ROBERT P. KRENKOWITZ Attorney-at-Law

Transcription

1 ROBERT P. KRENKOWITZ Attorney-at-Law N. Whitlock Canyon Drive Tucson, Arizona Telephone: (520) Fax: (520) Admitted to the Practice of Law in Arizona and New Jersey 2nd April 2013 Nevada Senate Bill 355: Testimony in Opposition I. Guiding Principles. A legislature s consideration of an unclaimed property law and its components can be guided by the following generally-applicable principles: A. The owner of the property presumed abandoned is the person or entity shown on the records of the property s holder as the one entitled to payment or delivery of the property. That owner has a legal right to payment or delivery. B. The property holder has mere possession of the property presumed abandoned, but no moral or legal right 1 to retain or use of the proceeds of that property. C. The property itself is a fixed and certain interest, 2 meaning that the owner has a clear right to payment or delivery of the property, and the holder has an indisputable obligation to pay or deliver. D. Unclaimed property laws prevent forfeiture of the property to its fortuitous holder. The law abhors a forfeiture. As the US Supreme Court concluded in 1951, by means of State unclaimed property law, unclaimed property thus escapes seizure by would-be possessors and is used for the general good rather than the chance enrichment of particular individuals or organizations. 3 E. An unclaimed property law is consumer protection and public interest legislation, protecting the interests of the true owner of property against confiscation by the holder while giving the State the benefit of its use until the owner claims it. 4 1 New Jersey v. American Sugar Refining Co., 119 A.2d 767, 773 (N.J. 1956). 2 N.R.S. 120A Standard Oil Co. v. New Jersey, 341 U.S. 428, (1951). 4 Clymer v. Summit Bancorp., 726 A.2d 983, 993 (N.J. Super. Ct. Ch. Div. 1998), rev d on other ground, 758 A.2d 652 (N.J. Super. Ct. App. Div. 2000), rev d, 792 A.2d 396 (N.J. 2002). EXHIBIT L Senate Committee on Judiciary Date: Page: 1 of 6

2 II. SB 355: Section 2. Exemption of payments or credits due to a business association from a business association presenting sums payable to suppliers, or payment for services rendered, in the course of business, including checks or memoranda, overpayment, unidentified remittances, nonrefunded overcharges, discounts, refunds, and rebates. A. Other States: a. Four States (IL, KS, Oh, and VA) have a plenary exemption for all business-tobusiness transactions. b. Three States (IN, MA, and NC) limit the exemption to outstanding credit balances. c. Three States (IA, MD, and WI) exclude banking and financial organizations from the exemption. d. Two States (AZ and TN) require a current or ongoing relationship between the businesses. B. The definition of business association is all inclusive and would include individuals that formed a business entity, who, but for the business purpose, would be entitled to the salutary benefits of the unclaimed property law. The proposed amendment effectively denies the equal protection of the law to small, individually-owned, or family-owned businesses. C. If the notion is that businesses inherently do not need the protection of the unclaimed property law and can themselves reconcile credit balances, query why substantial sums are reported to the State and then claimed by business owners. Similarly, if the businesses no longer have an on-going relationship, query what steps a business would likely take to find or pay the other business. D. Businesses are known to use machinations to evade their obligations to other businesses. For example, in 2004, Katun Corp. was convicted of fraud in federal court in Minnesota. The company admitted that its employees had engaged in a scheme to misappropriate unused credits owned to the business equipment industry. Without notification to its customers, the company wrote off the unused balances and transferred the sums to its other income account. The company was sentenced to pay $6 million in restitution and a $5 million fine. 5 E. The force of Nevada law ends at its borders and cannot bind any other State. This proposed exemption would be effective only where the transaction is between businesses in Nevada and occurred in Nevada. Another State could take custody of the property if one of the parties to the transaction was a resident of that other State or the transaction occurred in that other State. Exercising its sovereignty over persons and transactions in it, another State could claim custody of the property that Nevada can no longer take. F. As the Uniform Law Commission has found, this exemption undermines the sound public policies of Nevada s unclaimed property law. 5 Criminal No (PAM/RLE) (D.Minn. Jan. 14, 2004). L 2 Page 2 of 6

