Governor Andrew Cuomo campaigned on a “no new tax” platform and his recently proposed Executive Budget upholds his promise. However, while keeping his pledge to hold the line on taxes, included in the “Revenue Actions” section of the Governor’s proposed budget is a provision that would shorten various dormancy periods on several property types covered by New York’s Abandoned Property Law (“APL”) from five or six years to three years. These changes are estimated to raise $55 million and $70 million in revenue, respectively, during the next two fiscal years. 2011-12 New York State Executive Budget, Revenue Article VII Legislation, Part A.
Abandoned property laws, sometimes referred to as “escheat” laws, exist in every state. These laws are generally custodial in nature and are intended to ensure that property that owners have forgotten about – that has become “dormant” or “abandoned” – is protected by the states and is available to be claimed by owners. In those situations where the property has truly been abandoned, a state would be entitled to retain the unclaimed property for the use of the general populace.
The reduction to three years from the current five year dormancy period would apply to bank deposits, gift certificates, and court funds. Although the two-year reduction in these dormancy periods is arguably modest, the fact that the modification appears to be driven solely by a desire to increase revenue may make it vulnerable to constitutional challenges, particularly since the proposed shortened dormancy periods seem to bear no connection to any demonstrable change in actual abandonment.
In 1943, when the APL was adopted, the dormancy period was 15 years for bank accounts, 20 years for property deposited into court, and 10 years for child or spousal support payments paid into court. Laws of 1943, ch. 697. Prior to enactment of the APL, the law provided a 22-year dormancy period. Gift certificates were not subject to escheat until 1983. Without evidence of any change in the expectations of depositors and other owners, there seems to be no basis for the decrease in the length of dormancy periods.
The sole purpose cited in the memorandum in support for the Governor’s recent proposal is revenue generation. While the APL does provide that the policy reasons for escheating abandoned property to the state is to use that property “for the benefit of all the people of the state,” the State also retains the “main responsibility,“ after property has been presumed abandoned and delivered into its hands, “to act on behalf of the property owners by protecting their property and their rights to it.” Office of the New York State Comptroller, Unclaimed Funds (Feb. 2006) at 3, available at http://www.osc.state.ny.us/reports/other/unclaimedfunds.pdf. Declaring property “abandoned” without evidence that it is truly abandoned by its owner, solely to raise revenue, may violate various constitutional provisions, including the Takings and Contracts Clauses of the U.S. Constitution.
Keeping track of property deemed “abandoned” by the State can impose a practical and administrative burden on both owners and holders. The new, shortened dormancy periods will place an additional burden on owners to search for unclaimed property for themselves and their family members, and then, if necessary, to go through the process required of any owner of unclaimed property seeking the return of property placed in the custody of the State.
Moreover, despite the custodial nature of the APL, property owners who discover
The new, shortened dormancy periods will place an additional burden on owners to search for unclaimed property for themselves and their family members
their property has been escheated and who then come forward to claim their property will only receive interest, for the time the property was in the State’s hands, on certain property types and at a rate that is 1% less than the overpayment rate as provided by Tax Law § 697(j), for a period of 5 years. Abandoned Property Law § 1405. Based on the current 2% overpayment rate, interest at a 1% rate would be earned. By shortening the dormancy period, some owners of property deemed escheated and deposited with the Comptroller may actually suffer financial harm as a direct result of the escheat, if the funds had previously been invested in an account bearing interest of more than 1%.
Additional Insights. The reduction of the gift certificate dormancy period to three years would be particularly troubling to retailers because, in addition to losing income from the investment of the unused balances for an additional two years, and the negative impact on customer relations that are likely to occur when cardholders attempt to redeem “abandoned” gift certificates, retailers lose the profit element on such unused gift certificate balances.
Unlike some other states, New York includes gift cards redeemable only for merchandise as escheatable property and does not allow issuers of gift certificates to retain any portion of the unredeemed balances to compensate them for their lost profit. While not directly relevant to the shortening of dormancy periods, we note that the federal District Court in New Jersey recently enjoined New Jersey from implementing the portion of its new legislation which retroactively included stored value cards as escheatable property, insofar as the cards were only redeemable for merchandise or services. Am. Express Travel Related Servs. Co. v. Sidamon-Eristoff, Civ. No. 10-4890 (FLW), 2010 U.S. Dist. LEXIS 120153 (D.N.J. Nov. 13, 2010), appeal filed, No. 10‑4328 (3rd Cir. Nov. 14, 2010). The court recognized that the holders had “demonstrated a likelihood of success on their Contract Clause claim,” since “the issuer is deprived of its right to earn a profit in connection with the gift card sale and redemption.” Id. Likewise, the court concluded that escheat of stored value cards that are not redeemable for cash “could conceivably effect a taking of the gift card issuer’s profits” under the Fifth Amendment’s Takings Clause, which prohibits governments from taking private property for public use without just compensation. Id. It may also be that holders and owners of property in New York could be found to have property rights entitled to protection under the Contract Clause and Takings Clause that would be impacted by shortened dormancy periods.
Shortened dormancy periods impose additional costs on holders of potentially unclaimed property. One business group that might stand to benefit from the Governor’s proposal is bounty hunters specializing in finding owners of unclaimed property, who are permitted by statute to charge fees up to 15% of the value of recoverable property.
Given the possibility that reduced dormancy periods could lead to constitutional challenges under the Takings Clause, the Contract Clause or even the Due Process Clause, this proposed revenue measure could end up embroiling the State in litigation.