Unclaimed Property Responsibility
Every state and U.S. possession has an unclaimed property law on the books. Two court cases add conflict with differences in interpretations. Who is actually the “holder” of the property? What is the responsibility if the holder?
February 25, 2010
All states have unclaimed property laws requiring businesses to remit to the state any abandoned or unclaimed property after a stated dormancy period. All businesses, including not-for-profit entities, are subject to this requirement. The most common items impacted are payroll checks, gift cards, vendor credits and deposits.
Although dormancy periods vary by states, generally uncashed payroll checks revert to the state as early as one year after issuance. Some property can remain unclaimed for up to 15 years before the state can assert a claim to it. The holder of the unclaimed property is responsible for attempting to locate the owner. If the holder is unsuccessful in locating the owner, the property will be reportable to the state of record of the last known address of the owner. It should not be assumed that all unclaimed property reverts to the state of the business enterprise. The state of residence of the holder has the first priority claim to the property. If there is no known address for the owner, the state of domicile of the business can claim the property. If that state has no statute to claim the property, the funds could be thrown back to the state where the transaction occurred.
The Young America Case
When states differ in defining the holder of the property, conflicts arise. In the Young America case decided last year in Iowa, the true holder of the property was held to be the company originally issuing a rebate to customers, not the outsourced company handling the rebate processing. Young America Corporation is one of the largest rebate fulfillment companies in the country. The company administered rebate programs for Sprint and T-Mobile to provide their customers rebates on the respective companies’ products and services. Under these rebate programs, the customers mailed applications for rebates to Young America Corporation, who then processed and validated the requests. Sprint and T-Mobile remitted funds to Young America for payment of the validated rebates. Young America deposited the funds in its own bank account from which it would issue rebate checks to the customers. Under the terms of the contract, Young America was entitled to retain the funds from uncashed rebate checks. Sprint and T-Mobile were not provided with any accounting of the name and address of the customers who did not cash checks, nor was any amount reported to any state as unclaimed property. Iowa sued Young America to obtain access to the company’s books and records to audit and collect the unclaimed rebates of Iowa customers. Sprint and T-Mobile were later added to the complaint as “merchant defendants,” who filed summary motions for dismissal based on the fact that they were not in possession of the unclaimed rebates and therefore not the “holders” of the unclaimed property. The court denied the motion for dismissal and the determined that Sprint and T-Mobile were indeed liable for remitting the unclaimed property.
Impact of the Decision
Although this case was an interpretation of a state law, the Iowa unclaimed property statute strongly resembles the majority of states’ laws. Any company utilizing the outsourcing services of a third party to administer rebates, dividend payments, gift cards or similar company obligations, may have exposure in the area of noncompliance with unclaimed property laws. Outsourcing contract should be reviewed to assess the liability to states for reporting and remitting unclaimed property. Potential exposure can be minimized by requiring verification of remittance of unclaimed property by the third party and by providing a remedy in the event of delinquencies arising against the underlying “holder,” as determined in the Young America case.
Due Diligence Questioned
In the California case, Vondjidis v. Hewlett Packard, the level of due diligence required by a holder of unclaimed property was questioned. Hewlett Packard (HP) transferred HP stock that a former employee though the company’s employee stock purchase plan owned to California unclaimed property. The employee, Alexander Vondjidis, had worked and resided in Greece. During his four-year employment with HP, Vondjidis had all mail sent to him through the Athens office. When Vondjidis left the company in 1978, the HP Athens office forwarded mail to him at his Athens residence. While the personnel records may have contained his home address, the HP stock purchase plan reflected the Athens office as the shareholder’s address of record. When the Athens office subsequently closed in the early 80s, any mail sent to Vondjidis at the address was returned to HP as undeliverable. Consequently, between 1983 and 1992, 39 HP dividend checks for Vondjidis’ shares were never cashed. HP policy considered a shareholder lost if multiple mailings were returned reflecting “unknown address.” At this point, HP utilized the services of an escheatment vendor to transfer the shares to the state after attempting final mailing notices. In 1993, HP transferred Vondjidis’ shares to the state of California as unclaimed property. In 2001, Vondjidis learned of the transfer of the stock to the state and he recovered approximately $22,000.
In 2003, Vondjidis brought a suit against HP for breach of contract, breach of fiduciary duty, negligence, conversion and fraud, seeking damages and re-issuance of his shares. California Superior Court determined that HP was immune from liability because it had transferred the shares of stock to the state under the unclaimed property laws. As such, HP was “relieved and held harmless by the State from all or any claim or claims … with reference to such money or other property” brought by the owners to recover such property. The Court of Appeal, however, reversed the finding, holding that the immunity provided under the unclaimed property laws is not absolute, but rather intended to protect property owners.
The Vondjidis case leaves unanswered “How much is enough?” in the pursuit of missing property owners. If no immunity is to be provided under the states’ unclaimed property laws, the only preventative move to minimize exposure to potential litigation is to devise internal controls and procedures to ensure compliance with due diligence obligations. The pursuit of unclaimed property by the states can be expected to be accelerated, as more states struggle to increase revenue to balance their budgets. Vigilance with unclaimed property responsibilities now can save costly litigation later.
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Mary F. Bernard, CPA, is a tax principal and director of state and local tax services at Kahn, Litwin, Renza & Co., Ltd. in Providence, RI.