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Escheatment and State Laws

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By Ryan Wood
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP

Are You Complying With Your State Laws

Each State is considering new ways to continue to pay for the services they provide.

Given the current fiscal health of many states, each state is considering ways to continue to pay for the services they provide. One answer more states are turning to is stepping up the enforcement of their escheatment laws, or more popularly known as unclaimed/ abandoned property law. States where more businesses choose to incorporate, such as Delaware and California, will receive significant sums of unclaimed property that must be escheated to the state under their state laws. While the escheated property is merely being held for the rightful owner to claim it, the state may use a large portion of the property to help fund state services.

History of Escheatment

Modern escheatment law has its beginning under feudal law. The lord, upon termination of his tenantŪs tenure of land by reason of banishment, treason, forfeiture, or want of heirs, was presumed to resume his original title to the land by way of escheatment. All lands were deemed to be held by the subject either from his lord, or from the king as lord.

Escheatment today refers to the process by which property is transferred to the state for the rightful owner to claim it. State laws were enacted to prevent holders of unclaimed property from using the money and taking it into income. Escheatment laws provide states an opportunity to return money to the rightful owners and provide parties with a single source to report and claim the abandoned property. Every state has unclaimed property laws which declare money, property, and other assets to be abandoned after a period of time, usually three to five years, depending upon a stateŪs laws.

During this abandonment period, or dormancy period, business organizations are generally required to attempt to return the unclaimed property to their rightful owners. Some states require the holder of the abandoned property to satisfy the states due diligence requirements before the property escheats. This involves the holder of the property giving notice to the rightful owner that they have property that may be escheated to the state. Some states, such as Delaware, have no due diligence requirement. Those who must escheat property to the state of Delaware may do so without giving notice to the rightful owner.

In California, by contract, the due diligence requirements require the holder of the unclaimed property to send by mail, to the address of record, a notice either:

  1. Not less than two years, nor more than two and one-half years, after the date of last activity or communication with the owner with respect to the account; or

  2. Not less than six nor more 12 months before the time the account becomes reportable to the California State Controller.

In the United States, state law almost exclusively governs unclaimed property law or the process of escheatment. Businesses and residents abandon over a billion dollars of tangible and intangible property annually. According to the Abandoned Property Division of Massachusetts, for the fiscal year end 2003, the state of Massachusetts collected over $234 million and approved over 38,000 claims and returned over $24 million to the citizens of the commonwealth. The increasing need for states to fund their state budgets has resulted in unclaimed property departments adding positions to enforce unclaimed property laws. Florida has a reported $1 billion in unclaimed property. There is, however, no statute of limitations. Parties have the right to claim property, at no cost to them, at any time, regardless of the amount.

Aggregate Amount

Most states distinguish how one reports escheatable property by setting an amount at which the reporting entity may report escheatable property in the aggregate. The aggregate amount sets a minimum dollar amount at which a reporting entity must give detailed information regarding the owner of the property to the state. If the unclaimed property has a value less than the aggregate amount, then each account may be reported together as one total. In California, which has set their aggregate amount at $50, a reporting company with 20 separate accounts, each with a $30 credit balance, may report the $600 in the aggregate and turnover the cash value of the credit balance to the state without setting forth particular information for each account.

Conducting Business in Multiple States

As important as it is for each state to have some sovereignty, having 50 different sets of laws to follow when conducting business throughout the country is cumbersome. Which state must one escheat the unclaimed property to? In general, the first priority right to take and hold unclaimed property is the state shown on the holder's books as the state of last known address of the property owner. Many types of unclaimed property are anonymous, meaning the holder never obtained, or no longer retains, an address for the owner in its records.

In this case, or when the customer's last known address is in a foreign country, the state of domicile of the holder (which is the state of incorporation for a corporate holder) has second priority rights to receive and hold the property. The state of the holder's domicile also has second priority rights where the state of the owner's last known address does not assert a claim to the type of property in question.

Recent Developments: Electronic Stored Value Cards and Gift Certificates

An often overlooked and evolving category of potentially escheatable property is electronic stored value cards, a prepaid card or gift certificate issued by entities which are not used or are lost. These items which store money for future use present a dilemma if specific laws have not been passed to address them. Under New York, law for example, the question of whether or not the value of a telephone card is escheatable property is not easily answered.

Based upon New York law, will an issuer consider the funds which have been collected and which represent unused telephone time as žunclaimedÓ by an žownerÓ who is žentitledÓ to them? The telephone company may put an expiration date on the card or gift certificate. Or the purchaser may have agreed that after two years the right to the funds for a call or purchase is cut off, and ownership reverts to the issuer. While New York has not passed specific language to address this issue, the Comptroller has taken the position that inactivity for the statutory dormancy period triggers the statutory filing and transfer requirements for this type of unclaimed property.

If a person subsequently receives the services to which he is entitled to by using the phone card or gift certificate, the entity which already escheated the property to the state may file a claim for reimbursement. What if the issuer made clear that what was being sold was the opportunity to make telephone calls or purchase merchandise in the future? One interpretation is where no person has an enforceable entitlement to the funds, the state cannot act on their behalf in collecting the funds as abandoned property. The funds would be earned income to the issuer who makes the services available as promised.

Massachusetts passed a law clarifying how gift certificates will be treated in their state. The new law requires gift certificates issued in Massachusetts to not expire for seven years from the date of purchase. The new law enables businesses to keep the money of unredeemed gift certificates after seven years as long as the expiration is clearly marked on them. Gift certificates without expiration dates are redeemable to perpetuity.

Enforcement of Escheatment Laws

States have broad power to investigate and audit companies to ensure compliance with unclaimed property laws. California may punish any person who willfully fails to report unclaimed property to the state by a fine of $100 for each day such report is withheld, but not more than $10,000. California may punish any person who willfully refuses to pay or deliver escheated property to the Controller of California a required shall be punished by a fine not less than $5,000, but no more than $50,000. The State of California may also charge interest of 12% per annum on the property or value of the property that should have been reported, paid or delivered. Most states have similar laws and penalties for not reporting.

Escheatment and the Credit Professional

A vendor needs to monitor their accounts. Forming a compliance plan and a systematic process for tracking unclaimed property may be essential. Individual state laws vary, and a potential audit by the state, and the penalties for not reporting and delivering unclaimed property are all compelling reasons to closely manage unclaimed property.

Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP Fall 04

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