by Angela R. Gebert, CPA, Fort Wayne, IN (formerly with Crowe Horwath LLP), and Chris Hopkins, CPA, New York, NY
Miscellaneous
Why should tax professionals care about unclaimed property? After all, unclaimed property is not a tax but a property right. However, unclaimed property looks and acts very much like a tax. In fact, similarities can cause compliance responsibilities and audit notices to drop squarely in the lap of a tax practitioner. To recognize the issues and potential risks, the fundamentals of unclaimed property need to be understood.
Background
Unclaimed property, also known as abandoned property, consists of property held or owing in the ordinary course of business that the owner has not claimed for a certain period of time (the dormancy period). All 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, and Guam, as well as a handful of foreign countries, have enacted unclaimed property laws. Unclaimed property can include uncashed payroll and vendor checks, accounts receivable credit balances, dormant bank and brokerage accounts, life insurance policies, gift certificates and gift cards, customer refunds and rebates, publicly traded securities, benefit plan payments, and the contents of safe deposit boxes. While unclaimed property or escheat laws date back to the Middle Ages, aggressive compliance enforcement by states is a relatively recent phenomenon. When dealing with the state taxes, tax practitioners think in terms of physical presence, nexus, and equitable apportionment. But since unclaimed property is technically not a tax, these concepts generally do not apply.
The Supreme Court established the jurisdictional rules for states claiming property in the 1965 case Texas v. New Jersey, 379 U.S. 674 (1965). The priority rules are:
* The jurisdiction of the owner’s last known address as reflected in the holder’s records is entitled to custody of the unclaimed property; and
* If the owner’s last address is unknown, the jurisdiction in which the holder is domiciled (incorporated) is entitled to claim the unclaimed property.
As discussed below, liberal interpretations of the second rule by some states create the biggest challenge—and potential liability—for many companies. A number of states have also adopted a third-priority or “throwback” rule. Under this rule, if there is no owner address and the holder’s state of domicile does not have unclaimed property laws that apply to the property, the state in which the transaction giving rise to the property occurred may claim the property. The Supreme Court has not sanctioned the third-priority rule.
Current Economic Climate and Trends
Due to the current economic environment and the budgetary problems of many states, unclaimed property is turning into what amounts to a tax—or at least a means to fill depleted state coffers. A number of states now view unclaimed property enforcement as a politically neutral, no-cost revenue generator and participate in multistate audits conducted by contract audit firms.
Some unclaimed property administrators have expanded the definition of what constitutes unclaimed property, leading to new and sometimes creative types of property being subject to state claim. Increased legislative activity has also resulted in the enactment of shorter statutory dormancy periods. While dormancy periods were historically often 7–15 years, dormancy periods of three years or less are becoming the norm. The purported rationale for the shorter dormancy periods is to more quickly reunite property with owners, but the reality is that they accelerate states’ receipt of funds.
While the purpose and intent of the unclaimed property laws in most states is to reunite lost property with owners, cash-strapped states sometimes lose sight of this objective. In 2007, a U.S. appeals court effectively enjoined the state of California from taking unclaimed property due to inadequate efforts by the state to return property to owners (Taylor v. Westly, 488 F.3d 1197 (9th Cir. 2007)). After the state tightened its custodial safekeeping practices, the order was lifted.
In 2009, a U.S. district court ruled in favor of an issuer of traveler’s checks after the Kentucky legislature attempted to shorten the dormancy period for uncashed traveler’s checks from 15 to 7 years (American Express Travel Related Servs. v. Hollenbach, 630 F. Supp. 2d 757 (E.D. Ky. 2009), vacated and remanded, No. 09-5898 (6th Cir. 5/5/11)). The court concluded that the legislative change was “arbitrary and capricious and violate[d] the Due Process Clause of the United States Constitution.” However, the Sixth Circuit disagreed and held that the amendment does not violate the Due Process Clause.
On January 31, 2011, the Third Circuit issued a temporary injunction against New Jersey’s statutory requirement that stored value card issuers obtain and maintain a record of the zip code of stored value card purchasers (American Express Travel Related Servs. v. Sidamon-Eristoff, No. 11-1141 (3d Cir. 1/31/11)). The law, which included a presumption that the place of a card’s sale or issuance was the purchaser’s address if the purchaser’s name and address were not known, was a not-so-subtle attempt by the state to collect unredeemed stored value card balances. Notwithstanding these and other decisions, states continue to increase enforcement efforts to shore up budget gaps. Along with this increased enforcement comes significant audit exposure and financial risk.
