UPdate
Issue 2 | February 2008
UPdate is a publication from KPMG
LLP’s National Unclaimed Property practice. It is designed to provide you
with current developments in the unclaimed property arena and will be
published periodically throughout the year as developments
warrant.
Time to Sit Back and Read the Tea
Leaves
With the fall unclaimed property filing season behind us and a new year
underway, it’s time to take a look back at last year to see what the tea
leaves might tell us about the developments in unclaimed property in the
year ahead.
As this issue indicates, California was a hotbed of unclaimed property
activity last year, with several court rulings, reform legislation and
administrative activities. We know California will continue to be a state
to watch. Delaware needs $369 million in unclaimed property revenues to
balance its budget – what does this mean for your company?
We have outlined some of the unclaimed property highlights from 2007
below.
Hold on, 2008 is set to be a bumpy ride!
California Wins One, Loses
One
The Win
On the win side of the coin, the U.S. District Court for the Eastern
District of California lifted its injunction barring the state from
accepting or taking title to unclaimed property, Taylor v.
Chiang, Case No. CIV S-01-2407-WBS-GGH (E.D.Cal. October 17, 2007),
four months after issuing the injunction.
Background
The injunction followed a long legal process in which owners of
property held by the state sued, claiming California’s notice provisions
did not provide constitutionally adequate notice. The district court
initially denied the owners' motion for a preliminary injunction, but the
Ninth Circuit Court of Appeals reversed the decision, and ordered the
district court to issue an injunction.
The district court issued the injunction in June, ordering the state
not to accept, take title to, or possess any property; sell, convert to
cash, or destroy any property, including, but not limited to securities
and the contents of safe deposit boxes. The injunction was to remain in
place until the controller issued regulations providing for fair notice to
owners and the public, and the regulations were approved by the court.
In August, California enacted legislation (S.B. 86) changing the
state’s notice procedures. Under the new law, holders remit property to
the controller no sooner than 7 months and no later than 7 months and 15
days after the final date for filing the report. This change creates a
delay between when the reports are filed and when property is actually
remitted to the state. The new law also revises the state’s notice
procedures. Within 165 days of the final report due date, the state must
contact owners identified in the holders' reports and who are entitled to property valued at $50 or more with information on how to contact the holder
to make a claim, and the date by which the claim must be made. The notice
will inform the owner that if a claim is not made, the property will be
placed in the custody of the controller and may be sold or destroyed, as
provided by law. In the event a claim is made to a holder, the holder must
then file a report to the controller, providing information regarding the
previously reported property that is now no longer subject to escheat. Any
property not paid or delivered in response to a claim that the holder
later determines is in fact subject to escheat will not be subject to
interest. (See Special Issue of UPdate from September 2007)
Filing Procedures
The reporting cycle remains unchanged (May 1, 2008, for life insurance
companies and November 1, 2008, for all other holders, and holders are
responsible for notifying owners 6 – 12 months before the property becomes
reportable). The controller has implemented the UPS 2000 reporting system
and is accepting reports only in certain formats. Form UFS-1 has been
revised and is required to be filed with all unclaimed property reports,
regardless of format. The revised form includes a section for providing a
second holder contact to be included in the notice to owners as the
contact for filing a claim. If only one holder contact is provided on the
form, that contact will be used in the notice.
Impact on Holders
With the injunction lifted, the procedures enacted in August came into
effect. Thus, holders should have reported by November 1, 2007 (May 1,
2008, for life insurance companies). Holders with a November 1, 2007,
filing deadline must remit property to the state between June 1 and June
15, 2008, and, if applicable, file a report documenting any claims from
holders that occurred in the intervening period.
The Loss
In a case before a different federal district court, the state has been
ordered to pay interest on owner claims. The case sought, among other
items, a declaration that provisions of California’s unclaimed property
law were unconstitutional because they did not provide for the payment of
interest on monies returned to owners. Suever v. Connell, No. C
03-00156 RS (N.D.Cal. 2007).
