Here is a quick update on a few of the critical issues being addressed by the Drafting Committee of the Uniform Law Commission (ULC), which is working on a revised Uniform Unclaimed Property Act.
The Drafting Committee met on February 27 and 28, 2015 in Washington, DC. The Committee's plan is to present a draft to the ULC this summer, and then undertake further review leading to adoption of a revised Act in the summer of 2016. If the ULC approves a revised Act, that just begins the process of consideration of the revised Act by the states.
The Drafting Committee takes its job seriously—weighing the positions of the states, advanced by the National Association of Unclaimed Property Administrators (NAUPA); of the holders, advanced by a broad range of advocates, including UPPO, industry associations, the American Bar Association (ABA) and individual holders and professionals and of the owners.
It is still relatively early in the drafting process. Nothing in the proposed revisions is final until a revised Act is adopted by the ULC. “It Ain’t Over ‘til It’s Over.”
Gift cards and SVCs: Who prevails in a dispute between state legislatures and state treasurers?
Even though a majority of state legislatures have decided that gift cards which do not expire should not be subject to escheat, a majority of state treasurers apparently view gift card breakage as a potential important source of revenue. The position of the states is presented to the Drafting Committee by NAUPA, which represents the state treasurers and not the state legislatures. NAUPA therefore vigorously opposed an ABA and UPPO proposal that the Uniform Act exempt gift cards from escheat.
Escheating cash on gift cards redeemable only for goods and services raises grave constitutional issues. Notwithstanding those issues, the Drafting Committee accepted NAUPA's position, and declined to exempt any gift cards from the Uniform Act.
However, the Drafting Committee also adopted three critical changes in the Uniform Act's provision on gift cards so that the Act takes a more realistic position on how the gift card industry works. First, the dormancy period would be changed from three years to five—which would bring the Uniform Act into sync with the federal Credit CARD Act, and reduce the violation of issuer's due process rights caused by requiring issuers to continue to honor cards after the underlying funds have been subject to escheat. Second, the provision in the 1995 Act that the dormancy period for gift certificates would begin on December 31 of the year of sale would be replaced with a provision that the dormancy period would begin on the later of (a) December 31 of the year of sale, (b) the last owner use of the card or (c) the last owner verification or review of the card balance. Third, the 1995 Act's provision that the "face value" of a gift certificate is subject to escheat would be replaced with a provision that the "value remaining" be subject to escheat. The latter two changes properly recognize that, unlike gift certificates, gift cards may be used over a period of time to make a series of purchases.
Further work is needed to define a "gift card" and to address whether different forms of stored value cards (SVCs) should be treated differently under the Uniform Act.
Payroll cards: Should an unused (or partly used) payroll card be treated as an uncashed payroll check?
Payroll checks have long had the shortest abandonment period—one year. That makes sense: Why would any employee decide not to cash or deposit a payroll check? The Uniform Act presumes that an employee who failed to cash or deposit a payroll check within a year must have lost it.
But what about payroll payments that are made by issuance of a payroll card or by direct deposit into a bank account? These are, in many ways, comparable to each other. An employee who receives a payroll card uses the card to access cash from an ATM or to make purchases. Similarly, an employee who receives a direct deposit uses his or her bank card to access cash from an ATM or to make purchases. Payroll cards were not yet in use in 1995, and are not addressed in the 1995 Act. Payroll payments made by direct deposit to a bank account become part of the funds in the bank account, and are only subject to escheat if the account is dormant. The 1995 Act applies a five year dormancy period to bank accounts.
The Drafting Committee decided that payroll cards were more like payroll checks, and should be subject to a one year dormancy period—not the five year dormancy period applicable to bank accounts under the 1995 Act and proposed for stored value cards under the revised Uniform Act.
But the Committee recognized that it would make no sense to have that one year dormancy period run from the date the payroll card was issued (as it does for an uncashed, undeposited payroll check). Otherwise, a payroll card could be subject to escheat even though it had recently been used by the employee. Instead, the one-year dormancy period will run from the later of the date of issuance or the date of last use.
Insurance: Should the payment of benefits under life insurance policies be regulated by insurance departments or by unclaimed property administrators?
No industry has been battered more by unclaimed property audits than life insurance. A brief summary of what has happened over the past few years:
Life insurance has long been heavily regulated in every state. Until recently, no state required that life insurers take proactive measures to ascertain whether insureds had died, and thus whether claims for benefits could be made. Instead, life insurers reviewed claims when they were made, and no obligation to pay claims arose until after proof of death was presented and a claim made. The 1995 Act reflected this practice—providing that life insurance benefits were only subject to escheat “three years after the obligation to pay arose or, in the case of a policy or annuity payable on proof of death, three years after the insured has attained, or would have attained if living, the limiting age under the mortality table on which the reserve is based.” That means that life insurance benefits would escheat only in two circumstances: (a) the insurance company was duly presented with proof of death and a claim, but for some reason a valid claim could not be paid (for example, proof of death and a claim was made by a widower, but the policy was payable to the decedent’s sister, who could not be found to make payment); or (b) the insured reached the “limiting age,” which is usually about 100 years old. Those dual provisions reflected the fact that insurers had no proactive duty to determine whether an insured had died.
In a process of retroactive regulation, unclaimed property auditors took the position that life insurers had an obligation to conduct searches of the Social Security Administration’s “Death Master File” to determine if insureds had died and, if so, to escheat the benefits if not paid to the beneficiaries. Some insurers were already conducting such searches with respect to annuity policies, so that payments which terminated upon death would properly be stopped if the annuitant had died. The auditors took the position that this “asymmetrical” use of the Death Master File—conducting the searches to determine whether annuity payments should be stopped, but not conducting searches to determine whether claims could be made on life insurance policies—was improper. These audits have resulted in both settlements and litigation.
