Memorandum: Issues for Consideration in the Revision of the Uniform Unclaimed Property Act

Transcription

1 M EMORANDUM TO: FROM: Interested Parties Co-Chair Rex Blackburn Co-Chair Michael Houghton Reporter Charles Trost DATE: February 13, 2014 RE: Memorandum: Issues for Consideration in the Revision of the Uniform Unclaimed Property Act At the request of the Co-Chairs and Reporter to the Drafting Committee to revise the Uniform Unclaimed Property Act ( UUPA ), the attached memorandum which provides a significant overview of various issues for consideration in a revision of UUPA was prepared on a pro bono basis, by Greg Day, Nate Barnett and Justin Houser, associates at the Wilmington, Delaware law firm of Morris, Nichols, Arsht & Tunnell ( MNAT ). Committee Co-Chair Mike Houghton is a partner at MNAT. The Co-Chairs and Reporter thank the authors of this memorandum for their time, effort and good work on behalf of the RUUPA Committee and the Uniform Law Commission.

2 M ORRIS, NICHOLS, ARSHT & TUNNELL LLP M EMORANDUM TO: FROM: Rex Blackburn Michael Houghton Charles Trost Greg Day Nathan Barnett Justin Houser DATE: February 13, 2014 RE: Issues for Revision of the Uniform Unclaimed Property Act I. INTRODUCTION The law of unclaimed property has ancient and venerable roots. During the era of feudalism in medieval England, most real property was held by a peasant as a hereditary tenant of a minor lord, or by a minor lord as a heritable fief (owned subject to certain feudal obligations) of a major lord or to the crown. If the holder of such property died without heirs, the property revested as a true escheat in the lord or king from whom it was held in fief. 1 Likewise, unclaimed personal property passed to the crown or lord under the doctrine of bona vacantia, originally a form of custodial escheat, which provided that it was better that such property pass to them than to a stranger. 2 Most American states have since adopted these principles to provide for the escheat of unclaimed property within their borders. 1 2 See Cary B. Hall, Escheat? Gesundheit. But For States, It s Nothing to Sneeze At: Delaware v. New York, 113 S.Ct (1993), 5 Univ. Miami Bus. L.J. 79, (1995). See id.

3 2. In 1948, nine insurance companies brought suit against the State of New York, alleging that an escheatment statute violates both the Contracts Clause and the Due Process Clause of the Constitution. 3 The Supreme Court found that because the state took custody as a conservator, there was no violation of the Contracts Clause, and that escheatment of the property of its own citizens did not violate the Due Process Clause. 4 Then in Standard Oil Co. v. New Jersey, 5 the Supreme Court held that a state has a right to escheat property held by a corporation incorporated within that state, and dismissed fears of double liability by reference to the Full Faith and Credit Clause of the Constitution. This decision started a race to the bottom where states fought to become the first to escheat a given holder s property. 6 It was in this context that the National Conference of Commissioners on Uniform State Laws first sought to clarify this area of law, and the first Uniform Unclaimed Property Act (the Uniform Act ) was promulgated in Within the next decade, the Supreme Court attempted to arrest the race to the bottom. In Texas v. New Jersey, the Court used its original jurisdiction over interstate conflicts Connecticut Mutual Life Ins. Co. v. Moore, 333 U.S. 541 (1948). See id. at 547 ( The state is acting as a conservator, not as a party to a contract ); id. at 551 (finding close contacts between insurance companies and policy holders in state of escheat). 341 U.S. 428, 443 (1951) ( The Full Faith and Credit Clause bars any such double escheat. ). Hall, supra note 1, at 88. See Unclaimed Property Act Summary, Uniform Law Commission, available at (last visited Dec. 27, 2013). The Uniform Unclaimed Property Act is hereinafter cited as U.U.P.A.

4 3. as a basis to establish a priority scheme for the escheatment of unclaimed property. 8 First priority belonged to the state where its owner resides. If that state had not provided for the dispensation of unclaimed property, however, or if such property lacked an address, second priority would fall to the state in which the holder is located. In light of these sweeping changes, the Uniform Act was revised in 1966, and again in 1981 and 1995, each time taking into account the benefits and difficulties which had arisen from the previous version of the Uniform Act as well as unforeseen developments in the field itself. At the present time, while thirty-two states have adopted a version of the 1981 Uniform Act, fifteen states, including some that had once enacted the 1981 Uniform Act, have ratified a version of the 1995 Uniform Act. The Uniform Acts have not been uniformly adopted, however. Some states, such as Delaware, have not chosen to enact any of the Uniform Acts; other states have adopted either the 1981 Uniform Act or the 1995 Uniform Act. Even among these states, as will be shown below, certain terms have been modified inconsistently such that some issues still receive disparate statutory treatment. Moreover, the nature of unclaimed property has consistently evolved so as to require government entities and practitioners alike to reconsider the relevance of older statutes. And, importantly, a lack of case law has muddled efforts to interpret some statutes consistently. Unclaimed property statutes today generally consider property held by a business, and owed to another, to be presumptively abandoned after a specified amount of time elapses. The holders of unclaimed property assume a duty to report and remit unclaimed property to the proper state office, which retains it for the owner s benefit. Property that remains unclaimed 8 Texas v. New Jersey, 379 U.S. 674 (1965).