California law provides that principal does not permanently escheat to
the state, but the law has not always provided that interest does not
permanently escheat to the state. The court focused on the question of
whether California could constitutionally determine that interest on
property would permanently escheat to the state, even where the principal
did not. The court held that, although there are circumstances under which
permanent escheatment is possible, such circumstances were not presented
in this case. The court found that California, while purporting to take
property as a custodian, appropriated to itself the use and value of the
property. Thus, finding that the principal itself at all times remained
the property of the owners, and not the state, the court held that the
interest also belonged to the owners, and granted the motion for a
declaration that the controller is obligated to return interest to persons
who reclaim property taken into state custody under the color of the
unclaimed property law.
Subsequent Order
California requested reconsideration of the court’s decision that the
state is constitutionally obligated to pay interest when returning money
to owners. The court denied the motion, reiterating that the state is
holding property on behalf of owners and cannot constitutionally refuse to
return the interest.
California argued that the decision should be reconsidered because the
state was unable to determine the rate of interest to be paid to owners.
The court rejected this argument and noted that the state could file a
motion seeking a determination that a particular rate of interest was
constitutionally adequate, but the rate of interest issue as a whole did
not warrant reconsideration of the decision.
The court also indicated that it will issue an order in the future
regarding further proceedings to certify a class of plaintiffs with
respect to recovering interest on previously paid claims.
Further Reform Legislation
Expected in California
California’s controller has announced that legislation will be
introduced this year to further reform how the state handles unclaimed
property. The legislation is expected to include provisions that would
restore the state’s ability to pay interest on unclaimed property held by
the state for the first time since 2003. The legislation is expected to
provide that simple interest would be paid at the 13-week Treasury bill
rate from the time the property is received by the state.
The legislation is also expected to include provisions that would
reduce the state’s maximum claim processing time from 180 days to 90 days;
enable the controller to preserve property deemed to have no commercial
value for seven years; ban a financial institution from sending contents
of safe deposit boxes to the state if the owner has another active account
with the financial institution; and requiring financial institutions to
inform new safe deposit customers that property may be sent to the state
after three years of inactivity.
The controller has also indicated that the new legislation would
include civil penalties of $200 per day (up to $10,000) on businesses that
fail to report unclaimed property, and penalties of $1,000 per day (up to
$25,000) for willful refusal to report, pay, or deliver property.
California Appoints Property Owner
Advocate
In a related development, the controller has appointed a former
advocate for good government to the newly created position of Property
Owner Advocate. In the role of Property Owner Advocate, Ruth Holton-Hodson
will implement the Property Owners' Bill of Rights and identify additional
reforms to enhance customer service and improve the timeliness of claims
processing.
In addition to establishing the role of Property Owner Advocate, the
Property Owners' Bill of Rights describes:
- The Unclaimed Property Program’s mission – to reunite property with
the rightful owners and to safeguard properties from being used by
private interests for personal gain;
- The requirements holders and the state must follow for notifying
owners regarding unclaimed property;
- Claimants’ rights and protections; and
- Owners’ appeals rights and their right to judicial action.
California Announces Results of
First Unclaimed Property Contractor Audit
The California controller recently announced the results of the
nation’s first independent audit of third-party unclaimed property
auditors. Since 1985, California has contracted with private companies to
identify, collect, and deliver property held by out-of-state companies
that belongs to Californians.
The audits of Affiliated Computer Services – Unclaimed Property
Clearing House (ACS-UPCH) and Audit Services U.S. (ASUS) revealed no
illegal activity. However, the findings included apparent conflicts of
interest – or the appearance of a conflict of interest, where both
companies had related entities where one entity provided audit services to
the state and another provided consulting services to companies. Other
issues included conducting audits prior to or without authorization from
the controller (although the audit reports noted that where unclaimed
property was found during an audit for another state, such approvals were
deemed irrelevant); failing to communicate specific information to
holders; failing to obtain proof that the holders had completed the
required due diligence efforts; and conducting audits for more than a year
without requesting an extension from the controller.
