For the past two decades, unclaimed property (also called abandoned property or escheat) compliance and defense has slowly but surely become an increasing risk for businesses. Today, any company that is not on top of its unclaimed property obligations faces significant liability hazards that can reach back almost 30 years.  Even companies that think they are following the law may be surprised during an audit by the onerous documentation auditors require to accept that a credit or voided check is not unclaimed property.  All businesses, regardless of industry, geographic location or customer base, should keep abreast of current developments in unclaimed property enforcement. 

Background

Every U.S. state (and some foreign jurisdictions) has a law that requires businesses (known as holders) possessing intangible property remaining unclaimed by the actual owner to remit that property to the government.  While several uniform statutes have been drafted addressing unclaimed property, state laws still vary significantly regarding what is considered unclaimed property and when property is considered abandoned by the actual owner.  Some states, such as Delaware, rely on unclaimed property remittances as a revenue raiser supporting the state’s general fund. 

Unclaimed property is property, held or owed by a business to someone else, for which the actual owner has not, during a certain period specified by law, taken some action that indicated an awareness of an ownership interest in the property.  When this “abandonment” occurs, it becomes the obligation of the party holding the property to report and pay over such property to the state.  Unclaimed property may include almost every type of intangible property imaginable, including stocks, gift card balances, uncashed vendor or payroll checks, and customer credit balances. 

Many states do not have a statute of limitations on when a business can be assessed for unremitted unclaimed property, even if the company has routinely filed an unclaimed property report with the state.  As a result, unclaimed property audits have gone back as far as 1981 in some instances.  At a minimum, many states require that a holder maintain records related to unclaimed property for at least 10 years. 

The Supreme Court of the United States set out the following rules for determining which state is entitled to take custody of property when the owner cannot be located:

• Where the last known address of the creditor (i.e., owner of the intangible personal property) is known, the state in which that address is located has the right to escheat (primary rule).
• Where the last known address of the owner is unknown, or is in a state that “does not provide for escheat of the property owned,” the state in which the debtor is incorporated is awarded the right to escheat (secondary rule). 

Some states have adopted, controversially, a third priority rule that provides that if neither of the first two priority states claims the property, the state in which the transaction that gave rise to the property occurred may claim the funds (the transaction test).  While many states have codified the transaction test, it is not widely enforced, and at least one court has ruled that it is unconstitutional. This leaves holders in a continuing dilemma regarding the enforceability of the transaction test. 

Current Developments

Revision of Uniform Act

The Uniform Law Commission is the author of three historic versions of the Uniform Unclaimed Property Act—1954, 1981 and 1995.  It is currently undertaking a project to revise the Uniform Act and is expected to address many of the compliance and enforcement issues that have surfaced since the last revision.  Written comments are now being filed with the drafting committee, and an initial draft of the revision is expected prior to the drafting committee’s meeting in November 2014.  The states, through the National Association of Unclaimed Property Administrators, are very active in this drafting process and filed significant comments with the drafting committee on May 9, 2014.  Holders should become involved in the drafting process by either filing comments or participating in the meetings (directly, through counsel or through interested trade associations).  Many holders believe that the 1995 Uniform Act too heavily favored state and third-party auditor interests.  The revision is an opportunity for holders to fix problems that have developed as a result of aggressive audit positions by states and their third-party auditors, as well as changes in business practices and technology. 

Proof of Remediation

When a holder is audited, it must demonstrate that items that might otherwise be considered unclaimed property, such as voided checks or account receivable credit balances, are not actually due and owing.  This process is called remediation.  Auditors are very strict regarding the type of proof acceptable to demonstrate that the property is not actually owed to someone.  For example, if a holder issues a check to cover the fee for an employee to attend a conference, but the employee decides not to attend the conference and therefore the check is voided, the holder may lack the historic evidence to prove that the voided check was actually not due to the conference organizer.  Under audit, the company may have to find the conference organizer (if possible) and get a signed letter that the fee is not due.  This process may need to be repeated for all of the possible voided, but not actually due, checks that a company may have on its ledgers.  Similarly, a company may issue a credit to a customer for use against a future order as part of a customer satisfaction program.  If the customer never places another order, what proof can the company offer that the credit was not refundable in cash (if this is even a valid defense)?  Remediation can be expensive and extraordinarily time consuming, and can cause a significant drain on employee resources during an audit. 

Statute of Limitations

As noted above, many states (and the 1995 Uniform Act) do not provide a statute of limitations for assessments of unclaimed property, even if a holder has been routinely filing unclaimed property reports.  The lack of a statute of limitations is problematic from both a liability and a record-keeping perspective.  Several legal arguments may exist that can limit a holder’s historic liability, but these arguments have not yet been tested in court.  For example, there may be an argument that an external statute of limitations can be imputed on unclaimed property assessments, such as a state’s general statute of limitations that would apply in the absence of a specific provision.  Another problem arises from state provisions called anti-private escheat laws.  These laws prevent a statute of limitations that would otherwise run against the owner—such as a statutory one found in a law such as the Uniform Commercial Code or a contract provision—from operating against the state for purposes of unclaimed property remittance.  Thus, even though an owner may no longer have a claim against the holder for the property, the state may assert that the property must still be remitted to the state.  This is another area where legal challenges (for example, that a specific statute of limitations should overrule the general anti-limitations provision or the derivative rights doctrine) might give holders relief, but there has been little litigation, and when that litigation has occurred (such as for the derivative rights doctrine), the results have been inconsistent. 

Whistleblower Actions

Holders are at risk not only from state-generated audits, but also from third-party lawsuits under state qui tam, False Claims Act or private attorney general statutes.  While the state statutes vary in scope and language, under this type of action a third party (called a relator) brings a case against a holder claiming that the holder knowingly made false claims to the government regarding unclaimed property; willfully concealed property that was required to be delivered to the government; or knowingly made a false statement to conceal, avoid or decrease an obligation to pay money or property to the government.  These actions are particularly threatening, because if the holder is found liable, it can be subject to treble damages plus a per occurrence penalty. 

Conclusion

The issues noted above are only a few of the current matters that holders are grappling with regarding unclaimed property compliance and defense.  Additional issues include the amount of due diligence sufficient to locate a lost owner or owner address, the scope of indemnification provisions in an acquisition, liability for owners with foreign addresses, and the priority state for unclaimed property determined using sampling and extrapolation.  The Uniform Law Commission revision project, litigation and evolving audit techniques will have an effect on all of these issues.