Monday, April 25, 2011

Tangible Personal Property and Unclaimed Property: What Holders Need to Know

As unclaimed property compliance continues to grow in importance, a “sleeper” that is increasingly making its presence felt is the existence of tangible personal property (TPP). For many years overlooked or forgotten, TPP is increasingly of interest to the states, and should be of interest to many holders. This article will examine the jurisdictional rules pertinent to TPP, discuss a few random state laws, review some of the various types of TPP we have encountered in our practice, and examine the significance of the Internet and how it is fueling interest in this area. To lay the groundwork before focusing on these areas, a few definitions are in order. The term tangible property is defined in Black's Law Dictionary as meaning “Property which may be touched; such as is perceptible to the senses; corporeal property, whether real or personal. The phrase is used in opposition to such species of property as patents, franchises, copyrights, rents, ways and incorporeal property generally.” Thus, TPP should be distinguished both from real property, as well as from intangible property. The latter term is defined in a leading treatise as “...personal property, the physical manifestation of which generally has no intrinsic value, but is merely the representation or evidence of valuable property rights, such as certificates of stock, bonds, etc.”

Pertinent Jurisdictional Rules

The seminal case in this area is Texas v. New Jersey. In that case, the U.S. Supreme Court promulgated jurisdictional or priority rules regarding which state had a right to lay claim to unclaimed intangible personal property. However, the Court also summarized the law pertinent to escheat claims for tangible property, stating as follows: “With respect to tangible property, real or personal, it has always been the unquestioned rule in all jurisdictions that only the State in which the property is located may escheat the property.” Interestingly, Texas sought to argue in that case that mineral proceeds emanating from production in Texas should be escheatable only by the State of Texas. The Supreme Court disagreed, stating as follows: “Texas argues in particular that at least the part of the intangible obligations here which are royalties, rents, and mineral proceeds derived from land located in Texas should be escheatable only by that State. We do not believe that the fact that an intangible is income from real property with a fixed situs is significant enough to justify treating it as an exception to a general rule concerning escheat of intangibles.” Thus, to the extent property is classified as TPP, the Supreme Court ruled that only the state in which the property is located may escheat the property.

Overview of State Law TPP Provisions

As a number of states have enacted variations of one of the versions of the Uniform Unclaimed Property Acts, an analysis of state law provisions pertinent to the treatment of TPP starts with a review of the Uniform Act. Thus, the pertinent provision of the 1995 Act states as follows: “Tangible property held in a safe deposit box or other safekeeping depository in this State in the ordinary course of the holder's business and proceeds resulting from the sale of the property permitted by other law, are presumed abandoned if the property remains unclaimed by the owner for more than five years after expiration of the lease or rental period on the box or other repository.” The Commentary to such section states in pertinent part as follows: “Section 3 parallels Section 2(d) of the 1966 Act and Section 16 of the 1981 Act. This section is not intended to cover property left in places other than safekeeping repositories, for example, airport lockers or field warehouses. Its coverage is limited to tangible property held in safe deposit boxes and financial institutions.” With that background in mind, we will review a few representative state unclaimed property laws. A number of states explicitly provide in such laws that they claim tangible personal property. For example, Delaware law states in pertinent part: “Property” means personal property...of every kind or description, tangible or intangible, in the possession or under the control of a holder...” California law states in relevant part “All tangible personal property located in this state...that is held or owing in the ordinary course of the holder's business and has remained unclaimed by the owner for more than three years after it became payable or distributable escheats to this state.”

Florida provides in its law that “All tangible and intangible property held in a safe deposit box or any other safekeeping repository in this state in the ordinary course of the holder's business, and proceeds from the property permitted by law, that remain unclaimed by the owner for more than 3 years after the lease or rental period on the box or other repository has expired are presumed abandoned.” Florida Reporting Instructions state: “The only tangible personal property subject to the Unclaimed Property Law are items from safe deposit boxes in financial institutions as provided in Section 717.116, Florida Statutes.” Minnesota Department of Commerce Reporting Instructions state that “... the only tangible property that is reported is the contents of safe deposit boxes. Real estate and other tangible property are NOT reported.” Texas Reporting Instructions offer the following commentary on tangible property: “Safe deposit box contents held by depositories that have remained unclaimed by the owners for five years should be reported to the Comptroller's office on Nov. 1 of each year. Safekeeping properties, loan collateral and any other tangible properties not held in safe deposit boxes should be reported after remaining unclaimed for three years.” While these provisions may not be actively enforced, it is important that holders take note of the states' authority to escheat this property as it could become a significant issue under audit.

Discussion of Various Types of Tangible Personal Property

Based on our firm's collective consulting experience, we have encountered a number of diverse TPP types. Although by no means an exhaustive list, this discussion illustrates the myriad of diverse property types that arise in this area. Some of these types include the following:

* Banking/Financial Institutions - In addition to the safe deposit box contents already mentioned above, it is not unusual for loan departments to have tangible property held as collateral for a loan.

