unclaimed property - eversheds sutherland · this communication is for general informational...

© 2019 Eversheds Sutherland (US) LLPAll Rights Reserved. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Eversheds Sutherland (US) LLP and the recipient. Eversheds Sutherland (US) LLP is part of a global legal practice, operating through various separate and distinct legal entities, under Eversheds Sutherland. For a full description of the structure and a list of offices, please visit www.eversheds-sutherland.com.

Through the Looking GlassUnclaimed Property

Tuesday, February 26, 2019

Mary Jane Wilson-Bilik Wilson Barmeyer Phillip Stano John Allen Zumpetta

Eversheds Sutherland

Mary Jane Wilson-Bilik

Presenters

PartnerWilson BarmeyerPartner

Phillip StanoPartner

2

John Allen ZumpettaAssociate


Agenda

─ Setting the Stage “UP”

─ Rapidly Changing Laws, Issues and Trends for Holders

─ Priority Rules and Jurisdictional Distortion

─ Hot Topics and Trends

3


Setting the Stage “UP”


States Want the Money

5

States holding ›$58 Billion

UP Proceeds Close State Budget Shortfalls$

2000 2017


Aggressive Auditors

─ Aggressive Audit Tactics• Receive 10% to 15% • 15+ year lookback• Audits can last 5+ years

6


Audit Trends

─ Auditor Musical Chairs• State reassignment of audits• Competition for results• New third-party auditors

─ New States Initiating Audits• States other than Delaware taking the lead• Single and multi-state audits

7


UP Lingo in a Nutshell

─ Holder vs. Owner

─ Dormancy Period

─ Abandoned Property

─ Priority Rules

─ Derivative Rights

8


Rapidly Changing Laws, Issues and Trends for Holders


Legislative Trends – The Uniform Acts

─ Most state laws are modeled after a version of the Uniform Unclaimed Property Act (1966, 1981, 1995)

─ A “Revised Uniform Unclaimed Property Act” was promulgated in 2016• Many states are considering

comprehensive legislation• The American Bar Association released

its own model act

10


2016 Uniform Act – Adoption Trends

1954/1966 Act 1981 Act 1995 Act 2016 Act

11

Enacted as of February 2019• Delaware*• Utah• Tennessee• Illinois*• Kentucky

20 States

10 States

?

*Enacted, but with significant changes from the 2016 Uniform Act


Enacted the 2016 Uniform Act (in whole or in part)

Legislation introduced 2017 – 2019

States Considering the 2016 Uniform Act

12


2016 Uniform Act – Issues

13

Helpful to Holders Unhelpful to Holders

─ Broader coverage of issues; more clarity in many areas

─ 5-year statute of limitations; 10-year statute of repose

─ Appeal process for audits

─ Confidentiality and data security for audits

─ No express adoption of derivative rights doctrine

─ Use of contingency fee auditors permitted

─ No exemptions for business-to-business, de minimis amounts, or foreign-owned property

─ Contractual anti-limitations provision

─ Retroactive transitional provision (10 years)

Eversheds Sutherland 14

New Property Types Excluded─ Roth IRAs

─ Other tax deferred accounts

─ Stored value cards

─ Payroll cards

─ Virtual currency

─ Loyalty cards (unless for cash)

─ Game-related digital content

─ Worthless/nontransferable securities

Clarified Unresolved─ Life insurance

─ Securities

─ Gift cards

─ Merchandise credits

2016 Uniform Act – Issues


─ NAUPA pursuing anti-business amendments• Escheat of securities based on inactivity (instead of returned

mail)• Payroll cards subject standards for “wages” (1-year escheat)• Indefinite statute of limitations (longer lookback)• Others

─ Holders also seek amendments• Industry-specific• Exemptions (confirm or expand)• Oppose retroactivity• Others

2016 Uniform Act – Legislative Battles Ahead

15


Priority Rules and Jurisdictional Distortion


Priority Rule Primer

17

Federal common law “priority rules” for unclaimed property established by the U.S. Supreme Court

Impact: The state of incorporation has nationwide jurisdiction where address information is not available.

First Priority State Last known

address of the owner

Second Priority State

The company’s state of

incorporation

1.

2.


Which State Has “First Priority”?

Kelmar Exam Overview

“[A] valid address is an address sufficient for mailing correspondence through the United States Postal Service”

18

2016 Uniform Act

“[A]ny description, code, or other indication of the location of the apparent owner which identifies the state”

V.


Delaware v. Pennsylvania (arguing to reconsider Texas v. New Jersey)

─ Dispute over priority rules for MoneyGram “official checks”

Delaware (state of inc.)v.

