Commentary from G. Allen Mayer

  • G. Allen Mayer G. Allen Mayer

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The Revised Uniform Unclaimed Property Act (RUUPA)

The Revised Uniform Unclaimed Property Act (RUUPA), which the Uniform Law Commission (ULC) promulgated in 2016 will likely be the basis for most major legislative changes to state unclaimed property statutes. RUUPA, or significant portions of RUUPA, have become law in Tennessee, Kentucky, Utah, Illinois, and even Delaware1. Some form of RUUPA has been introduced in Colorado, the District of Columbia, Maine, Minnesota, Nebraska, Vermont and Washington with additional introductions expected in 2019.

Several states, including some of the largest, have gone on the record to say that they will not support an introduction of RUUPA. Among states supporting the introduction of RUUPA, it is reasonable to expect the introduced version will include some of the language adopted in Illinois’ modified version.

Some holder advocates are expected to seek introduction of either amendments to existing unclaimed property laws or wholesale revisions to include items that were rejected in the ULC’s drafting process, including a broad business to business (B2B) exemption and a “derivative rights” provision that would allow holders to use contractual provisions to avoid unclaimed property liabilities. The ULC and state unclaimed property administrators will vigorously oppose such proposals.

Third-Party Auditors

The ULC and NAUPA rejected the proposal from some holder advocates to prohibit the use of third-party auditors to perform unclaimed property examinations on a contingent fee basis. While a small number of holder advocates are bringing court challenges to the use of third-party contingent fee auditors, no court has found the arrangement to be unconstitutional2.

In response to complaints by holder advocates about the compensation for these auditors, NAUPA points out “the holder effectively receives a far more substantial sum when unclaimed funds are retained and taken into income.”3 If a holder can avoid reporting and remitting unclaimed property it takes 100% as compared to the 10-15% paid as a contingency fee for the auditors. Further, the auditors do not receive a percentage of all unclaimed property identified in an examination. Auditors receive no fee for unclaimed property identified in the examination that the holder returns to the rightful owner in the remediation and due diligence process. Auditors only receive their percentage on property which is reported and remitted to the state administrator at the end of the examination where the holder has not been able to return the property to its rightful owner. Holders are expected to address compliance issues identified by an examination report and remit accurately and completely all unclaimed property going forward; auditors receive no compensation for future compliance.

As NAUPA’s whitepaper surmises, the organized objection to third-party contingent fee auditors arose after such auditors identified unclaimed life insurance benefits being held by life insurance companies utilizing the Social Security Administration Death Master File (DMF). By early 2016 the 22 largest life insurers had paid out over $7.4 billion “either directly to beneficiaries, or to state unclaimed-property departments” as a result of unclaimed property examinations according to the Wall Street Journal4

Further, state administrators must make the final decision about legal issues raised in an examination–including approving the final amount to be reported and remitted to their state. Holders under examination can–and often do–make their arguments directly to state administrators when they disagree with the recommendations and findings made by auditors.

Estimation

RUUPA authorizes the use of estimation either when the holder consents in writing or when the holder fails to retain records required by the Act. The ability of an unclaimed property administrator to use estimation is necessary as a deterrent to the intentional or negligent destruction of records needed in an examination. The official comments to the ULC’s 1995 Uniform Act specifically note that estimation can be “viewed as a penalty for failure to maintain records of names and last known address” and not the imposition of multiple liability5. RUUPA has a similar, but more nuanced, comment referring to “adverse consequences, which might be characterized as ‘penalties,’ resulting from failure to maintain records…”6 Even the Temple-Inland court upheld the use of estimation7.

For the vast majority of states, however, estimation in an unclaimed property examination is rare. It is typically used when a holder requests the use of estimation to quickly end an examination. Most state unclaimed property administrators prefer that property be reported and remitted with the name and address of the rightful owner. Estimation is disfavored and used as a last resort when a holder has destroyed records.

Future of Enforcement

As the official comments to the 1995 Uniform Act note, unclaimed property laws are “based on a theory of truthful self-reporting” by holders8. Unclaimed property administrators are acutely aware, however, that compliance with unclaimed property laws is not universal. States are expected to expand their efforts to encourage holder compliance. These efforts are likely to include holder education, voluntary disclosure agreement (VDA) programs, and auditor or contractor assisted self-audits. But, multi-state examinations by third-party contingency fee auditors will continue to be used because, quite simply, they are effective and cost-efficient for the states.

