Abandoned and Unclaimed Property

Let’s say there is an abandoned car on the side of the road. It’s pretty unlikely that a passerby and the state government are going to battle over possession of the vehicle. On the other hand, if there is a business owner in possession of an uncashed payroll check, suddenly the odds of the state entering the situation exponentially increase. While the issue of abandoned physical property, like the car, receives little attention in the law, the issue of intangible personal property, like the value of the uncashed check or an unused gift certificate, continues to be a hot topic among policymakers.

Abandoned and unclaimed property (AUP) is defined as intangible property either possessed or owed to an owner that has not claimed the property. This includes uncashed vendor checks, dormant bank and brokerage accounts, life insurance policies, customer rebates, refunds, and even those unused gift certificates stashed away in your desk drawers.

Individual states have made different policies around this matter, but an increasingly large percentage of them have been ramping up audit efforts in order to claim this cash for themselves. In fact, some states have turned AUP into a substantial source of income. Because of this, AUP laws have spurred various lawsuits, policy changes, and relentless debate. While this article merely scratches the surface, its aim is to emphasize the importance of staying abreast of the evolving changes in order to avoid conflict with the states.

When states find themselves in need of funds, they have the option of either raising taxes or finding alternative sources of funding. It just so happens that abandoned and unclaimed property is an easy way for states to generate significant amounts of cash without having to raise taxes. How do the states get the funds? After a period of time, these funds get escheated (the legal term for the transferring of property) into the state’s general fund, where it becomes available to the state for general purposes. Laws vary by state, but the law generally requires that businesses in possession of AUP relinquish that property to the state after its dormancy period expires (generally 1-5 years).

In 2015, over $7 billion in AUP funds were collected, however, only $3 billion was returned to the rightful owner. That’s $4 billion that made its way into the states’ general funds. For this reason, some states are increasing their audit efforts in order to identify and confiscate unclaimed property funds. Some states, like Delaware, are even contracting with auditing companies on a contingent fee basis to perform these audits.

Delaware has become the poster child of abandoned and unclaimed property audits. Utilizing an increasingly large staff of contract auditors, they are able to estimate the holder’s liability for the years in which there are no records and claim that entire amount for the state. Delaware Concurrent Resolution No. 59 says that AUP is the state’s third-largest revenue source. It comes as no surprise that this tactic has fallen victim to litigation, and more importantly, these cases have resulted in changing regulations that are giving way to even more ambiguity.

In a recent court case, Temple-Inland, Inc. v. Cook, the courts ruled in favor Temple-Inland and their challenge of Delaware’s AUP estimation methodologies and accuracy. Thomas Cook, the Delaware Secretary of Finance, as well as the state’s auditing firm, was put under court scrutiny for exploitation of loopholes that ultimately produced a biased estimation. Essentially, they allegedly estimated a dollar amount too high in order to claim that amount for their general fund.

Despite the court ruling in favor of Temple-Inland, the court left the remedy proposal and plan up to the state. Shortly after the ruling, Delaware and Temple-Inland filed a joint motion to dismiss the case, an action widely assumed to mean that Delaware withdrew its liability assessment and likely reimbursed them for all court fees. Ultimately, this case opened the door for more states to estimate the unclaimed property to extrapolate data in their favor.

In 2014, limited partnership, Plains All-American Pipeline (Plains), was notified that it was going to be audited by Delaware’s auditing agent. While Plains was formed in Delaware, the company was domiciled in Texas. Therefore, Plains preemptively filed a lawsuit to stall the audit due to the state’s inability to request subsidiary information outside of its own state. Ultimately, the court found that Plains’ complaint was not “ripe” due to the audit had not yet occurred. Plains has appealed the court’s decision to the Third Circuit. This case proves that states are pushing the boundaries (literally) and seem to be getting away with it.

Gift cards create a rather complicated situation for AUP laws. Typically, the owner of a gift card remains unidentified, and if you are incorporated in a non-escheat state for gift cards, you may be ok. However, what if you documented the purchaser’s information or you sold the gift card in a state that requires escheatment? All of a sudden that $100 gift card can be subject to severe fines and penalties — up to 75% of the value of the card. Companies issuing gift cards should review their unclaimed property policies to ensure that they comply with the current laws of every state.

Two Belgian scientists were given shares in a US Company that they partnered with to develop a new Hepatitis B drug. The shares were held by two separate Belgian companies.  While the US company had proper contact information for both individuals, correspondence with the Belgian companies was returned as undeliverable, which was a qualification to be considered abandoned.  In accordance with the state’s policy, the shares were escheated to the state of Delaware and immediately sold — at that time the shares were worth $1.7 million. This was all done without attempting to locate the owners of the shares. Soon after, the company was merged, which would have made those shares worth over $14 million.

The suit, JLI Invest S.A. et al. v. Cook et al., seeks retribution for the increased value of the shares as the escheatment was unprecedented and no attempts were made to contact the owners. This case is still pending.

With states broadening their search criteria—and often creating inconsistent policies—it’s important for businesses to stay up-to-date on the evolving abandoned and unclaimed property regulations. While future changes remain unclear, staying aware of the developments can help businesses prepare for the evolving rules of engagement. Just recently, Delaware established a cap on the lookback to 10 years.  Previously, there was no cap on how far back these audits could go. Businesses that have never filed the necessary unclaimed property reports could be particularly at risk for longer lookback periods. Many states do offer amnesty programs, so if you have not filed, taking advantage of an amnesty program can help reduce your exposure. However, be aware that interest, fines, and penalties can quickly add up to double-digit percentages.

Until the courts start enforcing tougher limitations, we expect to see many more cases like those listed above. If you have questions or concerns about how these rules may affect your business, please feel free to contact us.