5 4. following a certain statutory period becomes escheatable to the state. Considering that some businesses retain large amounts of unclaimed property, the process by which states require holders to report and remit unclaimed property has created substantial liabilities for holders while providing windfalls to states. Numerous disputes have arisen between the states and holders, with the states claiming that holders are improperly retaining property which rightfully belongs to others, while holders claiming that overzealous state agencies are using escheat as a means to maximize revenue. Considering that significant commercial and statutory changes have occurred since the drafting of the 1995 Uniform Act, this memorandum addresses various topics of unclaimed property that have become ripe for discussion and review in the revision of the Uniform Act. II. ISSUES A. Derivative Rights Doctrine Neither of the two most recent Uniform Acts explicitly reference the derivative rights doctrine, 9 which maintains that a state's interest in unclaimed property can be no greater than the owner's rights 10 and, consequently, that state unclaimed property laws constitute 9 10 But see U.U.P.A. 6 cmt. (1995) (noting that when claiming abandoned property, the state steps into the shoes of the owner. ). See, e.g., Bank of Am. Nat'l Trust & Sav. Ass'n v. Cranston, 252 Cal. App. 2d 208, 211 (Cal. App. 1967) (the state succeeds, subject to the act's provisions to whatever rights the owner of the abandoned property may have ); State v. Standard Oil Co., 74 A.2d 565, 573 (N.J. 1950) ( [t]he inclusion of debts or demands due to the escheated estate in the definition of the personal property liable to escheat... is significant of a purpose to reach only choses in action whose obligation had not been extinguished ), aff'd, 341 U.S. 328 (1951). See also Diane Green-Kelly, Unclaimed Property: An Ancient Concept Creating Modern Liabilities, 32 Franchise L. J. 41, 42 (2012) (collecting cases to show that state acquires no more substantive rights than were available to owner of dormant property).

6 5. custodial escheats rather than true escheats. 11 Considering the extent to which commentators and jurists invoke the derivative rights theory, drafters of a revised Uniform Act should consider whether, and to what extent, the derivative rights doctrine serves as a basis for unclaimed property statutes. For example, while many courts have relied upon the derivative rights doctrine, they have also found several exceptions, including where presentment rights for a claimant to recover property are unreasonable when applied to a state escheator, 12 where the only impediment to escheatment is a procedural limitation, such as a state statute of limitation, 13 or where an unclaimed property statute provides generally for the escheatment of property to which an owner would not otherwise be entitled. 14 Some courts have recently opined that other bases for unclaimed property statutes independent of the derivative rights doctrine may exist. In American Express Travel Related Services Co. v. Kentucky, 641 F.3d 385 (6th Cir. 2011), the Sixth Circuit left open the possibility that revenue-raising is a legitimate basis for a state s adoption of unclaimed property laws. 15 To the extent that revenue-raising exists as an Ethan D. Millar and John L. Coalson, Jr., The Pot of Gold at the End of the Class Action Lawsuit: Can States Claim it as Unclaimed Property?, 70 U. Pitt. L. Rev. 511 (2009). Connecticut Mut. Life Ins. Co. v. Moore, 333 U.S. 541, 547 (1948) ( When the state undertakes the protection of abandoned claims, it would be beyond a reasonable requirement to compel the state to comply with conditions that may be quite proper as between the contracting parties. ). See, e.g., Benson v. Simon Prop. Grp., Inc., 642 S.E.2d 687 (Ga. 2007) (noting that antilimitations provisions of unclaimed property statute do[] not affect the substantive rights of any party until the conditions leading to a presumption are satisfied ). See generally Sean M. Diamond, Unwrapping Escheat: Unclaimed Property Laws and Gift Cards, 60 Emory L.J. 971 (2011). American Express Travel Related Services Co. v. Kentucky, 641 F.3d 385 (6th Cir. 2011) (reversing a district court decision, which held that revenue-raising was not a sufficient (Continued...)

7 6. independent ground for unclaimed property statutes, some commentators argue that escheatment might resemble taxation and that the present priority scheme governing unclaimed property could therefore be afoul of the constitutional restraints on nexus and apportionment. 16 Because the derivative rights doctrine has served as a basis for much of the conceptual framework of the limits of unclaimed property laws, any finding that it is not a fundamental underpinning of unclaimed property laws could have a material impact on the interpretation of state unclaimed property laws. B. Revisiting Provisions of the Previous Uniform Acts 1. Appeals Processes The and Uniform Acts both establish processes for claimants of unclaimed property to appeal decisions made by administrators. Although a few states provide (... continued) basis for adopting an unclaimed property statute, on the grounds that the district court had applied too strict a standard). See also William S. King, Note, A Bridge Too Far: Due Process Considerations in State Unclaimed-Property Law Enforcement, 45 Suffolk U. L. Rev. 1249, (2012). See also Teagan J. Gregory, Unclaimed Property and Due Process: Justifying Revenue-Raising Modern Escheat, 110 Mich. L. Rev. 319 (2011) Teagan J. Gregory, Unclaimed Property and Due Process: Justifying Revenue-Raising Modern Escheat, 110 MICH. L. REV. 319, 327 (2011). U.U.P.A. 26 (1981) ( [Action to Establish Claim]. A person aggrieved by a decision of the administrator or whose claim has not been acted upon within 90 days after its filing may bring an action to establish the claim in the [ ] court, naming the administrator as a defendant. The action must be brought within [90] days after the decision of the administrator or within [180] days after the filing of the claim if he has failed to act on it. [If the aggrieved person establishes the claim in an action against the administrator, the court shall award him costs and reasonable attorney's fees.] ). U.U.P.A. 16 (1995) ( ACTION TO ESTABLISH CLAIM. A person aggrieved by a decision of the administrator or whose claim has not been acted upon within 90 days after its filing may maintain an original action to establish the claim in the [appropriate] court, naming the [administrator] as a defendant. [If the aggrieved person establishes the claim in an action against the administrator, the court may award the claimant reasonable attorney's fees.] ).

