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Escheatment in the Post September 11 Environment

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By Mary Ludwig Schaeffer and Scott Blakeley Esq.
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP

A Problem for the Credit Executive

The recent anniversary of Sept. 11 reminds us that states are still struggling to meet the new financial burdens that the Sept. 11 terrorist acts created. States are incurring enormous financial costs for homeland security. In light of this, states are looking for untapped revenue sources. The Chicago Tribune recently reported that New York state's annual budget now includes $408 million line item for escheatment, or abandoned property. Other states are looking at abandoned property as a source of substantial revenue to offset rising costs post-Sept. 11.

Given this environment, how does a state's focus in abandoned property as revenue source affect the credit professional? A credit professional often manages a portfolio of hundreds of commercial accounts, with credit extensions that can be in the millions of dollars. With an active trade relationship, it is not uncommon for the credit professional to have accounts with a surplus or credit balance. On occasion the corporate customer may never claim the credit balance.

Are escheatment laws, or as commonly referred unclaimed property, a problem for the credit executive, especially post-Sept. 11 where states are seeking untapped revenue sources to help offset the expense of homeland security? What is considered unclaimed property that may fall under the escheat laws? Does a credit balance qualify? What may be the consequence if the vendor declares the unclaimed property as income and applies it to the bottom line, as the vendor views it as a windfall to offset losses from unrelated delinquent accounts?

Post-Sept. 11 and the States Efforts to Find Untapped Revenue

The post-Sept. 11 costs to state governments are estimated in the billions. For example, New York property claims associated with the attacks are expected to reach up to $16 billion. Local governments and cities report that municipal revenues have been affected by the Sept. 11 attacks, and many are finding it difficult to meet budgets, in part, because of a decrease in tax collection and an increase in expenses to cover security. In this setting, states are looking for sources of revenue, and abandoned property, as the press reports, may be that untapped source for states. Escheatment revenue is an appealing revenue source from the states' view as it does not require raising taxes. States are more aggressive in their escheat efforts. Several private firms are working on behalf of states on a contingency fee basis to locate abandoned property that should have been turned over to the state.

Escheatment Defined

Businesses and residents abandon over a billion dollars of tangible and intangible property annually. Every state has legislation that requires companies to escheat to the state after some period. California, for example, requires escheatment to the state after three years of abandonment. Escheatment includes all forms of property, both tangible and intangible. For the credit professional, an accounts' credit balance may qualify an abandonment of property. Escheatment laws provide that the state becomes the legal owner of abandoned property, based on the concept of state sovereignty. In looking at escheatment as a revenue source, states are considering those businesses that have failed to escheat.

Development of Escheatment Law

The origin of escheatment law dates back to British law. Abandoned land was returned to the king. The states within the United States have followed this principle.

Uniform Disposition of Unclaimed Property Act

With the growing popularity of state unclaimed property statutes as a new source of state revenue in the 1950's, uniformity of such laws became a necessity, as controversies between states over conflicting claims to property developed. For example, if a corporation abandons credits it has based on a trade relationship with a vendor, several states might attempt to claim custody. The credits could be covered under the law of the state where the company was incorporated, or the state where the corporate headquarters was located. In addition, any state that was doing significant business with the corporation might claim the property.

In 1954, the Uniform Disposition of Unclaimed Property Act (the "Uniform Act") was introduced to unify the state statutory scheme of escheatment. The Uniform Act was amended in 1966 and 1981. The Uniform Act attempts to prevent multiple sate claims for property by designating the last known address of the owner as the basic test of jurisdiction. Thus, under the Uniform Act, if two sates claim the same property, the law of the state of the last known address of the owner governs. If property is abandoned, the state must establish its right to the property by proving that the property is located within its territorial limits.

Generally, if the property is considered to have a situs within the state, it is subject to escheat. The Uniform Act establishes a period for a presumption of abandonment for most types of property. For example, in California if the property is unclaimed for three years after it becomes payable. Presently, forty two states (including California, New York, Texas, and Florida) and the District of Columbia have enacted some version of the Uniform Act.

Delaware receives a significant portion of escheated property, notwithstanding that its population is but 800,000. This is because a large percentage of corporations incorporate in Delaware. Under the escheat laws, a party forwards the abandoned property to the company's state of incorporation, where the address of the owner can no longer be located.

