Sutherland Asbill & Brennan LLP - Mary Jane Wilson-Bilik, Wilson G. Barmeyer, Holly H. Smith, Phillip E. Stano, Steuart H. Thomsen and Amy F. Nogid
The 2016 Uniform Unclaimed
Property Act (2016 Act) was adopted unanimously by the Uniform Law Commission
(ULC) in a 49-0 vote at its 2016 summer meeting. The adoption of the revised
model law is a significant step forward for the new 2016 Act, which has been
under development by the ULC for more than two years.
The ULC received
thousands of pages of comments from stakeholders and held numerous hearings in
a contentious process that exposed significant disagreements between states and
holders on the appropriate treatment of a large number of key issues under the
unclaimed property laws. A final version of the 2016 Act, with commentary from
the drafters, is expected to be released later in the year.
Here are 10 important
takeaways from the new 2016 Act.
1. The 2016 Act Is Not Law, at
Least Not Yet. The 2016 Act is model legislation, but is not (yet)
actual law in any state. All but a few states (such as New York and Delaware)
have unclaimed property statutes based on one of the four prior versions of the
uniform act. Approximately 25 states enacted the 1981 Uniform Act in some form,
while about 15 states enacted a version of the 1995 Uniform Act. It
remains to be seen whether the 2016 Act will be broadly adopted across the
states, either in whole or in part. The ULC anticipates that the 2016 Act will be
introduced as legislation in the states as early as 2017.
2. Broader Range of Issues
Covered. The 2016 Act is much more comprehensive than prior iterations of the
uniform act. As an illustration of its scope, the 2016 Act has almost 100
sections, whereas the entire 1995 Uniform Act had only 30 sections. The ULC has
undertaken significant efforts to address key issues of substance and process
not covered by prior models. As discussed below, many of these issues were
highly controversial among stakeholders. Whether the ULC has succeeded in
forging sufficient consensus on controversial issues to merit widespread
enactment of the 2016 Act into law remains to be seen.
3. Use of Contingency Fee
Auditors Still Permitted. Due to the proliferation of aggressive and burdensome
contingency fee audits of unclaimed property, holders advocated strongly for a
ban on the states’ use of contingency fee auditors as a matter of public
policy. After a valiant battle, holders lost. State treasurers retain their
right to employ auditors on a contingency fee basis, although the 2016 Act
suggests a 10% cap on auditor fees and provides a process for the holder to
take complaints directly to the state administrator if the contingent fee
auditor’s techniques are unreasonable.
4. Procedural Protections for
Holders Added, Including a Five-Year Statute of Limitations on State
Enforcement. The 2016 Act provides holders with several important procedural
protections that were noticeably absent from prior uniform acts. First, whereas
the 1995 Act contained no clear statute of limitations for states to conduct
audits and bring enforcement actions, the 2016 Act establishes a statute of
limitations of five years after the filing of a non-fraudulent report and a
statute of repose of 10 years where no report has been filed. If adopted by
states, these provisions would preclude audits going back for 20 years or more,
as some states assert the right to do. Second, the 2016 Act includes, for the
first time, a procedure for holders to appeal unclaimed property audits and
assessments. Third, the 2016 Act contains important provisions governing the
confidentiality and security of information that holders produce during the
course of an audit.
5. Business-to-Business and De
Minimis Exemptions Rejected. The business community advocated for exemptions
for business-to-business transactions and for properties valued under $50, but
neither was adopted in the approved version. States vigorously opposed a
business-to-business exemption, and the drafting committee did not accept
holder arguments that businesses do not need the “protection” of unclaimed
property laws. A de minimis exemption, which had been under discussion in early
sessions, was ultimately rejected.