Recommended changes include revised contract terms to address many of
these issues, especially after the reports noted that some contracts had
been renewed without change since the mid-1980s. The controller announced
that new contracts will be immediately negotiated to ensure that contract
provisions do not conflict with state law and to address the
conflict-of-interest issues.
The new contracts would also clearly delineate the parties’
responsibilities and require the contractors to maintain and provide
monthly status reports. In addition, internal audits of the contractors
will be undertaken on a two-year cycle.
California Begins Notifying Owners
of Unclaimed Property Identified in Holder Reports
The controller has begun sending notices to property owners who were
listed on the 2007 Holder Notice reports. The notification process will be
completed by April 15, 2008. This new procedure was established as a
result of the reform legislation enacted last year (S. 86).
Pursuant to the revised procedures, the state must notify owners that
holders may have property to which they are entitled. The notice
encourages owners to contact holders before June 1, 2008. Holders must
refund or activate owner properties when contacted by the owner before the
deadline. The state recently issued guidelines holders should follow when
submitting their remit reports.
|
KPMG Observation:
|
On a broader
level, it remains to be seen whether these developments in
California will be replicated elsewhere, with owners challenging the
notification and payment processes in other states. With owners
focusing on the escheatment process, will they, at some point, turn
their attention to whether holders are following proper procedures
to locate owners before property is remitted to the states? And will
states begin to beef-up their enforcement provisions and processes
to encourage holders to improve their owner location
procedures? |
Other 2007 Developments
Several key developments on both the federal and state level addressed
unclaimed property in 2007, with a focus on gift cards, credit balances,
and rebates. See the June 2007 issue of UPdate for more information.
The Federal Trade Commission (FTC) concluded two settlement agreements
and consent orders regarding deceptive trade practices involving gift card
disclosures and dormancy fees. Kmart Corp. and Darden Restaurants each
agreed to make changes to their disclosure policies – including clear and
prominent disclosure of fees and material terms and conditions,
maintaining specific records – including copies of all gift cards issued
for five years; and educating employees and vendors. Kmart is also
required to develop and prominently disclose a reimbursement policy for
fees that were previously deducted from gift cards.
The Superior Court of Massachusetts ruled that the definition of the
term “credit balance” and the regulations in place at the time
Massachusetts began its unclaimed property audit of Biogen Idec MA Inc.
should be controlling, not regulations subsequently adopted and
retroactively applied by the state.
In Iowa, Young America Corp. (YAC) is the focus. Iowa, joined by 27
other states and the District of Columbia, has sued YAC in order to
examine the company’s records to determine whether YAC has complied with
the state’s unclaimed property statute. The case is currently set for
trial later this year.
And in Georgia, the Georgia Court of Appeals addressed when the state’s
unclaimed property statute would be applicable to gift cards issued by
mall owner Simon Property Group. The court held that because the statute
applies only to rights between the holder and the state, a suit regarding
gift cards that remained unclaimed for less than five years did not allege
any violations because the conditions for the presumption of abandonment
had not been satisfied.
Legislative Year in Review
Major areas of legislative interest last year included gift cards and
gift certificates, abandonment periods, and changes in reporting
requirements. Since many states introduced legislation in these areas that
did not pass, we can most likely expect to see similar legislation
introduced again during the 2008 legislative sessions.
|
Topic |
States |
|
Gift cards and
gift certificates |
Florida –
defined "gift cards" and "credit memos" and exempts certain gift
cards and credit memos from reporting. Gift cards or credit memos
issued or sold in Florida are prohibited from having an expiration
date, expiration period, or any type of post-sale charge or fee.