Traditional Taxes Versus Unclaimed Property
While traditional state taxes and unclaimed property both serve as revenue generators for states, there are some significant differences that are important to recognize. In addition to tax nexus rules and equitable methodologies for apportionment not applying to unclaimed property, most states have no or limited statutes of limitation. Even companies that have a long history of compliance may be shocked to find that an unclaimed property audit can cover a period of up to 25 years. And although no state provides written rules for estimating a liability when a holder’s records are “incomplete,” there are limited or no rights for holders to administratively challenge assessments that seem unreasonable or egregious. Another significant difference is that contract auditors, not state employees, usually perform unclaimed property audits. States typically compensate contract audit firms on a commission or contingent fee basis, creating an incentive for such firms to propose very large assessments.
A major factor in the discrepancy between money collected by states on audit and money returned to owners is the fact that estimation techniques are often used to determine a holder’s liability. An estimated liability is outright revenue for a state since there is no owner to whom the state can return the property. A company needs to change its approach when considering unclaimed property issues. Unlike traditional taxes, where liability generally relates to the geographies in which the company has a business presence, most risk and exposure for unclaimed property usually lies with the company’s state of legal domicile. Risk and exposure increases if there is a lax history of compliance or there are limited available historical financial records. Liability is typically estimated in such circumstances, and the state of legal domicile is generally entitled to claim the entire estimated amount.
Interestingly, while the Supreme Court has addressed unclaimed property jurisdictional rules several times (Standard Oil Co. v. New Jersey, 341 U.S. 428 (1951); Texas v. New Jersey; Pennsylvania v. New York, 407 U.S. 206 (1972); Delaware v. New York, 507 U.S. 490 (1993)), there have been no federal cases that address the use—or permissibility—of estimates. And the authors are aware of only one state case that has considered the use of estimates in the context of an unclaimed property audit (New Jersey v. Chubb Corp., 570 A.2d 1313 (N.J. Super. Ct. Ch. Div. 1989)). It is worth noting that in Chubb, the New Jersey court concluded that the jurisdictional guidelines established by the Supreme Court in Texas v. New Jersey were relevant only to conflicts among states, and the rules did not apply to disputes between the state and a holder.
Relevance to Tax Practitioners
The relevance of unclaimed property to tax practitioners should now be obvious. Despite the differences, as administered and enforced by a number of states, unclaimed property looks and acts very much like a tax. Unclaimed property compliance is also often an organizational hot potato. It is technically not a tax, and it does not fall squarely into any single corporate function—there are legal aspects of rights to unclaimed property, accounting records to be tracked and analyzed, and annual reports to be filed with states. As a result, frequently no department within an organization claims ownership. If a company has not specifically assigned unclaimed property responsibilities to a functional group, chances are that no formal unclaimed property policies and procedures or reporting processes exist. This leads to heightened risk of audit and potentially significant unfavorable financial implications. Unfortunately, when the audit notice comes, it will usually find its way to the tax practitioner, who will be charged with “fixing the problem.”
What should tax practitioners do? At a minimum, they should educate their company’s CEO, CFO, or general counsel. While they can be reminded that unclaimed property is not a tax, executives should be made aware of the potential risks and financial exposure. Taking further steps, practitioners can determine if there is a history of compliance and if someone in the organization already has responsibility for tracking and reporting unclaimed property. Evaluating the company’s current policies and procedures and its compliance processes will provide a starting point for addressing possible gaps. Next, estimate potential unreported liability. Factors to consider include the company’s history of compliance, the availability and location of owner and historical financial records, states in which the company conducts business, and most important, the unclaimed property laws of the company’s state of legal domicile. If the amount of estimated exposure is significant, the company should consider entering into a voluntary disclosure agreement with one or more states. Most states have formal or informal voluntary disclosure programs under which penalties and interest are usually waived and lookback periods are shortened. Finally, once historical exposure has been addressed, companies need to adopt policies, procedures, and processes for prospective compliance.
Showing posts with label Unclaimed Property. Show all posts
Showing posts with label Unclaimed Property. Show all posts
Tuesday, September 6, 2011
Tuesday, July 5, 2011
Will the Real Holder Please Stand Up?