8 7. an official administrative appeals process for holders under audit, 19 many states do not. In these situations, the doctrine of administrative exhaustion holds that one who seeks to bring a claim against an administrative agency must wait for a final decision from the administrative agency before the issue becomes ripe for the judiciary. In the context of an unclaimed property dispute, audits often take years to complete. Failing to statutorily provide for an administrative review process could require aggrieved holders to acquiesce in the process and expend substantial amounts before being able to contest aspects of the remittance and auditing processes. A revised Uniform Act could consider offering defined and detailed mechanisms to balance the interests of holders who would prefer an equitable method to bring a grievance and the states interest in not adjudicating every aspect of the auditing process in a piecemeal fashion. 2. Statute of Limitations/Repose Should the statute of limitation for commencement of an action by a state against a holder be tolled by a holder s failure to report, or should a statute of repose which fixes an absolute date for commencement of an action by a state against a holder, whether or not a report is ever filed, be implemented. The 1981 Uniform Act provides, in relevant part, as follows: (a) The expiration, before or after the effective date of this Act, of any period of time specified by contract, statute, or court order, during which a claim for money or property can be made or during which an action or proceeding may be commenced or enforced to obtain payment of a claim for money or to recover property, does not prevent the money or property from being presumed abandoned or affect any duty to file a report or to pay or deliver abandoned property to the administrator as required by this Act. 19 See, e.g., Idaho Unclaimed Property Administrative Rules ( This chapter does allow administrative relief of the provisions outlined herein ); 12 Del. C (providing for internal review procedure).

9 8. (b) No action or proceeding may be commenced by the administrator with respect to any duty of a holder under this Act more than 10 years after the duty arose. 20 Commentators note that [t]he anti-limitations provision of subsection (a) is designed to remove the bar of the statute of limitations when the state asserts custody. 21 They further explain that because contractual limitations which establish a limitation period shorter than that governing the statute of limitations on the underlying claim are often clearly designed to avoid the effect of unclaimed property limitations, the statute renders [a]ll such contractual provisions... irrelevant to a presumption of abandonment. 22 This interpretation indicates that [t]he ten-year limitation period provided in subsection (b) is designed to provide holders with a clear cut-off date on which they can rely. 23 Consequently, there is a clear ten-year cut-off date under the 1981 Uniform Act, which runs from the date that the duty to report arose. This cut-off date functions as a statute of repose, which, unlike a statute of limitations, imposes an absolute deadline for action, running from a specific date or event and is not subject to tolling or exceptions. In the 1995 Uniform Act, the anti-limitation provision is substantially similar, and reads as follows: (a) The expiration, before or after the effective date of this [Act], of a period of limitation on the owner s right to receive or recover property, U.U.P.A. 29 (1981). David Epstein, Lynden Lyman and Robert P. Krenkowitz, 1 Unclaimed Property Law and Reporting Forms 12.29[2][b] (2013). Id [2][c]. Id [2][d].

10 9. whether specified by contract, statute, or court order, does not preclude the property from being presumed abandoned or affect a duty to file a report or to pay or deliver or transfer property to the administrator as required by this [Act]. 24 The statute of limitations provision, however, provides as follows: (b) An action or proceeding may not be maintained by the administrator to enforce this [Act] in regard to the reporting, delivery, or payment of property more than 10 years after the holder specifically identified the property in a report filed with the administrator or gave express notice to the administrator of a dispute regarding the property. In the absence of such a report or other express notice, the period of limitation is tolled. The period of limitation is also tolled by the filing of a report that is fraudulent. 25 This provision is a dramatic shift in policy, which eliminates the statute of repose language of the 1981 Uniform Act, and creates instead a tollable statute of limitations running from the date that a report was filed. The Official Commentary indicates that this change was done largely to conform to case law (either decided pre-1981 or with reference to escheatment periods before states implementation of the 1981 Uniform Act) which has held that the statute of limitations did not commence where no report was filed, and also notes that it comports with the theory of truthful self-reporting underlying the Uniform Act. 26 This language also parallels U.U.P.A. 19 (1995). Id. Id. cmt. (citing Blue Cross of Northern Cal. v. Cory, 120 Cal. App. 3d 723, 743 (Cal. Ct. App. 1981) ( [N]o statute of limitations will commence to run against [the Controller s] recovery of unclaimed money, pursuant to the UPL, unless and until... the holder has reported it.... ); Travelers Exp. Co., Inc. v. Cory, 664 F.2d 763, 768 (9th Cir. 1981) (reaching same conclusion); Employers Ins. of Wausau v. Smith, 453 N.W.2d 856, 868 n.26, (Wis. 1990) (finding that limitations period in 1981 Uniform Act irrelevant to analysis, given that period of escheat dated back to 1964, and noting that the statutory scheme depends on self-reporting... the statute of limitations did not commence to run... on the date the report was due. ); Sennet v. Ins. Co. of North America, 247 A.2d 774, (Pa. 1968) (reporting triggers running of statute); State v. U.S. Steel Corp., 126 (Continued...)

