July 26, 2018
I. UNCLAIMED PROPERTY: WHAT IS IT AND HOW DOES IT WORK?
A. What is Unclaimed Property?
1. Unclaimed property is cash and other intangibles owed to a person (i.e., owner) and held by another (i.e., holder). Examples of unclaimed property include unused deposits, returned dividend checks, uncashed payroll checks, uncashed interest checks, unpaid invoices, unused gift certificates, etc. Unclaimed property that is not ultimately returned to the owner is reportable to the state and must be turned over to the state after a designated abandonment period. All 50 states have unclaimed property laws.
2. For banks and financial institutions, unclaimed property includes, but is not limited to, checking and savings accounts, uncashed checks, safe deposit box items, money market accounts, etc. For business associations (i.e., most other businesses), unclaimed property includes all property and earnings to which the owner is entitled that has remained unclaimed.
3. Unclaimed property or escheat, a current “hot topic” among the states, is not a tax, so as discussed herein, traditional notions associated with state tax such as statutes of limitations, appeals process, nexus, etc., do not often apply. States see unclaimed property as a significant source of revenue without going to the well so states have dramatically increased their audit activity. State treasuries are holding nearly $33 billion of unclaimed property 117 million accounts. However, for the fiscal year 2012, the combined deficit for 42 states with budget shortfalls and the District of Columbia is estimated at approximately $103 billion so expect additional unclaimed property audits.
4. Most states estimate that only 15 to 35% of companies are in full compliance, and a trend is emerging that those companies that think they are in full compliance are only in full compliance on the securities side, but not the general ledger side. Experts see the most vulnerable companies as those incorporated in or doing substantial business in the most aggressive states, such as Delaware and California.
5. Holders need to be aware that credit balances may arise as a result or errors or failure to reconcile accounts. Too often, we find that companies are paying over amounts which have already been remitted to third parties but have been improperly reflected on the companies’ books.
B. Early History
1. Escheat and Bona Vacantia
At common law when some event obstructed the normal line of descent or succession of title to and/or custody of real property, “escheat” was the means by which land was returned to the tenant’s lord, or in the absence of such a lord, to the Crown. It arose as a consequence of the feudal tenure system of landholding. In England escheat was applicable only to real property held in fee.
b. Bona Vacantia
Bona Vacantia is an English common law doctrine, analogous to escheat, applied to personal property without an owner, not to property with an unknown owner. It provided that the personal property without an owner, such as property of a person who died without heirs, property held in trusts that had failed, and property left upon the dissolution of corporations, could be claimed by the Crown. Bona Vacantia enabled the Crown to claim certain personalty against all but the rightful owner. If there were no rightful owner, or if the rightful owner never claimed the property, the Crown retained title. The Crown’s claim was based on the absence of any other owner.
2. Abandoned Property
Abandoned Property is property to which the owner has voluntarily relinquished all right, title, claim and possession, with the intention of terminating his ownership, but without vesting it in any other person, and with the intention of not reclaiming possession or resuming its ownership, possession, or enjoyment. Abandoned property becomes subject to the appropriation of the finder. The finder’s rights to abandoned property are superior to those of the former owner, or the person upon whose premises the property was found.
3. Mislaid and Lost Property
a. Mislaid Property
Mislaid property is property which the owner voluntarily and intentionally put it in a place where it could be retrieved, but then forgot where he put it, and hence does not claim it. A finder of mislaid property on the premises of another has no right or interest in such property even if the owner of the mislaid property is not located. Rather, the owner of the premises on which the mislaid property was found has a right of possession as against all but the true owner of the mislaid property.
b. Lost Property
Lost property is property which the owner has involuntarily parted with through neglect, carelessness, or inadvertence, and of whose whereabouts the owner has knowledge. The primary difference between lost and mislaid property is that the former is lost involuntarily, while the latter is voluntarily and intentionally placed in a location, and then the location of the property is forgotten by its owner. Unlike the finder of mislaid property, the finder of lost property acquires a right and interest in the property against all but the true owner. The right of the finder of lost property is superior to that of the owner of the premises upon which such property is found.
Treasure-trove constituted a special class of lost property which constituted of gold or silver coins or money found concealed in the earth or other private place, whose owner is unknown. In England treasure-trove, unlike other lost property which could be claimed by the finder against all but the true owner, was awarded to the King as an incident of royal prerogative. In the United States the finder of treasure-trove similar to the finder of other lost property, has a right to the property superior to all but the original owner.
5. Unclaimed Property
Unclaimed property is property to which the owner has not, during a certain length of time specified by law, taken some action to indicate his ownership, interest or awareness.
C. Case Law
Some early Supreme Court decisions supported the states’ constitutional rights to escheat. In Hamilton v. Brown the Court held that escheat is an aspect of state sovereignty allowing the regulation of succession to property. While in Hamilton the Court acknowledged the need for a legislative act which enumerates the conditions for escheat, and the basis for determining that there are no legal heirs, it concluded that a state with such a statute met the due process requirements of the Constitution and did not represent an unconstitutional impairment of contract.