Holders of unredeemed gift certificates or credit memos are not
required to report them as unclaimed property.Consideration paid for
an unredeemed gift certificate or gift card is the property of the
issuer. An unredeemed gift certificate or credit memo is subject to
rights of the purchaser or owner and is not subject to a claim made
by any state on behalf of the a purchaser or owner. However, gift
certificates or credit memos issued by financial institutions or
money transmitters that are redeemable by multiple unaffiliated
merchants must be reported as unclaimed property. Effective
June 28, 2007. [S.B. 1638]
Illinois - amended its consumer protection law to provide that after January 1, 2008, no one shall sell a gift certificate that is subject to (1) an expiration date earlier than five years after the date of issuance, or (2) a post-purchase fee. Gift certificates issued prior to January 1, 2008, are subject to the law's prior language. The face value of a gift certificate issued after January 1, 2008, may not be reduced in value and the person in possession of the gift certificate may not be penalized in any way for non-use or untimely redemption of the gift certificate. Changes do not apply to award, loyalty, or promotional cards where money or anything of value has not been given in direct exchange or solely for the gift certificate by the consumer. Enacted August 28, 2007. [H.B. 36]
Minnesota
– barred gift card expiration dates and service fees, defined "gift
certificate" (to include gift card, stored-value card, store card,
etc.) and affiliate. Prohibits expiration dates and service fees of
any kind, including dormancy fees. Does not apply to (1) loyalty,
promotion, award, incentive, rebate, or other similar purposes
without any money or other tangible thing of value being given by
the consumer, (2) certificates sold below face value or at a volume
discount to employers, or nonprofit and charitable organizations for
fund-raising purposes, (3) debit cards or other legal access devices
used to access a deposit account and that are subject to the
disclosure rules in the Electronic Funds Transfer Act and Regulation
E, (4) cards issued by an employer to an employee, (5) cards issued
by a federally chartered or state-chartered bank and trust, savings
bank, savings association, or credit union, or by an operating
subsidiary, or other affiliate, that can be used at multiple
sellers of goods and services, provided that this issuer discloses
any expiration date and fee associated with the gift certificate, or
(6) prepaid calling cards. Effective August 1,
2007, and applicable to certificates issued or sold after that
date. [S.B. 69]
Montana –
added stored-value cards to its definition of "gift certificate." Gift
certificates are considered abandoned three years after December 31
of the year in which the certificate was sold. But if the
certificate is redeemable in merchandise only, the abandoned amount
is considered to be 60 percent of the certificate’s face value. A
gift certificate is not presumed abandoned if it was sold by a
person who in the past fiscal year sold no more than $200,000 in
gift certificates (this amount must be adjusted by November of each
year for inflation). The amount considered abandoned for a person
who sells more than the trigger amount is the value of gift
certificates greater than that trigger. Enacted
April 27, 2007. [H.B. 755]
Nevada –
added a prohibition on gift certificate service fees on the basis of
inactivity, if the inactivity is for less than three continuous
years. Sixty percent of the unredeemed or uncharged value remaining
on a gift certificate issued or sold in the state, and which has an
expiration date, is presumed abandoned on the expiration date.
Enacted May 23, 2007. [A.B. 279]
New
Mexico – amended its trade practices law to include
provisions providing that gift certificates (including electronic
cards with a banked dollar value, merchandise credits, certificates
where the issuer has received payment for the full face value for
the future purchase or delivery of goods or services, and any other
medium that evidences consideration in exchange for the right to
redeem) shall not have an expiration date less than 60 months after
the date of issue. If an expiration date is not conspicuously stated
on the gift certificate, the gift certificate will be presumed not
to have an expiration date and shall be valid until redeemed or
replaced. Issuers of gift certificates cannot charge a fee of any
kind in relation to the sale, redemption, or replacement of a gift
certificate other than an initial charge not exceeding the face
value of the gift certificate. Gift certificates cannot be reduced
in value by any fee, including a service or dormancy fee. Violations
would constitute an unfair or deceptive trade practice. Enacted
April 2, 2007; Effective for gift certificates sold or
offered for sale on or after July 1, 2007. [H.B. 127]
Oregon –
amended its monopolies and unfair trade statute to define a "gift card"
amended as a prefunded record evidencing a promise that the insurer
will provide goods or services to the owner of record in the amount
shown in the record. The definition of gift card does not include
prepaid phone calling cards, prepaid commercial mobile radio
services, or any gift card usable with more than one seller of goods
and services. A gift card cannot have an expiration date, a face
value that declines as the result of the passage of time or lack of
use, or fees – including, but not limited to, an inactivity fee,
maintenance fee, or service fee, with limited exceptions. Expiration
dates are permitted if the gift card contains specific expiration
information in a minimum font size, the gift card is sold at a cost
below the face value of the card, and the card does not expire until
at least 30 days after the date of sale. Applies to gift
cards sold on or after January 1, 2008. Enacted July 16,
2007. [H.B. 2513]
Pennsylvania – amended the
definitions of "general use prepaid card," "gift card," "gift
certificate," and "qualified gift certificate." Qualified gift
certificates (defined as gift certificates or gift cards that do not
contain an expiration date or a period of time after which they
expire, or any type of post-sale charge or fee, cash out fee,
replacement card fee or activation or reactivation fee) are not
subject to escheatment. Enacted November 9, 2006.