In unclaimed property terminology, the party or entity responsible for reporting and remitting unclaimed property to the various states is frequently referred to as a "holder". In a number of court cases that have occurred over the years, and particularly in a few important recent cases, a key preliminary issue courts have been asked to decide is "who is the real holder?" In other words, in some specific cases the rebate processors/fulfillment companies have asserted the defense that they're not the holder, while similarly entities that have contracted with the rebate processors/fulfillment companies have argued they're also not the holder. Who is correct? It is a rule that there can be only one holder, or can there potentially be multiple holders for unclaimed property purposes?
This article will examine some variations between the definition of a "holder", as such term is defined in the various Uniform Unclaimed Property Acts and selected state statutes, provide examples of where the issue of "who is the holder" may be clear cut versus ambiguous, review some cases that discuss the issue of which party or parties are defined as the holder(s) for unclaimed property purposes, and offer planning steps that holders may take to potentially minimize exposure in this area.
"Holder" Definitions
The definition section of the Uniform Unclaimed Property Act of 1995 ("1995 Act") states that a holder "means a person obligated to hold for the account of, or deliver or pay to, the owner property that is subject to this [Act]." Interestingly, a comment to the 1995 Act states that this definition of a holder was written to clarify some confusion over the issue of holder identity. The example provided in this comment sets forth an obligation that had been transferred by the original obligor corporation to a transfer agent, as in the payment of dividends on underlying corporate stock. As held by the U.S. Supreme Court in Delaware v. New York, the holder is the person indebted to the rightful owner under the applicable state law. But what does this mean in application? In the example outlined in the case of Delaware v. New York,, if the original debtor, the dividend-paying corporation, has satisfied its debt under the terms and conditions of its contract and under state law by transmitting payment to a third party record owner (which has contractually undertaken to make the payment), the record owner becomes the debtor / holder. As the Supreme Court stated in such case, "Intermediaries who hold securities in street name are the relevant 'debtors' because they alone, and not the issuers, are legally obligated to deliver unclaimed securities distributions to the beneficial owners." Accordingly, the holder is essentially the party who could be sued by the rightful owner for refusing to make payment or held liable by a state for not properly reporting items as unclaimed property. See Comments to Uniform Unclaimed Property Act (1995), Section 1.Definitions.
As the Uniform Acts are normative in nature and are not binding on any particular state unless and until adopted by a specific state, it is important to consider the definition of holder in the applicable state unclaimed property law. For example, under California law, Section 1501.4(e), a holder is defined as "any person in possession of property subject to this chapter belonging to another, or who is a trustee in case of a trust, or who is indebted to another on an obligation subject to this chapter." The key additions with this definition versus the definition in the 1995 Act are the terms "possession" and "trustee." Many states, including Florida, Texas, and New Jersey among others, include very similar definitions of "holder" as part of their unclaimed property statutes. This definition also largely conforms to the language of the Uniform Unclaimed Property Acts of 1981 and 1954. However, like the definition provided in the Uniform Unclaimed Property Act of 1995, this definition is also broad and leaves room for interpretation as to whether there is one definitive holder or potentially multiple holders of unclaimed property, depending on the facts and circumstances of each situation.
For example, if Company X issues an accounts payable ("A/P") check to a vendor from its A/P disbursement account, and that vendor fails to cash the check, the A/P check should be reported and remitted as unclaimed property by the holder after passage of the appropriate state dormancy period. In this example, it is clear that the holder would be Company X, as the A/P check was issued and disbursed from an account owned by Company X, and Company X is indebted to its vendor on the uncashed A/P check. However, in recent years, due to complexities with company organizational structures, legal issues surrounding certain property types, and relationships between companies and third party processors, fulfillment companies, etc., identification of the holder has become less clear cut.
Cases Discussing Holders of Unclaimed Property
Michael L. Fitzgerald v. Young America Corporation, et al.
In some cases, it may even be determined that there are multiple holders of unclaimed property. As reflected in the Young America Corporation ("YAC") litigation in District Court, Polk County, Iowa, the issue of whether the third party rebate fulfillment house or the original corporate obligor is the holder, or whether there may be multiple holders of uncashed rebate checks, is up for debate. The Iowa Treasurer brought suit against YAC, a rebate administration and fulfillment company, for allegedly retaining the proceeds of issued but uncashed rebate checks.
