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Unclaimed Property: The Year in Review

As the year winds down and we reflect on what has occurred in the world of unclaimed property over the last 12 months, we find it has been an unusually action packed year.  Joining the various other countdowns to 2011, here is the 2010 Countdo

December 30, 2010

As the year winds down and we reflect on what has occurred in the world of unclaimed property over the last 12 months, we find it has been an unusually action packed year.  Joining the various other countdowns to 2011, here is the 2010 Countdown of the Biggest Unclaimed Property Events of the Year.

5.  CALIFORNIA FINALLY ENTERS THE 21ST CENTURY: Enactment of Positive Contact Requirement and Allowance of Electronic Communication

 

California Assembly Bill 1291 (passed in late 2009) was up and running in 2010. The law placed greater owner notification burdens on holders, but permits such notifications to be peformed electronically, with one BIG caveat - an owner must consent to the electronic notice. Another bonus for California holders is that “communications” between holders and owners now includes account statements and statements required under the IRC. This is of special benefit to financial organizations and insurance companies that send monthly account statements to their customers.

California also recognized that not all owners (or even most, or maybe not even more than 10) are aware of the state’s unclaimed property laws. AB 1291 also requires holders to include the following specific language in due diligence letters: “THE STATE OF CALIFORNIA REQUIRES US TO NOTIFY YOU THAT YOUR UNCLAIMED PROPERTY MAY BE TRANSFERRED TO THE STATE IF YOU DO NOT CONTACT US.” Similarly, a separate section of the legislation, effective January 1, 2011, applies only to banking and financial institutions and requires  written notice to a person opening an account that the property in the account may be transferred to the appropriate state if no activity occurs in the account within the time period specified by state law. [If the person opening the account has consented to electronic notice, the above may be provided electronically.]  Because everyone reads all of the fine print provided by such institutions, this legislation will surely end any misunderstandings!

On a cheerful note, hopefully the California changes will encourage other states to embrace the technological advances of the last several decades and permit electronic notice to holders, particularly in light of states’ “Green Initiatives.” 

4.  MONEY, MONEY, MONEY: Shortened Dormancy Periods

Attempting to minimize the damage of budget deficits, states took to heart the musings of one of the greatest pop bands ever (and a palindrome – can you figure it out?): “Money, Money, Money, Always Sunny , , , All the things I could do, If I had a little money.”  Several states used their unclaimed property laws to get a “little money” by shortening their dormancy periods. For example, Arizona passed emergency legislation to shorten the dormancy period for most types of property from five years to three years. Michigan permanently shortened its default dormancy period from five years to three years, and New Jersey dramatically shortened the dormancy period for travelers checks from 15 years to three years.   

Since we know that states have not miraculously solved their budget problems, we predict that other states will adopt shortened dormancy periods in the coming year. For states that have already shortened their dormancy periods, maybe they will just keep chopping away like a person cutting his/her own bangs – with similar potentially ugly results. 

3.  GIVE A LITTLE, TAKE A LOT: Delaware Legislation – McKesson v. Cook

Bringing joy to holders everywhere, the McKesson Corporation brought suit against Delaware after the state asserted that the company’s un-invoiced payables (basically inventory overages) were unclaimed property. Instead of facing almost certain defeat in court, Delaware adopted legislation excluding un-invoiced payables from the definition of unclaimed property. Not stopping there, Delaware also adopted “administrative procedures” which turned this initial joy into a bit of a draw for holders who were hoping that the legislation would also include some type of real and independent administrative review process. The administrative procedures now require/permit that: 

  1. An audit assessment be paid within 30 days after the close of the audit; 
  2. Any audit dispute be first heard by a Delaware audit manager; 
  3. The holder may appeal the decision of the Delaware audit manager to the Delaware Secretary of Finance; 
  4. The matter may be referred to an Independent Reviewer; and 
  5. The Delaware Secretary of Finance may reject the decision of the Independent Reviewer.

We expect that this process will lead to a less than fair result, especially since the “Independent Reviewer” will likely be a current or former employee of the Delaware Bureau of Unclaimed Property.

2.  THE STAGES OF GRIEF: Insurance Company Audits

In 2009, life insurance companies began receiving state unclaimed property audit notices. While unclaimed property is nothing new to the industry, the particular focus of these audits was different, focusing almost exclusively upon life and annuity products. One life insurance product under intense scrutiny is retained asset accounts.

1.  AND THE STATE OF THE YEAR IS: New Jersey – for its Stored Value Card Legislation, Retroactive Remittance Law, Running Afoul of the United States Supreme Court, Making Delaware Mad and Earning a Preliminary Injunction from a Federal Court

New Jersey wins the prize for most audacious legislation of the year. In addition to dramatically reducing the dormancy period for travelers checks (see number 4), New Jersey:

  1. Revoked its previous judicial exemption for stored value cards;
  2. Imposed a two-year dormancy period on such cards (which is three years shorter than the federal expiration date law); 
  3. Applied its new law retroactively to all outstanding amounts (which were previously exempt); and 
  4. Took on Delaware and possibly the U.S. Supreme Court by adopting a law providing that the “location of the transaction” trumped the state of incorporation as the state of priority if unclaimed property had no last known address of an owner. 2010 N.J. Laws Chapter 25.

The state estimates this law will generate an additional $76 million annually in unredeemed gift cards – if it ever gets out of litigation. Not surprising, the law was met with great disapproval by retailers, restaurants and organizations, such as the New Jersey Retailers Association. A total of five cases were filed challenging the law and seeking a preliminary injunction. The plaintiffs were successful on the most important merits of the case – the state had unconstitutionally bent the established rules of jurisdiction. 

Not one to give up easily (or at all), New Jersey pushed on and issued Treasurer Orders mandating that issuers of stored value cards reconfigure their sales and data retention systems so that by January 3, 2011, they are capable of obtaining and maintaining at a minimum ZIP code information of all stored value card purchasers.

We expect that 2011 will be another very interesting year with respect to New Jersey’s stored value card legislation and whether  other states will adopt similar statutes. It will not be surprising to see the priority issue in front of the United States Supreme Court.

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Sutherland Asbill & Brennan LLP is an international law firm helping the Fortune 100, industry leaders, sector innovators and business entrepreneurs solve their biggest challenges and reach their business goals. Dedicated to unfaltering excellence in client service, we are known for our business savvy and industry intelligence, providing creative and custom solutions for each of our clients. Industry and business experience makes the difference for our clients.

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