A bridge too far: due process considerations in state unclaimed-property law enforcement.

• Author: King, William S.

"The UPL [Unclaimed Property Law] is not a permanent or 'true' escheat statute. Instead, it gives the state custody and use of unclaimed property until such time as the owner claims it. Its dual objectives are 'to protect unknown owners by locating them and restoring their property to them and to give the state rather than the holders of unclaimed property the benefit of the use of it, most of which experience shows will never be claimed.'" (1)

1. INTRODUCTION

   Although U.S. economists note that the most recent U.S. recession came to an end in June (2009), belt tightening can still be felt throughout the economy, more than three years later. (2) Perhaps nowhere is this more evident than in state budgets, which continue to face huge shortfalls and endure significant cutbacks. (3) With legislatures generally unwilling to raise taxes to make up for these deficits, states have looked toward new sources--unclaimed property, in particular--to find much needed cash. (4)

   By some accounts, $35 billion of unclaimed property is currently held by states--an amount that continues to increase annually. (5) Simply put, the transformation of unclaimed property into revenue first requires a state to "escheat," or take custody of property from a "holder," which is generally a corporation. (6) Furthermore, "unclaimed property" usually refers to intangible property (such as amounts represented by uncashed checks, amounts in suspense, or outstanding stock) in the custody of a holder that actually belongs to another (known as the "owner"), but which has been inactive for a statutorily defined amount of time (the "dormancy period"). (7) in their search for revenue, states have recently been escheating more unclaimed property than ever through the use of increasingly aggressive techniques. (8) Although states do not take title to the property they recover, most state laws provide that at least some portion of funds received as unclaimed property is deposited in a state's general fund, or go so far as to direct the proceeds from unclaimed property to fund specific state programs. (9) The benefits of a state's use of unclaimed property are compounded by the fact that underlying owners, to whom the property rightfully belongs, rarely claim escheated property from the state. (10) Thus, states have begun to transform their unclaimed-property laws and regulations into revenue-raising mechanisms that undermine their original, consumer-protection-oriented goal of reuniting missing owners with their property. (11) This departure raises a host of due-process concerns for unclaimed-property holders, which should be considered a defense to aggressive state escheatment. (12)

   This Note will focus on the constitutional concerns raised by two specific techniques employed by states that have resulted in the escheatment of large quantities of unclaimed property: the use of contract auditors paid on a contingency basis to make unclaimed-property assessments against holders, and state and auditor reliance on statistical modeling and estimates to make assessments against holders when their unclaimed-property records are deemed incomplete or inadequate. (13) This Note will begin by explaining the history and development of escheat law, from its common-law origins in England to its modern evolution in the United States. (14) Particular attention will be paid to cases that have attempted to address issues relating to audit techniques and revenue-raising statutes. (15) Finally, this Note will introduce new considerations and propose new procedures that legislatures, courts, and state unclaimed-property administrators should heed to address procedural shortfalls in constitutionality and fairness. (16)

2. HISTORY

   1. The Origins of Escheating Unclaimed Property

      The common-law concept of escheatment has its origins in feudal England, where its application was limited to real property. (17) This concept eventually developed into the notion of bona vacantia, whereby the sovereign could claim personal property as a custodian for the rightful owner. (18) After early American colonists broke off from the Crown, the newly-formed federal government did not assert similar claims to escheat property. (19) Nonetheless, the individual states held onto the notion that they retained an overlying title to real property. (20) Although, at common law, the ability to escheat real property derived from recognizing the sovereign's rights, in the United States the assumption of personal property under bona vacantia developed under the use of the states' police powers. (21)

      State laws dealt solely with real-property escheatment throughout most of the nineteenth century, but by its end, some states had begun to apply escheat principles to personal property. (22) By the second half of the twentieth century some states even recognized escheatment of intangible property. (23) Several early cases upheld the constitutionality of a state's right to escheat unclaimed property. (24) While state escheatments were frequently challenged on the grounds that they deprived property owners of due process, interfered with the operations of the federal courts and government, and violated the Constitution's Contract Clause, the Supreme Court upheld state unclaimed-property schemes on multiple occasions. (25)