Co-defendants Sprint, T-Mobile, and Walgreens ("Merchant Defendants") asserted that because they did not possess the funds at issue, they were not the “holder”, and thus not subject to the Iowa Unclaimed Property Act. Accordingly, they requested a summary judgment, which the Court denied on the basis that it could not determine that the definition of "holder" under Iowa law was only limited to those in possession of the property. Iowa's definition of holder is identical to California's, quoted above. An article by analysts in this area, published in a Council on State Taxation ("COST") publication, articulated the complexity and ambiguity that still exists with respect to the issue of holder identification. As stated in the COST article, the YAC case in Iowa and subsequent YAC case in Arkansas "imply that possession is not enough to determine the "holder" in an unclaimed property context, but they otherwise fail to provide clear guidance as to which entity or entities may properly be classified as a "holder" in the case. The question remains as to how the YAC line of trial court cases fits into the framework set forth by the Supreme Court in Delaware v. New York, and which criteria – contractual provisions, statutory definitions, underlying state law governing the property item at issue – should influence the "holder" determination."
The area of rebates provides an example of a situation where companies may be unsure who the holder of funds truly is and thus, which party has the unclaimed property compliance obligation. In the area of rebates, and in our experience, we typically request to review a copy of the legal agreement between the company and their third party rebate provider, as the agreement often contains language pertinent to which party is responsible for reporting and remitting uncashed obligations. In some cases, the third party will provide monthly reports of outstanding rebate checks and return those funds to the company. With those facts, and contractual terms that mirror that practice, a strong position exists indicating that the "holder" of uncashed rebates is the company. However, where the contractual terms indicate that the third party is responsible for the uncashed obligations, but they never report them as unclaimed property on behalf of the company, a state could decide to sue the third party rebate provider and the company, jointly (as in the YAC case) or severally. Our understanding is that the Merchant Defendants delineated above all entered into separate settlement agreements with the State of Iowa.
We are aware that rebate lawsuits involving some of the same entities and some of the same issues have been filed in state courts in New Hampshire and Arkansas, respectively. Thus, at this time, the issue of "who is the real holder" seems to be open or unresolved.
Metromedia Restaurant Services, Inc., et al. v. Comptroller of State of Texas
In a 2006 Texas Court of Appeals case, Metromedia Restaurant Services, Inc., S & A Restaurant Corporation, and Steak & Ale of Texas, Inc. v. Comptroller of Public Accounts of the State of Texas, the holder definition was raised in the context of Metromedia Restaurant Services, et al. ("Metromedia") appealing the district court's judgment assessing over $500,000 in liability against them for failing to remit unclaimed employee wages to the Comptroller under Texas law. Metromedia argued that it could not be held liable for failure to remit the uncashed wages as unclaimed property because of two factors: "(1) there is insufficient evidence to establish that it is a "holder" of the unclaimed property as required by property code section 72.001, and (2) the Comptroller failed to plead a corporate veil-piercing theory, precluding any recovery based on such a theory." The Texas Court of Appeals agreed with appellant Metromedia and reversed the district court's judgment in the case, largely due to the Texas Comptroller's failure to serve process and name in the lawsuit S & A Restaurant Corporation and Steak & Ale of Texas, the party that delivered the unclaimed funds to the Comptroller and the party that was the employer, respectively. In addition, the Court of Appeals disagreed with the jury's finding that Metromedia "operated as a single business enterprise" with both S & A Restaurant Corporation and Steak & Ale of Texas during the relevant time periods.
The Texas definition of a holder is a person who is "(1) in possession of property that belongs to another, (2) a trustee, or (3) indebted to another on an obligation."
The Texas Comptroller argued that Metromedia was a holder because the restaurants operating as subsidiaries of S & A Restaurant Corporation would deposit the revenue from their sales daily into their respective bank accounts. At the end of each day, the funds from all of these accounts would be electronically transferred to a "concentrated account" owned and controlled by S & A Restaurant Corporation. The process of transferring out all deposits and transferring in only the amounts necessary to cover items that were presented for payment occurred daily. Thus, the subsidiary accounts were "zero-balance accounts." According to the Comptroller, Metromedia owned such a zero-balance account and there was some testimonial that at least some of the payroll checks that went unclaimed by Steak & Ale of Texas employees were written on this Metromedia account. In addition, the Comptroller pointed to evidence that Metromedia employees calculated the amount of unclaimed property due to be delivered to the Comptroller on behalf of S & A Restaurant Corporation, and retained the records relating to the reporting and delivery of the unclaimed property. However, the Court of Appeals held that the Comptroller did not satisfy its burden of proving that Metromedia was either in possession of the property or indebted to another for the property. According to the Court of Appeals "Evidence that Metromedia handled payroll responsibilities for S & A Restaurant Corporation or its subsidiaries and that Metromedia provided administrative services with respect to the reporting of the unclaimed wages is not evidence that Metromedia is in possession of the wages or that Metromedia is indebted to the employees for the wages. Evidence to the effect that funds for claimed wages, i.e. funds for checks presented for payment, would pass through the Metromedia account is not evidence that Metromedia currently has or ever had in its possession funds representing the unclaimed wages of Steak & Ale of Texas employees.
