Escheat Trends
Unclaimed property/escheat laws cover a very broad spectrum of property types e.g. mineral interest, customer rebates, layaways, unpresented concert tickets (yes, there was litigation in three different states when Elvis did not complete his last tour).
The categories discussed in this section represent some of the most frequent issues:
2. "priority rules" which resolve competing state claims; and
3. gift certificates, a category which has expanded with the onset of stored value cards;
A "Typical" Unclaimed Property Statute
Why you need to understand this legislation
Evolution of Unclaimed Property
A. England
2. The related doctrine of bona vacantia ("vacant goods") covered personal property. Such property reverted to the Crown as a royal prerogative. The 1670 Statute of Distributions provided for a widow's portion, 22 and 23 Car. 2, c.10, Sec. 23.
3. These feudal concepts followed the colonists to America where bona vacantia gradually evolved into the modern unclaimed property legislation.
B. United States
Feudalism and its concepts never took root in this country; the prerogative of the Crown became irrelevant. Yet, escheat and bona vacantia remained, although in altered forms. The various states, not the feudal lords or the Crown, became the beneficiaries of both vacant land and vacant goods.
The title to such vacant land passed to the state. However, title to vacant goods never passed; the state merely took custody, Virginia's Uniform Disposition of Unclaimed Property Act became effective January 1, 1961. This Act was based upon the 1954 model legislation suggested by the National Conference of Commissioners on Uniform State Laws.
Operational Aspects of Unclaimed Property Compliance Under the Virginia Unclaimed Property Act
A. Broad Coverage; Report and Remittance
2. There are separate provisions for the more typical categories of intangible personal property:
b. Travelers checks and money orders, § 55-210.3:02;
c. Funds owing under life insurance policies, § 55-210.4:01;
d. Deposits held by utilities § 55-210.5;
e. Intangible interest in business associations, § 55-210.6:1;
f. Gift certificates and credit memos but only if redeemable in cash, § 55- 210.8:1;
g. Property held by public agencies, § 55-210.9;
h. Property held by courts, § 55-210.9:1;
i. Employee benefit trust distributions, § 55-210.10:1.
4. The Treasurer publishes notice in local newspapers, § 55-210.13; the owners or their successors may claim the funds in perpetuity. Although the Treasure holds some of the funds in a separate trust for prompt payment of claims, most of the funds are deposited in the Literary Fund, § 55-210.19.
5. Upon payment to the Treasurer, holders are relieved of liability to the apparent owners or their successors, § 55-210.15.
B. Examination and Enforcement
The initial report and remittance filed under this chapter shall include all items of property that would have been presumed abandoned if this chapter had been in affect during the ten-year period preceding January 1, 1961.
2. A statute of limitations defense is unavailable, § 55-210.17 (A) reads as follows:
The expiration of any period of time specified by statue or court order, during which an action or proceeding may be commenced or enforced to obtain payment of a claim for money or recovery of property, shall not prevent the money or property from being presumed abandoned property, nor effect any duty to file a report required by this chapter or to pay or deliver abandoned property to the State Treasurer.
3. The owner's failure to demand the property is not available as a defense. § 55-210.2:1 reads, in pertinent part, as follows:
Property is payable for the purpose of this chapter not withstanding the owners failure to make demand or to present any instrument or document required to receive payment.
4. The Treasurer, through his own staff or contract auditors, may examine the holder's books and records "at reasonable times and upon reasonable notice," § 55-210.24 (B.) Additionally such examination may be conducted "even if the person believes it is not in possession of any property reportable or deliverable under this chapter."
5. The holder must retain records for five years to verify a report (if no report is filed, then for ten years). A shorter retention period of three years is permitted for travelers checks and money orders, § 55-210.24:1 (A) & (B).
6. The Treasurer may assess interest and penalties as follows:
b. Up to $50 per account for failure to perform due diligence;
c. For inadvertent failure to report, $100 per day up to the lesser of $10,000 or 25% of the property's value;
d. For willful failure to report, $1,000 per day up to the lesser of (1) $50,000 or (2) 100% of the property's value;
e. For good cause shown, the Treasurer may waive, in whole or in part, interest and penalties.
Rules Of Priority
Delaware v. New Jersey was the last of the "priority to escheat" trilogy by which the U.S. Supreme Court has established the federal common law. The first case - Texas v. New Jersey, 379 U.S. 674 (1965) - established the following priority: 1. the state of the owner's last known address ("first priority") is entitled to escheat, except 2. the state of the holder's domicile ("second priority") is entitled to escheat when:
b. the law in the owner's state does not include the property category.
While the Texas case involved only $26,000 owing to unknown owners, the Supreme Court refused to modify these priorities when all of the property was owner-unknown, Pennsylvania v. New York, 407 U.S. 206 (1972). The final case affirmed the result, despite the tremendous amount of owner-unknown property at stake: $500,000,000, Delaware v. New York. This decision also resolved the "who is the holder" question in multi-party transactions. The holder is the party ultimately liable to the owner. In the case of a stored value card sold to individuals by retailers, the client remains liable.
The Texas decision rendered void the existing "jurisdictional" rules of the 1954 and 1966 Uniform Disposition of Unclaimed Property Acts. Belatedly the Commissioners promulgated the 1981 Uniform Unclaimed Property Act. This version of the model legislation included the Texas priority rules, but added several priorities not discussed by the Court in Texas. The 1995 Uniform Unclaimed Property Act reworded these priorities, but otherwise left them intact.