   2. Modern Escheat Law

      1. The Derivative-Rights Doctrine

         In modern escheats of unclaimed property, the state does not take title, but rather acts as a perpetual custodian until a beneficial owner comes forward; in this respect, the unclaimed-property laws of all fifty-five U.S. states and territories that require unclaimed-property remittance are not considered "true" escheat statutes. (26) The principle underlying this structure is known as the "derivative rights doctrine," which essentially provides that a state's rights in unclaimed property do not extend any further than the original owner's rights in the property. (27)

      2. The Priority Rules

         Procedurally, the unclaimed-property laws adopted by each state require holders of unclaimed property to annually report and deliver to the state any debts or obligations owed to an owner after the dormancy period has elapsed. (28) Determining which state may take custody of a holder's unclaimed property has been the focus of several Supreme Court decisions. (29) originally the Court, when dealing with these jurisdictional issues, analyzed whether a state could appropriately assert custody over unclaimed property based on the contacts of the holder or owner to the claiming state. (30) In 1951, the Supreme Court heard Standard Oil Co. v. New Jersey, (31) in which the State of New Jersey claimed funds based on the fact that the holders--whose unclaimed dividends, wages, and unpresented checks New Jersey hoped to escheat--were incorporated in New Jersey. (32) The Supreme Court upheld New Jersey's right to escheat the funds based on the holder's incorporation in New Jersey and fulfillment of notice requirements, despite Justice Frankfurter's strong objections to awarding the property to New Jersey. (33) Their concerns were realized when the Court's decision caused several states to shorten their dormancy periods in order to be the first to claim a holder's abandoned property. (34)

         In Texas v. New Jersey, (35) the Supreme Court fashioned a series of clear-cut rules for determining to which state unclaimed property escheats. (36) Under these "priority" rules, unclaimed property first escheats to the state of the owner's last-known address, according to the holder's records. (37) If the owner's address is unknown or located in a state that does not escheat that particular type of property, the property escheats to the state of incorporation of the holder (subject to a right by the owner or owner's state to later claim it). (38) The Supreme Court has rejected the chance to reevaluate these guidelines, despite concerns that the second rule creates a windfall to the state of incorporation. (39)

      3. The Uniform Acts

         Each state has been left to create its own unclaimed-property laws and regulations outlining property types qualifying as escheatable, reporting and remittance requirements for holders, dormancy periods, and the like. (40) Still, states have generally been guided by different iterations of a uniform act. (41) The 1981 Uniform Unclaimed Property Act adopted the Supreme Court's holdings by providing that if the owner's address is unknown, or he or she either resides in a state that does not claim the property or in a foreign country, the holder's state of corporate domicile has the next claim to the property. (42) Later versions of the Uniform Unclaimed Property Act expanded on the Supreme Court's priority rules by providing that if the state of corporate domicile does not claim the property and the last known address is unknown or in a state that does not claim the type of property at issue, the state where the transaction occurred that gave rise to the unclaimed property may claim it. (43) The Uniform Unclaimed Property Act also condones the auditing of holders' records to determine compliance with state unclaimed-property laws, a lengthy look-back period for state and third-party auditors, and the use of statistical sampling if the holder has inadequate records to determine the actual amount that should be escheated. (44) Under the Uniform Unclaimed Property Act, large interest and penalty assessments may also result from a holder's failure to comply with a state's unclaimed-property laws. (45)

   3. Aggressive State Escheat Tactics

      1. Audits and Auditors

         The 1954 version of the Uniform Unclaimed Property Act required that before a holder of unclaimed funds could be subjected to a compliance audit, the auditing state must show that it had a reason to believe that the holder had unreported, unclaimed funds. (46) The 1981 Uniform Unclaimed Property Act, however, eliminated the "reason to believe" requirement. (47) The effect of this change gives...