* Delivery Services - These companies routinely have TPP that is misplaced or otherwise not claimed. Although federal regulations may come into play, holders of TPP in this industry may desire to involve legal counsel to review the extent to which unclaimed property laws apply.

* Hospitals - It is not uncommon for these organizations to hold patient valuables which cannot be reunited with the owner. It is likely that TPP held in such capacity qualifies as property held in a safekeeping repository.

* Hotels/Motels - Many hotels/motels provide safes for valuables of their customers. This type of TPP also could be claimed by states whose laws either cover tangible property generally, or whose laws otherwise specify property held in a safekeeping repository format.

* Auction Houses - What if tangible property that has not been sold is not claimed by the original owner after several years? Do the unclaimed property laws apply? What about the effect of “liquidated damage” or other similar provisions in the contract that might allow the auction house to retain the property to cover its costs, assuming the owner cannot be found?

* Museums - What about tangible property loaned to a museum that is not claimed upon expiration of the loan agreement? See for example, Georgia S.B. 195 (2006), amending Ga. Stat. Ann., Sec. 44-12-193.

* Airlines - What about luggage that is not claimed, and the contents thereof? Do federal regulations preempt state law? Holders of TPP in this industry may desire to involve legal counsel to review the extent to which unclaimed property laws apply.

* Automobile Dealerships – Whether customers order specialty items or are waiting for standard accoutrements not available at the time of delivery, many fail to return to pick up floor mats, license plate holders, car covers, etc. Are states interested in this TPP? Are there any requirements to at least report an inventory of these items? This certainly warrants discussion with counsel to examine the unclaimed property implications and consider whether language can be incorporated into agreements to establish customer rights, dealer obligations and address the value of items that are not timely claimed.

Significance of the Internet Upon Tangible Personal Property Transactions

A random review of state unclaimed property websites indicated that states generally handle the disposition of unclaimed TPP in one of two alternative ways. First, some states utilize the Internet, and particularly eBay-for continual sales of TPP that is in their possession. Alternatively, some states utilize a traditional auction to dispose of TPP that is in their possession.

Prior to the advent of the Internet, it is believed states were faced with a number of practical problems entwined with the sale of TPP. Thus, pre-Internet, an annual auction of the property could take place, with attendant logistical difficulties. For example, a venue would need to be secured to have the auction, a percentage of the fees obtained from the sale might have been required to be paid to a contract auctioneer, and, once the auction was over, all the TPP that was not sold presumably would need to be moved and housed again in a different location. With the introduction of the Internet, and particularly eBay, all of this changed. State unclaimed property administrators realized they could have a continuous auction of the TPP, and the audience to bid on the property obviously greatly increased, with attendant higher prices for the TPP being obtained. A document found on the Texas State Comptroller's website captioned “About Texas Unclaimed Property”, indicated under a sub-heading “Online Auctions” the following: “Going, going-but not gone...Texas was the first state to sell unclaimed property online-specifically, safe deposit box contents whose owners have been unreachable for more than six years. The auctions began in 1999 on the popular auction web site The Unclaimed Property Division now holds weekly auctions, and the Comptroller's office is a “Top-rated seller” with 99.8 percent positive feedback. But rest assured that, even if your long-forgotten necklace was sold, the proceeds are and always will be yours. Proceeds from the auctions are" liquid" unclaimed assets; belong to the owner (not the state); and have no claim deadline. To view our current auctions, go to the “” eBay seller site and view current listings.” Similarly, a review of the Pennsylvania State Treasurer's website indicated they use eBay to auction a number of items deposited into their vault including coin collections, jewelry and musical instruments.

Other states utilize the traditional auction to dispose of TPP held in their possession. Thus, a 2009 wire story indicated that Florida was hosting an auction of TPP, stating: “The state will auction at least $500,000 worth of jewelry, watches, rare coins, and other property left in safe deposit boxes.” A related wire story stated that “40,000 items will be auctioned off at the annual Unclaimed Property Auction on Saturday, October 24.”

In addition, Washington has indicated on the state's Department of Revenue website that it usually holds an auction of TPP every four years. Materials found on such website stated: “Safe deposit box contents and safe keeping items are turned over to the state of Washington five years after the owner stops paying rent. If the owner does not claim the items, the State must sell the contents at public auction within five years. The Department typically holds an auction every four years. However, we are currently considering holding our next auction in May, 2011...Our last auction was held in December 2008. At that time, we sold more than 4000 lots with net proceeds of over $545,000. These proceeds were placed in accounts for the owners of the property that was sold. Sale items usually include collectable coins & currency, jewelry, pocket watches, stamps, silver bars, sports cards, and other collectables. We do not auction land, vehicles or most other tangible property.”

In summary, although not every state specifically addresses TPP in the context of unclaimed property law, TPP is a category that can be claimed by a number of states and is often auctioned off when items have some monetary value. Given the current economic climate, the review of TPP as a potential source of unclaimed property will likely continue to grow in visibility with the states. Especially in the areas outlined herein, holders who ignore this area do so at their own peril!

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