6. Life Insurance and
Knowledge-of-Death Standard Revived. Extensive negotiations
were held between states and the life insurance industry on the life insurance
provisions ultimately included in the 2016 Act. Under the 2016 Act, death
benefit policy proceeds are escheatable three years after an insurance company
has “knowledge” of the death of the insured, similar to the provisions of the
1981 Act adopted by many states. The 2016 Act defines “knowledge” of death
broadly to include the receipt of a death certificate, due diligence by the
insurer that results in the validation of a death, or a match with a death
records database, such as the Social Security Death Master File (DMF) that has
been validated by the company. Importantly, the 2016 Act does not impose an
affirmative obligation on holders to search the DMF under unclaimed property
law, because the ULC appeared to recognize that any such requirement is more
properly an area of insurance regulation. And a DMF match, unless and until
validated by the insurance company, does not trigger the dormancy period.
7. Securities and the Returned
Mail Standard Clarified. The core dispute over unclaimed securities was whether
escheat obligations should be triggered by mere account inactivity (advocated
by the states) or should be based on returned mail (advocated by the securities
industry). The securities industry argued that escheat based solely on
inactivity was in tension with federal securities laws and contrary to
buy-and-hold investment strategies. Ultimately, the securities industry
prevailed. The 2016 Act provides that a security is presumed abandoned if mail
is returned to the holder over a specified period. Special rules apply in the
case of holders that use electronic mail, rather than the U.S. mail, to
communicate with owners. In these cases, the holder must send an email to the
owner not later than two years after the owner’s last “indication of interest”
in the security; the holder must follow up promptly by U.S. mail if the owner
does not respond to the holder’s email within 30 days. The security is presumed
abandoned three years after the date the mail is returned to the holder as
undeliverable.
8. Escheat of Gift Cards
Unresolved. Given the widespread disagreement among stakeholders on the proper
treatment of unclaimed gift cards, the ULC did not attempt to resolve the issue
in the 2016 Act, but rather left the issue for individual states to address.
The 2016 Act gives states two options to consider: exclude gift cards
altogether from the statute or include gift cards with caveats. Similarly, the
escheatment of “in-store credits for returned merchandise” is left up to
individual states. In contrast, “stored value cards” are escheatable where they
are redeemable for money or may be monetized by the owner, whereas “loyalty
cards” and “game-related digital content” are excluded.
9. Priority Rules
Reinterpreted. The priority rules govern which state is entitled to
take custody of unclaimed property, and the U.S. Supreme Court has established
two simple rules: first priority is given to the state of the owner’s last-known
address; if the owner’s address is unknown, the second priority is given to the
holder’s state of incorporation. Despite the apparent simplicity of the Supreme
Court’s two-part rule, the ULC grappled with a number of disputed issues that
have received inconsistent treatment over the years by states and holders.
First, the 2016 Act gives broad authority to first priority states where there
is “any description, code, or other indication” that shows the last-known
location of the owner, even if the information is not an address sufficient for
the delivery of mail. If enacted, this would expand the first priority reach of
many state statutes.
Second, the 2016 Act purports to allow the second priority
state to escheat addressed property not claimed by the first priority state
unless the property is “specifically exempt” in the first priority state’s
statute. And third, the 2016 Act retains the “third priority rule” that permits
the state of the transaction to assert third priority. Each of these issues
affects the balance of state authority vis-à-vis one other, and all of them
either have been or may be challenged as potentially inconsistent with federal
common law or constitutional law.
10. Foreign Property Remains
Escheatable. Over the vigorous objections of holders, the ULC
retained the provision that would allow a holder’s state of incorporation to
claim abandoned foreign property, even if the foreign country does not require
that the unclaimed property be escheated. Holders argued that this provision
exceeds state authority and is invalid under federal common law, under the
Supremacy, Due Process and Commerce clauses of the U.S. Constitution, and under
international norms.
Conclusion
It remains to be seen whether
state legislatures will take up the new 2016 Act and, if so, whether it will be
widely adopted in whole or in part. The ULC process exposed numerous areas of
significant substantive disagreement between states and holders, and those
battles are expected to continue playing out on specific issues if and when the
2016 Act is introduced in individual state legislatures in 2017 and 2018.
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