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UNCLAIMED PROPERTY FOCUS is a blog written by and for UPPO members, featuring diverse perspectives and insights from unclaimed property practitioners across the U.S. and Canada. We welcome your submissions to Unclaimed Property Focus. Please contact Tim Dressen via tim@uppo.org with any questions about submitting a blog post for consideration and refer to our editorial guidelines when writing your blog post. Disclaimer: Information and/or comments to this blog is not intended as a substitute for legal advice on compliance or reporting requirements.

 

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A look at Delaware’s statute recognizing first priority states’ exemptions under S.B. 13, part 1

Posted By Mark Watters, Thursday, June 22, 2017
Updated: Thursday, June 29, 2017

One of the key provisions of Delaware’s S.B. 13, 149th General Assembly (the 2017 revision of its unclaimed property act), is Del. Code Ann., tit. 11, §1141(b), honoring exemptions of all first priority jurisdictions.

 

Formerly, Delaware was known to take properties exempted by the first priority jurisdiction based upon its interpretation of the priority rules (discussed below). As a majority of business associations are incorporated or formed in Delaware, this was a significant frustration of purpose for many other jurisdictions’ exemptions and provided a sizable windfall to Delaware. 

 

The new Delaware statute now maintains the exemption of the state of first priority, a reversal of the former Delaware common law practice. All the same, is the new “broad brush” Delaware exemption as it appears, or will it be restricted in practice by the state escheator?

 

Priority Rules and Prior Delaware Application

Under Texas v. New Jersey, 379 U.S. 674 (1965), the U.S. Supreme Court settled competing claims to property, creating a set of priority rules between competing state claims to properties. Under those priorities, the state of the property owner’s last known address has first priority to take the property. The second priority, which applies if the state of first priority takes no claim to the property, fell to the state of the holder’s incorporation (and now, formation for unincorporated business associations). The third priority, which is less well defined and which is rarely applied, is essentially any state with an economic interest, such as the jurisdiction where the original obligation arose. 

 

Under these common law rules, Delaware has historically benefited by taking properties with no known owner and address, foreign properties (that had no “state” of last address) and properties that were not escheatable to the state of first priority for any reason.

 

Del. Code Ann., tit. 11, §1141(b) (S.B. 13, 149th General Assembly)

Under its new statute, it appears that this substantial source of Delaware’s historic unclaimed property has been proactively eliminated; properties, once exempt in the jurisdiction of first domicile but taken by Delaware, may no longer be escheatable in Delaware under Del. Code Ann., tit. 11, §1141(b):

 

(b) Property is not subject to custody of the State Escheator under subsection (a) of this section if the property is specifically exempt from custodial taking under the law of this State or the state of the last-known address of the owner.

 

Under previous application, other states’ exemptions were frustrated by requiring holders incorporated in Delaware to escheat properties under the second priority.

 

This new Delaware statute raises several complex issues of application and definition, which will be resolved over time through regulation, policy, and practical application:

  • What constitutes an “exemption”?
  • How should holders manage these exemptions?

This article seeks to create awareness of these questions for further discussion.

 

What constitutes an “exemption” under §1141(b)?

There is no statutory definition of “exemption” under S.B. 13, so initially state regulation, policy statements, and audit practice will provide parameters. Guidance is promptly needed, since many potential “exemptions” represent substantial and growing amounts on the records of holders and, thus, potential significant exposure.

 

The meaning of “exemption” should apply to any specifically-identified by that term in the law. Beyond the use in statutes and common law of that exact word, there are other statutory constructions that arguably act as exemptions, but are not so named or act as property value reductions only. These terms include:

