Unclaimed property examinations and new types of regulatory inquiries will pose major challenges for US companies in 2024. Not only are states pushing ahead with more examinations, but many states are using new techniques to enforce their unclaimed property laws, such as self-audits and certifications that carry the potential for further action. These new techniques put all companies at risk of burdensome and expensive state examination and must be taken seriously. All companies, whether filing annual reports or not, continue to be at risk of state exam or other regulatory inquiries.
1. New Enforcement Methods Cast Broad Net
State regulators are developing new types of inquiry that could lead to new levels of unclaimed property enforcement. Regulators (or their designated audit firms) send seemingly benign letters to large numbers of companies in an effort to identify those with compliance gaps for broader review. Using four audit firms, Delaware mailed approximately a thousand verified report notices in November 2023 requiring companies to verify the completeness and accuracy of their past filings, disclose any known gaps, and provide copies of written policies and procedures, all under the signature of a company officer. Delaware’s audit firms, including Kelmar Associates, will review the responses. Incomplete or inadequate responses could lead to expanded review, such as a state compliance review, an invitation to Delaware’s voluntary disclosure program, or a full examination.
Other states are implementing self-audit programs, requiring companies to self-review their books and records and complete a worksheet to report any overdue amounts. The auditors administering these programs typically ask companies to analyze all potentially reportable property in a short timeframe (e.g., less than 90 days). Failing to complete a self-audit may also result in a state examination.
An unclaimed property examination is extremely burdensome and could lead to large assessments and fines. Audit firms issue voluminous data and document requests that go back ten or more years and take a “guilty until proven innocent” approach to any items that meet their overbroad testing criteria. For example, under Delaware examination regulations, state auditors will presume that any payment voided more than 30 days after issuance is “unclaimed property” unless a company can provide precise documentation to show otherwise. These exacting standards are applied to payments issued many years ago.
Voluntary disclosure programs are often a good option to mitigate penalties and interest associated with past non-compliance. The opening of a new Voluntary Compliance Program (VCP) in California is a key recent development. Before 2023, when the VCP program was established, California was the only large state without a path, whether formal or informal, for a company to remedy non compliance without the risk of paying substantial late interest. Now, for unclaimed property reported to California in accordance with the terms of the VCP, the Controller will waive the 12 percent interest assessment that California typically imposes on past due amounts.
2. Contentious Unclaimed Property Audit Issues Move to Litigation
Unclaimed property auditors can take aggressive positions in multi-state examinations, and recently, two of the more contentious issues moved into litigation. Newly litigated issues include (i) whether there are time limits for states to complete an examination and issue an assessment, and (ii) whether checks voided in the ordinary course of business (e.g., 30 days after issuance) should be presumed unclaimed unless proven otherwise.
In Michigan, two companies are challenging a state assessment going back to the early 2000s, after the examination took many years to complete. The companies argue that, under Michigan unclaimed property law, the initiation of an examination does not indefinitely freeze the state’s time limit for conducting the review. The practical effect of the companies’ position is that it would shorten how far back Michigan could examine records and compel the state to complete its exams within a finite period of time. The Michigan Court of Appeals initially agreed with the companies’ position,1 and the case will be heard by the Michigan Supreme Court in 2024. The implications of this case extend beyond Michigan, because many other states have similar statutory limitations provisions in their unclaimed property statutes.
Regarding the presumption that voided checks are unclaimed property, one holder appealed assessments in two states, arguing that the standard is arbitrary and capricious.2 The holder argued there was no basis to assume checks voided in the ordinary course of business are still due and owing, and that the documentation produced in the examination rebutted any such presumption. The cases were resolved by settlement, but this is an issue where there could be future litigation.
3. The End of the Push to Uniformity at the State Level?
Over the past decade, various state legislatures have enacted wholesale replacements to their unclaimed property statutes that are modeled after the 2016 Revised Uniform Unclaimed Property Act. The hope was that the new model would help modernize state unclaimed property laws and bring more uniformity to divergent standards on some issues. But even though the 2016 Uniform Act was enacted (in some form) by around a dozen states from 2017 to 2022, recent adoption has dwindled. 2023 was the first year that no new states enacted the new model. Instead, most new legislation in 2023 moved away from uniformity. By way of example, new non-uniform laws and regulations in Nevada, New York, and Oregon accelerate dormancy in some areas, and other states are considering non-uniform changes in 2024, adding to compliance burdens for all holders.