Given that many large corporations have multiple subsidiaries or divisions that may function in a fairly decentralized manner with respect to check disbursements (whether payroll, accounts payable, or both), this case points out more issues and ambiguity that may occur when trying to determine who is the holder for unclaimed property purposes.
Costco Wholesale Corporation v Washington State Department of Revenue and Suzan Delbene, Director, State Department of Revenue
On March 4, 2011, Costco Wholesale Corporation ("Costco"), a Washington corporation, filed a Complaint in Washington Superior Court against the Washington State Department of Revenue, and Suzan Delbene, in her official capacity as Director of the Washington State Department of Revenue ("DOR"). By way of background, the DOR conducted an examination of Costco's customer rebate program. As indicated in Exhibit 1 to the Complaint, on February 4, 2011, the DOR sent its audit report, including schedules and interest worksheets, to Costco in which it summarized the findings of its audit, made demand for the above-mentioned sum, and indicated payment of about $3.3 million was due on or before March 4, 2011. If the sum in question was not paid by March 4, the DOR letter indicated, various monetary penalties could be assessed, as well as criminal sanctions. The audit report indicated various property types had been identified as due and owing to the state, namely (i) Washington uncashed rebate checks, (ii) certain property "without the last known name or address of the apparent owner", which the DOR indicated was to be reported to the holder's state of incorporation or domicile, (iii) certain uncashed rebate checks for owners with a last known address in Maryland, and (iv) certain property with a last known address in a foreign country, which the DOR indicated was to be reported to the holder's state of incorporation or domicile. Costco paid the $3.3 million under protest, and filed suit to recover the funds.
After receiving the approximate sum of $3.3 million from Costco in early March under protest, the DOR states in the Answer and Counterclaim to Enforce the Unclaimed Property Act (collectively referred to as the "Answer") that "On March 30, 2011 it refunded Costco's payment, plus approximately $31,000 of interest accrued at the rate of 12%." Apparently the refund was made per Costco's assertion they were entitled to the funds as the owner of the property, i.e., an owner claim.
Before turning to the regulatory issues, a few key facts should be mentioned. According to the factual situation delineated by the DOR in its Answer, Costco maintained a program for "rebate promotions for multiple products sold at its warehouses during the period 2004-2010", and maintained a "rebate department", which managed such program. Costco, per allegations in the Answer, apparently required its suppliers to enter into contracts with it that specified its customers would receive rebate promotions for products sold at Costco warehouses. Costco allegedly contracted with Continental Promotions Group, Inc. ("CPG") to provide fulfillment/rebate processing services, such as processing the rebate forms and issuing the rebate payments. Costco would provide CPG with funds to cover the payments, apparently on a weekly basis. CPG would issue the rebate checks. The Answer stated that in its contracts with suppliers, "...the supplier allow Costco to take a credit against the supplier's account payable for the rebate amount at the time the customer was issued a rebate check"
The DOR essentially indicated that as Costco didn't cooperate in furnishing records pertinent to the rebates, it sought to obtain them directly from CPG. However, those efforts were initially unsuccessful, as CPG filed for bankruptcy in Federal court in Florida in Nov., 2008. The DOR then indicated it obtained pertinent CPG records from ACS, which had conducted a multi-state audit of Costco's rebate program. ACS had contracted with a digital forensics firm, which created a backup copy of CPG's available computer hard drives, including records of rebates it processed for Costco. It should be noted that Costco argued in the Complaint that it is not the holder. Rather, it stated that CPG is the holder. The DOR disagreed, stating in Paragraph 52 of its Answer "Costco is the holder of the uncashed rebate checks issued to its customers by CPG because Costco, not CPG or the manufacturer, is the person that contracted with the customer to pay the rebate amount." The Answer further stated "CPG had no independent contractual obligation to pay Costco's customers." As Costco is incorporated in Washington, the DOR claimed three types of uncashed rebate checks as follows: (i) those with last known addresses ("LKA") in WA, (ii) those with LKA in a state that does not escheat this property type, and (iii) those where Costco's records do not reflect any LKA of the person entitled to the property.