3 III. SB 355: Section 3: The unclaimed property law provisions do not apply to any property the value of which is less than $50. A. Other States. Only Idaho has a comparable provision. And Arizona limits its businessto-business exemption to account balances under $50 unless there is a continuing business relationship between the parties. B. The Nevada unclaimed property law replicates the Uniform Unclaimed Property Law (1995) that was drafted by the Uniform Law Commission. Nevada s current legislative policy is that its unclaimed property law is to be applied and construed to effectuate its general purpose to make uniform the law among the states that enact it. 6 Because only one State has such a broad exemption, Nevada s enactment of this exemption violates its public policy in favor of uniformity in the law. C. The effect of this exemption is to limit in effect or surreptitiously repeal the unclaimed property law as to small denomination property such as checks, bank deposits, class action distributions, wages, utility refunds, consumer rebates, gift certificates, gift cards, money orders, and traveler checks. Here again, this exemption denies the equal protection of the law to owners of small denomination claims. IV. SB 355: Sections 4 and 6. The limitations period for State enforcement actions and retention of records is not only reduced, but now runs from the date that a duty arose, or property is presumed abandoned, or an instrument is presumed abandoned. A. As the Massachusetts Supreme Judicial Court has concluded, the concept of a statute of limitations is antithetical to the purpose of the [unclaimed] property act because it would permit every entity to make a self-serving interpretation of the law[], and to use that interpretation to its benefit by failing to report such property and barring any later enforcement action by a statute of limitations. That Court further found a limitations period would render the [unclaimed property law] difficult, if not impossible, to enforce, and would create a situation in which the purpose of the act, to reunite the property with its owners and to employ the property for public purposes in the interim, could not be achieved. 7 B. As a New Jersey court found long ago, unclaimed property laws have the salutary and remedial effect of increasing the period during which claims may be asserted by [apparent] owners or claimants without being barred by [any limitations period]. 8 C. Limitations periods were originally designed to shield parties from litigation of stale claims when memories have faded and records have been lost. It was not designed to 6 N.R.S. 120A Treasurer & Receiver Gen. v. John Hancock Mut. Life Ins. Co., 446 N.E.2d 1376, , 1380 (Mass. 1983). 8 Pennsylvania v. Kervick, 274 A.2d 626, 631 (N.J. Super. Ct. Ch. Div. 1971), rev d on other grounds, 288 A.2d 289 (N.J. 1972). Page 3 of 6 L 3

4 be a sword whereby a holder can cut-off its legal obligations. For example, the Wisconsin Supreme Court rejected such a limitations period, concluding that it would impose an unreasonable burden on the state to monitor all possible holders, where the burden of reporting [was] on the holder. 9 D. The present Nevada law requires that the State receive some notice before any limitations period runs. It commences the period 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. 10 The Uniform Law Commission explained the requirement of notice as one that clarifies existing law and codifies the holding of abandoned property cases that have ruled on the issues of limitations. 11 E. It is only fair that the State be given some notice about the property. To do otherwise is to invite mischief, sanction delay, reward the concealment of information, and permit a forfeiture of undisputed obligations. As the Uniform Law Commission concluded, [s]ince the Unclaimed Property Act is based on a theory of truthful self-reporting, a holder [that] conceals property, willfully or otherwise, cannot expect the protection of the stated limitations period. 12 F. The Nevada law also provides that if a holder does not maintain the records to permit the preparation of the required unclaimed property report, the State may use reasonabl[e] estimates, based on available records or any other reasonable method of estimation. 13 Query whether a holder can, or should be able to, avail itself of the shorter records retention period where it has failed to file a report or has given no notice to the State. As the Utah Supreme Court has ruled, even where a holder has destroyed records as permitted by some State law, it runs the risk of needing such documents to later rebut a presumption of abandonment. As the Court explained, allowing [a holder] to escape the rebuttal requirements by reason of its disposal of the records would create a private escheat and frustrate the purposes of the Unclaimed Property Act. 14 G. While the amendment, if enacted, would apply in Nevada, it would not affect the reporting obligations of Nevada businesses to other States whose unclaimed property laws would apply. Once again, the Nevada business would act at its jeopardy in destroying its records and would expose itself to the use of estimation techniques. 9 Employers Ins. of Wausau v. Smith, 453 N.W.2d 856, 871 (Wisc. 1990). 10 N.R.S. 120A Uniform Unclaimed Property Act (1995), Comment to 19, 8C U.L.A. 135 (2001). 12 Id., at N.R.S. 120A.690 (6). 14 Div. of Unclaimed Property v. McKay Dee Credit Union, 958 P.2d 234, 239 (Utah 1998). L 4 Page 4 of 6