[H.B. 552]
Utah –
amended its Consumer Sales Practices Act to make it a violation to
issue a gift certificate that has an expiration date or deducts a
fee without disclosing the expiration date or fee on the gift
certificate or its packaging. A gift certificate that does not
disclose an expiration date or fee neither expires nor is subject to
a fee. Gift certificates that are usable at multiple unaffiliated
sellers of goods or services are not subject to the provision if an
expiration date is printed on the gift certificate, instrument, or
other record. Enacted February 27, 2007. [H.B.
261]
Gift card and gift certificate legislation was
introduced but not passed in Alaska (expiration
dates and fees would be an unlawful trade practice);
Arkansas (requiring disclosures, including gift
certificates and gift cards under the unclaimed property act);
Iowa (resolutions regarding abandonment, fees,
expiration dates); Michigan (adding gift
certificates to the definition of intangible property and defining
gift card abandonment periods and amounts; North
Dakota (gift certificates with an original value of more
than $5, with a remaining value of under $5 or 25 percent
of the value must be paid in cash at the request of the
consumer). |
|
Abandonment
Periods |
Arizona –
added a provision that any dividend, profit distribution, interest
or redemption, payment on principal or other sum held or owing by a
business association for or to its shareholders, certificate holder,
member, bondholder or other security holder who has not claimed it
or corresponded in writing concerning it, is presumed abandoned
three years after the date prescribed for payment or delivery.
Changed the abandonment period for principals on debt, other than a
bearer bond or an original issue discount bond, of a business
association or financial association from five years to three years
after the maturity date, and the abandonment period for the interest
on the debt is changed from five years to three years after the
payment date. Enacted June 25, 2007. [H.B.
2786]
Connecticut – added a provision
providing that the abandonment period for money orders is seven
years from the date of issuance. Effective July 1,
2007. [S.B. 229 (2006)]
Oregon –
changed the abandonment period for demand, savings, or matured time
deposits (including automatically renewable deposits) with a
financial institution and funds paid toward the purchase of a share,
mutual investment certificate, or other interest in a financial
institution from five years to three years (if certain criteria are
met). Established criteria under which owners of automatically
renewable deposits shall be deemed to have consented to renewal.
Changed the abandonment period for sums payable on a check, draft,
or similar instrument (including a cashier’s check or certified
check) from five years to three years after it was payable unless
within the three years (changed from five) the owner has
communicated in writing or expressed interest in the account as
documented in the financial institution's records. The abandonment
period for stocks, certificates of ownership or other intangible
equity ownership interest in a business association was changed from
five years to three years, as was the abandonment period for any
dividend, profit distribution, interest payment on principal or
other sum held or owing by a business association. Enacted
June 22, 2007. [H.B. 2104]
Utah –
Amended the unclaimed property statute to generally change the
abandonment period from five years to three years. The abandonment
period for funds owing under life insurance policies was changed
from two years to three years. Enacted February 27,
2007. [H.B. 219]
Abandonment period legislation was introduced
but not passed in California, South Carolina, and
Washington. |
|
Property
Definitions |
Florida –
clarified the statute to provide that unclaimed credit balances held
by a financial institution, credit union, or participant resulting from the
performance of or participation in check-clearing functions through
a contractual relationship or clearinghouse function are not subject
to the unclaimed property statute. Effective July 1, 2007;
Enacted June 15, 2007. [S.B. 672]
Kansas –
added definitions of “communication in writing or correspondence,”
and “interest bearing property.” Enacted April 9,
2007. [H.B. 2246]
North
Dakota – removed the definition of “last known address.”