11 10. the language of the Internal Revenue Code, which provides that there is no statute of limitations for assessment of a tax [i]n the case of failure to file a return. 27 The drafters of the ABA s Model Unclaimed Property Act (the Model Act ) have preliminarily proposed language which, like the 1981 Uniform Act, sets forth that the statute of limitations begins to run from the date that property is reportable, although it provides for a different period of limitations (3 years) for cases where reports are filed on time and a different period of limitations (10 years) for a report which was not filed or which was materially false or fraudulent. This limitations structure, based on the statute of limitations in the Virginia unclaimed property act, is akin to a statute of repose, just as was the 1981 Uniform Act. 28 There is also concern among the holder community with respect to the antilimitations period. Holders have argued that auditors have used the anti-limitations provision as a justification for voiding all manner of contractual limitations periods, including those between businesses, which were not drafted for the purpose of evading unclaimed property reporting obligations. One possible solution to this problem might be the inclusion of language into the anti-limitations provision which exempts limitations connected with the ordinary course of business and which serve a valid business purpose apart from evading reporting requirements. (... continued) A.2d 168 (N.J. 1956) (same); Treasurer and Rec. Gen. v. John Hancock Mut. Life Ins. Co., 446 N.E.2d 1376 (Mass. 1983) (same)) Id. (citing 26 U.S.C. 6501(c)(3)). See Ethan Millar, Proposed Model Unclaimed Property Act, Art. VI, draft dated 7/7/13 (copy in possession of compiler).

12 11. Therefore, any revision of the Uniform Act could consider whether there should be a modification of the statute of limitations provision in the 1995 Uniform Act to address either changes in state policy or the concerns of the holder community as to a lack of predictability and certainty with respect to reporting obligations. 3. Estimation Techniques Another topic of interest is the role and extent of a state s ability to estimate a holder s unclaimed property liability in the absence of records. The practice of estimating unclaimed property liability allows a state to determine the amount of unclaimed property due from a holder when records are unavailable or inadequate. The 1981 Uniform Act permitted the estimation of the amount of unclaimed property liable to escheat, linking estimation with a holder s failure to retain records for the required retention period. The 1995 Uniform Act, however, decoupled the relationship between record retention and estimation. While some commentators have criticized this development on the basis of the derivative rights doctrine and holders due process rights, states have argued that estimation remains an appropriate tool because it encourages record retention, because they are better custodians of property, and because revenue-raising is an independent justification for unclaimed property statutes. For instance, the 1981 Uniform Act permitted estimation, providing as follows: If a holder fails after the effective date of this Act to maintain the records required by Section 31 and the records of the holder available for the periods subject to this Act are insufficient to permit the preparation of a report, the administrator may require the holder to report and pay such amounts as may reasonably be estimated from any available records U.U.P.A. 30 (1981).

13 12. The Comment to this section indicates that estimation of liability is appropriate where the holder has failed to report and deliver property that is abandoned and no longer has records with which to prepare such a report. 30 The 1995 Uniform Act contains a similar provision concerning estimation: If, after the effective date of this [Act], a holder does not maintain the records required by Section 21 and the records of the holder available for the periods subject to this [Act] are insufficient to permit the preparation of a report, the administrator may require the holder to report and pay the amounts the administrator reasonably estimates, on the basis of any available records of the holder or by any other reasonable method of estimation, should have been but was not reported. 31 The justification for estimation, however, was altered in the commentary to the 1995 Uniform Act to reflect the view that estimation is appropriate where the holder has failed to report and deliver property that is abandoned and no longer has reasonably accessible records sufficient to prepare a specific report. 32 The Comment further notes that if the holder fails to maintain records of the last known address, States can assert claims based on any other records which might exist.... this subsection, viewed as a penalty for failure to maintain records of names and last known address, is not inconsistent with [Texas v. New Jersey]. 33 The Comment also emphasizes that where a holder has not maintained records as required by statute, a state may make estimations based on industry averages, and may rely on inferences that may be U.U.P.A. 30 cmt. (1981). U.U.P.A. 20 (1995). U.U.P.A. 20 cmt. (1995). Id.

14 13. based on statistics drawn from a larger basis than that of the holder in question who has failed to keep records. 34 Notably, as stated above, the 1995 Uniform Act also modified the language of the record retention requirement from ten years after the date that the property is reportable to ten years after the date on which the property is reported. 35 While many states presently use estimation techniques in their audits, apparently only one, Michigan, has enacted legislation providing guidelines for estimation procedures. 36 Act 148 provides in relevant part as follows: When the person being examined does not have substantially complete records, the administrator or his or her duly authorized agents may determine the amount of any abandoned or unclaimed property due and owing based upon a reasonable method of estimation consistent with the standards described in subsection (4). If the person being examined has filed all the required reports and has maintained substantially complete records, then all of the following apply to the examination: (a) The examination shall include a review of the person s books and records. (b) The examination shall not be based on an estimate. (c) The administrator or his or her duly authorized agents shall consider all evidence presented by the holder to remediate the findings. 37 The standards for a reasonable method of estimation require that they must be performed in accordance with the generally accepted auditing standards to the extent Id. U.U.P.A. 21 (1995). See 2013 Mich. Pub. Acts. 148 (Oct. 29, 2013). Id.