Claims Processing Will Continue to Improve Rapidly

States will continue to make great improvements in returning property to the rightful owners and processing claims promptly and efficiently. More and more states use direct mail to notify owners. Some states are beginning to use targeted digital and social media advertising – targeting rightful owners and directing online searches to official state websites. Many states even use telethons where local TV stations devote airtime to promoting unclaimed property programs – leading to ratings increases for the station and spikes in claims from the viewing public.

Many states now use online identity verification to fast track claims for smaller amounts of single owner property. This is usually done by having a claimant provide their social security number, name, and address online. This information is both compared to information associated with the property and verified using a proprietary database provided by Lexis, Thompson Reuters, or similar vendors. If there is a sufficiently good match, then payment of a smaller property will be quickly approved. After Illinois adopted a fast track process for single-owner properties of less than $500, the number of completed claims doubled from roughly 58,000 in FY 2017 to over 116,000 in FY 20189.

The next trend for state claims will be auto-payments based on data matching with state-level tax returns. Wisconsin10 and Rhode Island11 already returned millions of dollars in unclaimed property by simply mailing checks to owners when the owner of the unclaimed property can be matched to a recent state tax return. Illinois is now the third state and has now returned over 60,000 unclaimed properties without a claim ever having to be filed.

By G. Allen Mayer, Illinois State Treasurer Michael W. Frerichs

 

Sources:
1 With apologies to Field Marshall Von Moltke, no uniform act survives contact with the various state legislatures. In the sausage-making process of passing legislation uniform acts, including unclaimed property acts, are subjected to amendment.
2 See Fidelity & Guaranty Life Insurance Co. v. Frerichs, No. 3:17-CV-03050, 2017 U.S. Dist. LEXIS 181396, at *14 (C.D. Ill. Oct. 31, 2017) (“In Count 4, Fidelity alleges a violation of procedural due process resulting from the Treasurer’s contingent-fee arrangement with Kelmar, which gives Kelmar a financial interest in the audit proceedings… Fidelity argues that Kelmar’s role is analogous to a tax assessor, which courts have found are engaged in judicial or quasijudicial decision-making. The Court disagrees…Because Fidelity has not plausibly alleged that Kelmar is acting in a judicial or quasi-judicial capacity, the Court finds that Count 4 fails to state a claim.”)
3 “Why Your State Should Adopt the Revised Uniform Unclaimed Property Act” (2016) available at http://www.uniformlaws.org/shared/docs/Unclaimed%20Property/RUUPA%20-%20Why%20Your%20State%20Should%20Adopt.pdf
4 “NAUPA Business-to-Business Transactions Whitepaper” and “NAUPA Derivative Rights Doctrine Whitepaper” http://www.uniformlaws.org/shared/docs/Unclaimed%20Property/Comments%20-%20NAUPA.zip
5 “NAUPA States Effective Utilization of Private Auditors Whitepaper” http://www.uniformlaws.org/shared/docs/Unclaimed%20Property/Comments%20-%20NAUPA.zip
6 “Revised Uniform Unclaimed Property Act Prefatory Note http://www.uniformlaws.org/shared/docs/Unclaimed%20Property/RUUPA_Final%20Act_2016.pdf
7 “Courts have routinely upheld the government’s use of statistical sampling as a valid audit tool, provided it was properly performed.” Temple-Inland, Inc. v. Cook, 192 F. Supp. 3d 527, 548 (D. Del. 2016) citing Chaves Cty. Home Health Serv., Inc. v. Sullivan, 931 F.2d 914, 919, 289 U.S. App. D.C. 276 (D.C. Cir. 1991); Balko & Assocs., Inc. v. Sec’y of Health & Human Servs., 555 F. App’x 188, 194 (3d Cir. 2014); and United States v. Ukwu, 546 F. App’x 305, 308, 310 (4th Cir. 2013)
8 “NAUPA States Effective Utilization of Private Auditors Whitepaper” http://www.uniformlaws.org/shared/docs/Unclaimed%20Property/Comments%20-%20NAUPA.zip
9 See “Treasurer Frerichs’ I-Cash Program Returns Record-Breaking $180 Million to Individuals, Employers and non-Profits” http://illinoistreasurer.gov/TWOCMS/media/doc/July2018_ICash2018Returns.pdf
10 Comment to Section 20(f) of the 1995 Uniform Unclaimed Property Act. http://www.uniformlaws.org/shared/docs/unclaimed%20property/uupa95.pdf
11 Comment to Section 1006 of RUUPA. http://www.uniformlaws.org/shared/docs/Unclaimed%20Property/RUUPA_Final%20Act_2016.pdf

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