An early Supreme Court case dealing with intangible personal property, Cunnius v. Reading School District also declared that a state statute that provided for the state’s administration of the property of persons unheard of and absent for a period of seven years or more, did not violate the Fourteenth Amendment of the Constitution. The Cunnius Court specifically held that where the provisions of a state statute for administration on the assets of an absentee (1) are reasonable as to the period of absence necessary to create the presumption of death, and (2) create proper safeguards for the protection of his interests in case the absentee returned and the State does not deprive the absentee of his property without notice in violation of the Due Process Clause of the Fourteenth Amendment.
D. Uniform Acts
There are four versions of a uniform act for unclaimed or abandoned property. These uniform acts came into existence in 1954, 1966, 1981 and 1995. All of the versions of the uniform act specifically list the type of property which should be turned over to the state, including the time periods for abandonment, reporting requirements, procedural rules, and in some cases penalties and interest. All four versions are custodial in nature meaning that they do not result in a loss of owner’s rights, but provide for a transfer of custody of property presumed to be abandoned from the holder to the state to hold until the property is claimed by the owner. While some states have adopted their own unclaimed property law, the vast majority of states have adopted one of the uniform acts. However, even in those states which have adopted a uniform act, many of these states have changed certain provisions in the uniform act to conform to the needs indicated by that state legislature.
E. Types of Unclaimed Property
The 1954, 1966, and 1981 Uniform Acts did not generally define the “property” subject to custody. Rather, they dealt with specified property held by various types of holders, e.g., banking or financial institutions, insurance companies, utilities, business associations, etc.
However, each of the 1954, 1966 and 1981 acts contains a “catch-all” provision, which defines property subject to custody under the Acts without reference to particular types of holders.
The key features of property subject to custody therefore are:
1. generally intangible personal property;
2. property includes income earned thereon and appreciation in value thereof (e.g., simple and compound interest earned on bank accounts, in addition to account deposits);
3. property came to be in holder’s possession “in the ordinary course of the holder’s business”; and
4. property has remained unclaimed for a statutorily defined period of time.
The 1995 Uniform Act takes a different approach. It drops all of the provisions of the 1981 and earlier Acts addressing specific types of intangible property and specific types of holders. Instead, it sets forth a definition of “property” that includes tangible property (addressed specifically in Section 3 of the Act1) and enumerates a litany of types of intangible property subject to the Act. Intangible property is defined to include, but is not limited to:
1. money, a check, draft, deposit, interest, dividend and income;
2. credit balance, customer’s overpayment, gift certificate, security deposit, refund, credit memorandum, unpaid wages, unused airline ticket, or unidentified remittance;
3. stock or other evidence of ownership of an interest in a business association or financial organization;
4. money deposited to redeem stocks, bonds, coupons, or other securities or to make distributions;
5. an amount due and payable under the terms of an annuity or insurance policy, including policies providing life insurance, property and casualty insurance, workers’ compensation insurance, or health and disability insurance; and
6. an amount distributable from a trust or custodial fund established under a plan to provide health, welfare, pension, vacation, severance, retirement, death, stock purchase, profit sharing, employee savings, supplemental unemployment insurance, or similar benefits.2
Other examples of property (not listed in the 1995 Act) which have been found to be “intangible property” subject to the earlier Acts include corporate funds necessary to redeem trading stamps,3 casino chips and tokens,4 and unrefunded concert tickets.5
In addition, despite a trend to broaden the scope of unclaimed property laws, some states have specifically removed some types of property from coverage under their statutes. Examples include: gift certificates; non-refundable airline tickets; intangible property valued at $50 or less; and credits issued to vendors in the ordinary course of business.
F. Holder and Owner
Under the Illinois Uniform Disposition of Unclaimed Property Act, the term “holder” means any person in possession of property subject to the [Unclaimed Property] Act belonging to another, or who is trustee in case of a trust, or is indebted to another on an obligation subject to this [Unclaimed Property] Act. In addition, the term “owner” is defined as a depositor in the case of a deposit, a beneficiary in the case of a trust, a creditor, claimant, or payee in the case of other property, or any person having a legal or equitable interest in the property subject to this [Unclaimed Property] Act, or his legal representative. 765 ILCS 1025/1. Simply put, a holder is someone who is holding funds owed to another, and an owner is someone who owns funds that are being held by another.
G. Abandonment Period
The abandonment period is the period of time set by the state as the maximum period of time the property can be held by the holder and not reclaimed by the owner, before being required to be turned over to the state as abandoned or unclaimed property. This period varies under state law even if the state has adopted one of the uniform acts and can range anywhere from one year to seven years in most instances. For example, (1) under the 1954 and 1966 Acts, property is presumed abandoned after 7 years; (2) under 1981 Act, the period is shortened to 5 years; and (3) under the 1995 Act, the period is shortened to 3 years, with the following exceptions: Traveler’s checks – 15 years, Money orders – 7 years; and Equity interest in a business – 5 years. However, the most common abandonment period for property is five years, but more states are enacting laws shortening that abandonment period to 3 years. Indiana enacted a law in 2013 which provides that property left unclaimed in a safe deposit box for 3 years is presumed abandoned.