5 V. SB 355, Section 5 (2). Prohibition of contingency fees in contracted examinations. A. As the Wyoming Supreme Court has stated the principle, there is no constitutional ban forbidding contingent fee arrangements contracts as such. 15 The California Court of Appeal reiterated that principle recently by rejecting arguments that contingency fees violate a holder s right to due process. That Court also expressed its doubts about the notion that persons compensated on a contingency fee basis are more apt to treat [someone] unfairly if they are paid pursuant to a contingency fee arrangement, rather than an hourly fee agreement, because the financial interest of those persons may interfere with some duty of neutrality. The Court found that it is just as easily argued that a contingency fee [person] is less likely to pursue meritless [actions], whereas an hourly fee [person] may have a financial motivation to continue [to pursue actions] discovered to lack merit. 16 B. Contract auditing does not result in the contractor undertaking governmental powers or functions. The contractor serves only as an agent of the State to examine holder records and report its findings to the State. Throughout, the State itself instructs the contractor and can always control the contractor s actions. The State can accept or reject the contractor s findings, can question the methodology used, and decide any questions that may arise. The State alone handles the adjudication and enforcement actions that it deems appropriate. It is the State s Administrative Procedures Act that governs the resolution of any dispute that may arise about the contractor s findings or methodology. C. Contingency fee auditing is permitted by both State and federal law. For example, Georgia law, included in its unclaimed property law, not only allows, but requires, that such auditors be compensated on a contingency fee basis. 17 At the federal level, the Executive Office of the President, addressing the recovery of federal overpayments, provides that Agency heads may enter into any appropriate type of contract, including a contingency contract for recovery audit services. Just like an unclaimed property contract auditor, the amount the recovery audit contractor is paid is based on the amount actually collected and reported by that contractor to the appropriate agency official. 18 Likewise, the federal Centers for Medicare and Medicaid Services allows State Medicaid offices to use contingency fee contracts for purposes of recovering Medicaid overpayments subject to third party liability. 19 These contingency fee auditing 15 Gonzales v. Personal Collection Serv., 494 P.2d 210, 204 (Wyo. 1972). 16 Priceline.com Inc. v. City of Anaheim, 103 Cal. Rptr. 3d 521, (Ct. App. 2010). 17 Ga. Code , incorporated by reference in the State s unclaimed property law at (b). 18 Circular No. A-123 (OMB Mar. 22, 2010). 19 Medicaid Program: Recovery Audit Contractors, 76 F.R (Sept. 16, 2011). L 5 Page 5 of 6

6 situations recovery of property due to the Government are akin to the State s efforts to recover unreported and under-reported property. D. Auditing has been crucial to State enforcement of, and holder compliance with, State unclaimed property laws. Where records are located in a distant place or a State s staff is limited or already overburdened, private audit contracting provides a smart, effective, and economical means to enforce compliance with the State s unclaimed property law. It uses the knowledge, experience, and analytics of private contractors at no cost to the State s citizens. The Uniform Law Commission has found that cooperation among the States, including joining together to audit major holders, is essential if abandoned property programs are to be efficiently administered. 20 E. The presumption applicable to contract auditors is that auditors, acting as agents for the party states, will obey the laws of the states on whose behalf they are acting, and perform their duties honorably. 21 Most criticism of such auditors is based on generalities, unsupported by any concrete examples of abuses. The US Supreme Court has rejected challenges to State examinations based on mere speculation and exaggerated forebodings because they would provide practically complete immunity from examination, a result that is inconsistent with the law and detrimental to the public interest. 22 F. The substantial sums found for the State through contract auditing belies the notion that there is substantial compliance with the law. It appears that as much as 80% of businesses are not in compliance, either not reporting at all or under-reporting the property. The principal opposition to contingency fee arrangements comes from companies (or there trade associations) that have significant unreported property. Much of that opposition is a disguised opposition to the law itself and to the turnover of the property that might otherwise be taken into income. Because a direct assault on the unclaimed property program and its salutary benefits would probably be unpopular and unsuccessful, criticism of contract audits is used as a surrogate to undermine the law. If this proposed amendment was enacted, the State s enforcement capabilities would be emasculated. And a delinquent or recalcitrant holder would have an enhanced chance that it can retain and forfeit the unclaimed property that does not belong to it. At the same time, to allow some to evade the law is unfair to those others who conscientiously have sought or are seeking to comply, through voluntary disclosure programs and truthful annual reporting. Thank you for your consideration. 20 Uniform Unclaimed Property Act (1995), supra n.11, Comment to 23, 8C U.L.A. at U.S. Steel Corp. v. Multistate Tax Comm., 417 F.Supp. 795, 804 (S.D.N.Y. 1976), aff d, 434 U.S. 452 (1978). 22 Oklahoma Press Pub. Co. v. Walling, 327 U.S. 186, 217, 218 (1946). Page 6 of 6 L 6