  • Exceptions. Exceptions differ from exemptions primarily by how they arise. While an exemption recognizes that such properties would generally be escheatable, by affirmative statutory construction an exception is created by carving out that property type from the general statutory base. There are two types: Those created by definition restriction; and those created by statutes of application. The former will be found in statutes of definition, typically in that for “property”; the latter in statutes requiring general escheatment of a property type “except for” certain properties falling under a particular fact pattern or other condition. These differences are not important to our survey; each can be identified by the word “except” and its derivatives in the statutory or common laws proper;
  • Minimal value “exemptions.” Minimal value exemptions restrict the escheatment of properties exceeding a certain minimal value; 
  • Business sector exemptions. A few jurisdictions have exemptions based solely on the holder’s industrial sector, applicable to certain property types;
  • De facto exemption through superseding statutes. Federal and state laws, especially in the consumer protection, banking, insurance and commercial sectors, superseding unclaimed property law;
  • Deferral “exemptions,” where the holder need not report property until there is a clean break in overall relationship with the (typically business) owner; and
  • Reductions and deductions. These are reporting value adjustments recognizing and relieving duties and burdens imposed on holders. Typically, these are cost reimbursements, actual or computed, for the management of properties, particularly for performance of due diligence and preservation of properties and their maintenance on the books and records of the holder. These reductions and deductions may apply to both holders and state property administrators, the latter as compensation for property advertising and preservation. 

These are discussed in the context of Delaware’s statute below. 

 

Exceptions in state codes are clearly purposed to withdraw certain properties from escheatment in their jurisdictions just like exemptions. Unlike exemptions, these generally are not discretionary but mandatory. One would hope by application and intent exemptions and exceptions would receive equal treatment.

 

Partial exemptions. Several states provide a partial exemption, typically exempting minimal values of specific properties; higher property values are fully subject to escheatment. This issue is very hard to predict, as minimal values under the reporting threshold but having a single owner could be consolidated by Delaware to pass the threshold of such minimal values, and even if analyzed alone, might not rise to the level of “exemptions” under Delaware’s statute. 

 

Business sector exemptions. A few states create special exemptions for cooperatives, certain preferred business sectors, and similar holder groups. These exemptions are usually also limited to certain property types. By practical application these should be recognized as exemptions

 

De facto exemption through superseding statutes. There are many areas where federal and state laws supersede those for unclaimed property; many state laws are universal. These include life insurance, gift cards and certificates, commercial paper, and many others. Such statutory preemption should expect to be recognized. Common law (through litigation) recognizes other circumstances of preemption, such as U.S. savings bonds, although the case law may not be recognized until litigated in courts of local jurisdiction. 

 

Deferral “exemptions.” These are not true exemptions, but rather stay or delay escheatment until certain conditions are met, typically when the holder breaks connection with the owner. While these may be titled or described as “exemptions”, these are rightly deferrals, where the state of first priority delays (“defers”) reporting until after a break between the holder and owner. These properties may be subject to Delaware escheatment, especially considering the 10-year statute of limitations (Del. Code Ann. tit. 11, §1156(b)), and the closing door of opportunity; likewise, Delaware could honor the deferral and allow the jurisdiction of first priority to take when it is appropriate to do so.

 

Reductions and deductions. These are generally modest amounts to recompense the holder for costs associated with property management and reporting compliance. One might expect Delaware to honor such allowances of its sister states. However, there is no clear statutory requirement that it do so except through the statutory authority cited in this paper. This author is unaware of any instance where Delaware has historically pursued such allowances under the old law. 

 

Holders should be careful to recognize that any applied “exemption” does not extinguish its obligations to the property’s owner; rather, exemptions only relieve the holder from reporting and remitting the property to the appropriate jurisdiction. Obligations to the property’s owner are never relieved. 

 

The ultimate duty of all holders is to return property held to its rightful owner or report and remit it to the state. In addition, rolling such properties back into P&L may violate accounting standards that are beyond unclaimed property laws. Thus, other than the important consideration as to who should have the right to hold and have use of the property until redemption, there is no permanent value to its possession. 

 

Part 2

Part 2 of this article examines how holders should manage these exemptions.

 

About the Contributor

Mark Watters is technical director, unclaimed property, for DuCharme, McMillen & Associates Inc.