Given that the periods for presumption of abandonment vary under state law, it is imperative that you check each state’s applicable law especially considering that states are shortening the dormancy periods to accelerate cash flow.
H. Due Diligence Requirements
1. Due Diligence – holder must try to contact owner.
(1) Mailing of a first class letter to the last known address of the owner, apprizing the owner of the existence of the property and its imminent delivery to the state, and requesting a response or
(2) Publication of information about the property in a newspaper calculated to be seen by the owner.
(3) Applies only to property valued at $50 or more
(1) Written Notice to the apparent owner’s last known address not more than 120 days or less than 60 days before filing the report. Verified annual report to include name, social security or federal tax identification number and last known address of the “owner.”
I. Where to File/Priority Rules
1. Prior to the introduction of the 1954 and 1966 Uniform Acts, the states premised their claims to abandoned property on different jurisdictional standards. So, holders often found themselves in no-win situations as a result.
2. The 1954 and 1966 Uniform Acts attempted to resolve this problem by establishing a uniform priority rule for state claims. However, because so few states adopted these uniform acts, they did not resolve the problem.
3. In 1961, the U.S. Supreme Court ruled that Due Process precluded more than one state from escheating an item of property.
4. In 1965, the U.S. Supreme Court, in the seminal case of Texas v. New Jersey, established rules governing the priority of state claims.
a. General priority rule – state of the last known address of the apparent owner, as shown on the debtor’s books and records.
b. If no known address – state of the holder’s corporate domicile (state of incorporation) can claim. This secondary claim is subject to the subsequent establishment of proof by another state that the last known address of the creditor was within its borders.
5. An additional priority rule was established by the 1981 Uniform Act: where neither the first or second priority claims are relevant because (1) there is no last known address and (2) the state of domicile declines to exercise jurisdiction over the property, a default priority is afforded the state in which the transaction giving rise to the unclaimed property occurred.
J. General Reporting Requirements and Record Keeping
Unclaimed property reporting is normally done on an annual basis by the holder. For example, under both the 1981 and 1995 Uniform Acts, the Holder of property deemed abandoned under the Act, the value of which is $50 or more, must report such property annually before November 1 to the administrator of the appropriate state. In most states, a return is required even if no property is required to be reported that year (this is called a negative report), while some states do not require a report if no unclaimed property is to be reported. Other states have lowered their minimum reporting amounts. For example, California AB 212, signed September 26, 2013 lowers the minimum threshold amount for aggregate reporting of unclaimed property from $50 to $25, to take effect July 1, 2014.
As for payment/delivery of unclaimed property, under the 1981 Act, the Holder is required to deliver or pay the abandoned property to the administrator within 6 months after the final date for filing the report (May 1 of the following year). Under the 1995 Act, payment must be made at the time the report is filed. Because unclaimed property audits may encompass a 10-year period (and in some cases 20 or more years) and usually start from the end of an abandonment period, which can range anywhere from one to seven years, holders are technically required to keep records for anywhere from 11 to 17 years, and in some cases longer.
Ironically, there is no provision in any of the Uniform Acts requiring a holder to obtain name and address information. However, the 1981 and 1995 Acts impose retention requirements if the holder obtains name and address information in the regular course of business. The 1981 Act requires a holder that initially obtained name and address information to retain the information for a period of 10 years beginning when the property first became reportable as abandoned property. The 1995 Act requires a holder who obtained name and address information to retain additional information such as a description of the property, social security number and the date of last contact. Under the 1995 Act, this information must be retained for a 10 year period commencing on the date the unclaimed property report is filed by the holder, not on the date that the property became reportable as unclaimed property.
1 The only tangible property subject to the Act is the contents of safe deposit boxes or other safekeeping deposit boxes or other safekeeping depositories.
2 Section 1(10) of the 1995 Act.
3 See, e.g., The Sperry & Hutchinson Company v. O’Connor, 412 A.2d 539 (Pa. 1980)
(unredeemed trading stamps subject to jurisdiction for purposes of an escheat action in Pennsylvania); but see, State v. Sperry & Hutchinson Co, 139 A.2d 463 (N.J. Super. 1958) (trading stamps not subject to escheat because there was no obligation due or owing until the presentation of a completed book of stamps. 4 New Jersey v. Elsinore Shore Associates, 592 A.2d 604 (N.J. App. Div. 1991).
4 New Jersey v. Elsinore Shore Associates, 592 A.2d 604 (N.J. App. Div. 1991).
5 Presley v. City of Memphis, 769 S.W.2d 221 (Tenn. App. 1988).