Exemptions in unclaimed property: Fact or fiction?

• Author: Hall, Noel E., Jr.

"Escheat" refers to a jurisdiction taking possession of unclaimed property. What happens when multiple jurisdictions vie to claim such property? The Supreme Court has supplied a bright-line test and some jurisdictions have carved out escheat exceptions for certain types of property. This article addresses these and other issues.

Escheat (unclaimed property) laws can be traced as far back as feudal England; currently, 53 U.S. jurisdictions have them.(1) Obviously, there are innumerable differences between the laws then and the laws now. In feudal England, "escheat" meant that all land ultimately belonged to the king; when an individual died without an heir, the land rights and title reverted to the king as the ultimate owner. In contrast, jurisdictions today technically do not become the owners of unclaimed property; rather, they simply "step into the shoes" of the true owner and claim the same rights, second only to the missing owner's claim. Thus, if a jurisdiction takes possession of property as a holder for the true owner, should the true owner be located, the jurisdiction is legally obligated to return the property.

The Current Escheat Problem

Many practitioners would argue that jurisdictions today are claiming a greater right than that of the true owners. For example, an owner of a gift certificate generally cannot receive cash in exchange and instead must acquire merchandise. Jurisdictions; on the other hand, are requiring that the holder turn over cash, not the actual gift certificate. Some jurisdictions have attempted to mitigate this inequity by providing for an adjustment equal to either the holder's gross margin or a statutory flat rate. The theory is that, had the certificate been redeemed, the retailer would be entitled to its gross margin; thus, an implied profit is included in the certificate's face value.

Additionally, some practitioners would argue that, because jurisdictions are generally placing these funds directly into their coffers (in lieu of a trust or escrow account), they are not holding the property on behalf of the true owner, but using it for the jurisdiction's benefit.

Jurisdictions would vehemently contend that they are in the best position (and have the most incentive) to reunite an owner with property, rather than allowing it to remain with the holder (e.g., a corporation with unclaimed property in that jurisdiction). Additionally, if the true owner is never found, the theory is that it is better to use the property for the citizens' general welfare, rather than allow a holder to be unduly enriched. The dynamics of the unclaimed property laws are relatively straightforward; once an item of property has remained on a holder's books and records for a certain period without any activity or claim being made by the true owner, it is deemed abandoned. The length of time needed for the property to be deemed abandoned is the "dormancy" period, and varies by jurisdiction and property type. On abandonment, a holder must remit the property to the proper jurisdiction to hold for the rightful owner.

Increased Enforcement

Until seven to 10 years ago, the majority of jurisdictions did not aggressively enforce their escheat statutes. Jurisdictions have stepped up enforcement over the past five or six years, resulting in a barrage of audits and culminating in large assessments on holders. Arguably, the reason for such focus stems from the jurisdictions' sudden realization that unclaimed property can be a substantial source of revenue. Enforcement leads directly to greater revenue.

Jurisdictions would argue that unclaimed property is not a source of revenue, because they do not become the property's owner. However, because issuers do not track certain types of property by owner's name and address (e.g., gift certificates and customer credits), they ostensibly become revenue by default; jurisdictions do not have a means by which to reunite owners with such property.

Expanded Definition

While the genesis of modern unclaimed property laws stems from the banking, insurance and securities industries, the laws have been expanded to encompass a broader range of property types. Gift certificates, payroll checks, electronic gift cards, security deposits, mineral rights and royalties are among a plethora of property types now subject to escheat in various jurisdictions. Although the current laws may resolve who is entitled to unclaimed property as between a holder and a given jurisdiction, what happens when different jurisdictions each assert a right to the same unclaimed property? The 1954 Uniform Disposition of Unclaimed Property Act (Uniform Act) attempted to answer this question, but the U.S. Supreme Court ultimately resolved this issue in a series of cases that yielded a bright-line test to determine the priority of conflicting claims.

Supreme Court Decisions

Texas v. New Jersey

The first in a series of Supreme Court decisions was Texas v. New Jersey,(2) decided in 1965. The case involved a multistate oil company incorporated in New Jersey, with a principal place of business in Pennsylvania and outstanding debts in several other jurisdictions. The unclaimed property in issue was numerous uncashed small checks to creditors either located in Texas or evidenced on the books of the company's two Texas offices.

The Court created a "first priority rule"...