 

Disclaimer: Neither UPPO nor DMA, or any of their affiliated or related entities, by means of this summary, is rendering business, financial, legal, tax, reporting or compliance or other professional advice or services. This blog post is not a substitute for such professional advice.

Tags:  Compliance  Delaware  priority rules  unclaimed property 

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UPPO Asks: What are the most important personality traits for an unclaimed property professional? 

Posted By Administration, Thursday, June 15, 2017
Periodically, UPPO asks members to respond to a question, sharing their ideas, insights, and experience. The recurring UPPO Asks feature is a compilation of their responses.

 

We recently asked several members: What are the most important personality traits for an unclaimed property professional to have? 

 

“The most important personality traits are patience, good organizational skills and attention to detail.”—Martina Bantham, financial analyst, State Farm Federal Credit Union

 

“I look for people who have at least a basic understanding of unclaimed property, are organized (to manage volumes of data), are patient (helps with obtaining information needed from stakeholders or responses from states) and detail-oriented (to manage the complexities of varying state requirements).”Janeá D. Matchett, unclaimed property program director, Cox Enterprises Inc. 

 

“I believe that the most important personality traits for an unclaimed property professional to have are: ambitious/motivated, decisive, determined, involved, reliable, persistent and interested.”Krystal Greiten, supervisor – unclaimed property, Occidental Petroleum Corp.

 

Now it’s your turn. What do you think are the most important personality traits for an unclaimed property professional? Add a comment to this post to share your response.

 

Tags:  hiring  unclaimed property  UPPO Asks 

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Litigation Update: Supreme Court battle over MoneyGram “official checks” begins taking shape

Posted By Contribution from Sam Schaunaman, J.D. and GRAC member, Monday, June 12, 2017

Delaware v. Pennsylvania and Wisconsin and Arkansas, et al. v. Delaware (U.S. Supreme Court)

MoneyGram has been involved in a number of lawsuits involving Delaware, Wisconsin and Pennsylvania. The states are each claiming right to MoneyGram’s official checks. Delaware claims MoneyGram should escheat the property to Delaware because it is MoneyGram’s place of corporate domicile. Wisconsin and Pennsylvania argue that the official checks should be remitted to the jurisdiction in which the purchase took place. 

 

A key issue is whether the unclaimed funds attributable to the official checks should be escheated in accordance with the federal priority rules set forth in Texas v. New Jersey, or whether they should be escheated in accordance with the rules set forth in the Disposition of Abandoned Money Orders and Traveler’s Checks Act, 12 U.S.C. sec. 2501 et seq.

 

More than two dozen other states have joined Pennsylvania and Wisconsin in the lawsuits against Delaware. In October 2016, the U.S. Supreme Court (“Supreme Court”) agreed to hear the cases, and consolidated the two cases into one.   

 

(Learn more about the cases involving MoneyGram that led to Delaware v. Pennsylvania and Wisconsin: Part 1 and Part 2.)

 

Special master appointment

In disputes involving two or more states, the Supreme Court has original jurisdiction under the U.S. Constitution and the U.S. Code. In order to efficiently consider and manage such original jurisdiction cases, the Supreme Court may appoint a “special master” to act as a de facto trial court, responsible for gathering facts, taking testimony and making recommendations to the Supreme Court.

 

On March 29, 2017, the Supreme Court appointed Circuit Judge Pierre Leval of the Court of Appeals for the Second Circuit as the special master for this case.

 

Case Management Order No. 1

On May 12, 2017, Special Master Leval issued Order No. 1 in the case. It indicated that a status conference would be held in New York City on June 5, 2017, whereby the special master would meet with counsel for the parties and MoneyGram Payment Systems Inc. to discuss formulation of a Case Management Plan. Our understanding is that arguments on certain motions of the parties would be heard at such conference, as well as discussions pertinent to a letter from legal counsel for one of the parties requesting bifurcation of the proceedings. Such request asked that the case be bifurcated into two stages: (i) a first part to determine liability, and (ii) a second phase to determine damages, if needed. 

 

UPPO will continue to monitor and report on this case as it develops.