4. States Accelerate Escheatment of Securities
In most states, securities holdings are not presumed abandoned unless there is some combination of uncashed distributions and/or mailings returned as undeliverable, consistent with federal standards and the 2016 Uniform Act.3 But some states are accelerating escheatment of securities by applying a standard based on account inactivity, where shares are presumed abandoned solely because a shareholder has not had any account activity or transactions. This is a significant issue because many owners of securities use a “buy and hold” strategy and do not regularly trade on their accounts.
Several states moved to accelerate their securities escheatment in 2023. Nevada and Oregon did so with new legislation.4 Some other states, including California, are reinterpreting their existing laws to reach similar outcomes. A trade association filed litigation challenging California’s reinterpretation of its securities dormancy trigger in The Investment Company Institute (ICI) v. Betty Yee.5 Under the California statute, securities escheat if (i) there are at least three years of inactivity by the owner and (ii) at the end of the three-year period, the location of the owner is unknown. California has interpreted this law to mean that, at the end of the three year period, the holder must send the owner a due diligence letter, and, if the owner does not respond, then the owner's location is deemed “unknown.” ICI argues that (i) California’s interpretation would render the second requirement (i.e., that the owner’s location is unknown) meaningless, and (ii) if the holder sends mail to the owner and it is not returned as undeliverable, then the holder should be presumed to know the location of the owner. The California court is likely to issue key substantive rulings in this case in 2024. We expect to see continued movement to an “activity” standard in 2024.
5. False Claims Act Litigation Raises the Stakes for UP Disputes
In recent years, private whistleblowers and some state attorneys general have filed state false claims act lawsuits, also known as qui tam cases, over alleged noncompliance with unclaimed property laws. These lawsuits generally allege that the holder has knowingly and willfully underreported amounts owed to the state. Because the false claims acts are quasi-fraud statutes and provide for treble damages, and because they can be brought by private parties, the risk of such suits raises the stakes for unclaimed property compliance.
Companies in a variety of industries have faced false claims actions over unclaimed property in recent years, including retailers, financial institutions, and life insurers, among others. For example, in December 2023, the California Attorney General announced a $43 million settlement against an operator of golf courses for allegedly failing to report unrefunded membership deposits as unclaimed property. California also brought a false claims action against a healthcare provider in 2022 for alleged failure to report millions of dollars in unclaimed overpayments, refund checks, and other monies. We expect this trend to continue in 2024.
Conclusion
As with all matters relating to unclaimed property, companies should stay informed of litigation, enforcement, and regulatory trends and prepare for an ever-evolving landscape of compliance expectations, legal requirements, and state inquiries.
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1 Disney v. Eubanks, No. 360291, 2023 Mich. App. LEXIS 499*, 2023 WL 324594 (Mich. Ct. App. Jan. 19, 2023); Dine Brands v. Eubanks, No. 360293, 2023 Mich. App. LEXIS 469*, 2023 WL 324426 (Mich. Ct. App. Jan. 19, 2023), remanded by Dine Brands Global, Inc. v. Eubanks, 994 N.W.2d 771 (Mich. Sept. 15, 2023).
2 Disney. v. State of N.J. Dept. of Treas. Unclaimed Property Admin., Case No. A-003032-22 (filed June 13, 2023); Disney v. Commw. of Pa. Treas. Dept. Bureau of Unclaimed Property, No. 010-BUP-2023 (filed June 29, 2023).
3 SEC Rule 17Ad-17.
4 NV A.B. 55 (2023) (effective July 1, 2023); OR H.B. 2160 (2023) (effective January 1, 2024).
5 The Investment Company Institute (ICI) v. Betty Yee, Case No. 34-2021-00310039-CU-MC-GDS (filed Oct. 22, 2021).
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