20+ States (state where issued)

─ MoneyGram escheated all funds to DE, but other states claim first priority

─ May issue be decided on narrow grounds:

• Abandoned Money Orders and Traveler’s Checks Act, 12 U.S.C. §§ 2501-2503

─ But PA is also advocating to change the priority rules

19

Delaware v. 20+ States (U.S. Supreme Court)


Gift Card Escheat Map

20

Gift Cards

*Map applies only to traditional closed-loop gift cards and does not address other card types. The map provides only a general overview of state unclaimed property laws and does not reflect all details needed for compliance with any particular state law.


Gift Cards and False Claims Act

Marathon Petroleum v. Delaware (3rd Cir. 2017)

‒ Delaware parent company under audit‒ Ohio subsidiaries issue gift cards

Held:─ Federal priority rules apply to disputes

between a private entity and a state

─ Validated the concept of intercompany planning structures for gift cards

─ Delaware may conduct a limited audit to exam the structures

21

Delaware v. Card Compliant & 20+ Retailers (Del. Superior Court 2018)─ Gift cards issued by a third-party

─ Delaware alleged the retailers were the true holders

─ Filed under the Delaware False Claims Act

─ Most retailers settled

Verdict:─ Jury returned a verdict against Overstock.com

─ The third-party structure was invalid; UP reports were “false claims”

─ Overstock must remit unredeemed gift cards and pay treble damages under the False Claims Act


1. False Claim Act & Litigation Risk• A potential risk for all industries• Other industries have faced similar suits going back 20+ years

2. Reassess Entity Planning• Recent cases offer a roadmap for success• Structures/affiliates should be improved before audit/litigation

3. Business Trends – More known customers, with known addresses• Mobile apps• Customer online accounts• Registered/reloadable cards• Electronic delivery

Takeaways for Holders from the Gift Card Experience

22


Owners with Foreign Addresses

─ States pursue foreign-addressed property under the second priority rule

─ States see this as a “rational extension” of the priority rules

─ Most states exempt “property held, due, and owing in a foreign country if the transaction out of which the property arose was a foreign transaction”

23


Estimation & Extrapolation

States/auditors continue to apply troublesome estimation and extrapolation techniques

Delaware sends VDA “invitations” to target companies

Companies who do not enroll in the VDA in 60 days will receive audit notices

24

Temple-Inland v. Cook (D. Del. 2016)Struck down the estimation method to extrapolate a 50-state liability assessed solely by Delaware

Delaware Audit Regulations (2018)Articulates the same method rejected bythe Court


Hot Topics and Trends


Cybersecurity and Audits

26

─ “Hacking of U.S. Networks Traced To China and Iran” NY Times 2.18.19• Private companies and governments are battling

increasingly sophisticated government-affiliated hackers from China, Iran and Russia

─ It’s not a matter of if, but when

─ Holder must perform rigorous due diligence on the auditor’s cybersecurity policies, procedures and cyberinsurance policies

─ Limit confidential data provided to auditors and know legal ramifications

─ Understand your own company’s cybersecurity policies on data transfers with vendors and third parties; have your CISO and legal department review any arrangements involving data transfer

─ Pay attention to destruction of data at the end of audit


Emerging Property Types

─ Stored Value

─ Loyalty Programs

─ Cryptocurrency and Cryptotokens

27


Retirement, Pensions and Insurance

Insurance and Financial Services

DMF MATCHING GENERAL LEDGER

Life Insurance/Annuities

+DMF

28


Retirement, Pensions and Insurance

─ California Unclaimed Life Insurance Benefits “Guidance” Held to be Invalid Regulations

─ Lost Pensionholders

─ 401(k) Plan Treatment

─ IRA Reporting – Tax Implications

29


Recent Litigation

Life InsuranceCryptocurrencyGift cards and store credit

BankruptcyAudit requestsMemberships

Interest

SecuritiesBankingERISA

Audit processGift cardsEstimationRetroactivity

Life Insurance

Insurance

Litigation Landscape

30


Key Takeaways

─ Increased Intensity Across the Board• Regulator expectations of compliance• Legislative change and new rules• Audit risk and frequency

─ Assess & Mitigate Your Risk• Understand areas of potential exposure• Engage in proactive compliance efforts and planning• Cybersecurity issues

─ Educate Stakeholders within Your Organization• Integrate unclaimed property into your new

processes/products

31


Questions

32

eversheds-sutherland.com© 2019 Eversheds Sutherland (US) LLPAll rights reserved.This communication cannot be used for the purpose of avoiding any penalties that may be imposed under federal, state or local tax law. PRIVILEGED AND CONFIDENTIALThis communication cannot be used for the purpose of avoiding any penalties that may be imposed under federal, state or local tax law.

Mary Jane [email protected]+1 202 383 0660

Wilson [email protected]+1 202 383 0824

Phillip [email protected]+1 202 383 0261

John Allen [email protected]+1 212 389 5078

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