The Federal Court for the Eastern District of California recently lifted its injunction, freeing the California State Controller to resume collecting and selling unclaimed property. 1In light of legislation effective August 24, 2007 amending the state’s unclaimed property statutes, the federal district court found that the amended law “appears to provide notice reasonably calculated to inform property owners of the impending seizure of their property.” 2

As we reported in June, the federal district court ordered the California State Controller’s office to immediately cease all unclaimed property collections and barred the Controller from selling property currently in its treasury. 3 This unprecedented move followed a Ninth Circuit Court of Appeals decision finding that California’s method of notifying potential owners of unclaimed property failed to provide adequate pre-seizure notice in violation of the Due Process Clause of the U.S. Constitution. 4 The injunction was to remain in place until the Controller presented, and the court approved, a constitutionally adequate scheme providing for fair notice to potential owners and the public.

Ineffective Notice Under Prior California Law

Prior California law required the Controller to provide notice to property owners in a newspaper of general circulation not later than one year after receipt of the property. 5 Notice to specific property owners was permitted only if the business reporting the property provided a social security number for the owner and the Franchise Tax Board had in its records an address different from that reported by the business. 6 The Controller’s office was further restricted by budgetary constraints that limited spending to notify the public that their property may have been handed over to the state to $50,000. Limited by these restrictions, the Controller did little more than place general newspaper ads directing the public to the Controller’s website to determine whether the state possessed property belonging to them. 7 According to the Controller, his office failed to notify as many as 80% of all property owners, or more than 650,000 individual owners, annually. 8

Amendments Increase Controller’s Ability

To Locate And Notify Property Owners At the Controller’s urging, on August 24, 2007, Governor Schwarzenegger signed S.B. 86 lifting many of the restrictions discussed above. 9 Returning more to the original intent of the unclaimed property statutes, which is to reunite owners with their property, the California Legislature stated:

It is the intent of the Legislature that property owners be reunited with their property. . . . The Legislature intends to adopt a more expansive notification program that will provide all of the following:

(1) Notification by the state to all owners of unclaimed property prior to escheatment.

(2) A more expansive post escheatment policy that takes action to identify those owners of unclaimed property.

(3) A waiting period of not less than 18 months from delivery of property to the state prior to disposal of any unclaimed property deemed to have no commercial value. 10

The most significant change to California’s unclaimed property statutes is the bifurcation of the reporting and remitting process. States generally require that businesses remit unclaimed property when they file their annual report. Under the new California law, however, businesses will continue to file the annual report (generally on November 1), but will not immediately remit reported unclaimed property. 11 Instead, businesses must retain the reported property for at least seven additional months. 12 If, during this seven month period, an owner contacts the business and establishes a claim to property to the satisfaction of the business, the business will not need to remit that property. 13 Reported unclaimed property not claimed during the seven months following the filing of the report must be remitted to the Controller before seven months and 15 days after the report filing deadline (or between June 1 and June 15) along with a report detailing the property claimed by owners. 14

After the Controller receives the reports from businesses, the Controller must, within 165 days (before April 15 for reports due the previous November 1), mail notices to each owner entitled to property valued at $50 or more with an address listed in the report. 15 If the report includes a social security number for the owner, the Controller is required to request a current address from the Franchise Tax Board. 16 The required notice must provide the name and address of the business in possession of the property and a statement indicating that if satisfactory proof of claim is not presented to the business, the property will be transferred to the state. 17 Accordingly, under this scheme, owners should have at least 45 days from receipt of notice from the Controller until the business is permitted to remit the property to the state.

The new law will permit the Controller to sell escheated property no sooner than 18 months after the final date for filing the report. 18 Sales must be by public auction, including over the Internet. 19 Listed securities may be sold no sooner than 18 months and no later than 20 months after the final date for filing the report. 20

Amended Notice Requirements Sufficient To Lift Injunction

Citing the amendments discussed above, the district court on October 18, 2007 lifted the injunction that halted California’s unclaimed property program because the legislation, “as it is being implemented by the Controller, satisfies the Constitution….” 21 According to the court, “S.B. 86 remedies the problems identified [by the Ninth Circuit] by providing actual pre-transfer notice. S.B. 86 mandates that the Controller send direct mail notice … at least 45 days (and 60 days before the deadline for transfer) before the holder can transfer the property to the Controller.” 22 Additionally, the court cited the Controller ’s commitment to maintain a searchable website listing property by owner name and address with assurances from the Controller that the names are published on the website before the Controller receives the property.

More Changes Coming?

In addition to the significant changes discussed above, the Controller has stated that he will continue to press for additional reforms, including:

  • lengthening dormancy periods;
  • expediting the processing of owners’ claims;
  • requiring financial institutions to inform new customers of escheat laws;
  • requiring financial institutions to hold safe deposit box contents as long as other property is held that is not subject to escheatment;
  • clarifying that holders must comply with all unclaimed property laws and make a good faith effort to notify owners before being relieved of liability upon remittance;
  • increasing non-compliance penalties to $200 per day, up to $1,000; and
  • increasing penalties for willful noncompliance to $1,000 per day, up to $25,000, plus 25% of the value of the property. 23

Where We Go From Here

For owners, the immediate result of the revised law is that the Controller’s office sent out almost 100,000 notices to property owners in the first week following enactment. 24 For businesses the effect is somewhat unclear. Lifting the injunction means businesses must resume remitting unclaimed property to the Controller under the new bifurcated procedure. Businesses may see an increase in requests from owners seeking to claim property before it is turned over to the state. Aside from the potential increase in administrative burden, the full impact of these changes on businesses is not yet known.

The injunction itself may not be dead either. Attorneys for the plaintiffs have indicated that they will appeal the district court’s decision and seek a restraining order to prevent the Controller from resuming collections. 25 Among the plaintiffs’ concerns are that notices sent to a last known address based on state tax records may not reach people living out-of-state or overseas that never paid California taxes. 26 In addition, plaintiffs′ attorney has raised the issue of effectiveness of publishing names on the Internet instead of in newspapers. 27 It will be interesting to see if the Ninth Circuit agrees that the new law “as it is being implemented by the Controller” provides constitutionally adequate pre-seizure notice, particularly in the context of individuals that do not have the ability to search the Controller’s website. Stay tuned for future developments as this case progresses.¦