Many US companies will face the threat of increased unclaimed property exposure in 2021 as states and private litigants ramp up audits, litigation and legislative changes designed to increase payments to states. Although states already view escheat as an important source of revenue, budget strains stemming from the pandemic will increase pressures to generate revenue through unclaimed property enforcement. State legislatures likely will return their focus to unclaimed property legislation this year, which could remove important exemptions and shorten time periods for escheat. Additionally, private plaintiffs may continue the trend of using state false claims acts to challenge companies’ past filings. We also expect holders to continue pushing back in litigation against overreaching audit and enforcement methods.

Here are key trends to watch in 2021.

     1. Increased enforcement push and compliance “invitations” by states in response to state budget shortfalls

Many states are facing severe budget shortfalls due to the pandemic. In response to these deficits, we expect states will take aggressive actions to increase revenue through unclaimed property enforcement.

In recent years, states and third-party auditors have begun using new tools to analyze internal state data to identify companies that may be out of compliance and to identify gaps in filing history and types of property reported. State budget pressures could accelerate these trends, resulting in more third-party audits authorized by states and enhanced outreach to encourage companies to enroll in state voluntary disclosure programs. It could also lead to a push to resolve more quickly the audits and voluntary disclosure programs that are already in process.

Delaware continues to be the most active state in enforcing its unclaimed property laws through audits and its Voluntary Disclosure Agreement (VDA) program. Notably, some companies that completed a compliance process with Delaware in the early 2010s have received new invitations, which suggests that even holders that have made prior efforts to demonstrate compliance will still be expected to periodically enroll in the state’s VDA program or be subjected to an audit.

With heightened compliance expectations, companies should not wait until they receive an audit notice or voluntary disclosure program notice to review and understand their potential exposures. Additionally, companies should consider unclaimed property obligations when entering into mergers and acquisitions and revisit their relationships with vendors, e.g., transfer agents and third-party administrators, to understand whether unclaimed property reporting obligations and responsibilities are clearly and correctly assigned. Gaps in tracking unclaimed property obligations can lead to substantial escheat exposure, particularly in jurisdictions that routinely assess interest on late filings (e.g., California, Nevada, Texas, and Washington).

     2. State legislatures return to unclaimed property legislation

Due to the pandemic, state legislatures were less active in addressing unclaimed property issues in 2020, but there is already some evidence that state legislatures may be turning back to unclaimed property legislation in 2021. Legislators in multiple states have already introduced unclaimed property bills that would significantly revamp their current unclaimed property laws. Nine states¹ have enacted wholesale replacements to their unclaimed property statutes since the promulgation of the new model unclaimed property law in 2016 (the 2016 Uniform Act).

While most of its core provisions are consistent with prior model laws and existing state statutes, the 2016 Uniform Act contains significant updates on many topics, including property types, dormancy periods, priority rules, and audit standards. Some states have used the legislation as an opportunity to remove significant reporting exemptions — in some cases retroactively. Several years ago, Illinois eliminated its exemption for business-to-business transactions, and new legislation in Indiana in 2021 proposes to remove the business-to-business exemption and a long-standing gift card exemption. In addition to states adopting wholesale replacements to their unclaimed property statutes, states have also been adopting legislation and/or regulations focused on particular issues, such as gift cards, life insurance, and consolidated reporting.

Holders should be aware of pending state legislation and regulations and prepare for more changes to unclaimed property standards at the state level.

     3. Holders continue to challenge audit methods

Delaware’s expansive audit requests and controversial estimation techniques continue to be challenged by holders. Many of these cases are a continuation of the challenges to audit techniques raised in Temple-Inland, Inc. v. Cook ² in which the Delaware federal district court struck down Delaware’s prior estimation method as unconstitutional.³ Although Delaware amended its unclaimed property statute and promulgated new regulations following Temple-Inland, the State’s audit estimation methods have remained largely the same, thereby prompting continued challenges.

Two notable cases from 2020 relate to the enforcement of subpoenas in connection with unclaimed property audits being conducted by third-party auditors. In Delaware Department of Finance v. AT&T Inc.,⁴ the Delaware Chancery Court quashed Delaware’s subpoena on the grounds that it was overbroad and unreasonable such that enforcing the subpoena would constitute “an abuse of the court’s process.” In Delaware Department of Finance v. Univar, Inc.,⁵ the Delaware Chancery Court enforced the subpoena, but it also issued an order prohibiting the same personnel from working on both the Delaware audit and an audit of the holder on behalf of any other state, which raises questions about third-party auditor management of a multistate audit.

Other holders that had expedited their audits through Delaware’s one-time expedited audit program sought relief from the State’s burdensome audit procedures and estimation methodology.⁶ Although many of their claims were dismissed by the Delaware federal district court on procedural grounds, the substantive issues raised in these cases will likely continue to be asserted by other holders facing disproportionate assessments due to Delaware’s estimation methodologies.

     4. False claims act litigation raises the stakes for compliance

In recent years, state false claims act lawsuits, also known as qui tam cases, involving unclaimed property have become another area of concern for holders. State false claims act lawsuits typically allege that a company has knowingly and willfully underreported amounts owed to the state. Because the false claims acts are quasi-fraud statutes and provide for treble damages, the potential for false claims act litigation raises the stakes for unclaimed property compliance and risk management.

Following on the heels of false claims actions related to unclaimed gift cards and interest reported by financial institutions in 2019, major life insurers are now facing false claim act litigation that alleges underreported death benefits.⁷ In December 2020, a New York appellate court breathed new life into a previously dismissed case by finding that an insurer’s alleged act of knowingly filing a false unclaimed property report could serve as a basis for a claim under the New York False Claims Act, and that the relator’s allegations, if true, could support that the insurers “deliberately turned a blind eye to reporting error and then attested that to their knowledge, they did not exist.” The case alleges that the insurers had a duty to escheat unclaimed death benefits from 1986 to 2017 and that they knowingly filed false unclaimed property reports to avoid their escheat obligations. The New York appellate court agreed with the relator that an insured’s death triggers the obligation to escheat under New York law, even in the absence of proof of death, and is permitting the relator to amend its complaint to allege more specific facts against each insurer.

As shown by this case and other recent false claims act litigation, in addition to being prepared to defend escheatment and reporting decisions against states and third-party auditors, holders may now also need to be prepared for lawsuits from private parties.

Conclusion

Holders should be prepared for an ever-evolving landscape of unclaimed property compliance expectations, legal requirements, and litigation. We expect to see many developments related to the trends described above and also on other issues in 2021 and beyond.

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