The DOR alleged in its Answer that Costco failed to furnish any information with respect to its customer rebate program, and responded that the DOR's inquiry was "inappropriate" for two reasons. First, Costco insisted that it "had no obligation to its members to pay any rebates". Second, Costco asserted that it "...did not receive the funds associated with those uncashed checks; thus it did not hold and does not hold any UP associated with those uncashed rebate checks." Costco alleged CPG was the holder, and that the DOR should look to CPG as "...the person that contracted with the customer to pay the rebate amount." In summary, the last two pages of the Answer-captioned "Request for Judgment" indicates that the DOR seeks (i) the cash value of the unreported UP attributable to the uncashed rebate checks, (ii) an Order directing Costco to "produce for examination all pertinent records concerning the handling and disposition of uncashed rebate payments", (iii) interest and penalties, and (iv) attorneys fees and costs.
On April 25, 2011, Plaintiff Costco filed an Answer to Defendants' Answer/Counterclaim, referred to hereinafter as "Plaintiff's Answer." Plaintiff, in such document, denied that Defendants have a valid claim to require Costco to turn over the proceeds of any uncashed rebate checks issued by CPG. Plaintiff further denied the allegation alleged in the Defendants' Answer/Counterclaim that it had not "filed with the Department an unclaimed property report disclosing information about payees and the unpaid amount due on its unclaimed rebates." Plaintiff noted that such allegations "erroneously imply that Costco is obligated on rebate checks implicated by Defendants' claims", and denied the allegations in full. Plaintiff's Answer further stated that Costco "was not, and is not, the holder of the 'uncashed rebate checks' allegedly implicated by Defendants' claims." In summary, Plaintiff's Answer asserted a number of legal and equitable defenses to the Defendants allegations made in their Answer/Counterclaim, noting, for example "Costco already made payment to CPG of the amounts of money sought by Defendants; for the government to collect again what Costco has already paid would constitute an unconstitutional taking and a violation of due process, as well as being inconsistent with Washington's Unclaimed Property Law." Among other defenses and affirmative defenses, Plaintiff's Answer noted that Defendants' claims were barred by the equitable doctrine of laches, waiver, and estoppels. Plaintiff requested dismissal of Defendants' Counterclaim with prejudice, granting of relief requested in its Complaint, and attorney fees. In short, absent a settlement of this matter, it appears the lawsuit may continue for some time.
Planning Steps
In order to minimize exposure in this area, companies should be aware of several planning steps. First, each agreement with a third party administrator, fulfillment company, payroll or other agent, should be carefully reviewed from an unclaimed property perspective, and responsibility for unclaimed property compliance should be clearly delineated in the agreement. If such responsibilities are sought to be delegated to a third party agent or contractor, the company's legal counsel should be satisfied that appropriate indemnity or similar provisions are in place to protect the company. Second, if it is believed that provisions of federal law – such as ERISA – supersede the unclaimed property laws, appropriate review and documentation of that fact should be obtained up front from the company's legal counsel. Third, in situations where internal planning techniques are utilized to clarify who is the "holder" – such as "giftcos" – it is important that all requisite corporate documents needed to accomplish that goal be executed and implemented. Finally, in companies that are decentralized with multiple payment locations, an overall compliance plan is needed to ensure that each subsidiary or independent payment location is aware of, and understands the importance of compliance with the unclaimed property laws.
In summary, as certain conflicts and lack of clarity remain between the definitions of a holder among the Uniform Acts, state statutes, case law, and contractual limitations contained within third party agreements, the real question for purposes of unclaimed property compliance becomes "will the real holder please stand up"? As indicated by the complexity of the court cases discussed above, what started as a simple threshold question can, at times, turn into a fairly complex issue.
This article will examine some variations between the definition of a "holder", as such term is defined in the various Uniform Unclaimed Property Acts and selected state statutes, provide examples of where the issue of "who is the holder" may be clear cut versus ambiguous, review some cases that discuss the issue of which party or parties are defined as the holder(s) for unclaimed property purposes, and offer planning steps that holders may take to potentially minimize exposure in this area.