15 14. applicable to unclaimed property examinations. 38 Furthermore, substantially complete records is defined as follows: substantially complete records means at least 90% of the records necessary for unclaimed property examination purposes as defined under the principles of internal controls. The determination of substantially complete records shall not be made solely as a percentage of the total overall individual records to be examined, but also on a materiality level of value of the records. The lack of greater than 10% of records in 1 particular property class to be examined does not result in the extrapolation of error in those areas in which a person has filed all the required reports and has maintained at least 90% of the overall records for that particular property class. Substantially complete records are not meant to be an absolute measurement of all available records. 39 In addition to criticizing the effect of the change of the records retention period on estimation, some commentators also dispute whether estimation of liability is appropriate at all. They argue that escheatment of property is based on the derivative rights doctrine, and that for intangible property to be escheatable, a holder must have a fixed and certain obligation to pay the property, a situation which does not exist in the estimation context. 40 Consequently, these commentators contend, estimation violates the due-process rights of holders. 41 These Id. Id. See, e.g., King, supra note 15, at Id. See also American Exp. Travel Related Servs. Co., Inc. v. Hollenbach, 630 F.Supp.2d 757, 759 (E.D. Ky. 2009) (finding that Kentucky statute shortening presumptive period of abandonment for uncashed travelers checks is arbitrary and capricious and violates the Due Process Clause of the United States Constitution because not rationally related to purpose of state taking custody of abandoned property), vacated sub nom. Am. Express Travel Related Servs. Co. v. Kentucky, 641 F.3d 685 (6th Cir. 2011) (finding that statute was rationally related to legitimate purpose of escheat of abandoned property and therefore not violative of Due Process Clause).

16 15. commentators also assert that estimation is more like a tax. 42 Furthermore, some have viewed an implicit reasonableness requirement for any estimation procedure, in that an unreasonable estimation might be considered an unconstitutional taking and, further, that estimation in the absence of records might create a windfall to one state under the application of present priority rules. 43 States have countered these arguments with the ideas that states are better custodians of unclaimed property than holders and that such provisions encourage record-retention by holders. 44 There is also an argument that revenue generation is a legitimate state interest and therefore an independent basis for unclaimed property statutes. 45 Commentators have proposed that, because estimation is no longer intrinsically linked with records retention, a statutory record-retention requirement may be a simpler means of ensuring holders retention of records for an adequate period of time Interest/Penalties Many states impose penalties and interest on holders for failing to comply with unclaimed property reporting requirements and failure to pay. These penalties have generated some concern for the holder community, considering that penalties can be quite substantial See King, supra note 15, at ; Gregory, supra note 15, at 328 ( If a court accepts the proposition that unclaimed property laws are intended to yield public revenue, there is no principled reason to treat these measures differently from taxes.... ). See Texas, 379 U.S. at 376 ( [T]he Due Process Clause of the Fourteenth Amendment prevents more than one State from escheating a given item of property.... ). But see New Jersey v. The Chubb Corp., 570 A.2d 1313 (N.J. 1989) (holding that estimation of liability based on percentage of holder s business locations in New Jersey reasonable ). See Gregory, supra note 16, at See Am. Express Travel Related Serv. Co. v. Kentucky, 641 F.3d 685, 693 (6th Cir. 2011). See King, supra note 15, at 1260 n.62.

17 16. Penalties for failure to report generally range from $ per day with a maximum of $5,000 or $10,000 (or a percentage of property owed). 47 Penalties for failure to pay, however, are typically higher, such as 25% of the value of the property that the state claims should have been paid plus an additional amount, usually $25, Some states impose greater penalties when there is a willful failure to pay. The 1995 Uniform Act imposes a maximum penalty of $25,000, plus 25% of the value of any property, for fraudulent reporting. 49 The 1995 Uniform Act also provides for waiver of interest and penalties when a holder acts in good faith and without negligence. 50 Drafters of a revised Uniform Act could reassess the current penalty and interest scheme to reassess its fairness and wisdom, as well as to create uniformity. For instance, holders who seek to object to an auditor s methods or process could, theoretically, be threatened with interest and penalties for non-payment. There are also many contrasting interest and penalty schemes, and related statutes that can give rise to penalties, requiring holders to become well versed with each unclaimed property statute or risk being subjected to significant penalties. 51 For instance, some state administrators enjoy freedom to increase or decrease penalties based U.U.P.A. 34 (1981); U.U.P.A. 24 (1995). U.U.P.A. 34 (1981); U.U.P.A. 24 (1995). U.U.P.A. 24 (1995); Kendall Houghton, Maryann Luongo, and Jana Leslie, In the Nick of Time? Reforming State Unclaimed Property Laws: Essential Goals and a Review of Potential Forums, COST: Council on State Taxation (2009). Id. For instance, states have recently sought to decrease dormancy periods. When a holder mistakes a shortened dormancy period for a longer one, that holder can then incur significant penalties. See supra II.B.6.