 

About the contributor
Sam Schaunaman, senior manager at Ryan AUP and member of the UPPO Government Relations and Advocacy Committee, contributes to UPPO’s monthly litigation update blog posts. Schaunaman has over 26 years of unclaimed property experience in all aspects of unclaimed property, is a frequent author of unclaimed property articles and whitepapers, and is a co-author of the Bloomberg BNA Unclaimed Property Portfolio, Corporate Practice Series.  Schaunaman is a member of the Oklahoma Bar Association.    


Disclaimer: This case summary contains a general description of the case, and neither UPPO nor Ryan, or any of their affiliated or related entities, by means of this summary, is rendering business, financial, legal, tax, reporting or compliance or other professional advice or services.  This summary blog is not a substitute for such professional advice.

 

 

Tags:  Delaware  litigation  money orders  MoneyGram  official checks  Pennsylvania  unclaimed property 

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Office Depot case takes on federal priority rules

Posted By Administration, Thursday, June 1, 2017

On May 4, 2017, UPPO filed an amicus brief with the U.S. Court of Appeals for the Third Circuit in the case of Office Depot v. Cook. The amicus brief supports the arguments of the plaintiffs, retailer Office Depot and its gift card management company, North American Card and Coupon Services (NACCS). 

 

Like many retailers, Office Depot established and uses a special purpose entity for oversight and management of its gift cards and gift certificates. The gift card management company, NACCS, was incorporated in 2002 in Virginia, which exempts gift cards from unclaimed property reporting. NACCS does not collect names and addresses of gift card or certificate purchasers. 

 

As part of an audit that began in 2013, Delaware’s third-party auditor, Kelmar, requested information from Office Depot that included detailed records regarding NACCS transactions. Office Depot declined to provide this information, arguing that NACCS transactions fall outside of Delaware’s jurisdiction under the priority rules established by the U.S. Supreme Court in Texas v. New Jersey

 

As a result of Office Depot’s refusal to turn over requested NACCS documentation, Kelmar subsequently referred the issue to Delaware’s attorney general for “enforcement action.” 

 

On July 18, 2016, Office Depot and NACCS filed suit  against Delaware unclaimed property officials, seeking a declaratory judgment that the state’s unclaimed property practices violate the Fourth Amendment and federal common law. The plaintiffs argue that:

  • The defendants’ information request amounts to unreasonable search and seizure.
  • Delaware’s unclaimed property laws violate the federal priority rules established in Texas v. New Jersey.

On March 3, 2017, the U.S. District Court of Delaware dismissed the case, saying that the priority rule cases cited by Office Depot apply only to interstate disputes, but not disputes between private entities and states. Office Depot appealed the ruling to the Third Circuit Court of Appeals.

 

“Delaware is arguing that holders can’t rely on the federal common law rules and that the state has the right to essentially demand any and every bit of documentation or information concerning how a retailer set up its gift card structure,” says Ethan Millar, partner with Alston & Bird. “If Office Depot prevails in this case, then Delaware will be significantly limited in its ability to challenge these structures.”

The priority rules permeate many aspects of unclaimed property compliance—beyond just the retail industry. On a larger scale, the Office Depot case takes aim at any holder’s ability to rely on the federal priority rules to determine the states to which they should escheat unclaimed property.

 

“If the court determines the federal common law rules do not apply to disputes between a holder and a single state, that will invite chaos as a matter of compliance because holders will have to try to anticipate claims by states that wouldn’t normally have a claim under those rules,” Millar says.

 

In addition, invalidating the priority rules in disputes between single holders and states could affect states’ use of estimation. Losing the weight of the priority rules would make it much more difficult for holders to argue that estimation is impermissible because the state is trying to escheat something other than the actual debt that’s owed. Also, because the priority rules are the foundation for the argument against having to escheat foreign-owned property to a state, this case’s decision could affect how holders deal with such property.

