- Ten Things You Should Know About the 2016 Uniform Unclaimed Property Act
- August 11, 2016 | Authors: Wilson G. Barmeyer; Holly H. Smith; Phillip E. Stano; Steuart H. Thomsen; Mary Jane Wilson-Bilik
- Law Firm: Sutherland Asbill & Brennan LLP - Washington Office
- 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.
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.