Revised Uniform Unclaimed Property Act Finalized for State Enactment—Legislative Drafting Notes and Interpretative Comments Added

Years in development, with thousands of pages of comments submitted by interested parties, the fourth iteration of a uniform unclaimed property act—entitled the Revised Uniform Unclaimed Property Act (RUUPA or Act)—has been finalized by the Uniform Law Commission (ULC) for state enactment. The version now available includes a Prefatory Note, Legislative Notes, (Notes) and Comments (Comments) components. The Prefatory Note is an overview of the history of unclaimed property laws and the process and issues relating to this new act. Legislative Notes are directions to state legislatures as to how to conform elements of the Act to specific state requirements—such as when a provision is optional in the Act, or where a provision references a federal law and a state is prohibited from incorporating another law by reference. Comments explain the drafters’ interpretations and intent of the statutory language.

Practice Note: These Notes are often considered legislative history or explanatory guidance by state agencies and courts tasked with interpreting the statutory language.

Prefatory Note

RUUPA’s Prefatory Note provides a history of unclaimed property concepts and the previous uniform acts, a summary of the current status of unclaimed property laws in the states, an account of relevant terms, an explanation of the goals of unclaimed property laws and a description the stakeholders. Oddly, the one stakeholder group not specifically mentioned is actual owners of the property. The Prefatory Note also explains the significant areas of dispute: look-back period for audits; estimation methods in audits; and application of the “derivative rights” doctrine. The Note addresses the lack of a “business-to-business” (B2B) exemption in the Act, despite rigorous advocacy by the holder community. The Note explains:

“Achieving the proper balance between . . . competing interests has been difficult. B2B provisions have not been incorporated into this act. However, states that have a B2B exemption will be able to keep it if they want to, and those who do not have or want a B2B exemption, will be free to leave it out without offending the goal of achieving substantial uniformity.”

Practice Note: The failure to include at least a placeholder for a B2B exemption in the Act is a significant disappointment to holders. Reference to this exemption in the Comments at least legitimizes the exclusion and provides support for its adoption by states.

Highlights of RUUPA Section Comments

• Definition of “Holder”

One Comment provides an extensive discussion of whether there can be more than one Holder—an issue that continues to be controversial under current law. The Comment clears up some of this controversy by noting:

“Where one party has a direct legal obligation to the owner of the property, and another party has possession of funds associated with the property and an obligation to hold it for the account of, or to pay or deliver it to, the owner solely by virtue of a contractual relationship with the party who is directly obligated to the owner, but who has not assumed direct liability to the owner, it is the party who is directly obligated to the owner who is the holder for purposes of the act.”

(Emphasis added). An example is provided in the context of an issuer of stock or bonds and provides that it is the issuer not the transfer agent that is the holder. In contrast, the Comment explains that when “a corporation sells assets to another corporation and the acquiring corporation affirmatively assumes liability for obligations of the selling corporation for certain liabilities associated with the acquired assets, the acquiring corporations becomes the applicable ‘holder’ of the assumed obligations.”

Practice Note: The use of the term “affirmatively” in the Comment is important in asset deals. Sometimes state administrators argue that if the purchaser acquired bank accounts or other assets as part of the deal, and such assets could hypothetically be tied to the seller’s unclaimed property liability, this is enough to shift the liability to the purchaser. This Comment suggests that the acquirer must “affirmatively” assume liability, which suggests something more than an inference from the transfer of related assets.

• Loyalty Programs

RUUPA provides an exemption for loyalty programs for which no consideration was exchanged. The Comment on the issue specifically addresses an issue raised by a commissioner from the floor at the final ULC meeting at which the Act was adopted, regarding programs that allow purchases of loyalty points. In response to this question, a Comment explains:

“Some loyalty programs permit consumers to purchase additional rewards for direct monetary consideration. The burden would be on the issuer of cards under such programs to establish that unredeemed card balances for which exemption is claimed do not include balances for which the cardholder paid any direct monetary consideration.”

Practice Note: This interpretation is a good result. There was some concern (fueled by comments from state representatives) that any ability to purchase loyalty points would taint an entire loyalty account and result in even points for which no consideration was paid being subject to classification as remittable abandoned property. The Comment does not provide how the burden of establishing which balances qualify for the exemption is satisfied by the issuer. Holders should consider their options for doing this, such as segregating points; adopting a policy that paid points are used first and a program for tracing such points; or considering mathematical models to estimate which points are paid and which are gratis.

• Scope of Covered Property

Another Comment notes that “unless specifically excluded, all intangible property is within the coverage of this Act.”

Practice Note: This Comment could cause mischief in the future as new types of property are created through technology and other business model advances.

• Merchandise credits and similar items

Whether merchandise credits are property subject to the Act is an option specifically left up to the individual states. The Comment to the section addressing presumptions of abandonment addresses these credits and provides:

“This section also covers consumer credits owed on consumer transactions such as returns of merchandise, cancellation of layaways, and various kinds of deposits. The existence and amounts of such credits will of course be dependent on the terms of the contract between the older and the consumer. However, in-store credits for returned merchandise are included, unless expressly excluded in the Act.”