 

UPPO’s amicus brief raises several arguments in support of Office Depot and points to a previous Third Circuit Court of Appeals decision as one of the reasons Office Depot should prevail. The 2012 case of N.J. Retail Merchants v. Ass’n v. Sidamon-Eristoff case similarly involved a state’s attempts to escheat gift cards by taking a position different from what the federal common law rules required.

 

The Third Circuit held that the federal common law rules were intended to be rules of general application. Even though they were created under the U.S. Supreme Court’s jurisdiction to resolve disputes between states, that doesn’t mean they’re limited to interstate disputes.

 

The N.J. Retail Merchants case is not an outlier. The Tenth Circuit reached a similar conclusion in the 1986 American Petrofina Co. of Texas v. Nance case, and several lower federal court and state supreme court decisions concur.

 

UPPO will continue to monitor and report on this case as developments occur. UPPO’s amicus brief was written and submitted on behalf by Ethan Millar and John L. Coalson Jr. from Alston & Bird; James G. Ryan and Jameel S. Turner from Bailey Cavalieri; and Michael Rato from McElroy, Deutsch, Mulvaney & Carpenter.

 

 

Tags:  compliance  Delaware  Office Depot  priority rules  unclaimed property 

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Michigan enacts new audit standards

Posted By Administration, Thursday, May 25, 2017

Earlier this spring, the Michigan treasurer enacted new audit standards for examination, authorized under the Michigan Uniform Unclaimed Property Act. Following is an overview of those new standards.

 

Rules and rights

The state unclaimed property administrator is charged with determining who will undergo examination. Use of collection goals or quotas is prohibited. If someone under audit believes a contracted auditor is acting outside of the scope of the Act, policy or procedures, a review may be requested and will be carried out by the administrator.

 

Auditor standards

Auditors are expected to meet specific professional standards and supervision requirements, and follow specific fieldwork standards. Their planning should include a timeline for each examination segment, the property types to be included and the documentation the audit subject may need to provide. The timeline should account for whether or not the audit subject intends to provide electronic records.

 

Auditor documentation should provide sufficient detail to enable an experienced auditor with no connection to the examination to understand: the documentation of work performed; the property types reviewed; any estimation techniques used; and calculations that form a basis for the examination findings.

 

Process

For audits conducted only on behalf of Michigan, the state administrator is responsible for notifying and examination subject of the audit, providing the auditor’s contact information and the administrator’s contact information. For audits conducted on behalf of Michigan and at least one other state, the administrator submits an audit authorization to the auditor.

 

The auditor and examination subject are expected to reach agreement on a nondisclosure agreement within 30 days of the notice of commencement of the examination. The auditor is also responsible for ensuring confidential records remain confidential.

 

Before or during the opening conference, the administrator establishes whether the audit subject is an “eligible holder.” The audit standards provide a timeline and process for the audit subject to dispute its standing as an eligible holder.

 

At the opening conference, the audit subject receives a copy of the auditor’s contract with the state. The administrator is charged with investigating complaints that the auditor is not complying with the contract or examination standards. If appropriate, the administrator may replace the auditor with another auditor to complete the audit.

 

The auditor is also responsible for providing:

  • A list of states participating.
  • A description of the components and stages of the audit.
  • Expected duration.
  • A description of the responsibilities of the audit subject and auditor.
  • The potential types of property that may be subject to examination.
  • An initial records request.
  • The time period subject to examination.
  • The applicable dormancy periods for each property type.
  • Explanation of examination methods, including estimation techniques that may be used.
  • A summary of the opening conference.

 

Remediation

After the preliminary audit findings, the auditor will provide a copy to the exam subject, beginning a 120-day remediation period. During the remediation period, the exam subject can provide documentation demonstrating that property presumed abandoned should be removed from the final report.

 

Final conference

Within 30 days of the end of the remediation period, a final conference will occur. The audit subject’s total liability will be calculated at this conference. The auditor may adjust the liability based on information received during the final conference. Within 45 days, the auditor will file the examination report with the administrator and provide a copy to the audit subject.

 

 

Tags:  audits  Michigan  unclaimed property 

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