Enacted May 7, 2007. [H.B. 1058]
Legislation changing the definition of various
types of property was introduced but not passed in
Illinois. |
|
Reporting
Requirements and Other Holder Issues |
California – reformed holder
reporting and remitting requirements and state notice requirements
in response to a federal court injunction. Enacted August
24, 2007. [S. 86]
Connecticut – amended its statute to
provide that, except for accounts issuing periodic statements, if a
financial institution imposes dormancy fees on inactive deposit
accounts, it must send a notice to the depositor within 15 days of
assessing the dormancy fee. The notice must be formatted in a
specified font, include specified language, and be mailed to the
owner’s last known address. Enacted April 25, 2007.
[H.B. 5003]
Florida –
added the definition of “property identifier” to its reporting
provisions and provided that property identifiers contained in
reports be made confidential and exempt from public records
requirements. Effective October 1, 2007. [S.B.
1848].
Indiana –
changed the penalty for non-compliance with its reporting
requirement from $200/day to a “reasonable rate established by the
Attorney General.” Enacted April 25, 2007. [H.B.
1210]
Iowa –
amended its statute to eliminate the 120-day period between filing a
report and remittance of property (other than property held in a
safe deposit box or other safekeeping depository), providing that,
at the direction of the treasurer, the property can be remitted at
the same time as or after filing the report. Enacted April
4, 2007. [S.B. 202]
Nevada –
eliminated the requirement that items of value under $50 may be
reported in the aggregate, and now provides that the administrator
may require electronic reporting for all reports (not just reports
containing 15 or more items of property. Enacted May 31,
2007. [S.B. 519]
Rhode
Island – added a provision authorizing the tax
administrator to audit, assess and collect all unclaimed tangible
and intangible property, and changed its definition of
"administrator" to include agents hired for the express purpose of
auditing, assessing, and collecting unclaimed property.
Enacted June 30, 2007. [H.B. 5300]
Utah –
added electronic book entries as a means of delivering or
transmitting evidence of ownership; included records of an agent of
a business association or financial association as being subject to
examination for compliance with the state’s reporting requirements;
and added a provision permitting the administrator to require a
person who has not filed a report to file a verified report stating
whether or not the person is holding any unclaimed property
reportable or deliverable under the statute. Enacted
February 2, 2007. [H.B. 261]
Utah –
changed the report filing deadline to November 1 of each year as of
the preceding June 30, with the transfer of property required as of
November 1 of the year in which the report is required (the previous
deadline was May 1 for each year as of the preceding December 31).
The dollar threshold for reporting property (except traveler’s
checks) was increased from $25 to $50. Provisions were also added
permitting the administrator to require a person to file a verified
report stating whether or not the person is holding unclaimed
property, and imposing 12 percent interest per annum for failure to
pay or deliver property when required under the statute.
Enacted February 27, 2007. [H.B. 219]
Legislation regarding holder and reporting
obligations was introduced but not passed in Indiana,
Iowa, Maine, and Oklahoma. |
|
Repeal |
Hawaii –
repealed a portion of its unclaimed property statute removing the
requirement that property held by the state is no longer escheated
to the state. Enacted April 20, 2007. [H.B.
1287] |
|
Uniform
Act |
Nevada –
adopted a version of the 1995 Uniform Unclaimed Property Act.
Enacted May 31, 2007. [S.B.
103] |
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