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Theory of Escheatment

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By Richard Ruszat
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP

Using your customer's dormant account as a source of revenue

This may come as a surprise if your customer's dormant accounts are used as a source of revenue - it is likely, and in fact inevitable, that those funds must be remitted to the state or federal government. This procedure is known as "escheatment," which has amassed billions of dollars of unclaimed property to state coffers.

Unclaimed Property

The theory of escheatment provides that until the rightful owner is located, all citizens of the state, rather than an individual holder, derive benefits from the unclaimed property. Unclaimed property law finds its genesis in early English common law where unclaimed property would escheat, or revert, to the king upon abandonment. In modern times, a custodial theory has replaced confiscation. In the United States, the laws of the individual states govern abandoned property and escheatment. The meaning of escheatment has broadened to include property of every kind and description that remits to the state for want of individual ownership. Accordingly, the definition of unclaimed property involves hundreds of categories of property. As a rule of thumb, if a person or entity has a legal or equitable right to the property, then a state's unclaimed property law governs it.

The Uniform Laws and Purpose of Escheatment

Congress enacted several uniform laws to control the disposition of unclaimed property among the various states. The most recent legislation is the Uniform Unclaimed Property Act of 1995 (the "1995 Act"). The Uniform Unclaimed Property Act of 1981 and the Uniform Disposition of Unclaimed Property Act of 1954 preceded the 1995 Act. Portions of the uniform laws have been enacted by every state, the District of Columbia, and Puerto Rico. The purpose of the unclaimed property laws have remained constant-to reunite owners with their property, limit the liability of the holder of unclaimed property, and to provide states with a stream of income.

Reporting Requirements

If property remains unclaimed for a certain period of time, known as the "dormancy period," then a state gains derivative rights to the unclaimed property. The dormancy period is defined by state law and is measured by the date that the holder comes into possession of the unclaimed property and the date that the property must be reported to the state. A majority of states follow the 1995 Act and mandate that any money or credits owed to a customer has a dormancy period of three years. However, the dormancy period may range between one year and five years.

As a general rule, the owner's domicile governs a state's rights to succession of unclaimed property. The primary rule requires reporting the last known address of the owner as documented by the holder's books and records. If the identity and address of the owner is not known, then the secondary rule awards the right to escheat to the holder's state of corporate domicile. It is important to note that the holder's corporate domicile governs which property is required for reporting purposes, not the owner's domicile.

Under limited circumstances, a holder may deduct charges to maintain the unclaimed property during the dormancy period. In order to deduct charges, the holder must have a valid written contract with the owner, regularly impose the charge, and the amount of the deduction may not be unconscionable.

Annual Reporting

The holder of unclaimed property must submit an annual report to the state in which the property escheats. Some states require "negative filing," which is a report demonstrating that the holder is not in possession of unclaimed property. The holder should file an annual report using forms that are provided by the individual states.

Generally, the annual report requires the following information. First, the report should provide a brief description of the unclaimed property, including dates that the property became payable and the last transaction with the owner. Second, the report should provide the owner's name, address, and social security number or tax identification number. Third, if permitted by state law, a report should aggregate all claims with minimal value. A holder should consult state law to assure compliance with state-specific procedures.

In addition, a majority of states require a final notice period. Generally, the holder of unclaimed property is required to provide notice to the owner that the property is subject to escheatment. This notice is required 60 days to 120 days prior to escheatment if the unclaimed property meets minimum value threshold requirements.

Challenging Abandoned Property Laws

In an effort to avoid turning over property to the state, some businesses include contractual provisions that cause the loss of the owner's property rights prior to the time the property would escheat. For example, a business may include a statement on a written instrument declaring that the owner's failure to negotiate an instrument within a certain period of time constitutes private escheat (i.e., the property reverts back to the holder). A majority of courts conclude that this practice circumvents public policy and constitutes an attempt to avoid compliance with unclaimed property laws.

In addition, some businesses argue that credit balances and credit memos resulting from business to business transactions should not be subject to escheatment for the following reasons. First, business transactions are not similar to consumer transactions since businesses have the capability to audit accounts and an incentive to collect outstanding balances. Second, unclaimed property arising from business transactions is usually the result of administrative errors or a credit issued against future purchases to preserve goodwill. Third, compliance results in an administrative burden that exceeds any benefits to society. Although certain states have excluded this property from reporting requirements, the majority of states require reporting business to business transactions.


Generally, compliance with a state's unclaimed property law is mandatory. There are significant civil penalties for the failure to comply with reporting requirements. Penalties range from simple interest to the full value of the unclaimed property. In addition, some states impose daily penalties. Moreover, if a business willfully or fraudulently files a report, then the penalties may exceed $1,000 per day. However, criminal penalties are rare.


Compliance is an ongoing process that requires conscious efforts to implement procedures to comply with state law. The states have several methods to enforce unclaimed property laws. These methods include auditing the business for compliance and voluntary amnesty programs to entice businesses to comply without incurring penalties. It is necessary for businesses to comply with state escheatment laws and file annual reports to avoid the consequences of time consuming audits, monetary fines, and the surprise associated with remitting thousands, even millions of dollars, in unclaimed property that has accumulated over the years.

Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP Fall 02

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