18 17. upon mitigating factors. 52 The states, however, require sufficient penalty or interest schemes considering the degree to which they depend upon voluntary reporting. With both holders and states harboring contrasting yet important preferences, a future Uniform Act should consider how to best unify penalties and interests. 5. Record Retention Inconsistency exists among the states concerning record retention requirements under the Uniform Acts. Although both the 1981 and 1995 Uniform Acts provide for record retention periods, the 1981 Uniform Act s use of estimation as a penalty for failure to retain records has been reshaped by the 1995 Uniform Act s alteration of the calculation of the retention period. For this reason, the relationship between record retention requirements and estimation has become somewhat tenuous. Consequently, some practitioners have proposed that, instead of the use of estimation as a penalty for failure to retain records, a direct penalty for failure to keep records should be imposed. Section 31 of the 1981 Uniform Act provides as follows: (a) Every holder required to file a report... shall maintain a record of the name and last known address of the owner for 10 years after the property becomes reportable, except to the extent that a shorter time is provided in subsection (b) or by rule of the administrator. (b) Any business association that sells in this State its travelers checks, money orders, or other similar written instruments, other than third party bank checks on which the business association is directly liable, or that provides such instruments to others for sale in this State, shall maintain a record of those instruments to while they remain outstanding, indicating the state and date of issue for 3 years after the date the property is reportable Fla. Admin. Code Ann. r. 69I U.U.P.A. 31 (1981).

19 18. The Official Comment to the 1981 Uniform Act states that [i]nitially, the period for which records of address must be obtained is established at 10 years from the date the property was first reportable as abandoned property. However, this section permits a state to shorten this period by rule. 54 It further states that [b]ecause the reporting practices of holders vary, an administrator will want to consider such factors as the burden imposed on the holder in maintaining such records, the opportunity of returning the property, and the type of business of the holder. 55 These provisions are beneficial to holders in that they establish a definite period for the retention of records (ten years after property becomes reportable). The 1995 Uniform Act modified the language of the record retention requirement from ten years after the date that the property is reportable to ten years after the date on which the property is reported and likewise, with respect to traveler s checks, money orders, or similar instruments, for three years after the holder files the report. 56 The commentary, however, remains unchanged in the 1995 Uniform Act. This revision presents difficulty for the holder community; if a holder does not report property as it becomes dormant, it is required to retain records for property which have been dormant for an indefinite period of time. While estimation was originally introduced as a penalty for failure to maintain records of names and last known address, 57 changes in the records retention requirement since the 1995 Uniform Act have authorized estimations for periods beyond the date for which records U.U.P.A. 31 cmt. (1981). Id. U.U.P.A. 21 (1995). U.U.P.A. 20 cmt. (1995).

20 19. must be maintained under the Uniform Act. Some practitioners have stated that, because estimation no longer serves as a tool to enforce a specific records retention period, the imposition of a direct penalty for failure to keep records for the prescribed period may be appropriate. 58 Furthermore, even where other statutes provide for the lawful destruction of records after a certain period of time, such destruction does not absolve a holder from its obligation to report property under the Uniform Act, nor does it remove the possibility of estimation of liability in lieu of those destroyed records. For example, the Internal Revenue Service advises that businesses should retain records for up to seven years under various circumstances, 59 yet it is likely that destruction in accordance with this advice would leave holders subject to an estimation of unclaimed property liability with respect to those destroyed records. Indeed, one court has specifically found that a statute authorizing destruction of records does not abrogate a holder s duty to retain those records for purposes of unclaimed property reporting obligations under the Uniform Act, nor does it remove the ability of states to estimate a holder s liability where the holder s records for a given period were lawfully destroyed under other acts. 60 In Division of Unclaimed Property v. McKay Dee Credit Union, the Supreme Court of Utah found that, despite a holder s destruction of records in accordance with a provision in the state Financial Institutions Act which authorized destruction of records after seven years, the See Letter from Ethan D. Millar to Robert J. Tennessen, June 18, 2009 (copy in compiler s possession). See Starting a Business and Keeping Records, I.R.S. Pub. No. 583, at 15 (revised December 2011). Division of Unclaimed Property v. McKay Dee Credit Union, 958 P.2d 234 (Utah 1998) (holding that lawful destruction of records under state Financial Institutions Act is not a defense to estimation proceeding).

21 20. state was nevertheless entitled to estimate property represented by those destroyed records. 61 Notably, the facts at issue in McKee Day arose before Utah had adopted the 1981 Uniform Act, in which estimation was intended to serve as a penalty for failure to retain records for a designated period of time. 62 Moreover, states have varied with respect to their retention periods. While several states, such as Alabama and Oklahoma (both of which have adopted the 1981 Uniform Act), impose the ten-year requirement, others diverge from this requirement. For example, Washington, another 1981 Uniform Act state, imposes a six-year requirement. Ohio requires that records be retained for five years or until an audit is completed. States also differ on the types of records to be retained; Washington requires retention only of the name and address of the owner, while Virginia, also a 1981 Uniform Act state, requires retention of all books, records, and documents necessary to establish the accuracy and compliance of such report. 63 Thus, it is important to consider whether a revised Uniform Act should address the types and nature of records to be retained, the relationship between records retention requirements and the ability of states to estimate holder liability, as well as the proper Id. at 240 ( We cannot accept McKay Dee s argument that in spite of its failure to remit or report the unclaimed property in its possession after the five-year period required by law, it is immune from having to rebut a presumption of abandonment because of the Financial Institutions Act. Such a construction of the law would frustrate the purpose of the Unclaimed Property Act. ). See id. at 235 n.1 ( We refer to the statute as it was in effect at the relevant time ); Utah Code. Ann. 67-4a-101 n. (1995) ( This section is similar to... the Uniform Unclaimed Property Act (1981). ). See James Doody et al., Unclaimed Property Record Retention: What Holders Need to Know, Ryan: Innovative Solutions to Taxing Problems, available at n_what_holders_need_to_know.pdf (last visited Dec. 3, 2013).

