Banks, insurers and other financial services companies, as well as other companies holding unclaimed property, are automatically liable for interest that accrues on unclaimed property held by them in New York, without having to be specifically assessed. That is the holding of a recent New York State Supreme Court decision on escheatment. In the decision, State of New York, ex rel. Raw Data Analytics LLC v. JP Morgan Chase & Co., the court held that interest automatically accrues on such property under the state’s Abandoned Property Law (APL), and, although it can be waived by the Office of the State Comptroller (OSC), the interest itself is not contingent on an OSC assessment.
By way of background, although laws vary by jurisdiction, most, if not all, states (including New York) have enacted escheat laws governing the disposition of unclaimed or abandoned property. Such laws are intended to provide for the safekeeping of abandoned property until it is reunited with its owner. Under such laws, a person possessing unclaimed property is generally considered to hold such property on the owner’s behalf until it is presumed abandoned following a dormancy period after the holder’s last contact with the owner. Before turning over abandoned property to the state, the holder must typically attempt to return the property by contacting the owner, using the owner’s name and last known address. Once property is presumed abandoned, a holder must report and escheat the property to the state within a certain period of time and provide the state with the name and last known address of the owner. The state will attempt to reunite the owner with the property. If such owner cannot be found, the property may, after a designated period of time, revert to the state.
Raw Data Analytics commenced a whistleblower action under New York State’s False Claims Act concerning JP Morgan’s alleged underpayment or failure to pay interest to OSC in accordance with the APL in thousands of cases of late escheatment of abandoned property to the OSC. In addition to penalties for late escheatment, the APL provides for interest payments at a rate of 10% per year running from the date payment or delivery of abandoned property was due to the state.
Among other things, Raw Data Analytics alleged that JP Morgan, in its abandoned property reports filed with the OSC, underreported the amount of interest due and in some cases stated that no interest was due. Raw Data Analytics also alleged that JP Morgan had in certain cases falsely reported the date of its last contact with property owners, which date starts the clock running for purposes of determining when property escheats to the state.
JP Morgan argued that the duty to pay interest with respect to the unclaimed property it held was merely a contingent obligation imposed at the discretion of the OSC and that nothing in the APL required it to self-calculate and pay interest for late escheated property. Raw Data Analytics argued that the obligation to pay interest automatically arises under the APL as soon as the holder of abandoned property is late in paying or delivering such property to the state, such that the duty is not contingent or dependent on the OSC’s discretion.
The court asked the OSC to provide its interpretation of the APL with respect to whether banks were obligated to self-calculate and pay interest on late escheated property during the relevant period before the court. The OSC responded that the potential imposition of interest was at the discretion of the Comptroller, noting a handbook it had published stating that New York State “can charge” late filing interest. The OSC also noted that it had previously waived interest in connection with other late escheatments by JP Morgan.
In a letter submitted to the court, New York State’s Office of the Attorney General disagreed with the OSC, stating that JP Morgan had incorrectly characterized the interest obligation under the APL as discretionary and contingent.
The court found that the language of the APL was abundantly clear in prescribing that a holder “shall pay” interest with respect to late escheated property, describing the amount of such interest and the period for which it must be paid, without requiring any further assessment by the OSC. The OSC’s discretion to waive interest was the exception, not the rule. The fact that the OSC had in the past waived interest with respect to late escheatments by JP Morgan did not mean that interest is discretionary.
On October 3, 2019, JP Morgan filed a notice indicating it would appeal the decision to the Appellate Division.
While the facts of Raw Data Analytics are somewhat unusual in that the abandoned property holder therein is alleged to have engaged in fraudulent conduct, a key aspect of the decision that more broadly impacts other holders of abandoned property in New York and other states (and those who acquire such holders or provide representations and warranties insurance with respect to such acquisitions) is the court’s determination that interest on late escheated property begins to run automatically under New York’s statute, and is not contingent upon contact initiated by the relevant state administrator. Such determination has come as a surprise to many stakeholders and observers, and runs counter to the efforts of state administrators to encourage an abandoned property holder’s voluntary compliance in this area. Depending on the applicable state escheat law and the type of business engaged in by an abandoned property holder, the amount of unpaid interest liability and potential penalties could be both entirely unforeseen and surprisingly high. An examination of applicable state escheat laws and an accurate cataloguing of abandoned property by holders thereof (and appropriate due diligence by their potential acquirors) are therefore advisable.
 No. 100271/2015, 2019 WL 4148055 (N.Y. Sup. Ct., N.Y. County, Aug. 30, 2019).