Business to Business Exception

Under the business-to-business exception, outstanding balances between vendors may be deemed a duplicate payment. Accordingly, under this exception there is no unclaimed property to turnover. Nine states recognize the exception: Illinois, Iowa, Kansas, Maryland, Masschusetts, North Carolina, Ohio, Virginia and Wisconsin. However, application of the exception has proven a problem. Under the ruling of Texas v. New Jersey, should one state not require unclaimed property be turned over, but another state does require turnover, the later state would control for turnover of the property. Thus, only those cases where both states do not require turnover does the credit professional not have to escheat.

Change to Law May be Coming

Populous states are shouldering a larger financial burden with homeland security post-Sept. 11. A multiyear agreement between the states concerning escheatment expires in 2004. Because of this heavier financial burden populous states object to the escheatment provision that allows for the state of incorporation to serve as the basis for money to be turned over where the company cannot be located. Populous states are pushing for the location of the company's headquarters as the basis for jurisdiction for escheatment.

Risks of Not Escheating

Most states require businesses to review their records to determine whether any property has been unclaimed for the dormancy period and to make an annual report, especially post Sept. 11. State escheat statutes have harsh provisions for parties that fail to timely report or turnover unclaimed property. In addition to interest that runs from the period that the property should have been turned over, a state may assess fines, penalties and damages.

States Adopting Amnesty Program

While most states had offered amnesty programs for companies that had not escheated, only California still offers amnesty. The amnesty program provides waiver of penalties for parties who come forward prior to December 31, 2002.

Escheatment Audit

A state generally enforces its escheatment law through an audit. Audits are usually handled by the state treasurer's office or controller. The scope of the audit usually goes back several years. The auditors usually request the following: (1) chart of accounts; (2) general ledger/trial balance; (3) annual report; (4) journal entries; (5) bank reconciliations; and (6) accounting policies.

Steps to Protect Against Escheatment Claims

A credit executive should develop a game plan, and consider the following:

Step One: Determine the Situation

  • Review past compliance. Has the company every reported unclaimed property? If so, what, when, and where?

  • Has the company every been subject to an escheatment audit? If so, what were the results?

  • Are there any subsidiaries to be included? Has the company made any recent acquisitions that should be included?

Step Two: Determine Eligible Property

  • Does your company have some of the property types covered by most states? For the credit professional these include:

    1. - vendor checks,

    2. - payroll checks,

    3. - customer credits,

    4. - refunds,

  • What states are represented among the names and addresses to be reported? If this is an initial filing, what about years that may not be on the books?

Step Three: Perform the due diligence

  • What due diligence is required by state? Specifically, focus on:

    1. - the minimum dollar amount,

    2. - timing, method and

    3. - content notice.

  • What about operational due diligence? This might include developing a strategy to minimize unclaimed property liability and reviewing potentially reportable items.

  • Prepare the due diligence letter. This should include:

    1. - response deadline

    2. - identification number and amount

    3. - property type/reason

    4. - instructions for claiming

Step Four: Prepare Reports and Remittances

  • Identify due dates for states

  • Prepare a cover sheet with signature

  • Use the proper media, paper, diskette, etc.

  • Use the proper report format

  • Include the remittance, which might be a check, wire transfer etc.

Step Five: Filing Reports and Remittances

  • File on time to avoid penalties and interest

  • If you get an extension, get it in writing. Only some states will grant them.

Step Six: Follow up...Reconcilement

  • Reconcile general ledger to detail

  • Reconcile paid items to appropriate accounts/divisions

  • File any necessary holder reimbursement claims with the states

  • Establish a filing system for reports and work papers.

Credit professionals can also look to the following web site for guidance: National Association of Unclaimed Property Administrators at

Turning Over the Property

If your company decides to turnover the property to the state, most state statutes provide that the vendor should turn the property over to the state controller. Most legislation requires the vendor to make reasonable efforts to notify the owner of the property by mail that the owner's property will escheat to the state. The notice should be mailed not less than six months before the property is to be turned over to the state controller.

Depending upon the nature, all unclaimed property should either be delivered to the State Treasurer or Controller. When the unclaimed property is cash, delivery is made to the State Treasury; all other types of personal property go to the Controller.

The party delivering the property is relieved and held harmless by the state from all claims regarding the property. No action or lawsuit may be maintained against the holder of the property.

Prior to delivery, the holder must furnish notice to the Controller. At a minimum notice must include the amount of cash, or nature or description of other personal property; the name and last known address of the person entitled to the property; and reference to a specific statutory provision under which the property is being transmitted.


Reprinted by permission from The Trade Vendor Quarterly Blakeley & Blakeley LLP
Winter 02

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