22 21. relationship between record retention requirements under the Uniform Act vis-à-vis retention requirements under federal and state law. 6. Presumption of Abandonment/Abandonment Dormancy Periods In general, the states have the burden of proving the existence and the amount of any unclaimed property due. 64 Many states unclaimed property laws shift this burden to the holder if the holder s own records indicate a liability that may or may not still be unclaimed. The 1995 Uniform Act states: A record of the issuance of a check, draft, or similar instrument is prima facie evidence of an obligation. In claiming property from a holder who is also the issuer, the administrator s burden of proof as to the existence and amount of the property and its abandonment is satisfied by showing issuance of the instrument and passage of the requisite period of abandonment. Defenses of payment, satisfaction, discharge, and want of consideration are affirmative defenses that must be established by the holder. 65 The Comment to this section cites cases which adhere to the derivative rights doctrine ( the State steps into the shoes of the owner ) as not incongruous with this position. Under this interpretation, simply by proving issuance of the instrument or property, the state succeeds to all rights of the owner. Commentators and practitioners have stated that, by this reasoning, the state should be bound by the same standard of proof that the owner would need to See Ethan D. Millar & Kendall L. Houghton, Unclaimed Property: The Solution to State Budget Woes?, Tax Analysts 723, 725 (Sept. 12, 2011), available at 290da2da82d2/UP%20Trends%20STN%20Article.pdf (last visited Dec. 19, 2013). U.U.P.A. 6 (1995).

23 22. satisfy to claim property from the holder. 66 Courts may have recognized an exception to the derivative rights doctrine in this area, however. 67 Moreover, states have responded that such a requirement would be overly burdensome and that the current method encourages holders to maintain better records. The presumption of abandonment issue should also be considered when discussing statutes of limitation on unclaimed property assessments. Another issue related to the presumption of abandonment is the dormancy period attached to specific unclaimed property. The dormancy periods for property have been consistently reduced over the years. 68 This reduction has been championed by states claiming that shorter dormancy periods aid the reunification of property and owner. 69 Holders respond that the shortening of dormancy periods simply aids the state in increasing its unclaimed property revenue. 70 Any review of the dormancy periods should take into account their interrelation to other unclaimed property matters. 7. Address Requirements The amount of detail necessary to consider an address sufficient for the purpose of determining a state s priority has created some controversy. The 1981 Uniform Act defines a Millar and Houghton, supra note 64, at 725. See supra II.A. See, e.g., U.U.P.A. 2 cmt. (1981) (reducing the general dormancy period to five years from the seven years found in the 1966 Uniform Act); U.U.P.A. 2 cmt. (1995) (reducing the dormancy period for gift certificates to three years from the five years found in the 1981 Uniform Act). See Gregory, supra note 16, at See Conrad Bower, Note, Inequitable Escheat?: Reflecting on Unclaimed Property Law and the Supreme Court s Interstate Escheat Framework, 74 Ohio St. L. J. 515, (2013) (mentioning that most states now enforce a third rule of escheatment); Millar and Houghton, supra note 64, at 725.

24 23. Last known address as a description of the location of the apparent owner sufficient for the purpose of the delivery of mail. 71 Some auditing firms, however, consider an address to be insufficient even if it includes all distinguishing information except for a ZIP code, which some commentators allege to be incongruent with the statute. 72 Other problems arise when there is too much information. For instance, some property contains multiple addresses belonging to owners found in different states or a single owner uses multiples addresses. This can create tension between states that potentially can assert equal priority claims over such property. 73 A dispute in New Jersey concerned a statute requiring gift card merchants to maintain names and addresses of all gift card purchasers, or at a minimum, maintain a record of the zip code of the owner or purchaser. 74 This statute, in effect, required merchants to retain only zip codes, increasing the probability that unclaimed property would not be reunited with its owner. New Jersey also established a third-priority rule, whereby it claimed title to all gift cards addressed to a second priority state that had exempted this property type. 75 The result was that New Jersey s zip-code-only requirement could increase the amount of property it could claim, U.U.P.A. 1(11) (1981) ( Last known address means.... ). Kendall Houghton, Maryann Luongo, & Jana Leslie, In the Nick of Time? Reforming State Unclaimed Property Laws: Essential Goals and a Review of Potential Forums 9, COST: Council On State Taxation, available at (last visited Dec. 19, 2013). Five Unclaimed Property Issues that Resist Easy Answers, Unclaimed Property Alert, at 2-3, November 12, New Jersey Retail Merchants Ass n v. Sidamon-Eristoff, 669 F.3d 374, 384 (3d. Cir. 2012) (citing N.J. Stat. Ann. 46:30B 42.1c (2010) (Chapter 25, 5c)). Id.