(Emphasis added).

Practice Note: This Comment is confusing because it specifically provides for reliance on contract terms—which typically limits the use of the credit to purchasing merchandise or services and prohibits redemption for cash. Such credits may also include a period in which the credit is valid. However, the Comment goes on to say that such merchandise credits are property covered by the Act unless specifically excluded. It is not clear why the Comment would reference the importance of the contract terms and then in the next sentence apparently negate their relevance.

• ERISA Pre-Emption

Another Comment specifically addresses the issue of ERISA pre-emption of state unclaimed property laws. The Comment describes the various cases and US Department of Labor guidance on this issue. The Comment notes “there may be a valid distinction between assets held in a defined contribution plan where each participant’s portion is held separately and those held in defined benefit plan where the assets are held in a pool or fund out of which funds are withdrawn as needed, and excess funds may be returned to the plan sponsor.”

Practice Note: The Comment does not mention a recent US Supreme Court case that could have significant repercussions on states’ rights to audit ERISA related assets. The Comment also is only in the Act’s section addressing tax-deferred retirement accounts, but there are other types of employee welfare plans with similar issues.

• Securities

Regarding the deemed abandonment of securities, a Comment clarifies some ambiguous language in the Act. The Act states that “[a]t and after the time property is presumed abandoned under this [act], any other property right or interest accrued or accruing from the property and not previously presumed abandoned is also presumed abandoned.” The Comment makes it clear that this provision is “not intended to mean that a security is presumed abandoned as a result of a dividend payment being presumed abandoned, nor does it mean that the underlying bond will be presumed abandoned merely because an interest payment with respect to the bond is presumed abandoned.”

• Life Insurance

Significant controversy has persisted over when life insurance proceeds become abandoned and the extent of the obligations of an insurer to determine whether benefits have become payable. A Comment addressing “knowledge of death” explains that a new Model Act being developed by the National Association of Insurance Commissioners may be substituted for the RUUPA life insurance provisions. The Comment also notes that several of the RUUPA provisions are consistent with another Model Act created by the National Conference of Insurance Legislatures.

• Place of Transaction Priority Rule

A Comment makes it abundantly clear that:

“a newly added provision recognize[is] that, if property is specifically exempt as unclaimed property under the laws of the state of last known address of the owner, or that of the holder’s domicile, then the state in which the transaction giving rise to the property occurred must recognize the higher priority state’s affirmative exemption of the property and cannot take custody of the property because to do so would not give Full Faith and Credit to the laws of a state with a higher constitutional priority to claim the property.”

Practice Note: This is a significant development. In states that adopt this provision, businesses like retailers that utilize gift card management companies can now rely on the rules in the management company’s state of incorporation rather than worrying that the state of transaction would apply a different rule (which was possible under the 1995 Act but subject to litigation).

• Administrator’s Burden of Proof

Another Comment notes that a section addressing a state administrator’s burden of proof to establish its right to custody of property is “an expansion of the concept of the administrator’s burden of proof . . . this Act acknowledges that the burden of proof as to all items of property is on the administrator.”

Practice Note: It will be very interesting how this plays out in an audit!

• Record Retention

The record retention Comment explains that the provision “does not require the holder to obtain the address of the owner.” It specifically notes: “For example, a record of the address of the purchaser or donee of a gift certificate often is not obtained.”

• Audit

The Comment to the compliance examination section notes that “one of the dual purposes of this act is the collection of revenue.” As a result, the Comment finds that in determining the scope of an audit, reference may be to cases “holding that it is not an unreasonable search [under the Fourth Amendment] to require taxpayers to produce their books and records.”

Practice Note: Reference merely to “books and records” can be problematic because this is such a broad term and allows auditors to go on extensive phishing expeditions. For example, most auditors assert the right to review all books and records, even those records that pertain to owners with addresses in states not participating in an audit. This can be particularly problematic when the records demanded include protected confidential information, such as information under HIPAA.

• Holder’s Failure to Maintain Records

Practice Note: Under the 1995 Act, use of estimation as a result of failure to maintain records was characterized as a “penalty” rather than merely an audit methodology. Some states took the position that if they were not the state of domicile, they could nevertheless impose a penalty for failure to keep records and measure that penalty by estimated unremitted abandoned property. RUUPA seems to say that only one state can use estimation. The Comment suggests that estimation is a penalty only in the sense that it may overstate the holder’s actual liability. The Comment also suggests that only the second priority state is entitled to estimated property. While citing to Temple-Inland, the Comment does not reconcile the suggestion in that case that addresses be extrapolated back as well as value.

Conclusion

The art of crafting the Revised Uniform Unclaimed Property Act has been a tremendous task. Thanks should be given to all of the drafting committee members and to the ULC Reporter, Charlie Trost. While we do not agree with all of the choices that were made in finalizing the Act, the commissioners put in tremendous unpaid hours and put up with a lot of forceful advocates from both sides of the fence. The result is an Act that addresses many of the modern unclaimed property issues.

See everyone in 2036 for the next Revised Uniform Unclaimed Property Act drafting process!