"Place of Transaction" Test
One such priority is a "place of transaction" test which comes into play when the priority rules are not applicable. The 1995 version contains the following language in Section 4(6): >
(6) the transaction out of which the property arose occurred in this State, the holder is domiciled in a State that does not provide for the escheat or custodial taking of the property, and the last known address of the apparent owner or other person entitled to the property is unknown or is in a State that does not provide for the escheat or custodial taking of the property....
The majority of the states adopted this priority when they adopted their respective versions of either the 1981 or 1995 Act. Although this priority has not, to my knowledge, been tested in litigation, a fact pattern underlying this priority was the subject of earlier litigation, O'Connor v. Sperry and Hutchinson Company, 379 A.2d 1378 (Pa. Commw. 1977), aff'd 412 A.2d 539 (Pa. 1980).
Pennsylvania had sought to escheat approximately $3,000,000 representing unredeemed trading stamps (S&H Green Stamps) sold by this New Jersey domiciliary to Pennsylvania retailers who in turn distributed them to their own customers as a promotional device. The "owners" were unknown as the retailers had no reason to record the names and addresses of their customers. New Jersey decisional law had held that New Jersey could not escheat the property because the non-appearing owners had not presented a completely filled book of stamps. The failure of this condition precedent meant that the state in turn could not meet its burden of proof, State of New Jersey v. Sperry & Hutchinson Co., 153 A.2d 691, (N.J. Super. Ct. App. Div. 1959), aff'd 157 A.2d 505 (N.J. 1960).
Therefore Pennsylvania argued that since (1) the owners were unknown and (2) the holder's domicile didn't include the property category, the state wherein S&H sold its product was the logical candidate to escheat. Although the two appellate courts addressed only the interlocutory jurisdictional issue (could a Pennsylvania court properly decide this case), dicta from the Pennsylvania Commonwealth Court supported this approach. (The case was remanded to the trial court for a decision of its merits; unfortunately the result of that decision is unknown.)
The possibility that a coalition of states, led by a contingent-fee vendor, applying a "place of transaction" increases with the amount of dollars at issue.
GIFT CERTIFICATES REVISITED
Retailers always ask why unpresented gift certificates or cards should be considered escheatable property. They argue that such certificates are contracts which the customers fail to perform by presenting the certificate in exchange for goods or services. That being the case, retailers believe that they are not required to escheat the monies.
Originally American escheat statutes focused upon savings accounts held by banks for their depositors. One of the earliest escheat decisions involved savings accounts which had shown no activity for thirty years, Provident Inst. for Savings. v. Malone, 221 U.S. 660 (1911). Escheat legislation gradually expanded to include other categories of intangible personal property which had been inactive. Notably the first two versions of the Uniform Unclaimed Property Act failed to include a specific statutory provision to cover gift certificates. The Act also failed to list gift certificates as one of the eighteen items of property illustrating the omnibus or "catch-all" clause.
The first case involving attempted escheat of gift certificates was a victory for the retailer in Murdock v. John B. Stetson Co., 32 Pa. D & C.2d 300 (1960). The Pennsylvania court found that the unknown customers had failed to present their certificates; therefore the state as custodian had no greater right to the monetary value of the certificates than did the missing owners. The court also noted that the Stetson certificate required the owner to claim his or her hat within a one-year period from issuance.
The 1981 Uniform Act explicitedly recognized gift certificates for the first time, both as a separate statute and as one of the enumerated examples in the definition of "intangible personal property." 1981 was also the first state victory for the escheat of the certificates.
In People v. Marshall Field & Co., 404 N.E.2d 368 (Ill. App. 1980), the Illinois Court of Appeals was unpersuaded by Marshall Field's argument that the customers' breach of contract; instead the court was bothered by the "unseemliness " of the retailer lowering its prior ten-year expiration period to five years in the transparent attempt to circumvent Illinois' reduction of the dormancy period from fifteen to seven years.
The pendulum began to swing back in the retailers' favor in the 1990s. The 1995 Uniform Act recognized that the face amount of the gift certificate had two distinct components: the cost of goods or services themselves and the anticipated profit. For that reason the Act recommended that the amount escheated be sixty percent (60%) of the face value of the certificate. This is the only instance of a reduction in face value of any property category found INany of the four versions of the Uniform Unclaimed Property Act.
In 1998, the judiciary returned to the contract analysis with renewed respect. New Jersey had attempted to escheat monies representing Hilton Hotel's certificates. The court asked: What did the purchaser bargain for? Goods or services at the hotel was the court's answer to its rhetorical question, In Re: Determination of Unclaimed Property Office, 156 N.J. 599 (1999).
Successful lobbing by retailers on a state-by-state basis caused the legislatures of more than twenty-five states to modify their respective gift certificates statutes. Some states eliminated this category entirely, others used a dollar ceiling or floor to eliminate certain certificates and still others used the presence or absence of an expiration date as the criteria.
Despite the New Jersey courts' analysis and the growing list of exempt states, many retailers have considered relocation to a more favorable state of domicile. Given the fact that there is no business rational for obtaining the owners' name and address, all unpresented certificates will escheat to the state of domicile under the Texas v. New Jersey priority rules. Therefore a retailer may avoid escheat.
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