25 24. but did not facilitate return of property to actual owners. 76 In 2012, the Third Circuit refused to invalidate the zip code requirement. 77 To promote predictability and avoid disputes arising over duplicative or ambiguous addresses, it could be useful to consider a more precise definition regarding address sufficiency. 8. Holder Definition The 1981 and 1995 Uniform Acts define holder so broadly that several parties could be deemed the holder of the same unclaimed property. 78 Accordingly, commentators argue that the definition of holder could benefit from clarification as to compliance responsibility when a third-party relationship is involved, 79 such as third-party administrators of rebate programs, gift card issuers, and transfer agents responsible for issuing payment from an acquirer to stockholders in mergers and acquisitions. The ABA Model Unclaimed Property Act has a recent draft revision to its securities provision, defining the holder for a securities account as the entity that is authorized by the customer to effect transactions in the securities account. This definition considers the broker who has direct customer contact to be the holder (rather than the entity in physical possession of the security) because (i) the broker likely has current customer information so as to avoid a Id. at 397 ( They submit that retaining the zip code of the purchaser does nothing to reunite the abandoned property with the actual owner, often the recipient, of the gift card. ). Id. U.U.P.A. 1(8) (1981) ( Holder means a person, wherever organized or domiciled, who is: (i) in possession of property belonging to another, (ii) a trustee, or (iii) indebted to another on an obligation. ); U.U.P.A. 1(6) (1995) ( Holder means a person obligated to hold for the account of, or deliver or pay to, the owner property that is subject to this [Act]. ). See Houghton et al., supra note 72, at 9.

26 25. running of the dormancy period and (ii) reporting of the property in the broker s name increases the likelihood of reunification with the owner. This logic that the entity most likely to have current owner information should be the holder could be useful in considering revisions to the holder definition in the Uniform Act. 9. Escheatment for Foreign Holders Both the and Uniform Acts established that a state may claim title to foreign addressed unclaimed property held by an in-state corporation, which may be in conflict with the precedent set by Texas v. New Jersey. Texas established that when an owner s state lacks an unclaimed property law, the state with second priority may escheat. 82 Several states assert that this priority scheme applies only to U.S. states, meaning that they may claim title to property owed to an owner residing in a foreign country. 83 Such a narrow reading may be U.U.P.A. 3 (1981)( [General Rules for Taking Custody of Intangible Unclaimed Property]: Unless otherwise provided in this Act or by other statute of this State, intangible property is subject to the custody of this State as unclaimed property if the conditions raising a presumption of abandonment under Sections 2 and 5 through 16 are satisfied and:.... (5) the last known address, as shown on the records of the holder, of the apparent ownerhoughton is in a foreign nation and the holder is a domiciliary or a government or governmental subdivision or agency of this State.... ). U.U.P.A. 4 (1995) ( RULES FOR TAKING CUSTODY. Except as otherwise provided in this [Act] or by other statute of this State, property that is presumed abandoned, whether located in this or another State, is subject to the custody of this State if:... (5) the last known address of the apparent owner, as shown on the records of the holder, is in a foreign country and the holder is domiciled in this State or is a government or governmental subdivision, agency, or instrumentality of this State.... ). 379 U.S. at 682. Noel E. Hall, Jr., James G. Ryan, Jameel S. Turner, Brian L. Browdy, and Lisa D. Elzholz, Delaware s Authority to Claim Abandoned Property Owed to a Non-U.S. Law- Known Address, J. MULTISTATE TAX N, Jan. 2011, at 28 (noting that countries with unclaimed property statutes include Australia, France, Germany, Hong Kong, Italy, Japan, Kenya, New Zealand, the United Kingdom, as well as several Canadian provinces).

27 26. mistaken if Texas could be read more broadly, however, affording priority to any jurisdiction, either domestic or foreign, 84 and, indeed, numerous foreign jurisdictions now have unclaimed property laws, some of which provide for local escheatment. 85 This issue was also mentioned in New Jersey Retail Merchs. Ass n v. Sidamon- Eristoff, 86 where it was noted that some states have sought to exempt certain property types from escheatment laws. Just as third-priority rules may violate Texas, 87 if a foreign nation does not require remittance of certain property types, or even consciously chooses not to enact an unclaimed property regime, then requiring holders to remit unclaimed property owing to a foreign nation may likewise violate Texas. 10. Notice Traditional dormancy periods in the Uniform Acts with respect to securities have been criticized as not reflecting the realities of the securities industry. The 1981 Uniform Act provides that, except for automatic reinvestment plans, securities are presumed abandoned if a dividend, distribution, or other sum payable as a result of the interest has remained unclaimed by the owner for 7 years and the owner within 7 years has not: (1) communicated in writing with the association regarding the interest or a dividend, distribution, or other sum payable as a result of the interest; or (2) otherwise communicated with the association regarding the interest or a dividend, distribution, or other sum payable as a result of Id. (mentioning that asserting jurisdiction over property owed to a non-u.s. owner who lives in a country that has an established unclaimed property law is likely contrary to the spirit of the secondary rule of escheat. ). Hall et al., supra note 1, at F.3d at 374. See infra Part II.C.