"Holder" Definitions
The definition section of the Uniform Unclaimed Property Act of 1995 ("1995 Act") states that a holder "means a person obligated to hold for the account of, or deliver or pay to, the owner property that is subject to this [Act]." Interestingly, a comment to the 1995 Act states that this definition of a holder was written to clarify some confusion over the issue of holder identity. The example provided in this comment sets forth an obligation that had been transferred by the original obligor corporation to a transfer agent, as in the payment of dividends on underlying corporate stock. As held by the U.S. Supreme Court in Delaware v. New York, the holder is the person indebted to the rightful owner under the applicable state law. But what does this mean in application? In the example outlined in the case of Delaware v. New York,, if the original debtor, the dividend-paying corporation, has satisfied its debt under the terms and conditions of its contract and under state law by transmitting payment to a third party record owner (which has contractually undertaken to make the payment), the record owner becomes the debtor / holder. As the Supreme Court stated in such case, "Intermediaries who hold securities in street name are the relevant 'debtors' because they alone, and not the issuers, are legally obligated to deliver unclaimed securities distributions to the beneficial owners." Accordingly, the holder is essentially the party who could be sued by the rightful owner for refusing to make payment or held liable by a state for not properly reporting items as unclaimed property. See Comments to Uniform Unclaimed Property Act (1995), Section 1.Definitions.
As the Uniform Acts are normative in nature and are not binding on any particular state unless and until adopted by a specific state, it is important to consider the definition of holder in the applicable state unclaimed property law. For example, under California law, Section 1501.4(e), a holder is defined as "any person in possession of property subject to this chapter belonging to another, or who is a trustee in case of a trust, or who is indebted to another on an obligation subject to this chapter." The key additions with this definition versus the definition in the 1995 Act are the terms "possession" and "trustee." Many states, including Florida, Texas, and New Jersey among others, include very similar definitions of "holder" as part of their unclaimed property statutes. This definition also largely conforms to the language of the Uniform Unclaimed Property Acts of 1981 and 1954. However, like the definition provided in the Uniform Unclaimed Property Act of 1995, this definition is also broad and leaves room for interpretation as to whether there is one definitive holder or potentially multiple holders of unclaimed property, depending on the facts and circumstances of each situation.
For example, if Company X issues an accounts payable ("A/P") check to a vendor from its A/P disbursement account, and that vendor fails to cash the check, the A/P check should be reported and remitted as unclaimed property by the holder after passage of the appropriate state dormancy period. In this example, it is clear that the holder would be Company X, as the A/P check was issued and disbursed from an account owned by Company X, and Company X is indebted to its vendor on the uncashed A/P check. However, in recent years, due to complexities with company organizational structures, legal issues surrounding certain property types, and relationships between companies and third party processors, fulfillment companies, etc., identification of the holder has become less clear cut.
Cases Discussing Holders of Unclaimed Property
Michael L. Fitzgerald v. Young America Corporation, et al.
In some cases, it may even be determined that there are multiple holders of unclaimed property. As reflected in the Young America Corporation ("YAC") litigation in District Court, Polk County, Iowa, the issue of whether the third party rebate fulfillment house or the original corporate obligor is the holder, or whether there may be multiple holders of uncashed rebate checks, is up for debate. The Iowa Treasurer brought suit against YAC, a rebate administration and fulfillment company, for allegedly retaining the proceeds of issued but uncashed rebate checks.
Co-defendants Sprint, T-Mobile, and Walgreens ("Merchant Defendants") asserted that because they did not possess the funds at issue, they were not the “holder”, and thus not subject to the Iowa Unclaimed Property Act. Accordingly, they requested a summary judgment, which the Court denied on the basis that it could not determine that the definition of "holder" under Iowa law was only limited to those in possession of the property. Iowa's definition of holder is identical to California's, quoted above. An article by analysts in this area, published in a Council on State Taxation ("COST") publication, articulated the complexity and ambiguity that still exists with respect to the issue of holder identification. As stated in the COST article, the YAC case in Iowa and subsequent YAC case in Arkansas "imply that possession is not enough to determine the "holder" in an unclaimed property context, but they otherwise fail to provide clear guidance as to which entity or entities may properly be classified as a "holder" in the case. The question remains as to how the YAC line of trial court cases fits into the framework set forth by the Supreme Court in Delaware v. New York, and which criteria – contractual provisions, statutory definitions, underlying state law governing the property item at issue – should influence the "holder" determination."
