UPdate Special Issue:
California Barred
from Collecting or Selling Unclaimed Property – Holders Should Hold
Unclaimed Property until Further Notice
The U.S. District Court for the Eastern District of
California (the district court) has issued an injunction barring the
Controller of the State of California (the Controller) from accepting,
taking title to, or possessing any property, including, but not limited
to, securities and the contents of safe deposit boxes, effective June 1,
2007. Taylor v. Chiang, CIV S-01-2407 WBS/GGH (E.D. Cal. June 1,
2007)
Background
The injunction is the latest action in a long-running case
challenging the constitutionality of California’s Unclaimed Property Law
(UPL). The case focuses on whether California provides constitutionally
adequate notice before accepting or taking title to property – or selling,
converting to cash, or destroying property under the UPL. In 2005, Taylor
filed a motion with the district court requesting a temporary restraining
order and preliminary injunction, asking the court to bar enforcement of
the UPL. The court denied the motion for the preliminary injunction, and
the decision was appealed to the Ninth Circuit Court of Appeals (the
appeals court). The appeals court reversed the district court and ordered
the district court to grant the preliminary injunction consistent with its
decision.
Scope of the Injunction
The injunction states that the controller shall not accept,
take title to, or possess any property, nor sell, convert to cash or
destroy any property, including, but not limited to, securities and the
contents of safe deposit boxes, pursuant to the UPL until the controller
has issued regulations providing for fair notice to the owner and public
and such regulations are approved by the district court.
In its decision, the district court noted that all parties
agreed that the injunction should cover the sale, or conversion to cash,
or destruction of any property received under the UPL. However, there was
disagreement over whether the injunction should cover “taking title to or
possession of” any private property. The district court concluded that an
order that prevents only the sale or conversion to cash of property would
not be sufficient to prevent irreparable harm to owners who are not able
to readily access their property. As such, the district court ruled that
the injunction will remain in effect until a constitutionally adequate
scheme for notifying owners is established with respect to conversion and
taking title to property.
Controller’s Response
California has issued a notice that, effective June 1,
2007, the state will no longer accept any unclaimed property until the
district court lifts the injunction. Additionally, in a statement
responding to the injunction, the Controller acknowledged that over the
years, California’s UPL has eroded into a program that no longer meets its
original intent of safeguarding owners’ property. As such, the state is
considering comprehensive reform to its unclaimed property statute.
Legislative Fix Proposed
The state’s current unclaimed property law limits the use
of state resources to notify individuals when the state receives their
unclaimed property. Legislation, S.B. 919, has been introduced to allow
for increased notification, restoration of interest paid on claims, and
imposition of strict rules on banks, financial institutions, and other
businesses that fail to comply with the UPL.
Among the provisions of the bill, as currently drafted, is
a provision that would require the Controller to mail a notice to each
apparent owner within one year after the receipt of a report of escheated
property, and would require the Controller to establish an outreach
program to inform owners of their potential unclaimed property being held
by the state. Another provision would require the Controller to add
interest to the amount of any claim paid to the owner for the period the
property was on deposit in the state’s Unclaimed Property Fund.
To encourage compliance, the legislation would also
increase the penalty for failure to comply with the required notice
provisions and to file annual reports from $100 per day to $200 per day,
capped at $10,000. The bill would also increase the fine for willful
noncompliance with the UPL to $1,000 per day capped at $25,000 plus 25
percent of the value of the reportable property.
Impact on Holders
Effective immediately, holders should not remit any
unclaimed property to California unless notified that the state has issued
unclaimed property notice regulations that have been approved by the
district court. However, holders should continue to maintain appropriate
records and documentation regarding unclaimed property in their possession
that is potentially reportable to California.
Contact Us
Our area leaders in the National Unclaimed Property Practice are
interested in your feedback, including any topics you might like to see
addressed in future issues.
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