The current landscape in state unclaimed property enforcement leads me to believe that an increase in litigation arising from audits, with the potential for another Supreme Court case, is likely. Additionally, I do not believe the voluntary disclosure agreement (“VDA”) programs will significantly reduce the number of audits commenced.
More Litigation Is Likely
There are significant due process and federal preemption concerns that have not been corrected by recent legislation or in RUUPA and, in some instances, have actually created new issues or exacerbated existing ones. Prior to the decision in Temple-Inland Inc. v. Cook1, few companies were willing to litigate audit assessments, even though the assessments were unreasonable and appeared to conflict with the federal priority rules affirmed in Delaware v. New York2. But, the opinion in Temple-Inland holding that Delaware administrators’ audit conduct “shocked the conscience,” coupled with the ruling in Marathon Petroleum Corporation v. Sec’y of Finance3, that private parties have standing to enforce the federal common law in a dispute with a state, has changed the landscape. It also appears to have interested the Supreme Court. In Taylor v. Yee4, Justice Alito, with Justice Thomas joining, concurred in denying certiorari, but seemed to invite the right case for addressing the “important due process concerns” created by shortened dormancy periods and insufficient pre-escheatment notice.
Although virtually all states now require some form of mailed pre-escheatment notice, that does little to reach owners that moved and does nothing to minimize the due process concerns raised by claiming estimates of liability from companies that do not represent property abandoned by anyone (and raise significant federal preemption questions). The fact that in Temple-Inland, the state could not cite a single instance during a period of almost 30 years in which it returned property to an owner where the property was taken from a holder based on an estimate speaks volumes5.
Notwithstanding statutory provisions authorizing estimation, virtually no company realizes how that estimate will be calculated and is quite shocked when they learn. So, I think there will be more law suits challenging assessments.
Voluntary Disclosure Programs Will Not Reduce Audits
The existence of voluntary disclosure programs indicates a desire by the states to avoid audits (and potential litigation) while enabling the states to collect and use the funds in perpetuity. But, there is relatively little effective outreach and education about those programs. Indeed, states provide limited information about the fact that companies are obliged to escheat more than just uncashed checks in the first place.
Delaware’s Secretary of State disseminates letters notifying companies of the VDA program, but the fact that so many new audits have commenced, even after those letters are sent, indicates that companies do not understand the implications of the letters. I have heard companies say that because they did not think they owed anything to Delaware, they ignored the letter, only to receive an audit notice letter later.
The fact that so little of the unclaimed property is returned to owners means that states know this is free money, especially where assessments are based on estimates. Most companies have no idea that an estimated liability will be assessed if they do not retain records for far longer than standard document retention policies provide, and virtually none know how such an estimate will be calculated. So, companies receiving an invitation to voluntarily disclose do not fully understand what they may be facing in a multi-state audit if they ignore the VDA program. The result is that they must submit to a lengthy, burdensome audit.
By Diane Green-Kelly, Reed Smith LLP
1 192 F.Supp. 3d 527 (D. Del. 2016).
2 507 U.S. 490 (1993).
3 Fd.3, No. 16-4011, 2016 WL 5986000 (Dec. 4, 2017).
4 136 S.Ct. 929 (Mem) (2016).
5 See Temple-Inland, 192 F.Supp.3d at 549.