds after maturity. See 31 U.S.C. 3105(b)(2)(A). As such, the Court held that any state law inconsistent with the federal right to maintain ownership of bonds after maturity (such as the Arkansas and Kansas laws whereby the state takes away that ownership right after maturity) were preempted by federal law and thus invalid.

The Federal Circuit also rejected the states’ claim for the bonds on the separate grounds of the derivative rights doctrine. As noted by the Court, it was undisputed that “even if Federal law recognized them [i.e., the states] as the rightful bond owners, they could have no greater rights than the original bond owners.” Under federal law, in order to redeem a bond, the owner must have either (a) possession of the bond; or (b) the bond serial number. Accordingly, because the states had neither possession of the bonds or the serial numbers, the states could not claim the unredeemed bonds.

Given the relatively few reported decisions relating to unclaimed property, the Federal Circuit’s decision in Laturner is an important precedent for several reasons. First, the Court’s reasoning with regard to the derivative rights doctrine is an important reaffirmation that the states’ rights with regard to unclaimed property are no greater than the rights of the original owner – a concept which states have increasingly attacked in litigation, regulations, and unclaimed property audits. Second, the Federal Circuit’s application of federal preemption to the unclaimed property laws has potentially many other parallels in federal law.

The Laturner decision, however, is probably not the end of the story. As the opinion notes, the states’ next step is likely to file a “Freedom of Information Act” request with the U.S. Treasury, demanding disclosure of the serial numbers of the unclaimed bonds. Assuming the states get that information, they likely will try to redeem the bonds themselves without regard to whether the original bonds are still in the owners’ possession.

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Colorado State Auditor Issues Report Critical of State Unclaimed Property Division

by Michael Rato

State Watchdog Finds Claim Processing and Other Deficiencies

The Colorado Office of the State Auditor recently issued a Report reviewing the performance of the Colorado State Department of Treasury, Division of Unclaimed Property. For those who don’t want to read the full report, a summary of the key findings can be found here. The Auditor expresses the concern that the Division “is not fully meeting its core responsibility under the Unclaimed Property Act to reunite citizens with lost or forgotten property.” As support for that conclusion, the Auditor notes the following:

  • The Division has not mailed notification letters to the owners of unclaimed property since March 2005 (representing over 1.5 million notifications that have not been issued);
  • The Court failed to process claims within 90 days (as required by statute) in nearly half of cases, with at least one claim taking more than a year and a half to process;
  • More than half of the claims reviewed by the State Auditor, were “identified as duplicate, incomplete, inaccurate, or questionable that did not represent valid claims.”

The Auditor’s recommendations to the Division are also notable in that most of them amount to suggestions that the Division simply comply with the applicable laws already in force relating to owner notice, claims processing, and claims payment. In light of the Report, owners of unclaimed property have some reason to be hopeful that the Division’s claim processing performance will improve.

It’s the Big White Building With the Ionic Columns and the Statue of Alexander Hamilton . . .

by Michael Rato

An Exercise in Finding the Owners of Unclaimed Property

One of the theoretical policy justifications for state unclaimed property laws is that the states will be conscientious about finding missing owners and reuniting them with their property. Indeed, according to the National Association of Unclaimed Property Administrators (an affiliate of the National Association of State Treasurers) the “purpose of unclaimed property laws is to protect consumers by ensuring money owed to them is returned to them, rather than remaining permanently with financial institutions, business associations, governments, and other entities.”

Given that premise, the identities of “lost” owners with property being held by the state never cease to amaze. Property is not just held for those truly “lost,” or famously reclusive authors, or politicians too busy to open mail, or those off in a galaxy far, far away. Some owners of unclaimed property are . . . ahem, presumably easier to find. As we pause the week to celebrate the 243rd birthday of the United States of America, note that California, New York, Illinois, Texas, Washington, D.C., and no doubt others are all holding “abandoned” or “unclaimed” property for the United States of America, United States Government and/or United States Treasury (and probably hundreds of other federal agencies).

While Washington D.C. might get a pass here because of the whole “Taxation Without Representation” thing, for the other jurisdictions searching in vain for the United States Treasury: try the big white building in Washington, D.C. with the ionic columns and the statues of Alexander Hamilton and Albert Gallatin . . . or, you know, the back of the $10 bill

Happy Fourth Everyone!

Nevada Passes 2016 Uniform Act Amendments

by Michael Rato

On June 7, 2019, Nevada Governor Steve Sisolak approved Senate Bill 44 which incorporates certain provisions of the 2016 Uniform Unclaimed Property Act into the Nevada Unclaimed Property Act. In particular, the new legislation adds provisions relating specifically to payroll cards and virtual currency and exempts game-related digital content and loyalty cards. It also changes the dormancy standards for life insurance policies and IRA accounts to more closely mirror the provisions of the Uniform Act and allows for the use of electronic communications.

With regard to owner claims, the new law expressly permits the state to deduct from such claims and amounts owed by the owner for outstanding child support, civil or criminal penalties, or state and local taxes. In an effort to combat fraudulent claims made for unclaimed property, the new legislation also imposes criminal penalties for the filing of false claims.

The new law goes into effect on July 1.

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