But, more importantly, this process has focused attention of state insurance departments and state legislatures on this issue, which is where the issue should have been dealt with in the first place. Whether life insurers should be required to take proactive measures to determine whether an insured has died is a matter of insurance regulation, not a matter of unclaimed property law. That issue is being addressed throughout the country by state insurance departments, state legislatures and the National Conference of Insurance Legislators (NCOIL).
In light of the fact that this issue is being addressed by insurance statutes and regulations, is there any reason for the issue to be addressed in the Uniform Unclaimed Property Act (other than making unclaimed life insurance benefits subject to escheat based on whatever requirements are included in insurance statutes and regulations)? The Drafting Committee has—at least to date—accepted NAUPA’s position that the answer is “yes.” While the issue is still under consideration, the Drafting Committee appears inclined to have the Uniform Act include a “default definition” of what constitutes “notice of death” which would start an abandonment period, with a provision that this default could be overridden by regulations promulgated by the state insurance commissioner in consultation with the state unclaimed property administrator. This provision would, oddly, give unclaimed property administrators an active role in insurance regulation. If this provision is adopted, there would be a real risk of either duplicative or inconsistent regulation by the insurance commissioner and the unclaimed property administrator. Worse yet, there would be a real risk that an unclaimed property auditor would take the position that the default provision in the Uniform Unclaimed Property Act (as adopted by that state) overrode insurance regulations, because the insurance regulations had been issued without consultation with the unclaimed property administrator. Such conflict could be avoided if the Uniform Act simply dealt with the consequences of insurance regulations issued by the state insurance department—instead of trying to have treasurers and unclaimed property administrators regulate insurance.
Liquidation of securities: Does it “protect consumers” to liquidate their unclaimed shares in Apple at $100 per share?
State treasurers and unclaimed property administrators uniformly maintain that the purpose of unclaimed property laws is to protect consumers. And there are many instances where unclaimed property laws do just that, by enabling owners who have truly forgotten about property to find it on an online unclaimed property database.
But sometimes unclaimed property laws can inflict enormous financial loss on consumers. The greatest damage is often inflicted when “unclaimed” securities are liquidated after escheat to the states and, when the owner claims the securities years later, the state only pays the proceeds of the liquidation, thus depriving the owner of the appreciation which had taken place in the interim. This problem is particularly acute when a consumer has invested for the long-term in stock which does not pay a dividend, and therefore it is not unusual for the stock issuer to have no contact from the consumer for years.
There is a simple solution to this problem: If unclaimed securities are escheated to a state, the state can simply hold the securities (and establish an account if dividends are paid), so that when the owner reclaims the securities, the actual securities can be returned to the owner. If the securities appreciated in value, the owner would get the benefit; if the securities declined in value, the owner would sustain the loss. That is what the owner expected when the securities were purchased.
When the Drafting Committee first addressed this issue several months ago, it tentatively adopted that position; securities would not be sold, but would be held for reclamation by the owner. But in the most recent session, the Drafting Committee adopted a hybrid position: Securities could not be sold within three years after they were escheated to the state, but could be sold thereafter upon notice to the owner. If the state was still holding the securities when an owner made a claim, the state would be obliged to return the securities to the owner (with dividends paid). But if more than three years had elapsed, and the securities had been sold, the owner would be entitled only to the proceeds of the sale (with dividends to the time of sale).
This hybrid approach will reduce the number of instances in which consumers sustain real damage through the unclaimed property process—but consumers who invest for the long term, and do not find out until years later that their securities had been delivered to a state as unclaimed property, are still at risk. Those consumers will be grateful if they made poor investments, and were saved, by liquidation after escheatment, from decline in value, but if they invested well, the state will have done them no favor.
Statutes of limitation and repose: How far back should audits be able to reach?
One of the central reasons why unclaimed property audits have an in terrorem effect on holders is that, under many states’ laws, auditors can reach back decades. The 1981 Act set a 10-year statute of limitations; no action or proceeding could be commenced by a state against a holder more than 10 years after the duty to report the property arose. But the 1995 Act eliminated that statute of limitations, instead providing that there is no limitations period, except in one limited circumstance: If the holder “specifically identified the property” in an unclaimed property report and “gave express notice to the administrator of a dispute regarding the property,” then a 10 year limitations period would apply with respect to that property.
That limited exception under the 1995 Act is, for most if not all practical purposes, meaningless. If an unclaimed property report, prepared in good faith, either fails to locate property, or does not report property because the holder believes that the property is not subject to escheat, the holder will not give “express notice to the administrator of a dispute,” and therefore no limitations period would apply.
The American Bar Association made a simple and sensible proposal on limitations: Apply a shorter limitations period (three or five years) if a non-fraudulent report is filed, and otherwise apply a longer limitations period (10 years, as in the 1981 Act).
The Drafting Committee instead voted to apply a five-year limitations period if a report was filed which “specifically identified the property,” but to apply the 10-year limitations period under all other circumstances. Re-adopting the 1981 Act’s 10-year limitations period is a major step forward. But the five-year limitations period for property “specifically identified” in a report will be of little benefit to holders.
One of the Commissioners noted that the reason why he did not accept the ABA proposal was that “non-fraudulent” was too low a standard to warrant the shorter limitations period. The Drafting Committee would do well to consider a variation of the ABA proposal: Apply a short limitations period (three or five years) if a report was filed that was neither fraudulent nor grossly negligent, and otherwise apply a longer limitations period (10 years, as in the 1981 Act).