The area of rebates provides an example of a situation where companies may be unsure who the holder of funds truly is and thus, which party has the unclaimed property compliance obligation. In the area of rebates, and in our experience, we typically request to review a copy of the legal agreement between the company and their third party rebate provider, as the agreement often contains language pertinent to which party is responsible for reporting and remitting uncashed obligations. In some cases, the third party will provide monthly reports of outstanding rebate checks and return those funds to the company. With those facts, and contractual terms that mirror that practice, a strong position exists indicating that the "holder" of uncashed rebates is the company. However, where the contractual terms indicate that the third party is responsible for the uncashed obligations, but they never report them as unclaimed property on behalf of the company, a state could decide to sue the third party rebate provider and the company, jointly (as in the YAC case) or severally. Our understanding is that the Merchant Defendants delineated above all entered into separate settlement agreements with the State of Iowa.
We are aware that rebate lawsuits involving some of the same entities and some of the same issues have been filed in state courts in New Hampshire and Arkansas, respectively. Thus, at this time, the issue of "who is the real holder" seems to be open or unresolved.
Metromedia Restaurant Services, Inc., et al. v. Comptroller of State of Texas
In a 2006 Texas Court of Appeals case, Metromedia Restaurant Services, Inc., S & A Restaurant Corporation, and Steak & Ale of Texas, Inc. v. Comptroller of Public Accounts of the State of Texas, the holder definition was raised in the context of Metromedia Restaurant Services, et al. ("Metromedia") appealing the district court's judgment assessing over $500,000 in liability against them for failing to remit unclaimed employee wages to the Comptroller under Texas law. Metromedia argued that it could not be held liable for failure to remit the uncashed wages as unclaimed property because of two factors: "(1) there is insufficient evidence to establish that it is a "holder" of the unclaimed property as required by property code section 72.001, and (2) the Comptroller failed to plead a corporate veil-piercing theory, precluding any recovery based on such a theory." The Texas Court of Appeals agreed with appellant Metromedia and reversed the district court's judgment in the case, largely due to the Texas Comptroller's failure to serve process and name in the lawsuit S & A Restaurant Corporation and Steak & Ale of Texas, the party that delivered the unclaimed funds to the Comptroller and the party that was the employer, respectively. In addition, the Court of Appeals disagreed with the jury's finding that Metromedia "operated as a single business enterprise" with both S & A Restaurant Corporation and Steak & Ale of Texas during the relevant time periods.
The Texas definition of a holder is a person who is "(1) in possession of property that belongs to another, (2) a trustee, or (3) indebted to another on an obligation."
The Texas Comptroller argued that Metromedia was a holder because the restaurants operating as subsidiaries of S & A Restaurant Corporation would deposit the revenue from their sales daily into their respective bank accounts. At the end of each day, the funds from all of these accounts would be electronically transferred to a "concentrated account" owned and controlled by S & A Restaurant Corporation. The process of transferring out all deposits and transferring in only the amounts necessary to cover items that were presented for payment occurred daily. Thus, the subsidiary accounts were "zero-balance accounts." According to the Comptroller, Metromedia owned such a zero-balance account and there was some testimonial that at least some of the payroll checks that went unclaimed by Steak & Ale of Texas employees were written on this Metromedia account. In addition, the Comptroller pointed to evidence that Metromedia employees calculated the amount of unclaimed property due to be delivered to the Comptroller on behalf of S & A Restaurant Corporation, and retained the records relating to the reporting and delivery of the unclaimed property. However, the Court of Appeals held that the Comptroller did not satisfy its burden of proving that Metromedia was either in possession of the property or indebted to another for the property. According to the Court of Appeals "Evidence that Metromedia handled payroll responsibilities for S & A Restaurant Corporation or its subsidiaries and that Metromedia provided administrative services with respect to the reporting of the unclaimed wages is not evidence that Metromedia is in possession of the wages or that Metromedia is indebted to the employees for the wages. Evidence to the effect that funds for claimed wages, i.e. funds for checks presented for payment, would pass through the Metromedia account is not evidence that Metromedia currently has or ever had in its possession funds representing the unclaimed wages of Steak & Ale of Texas employees.
Given that many large corporations have multiple subsidiaries or divisions that may function in a fairly decentralized manner with respect to check disbursements (whether payroll, accounts payable, or both), this case points out more issues and ambiguity that may occur when trying to determine who is the holder for unclaimed property purposes.
Costco Wholesale Corporation v Washington State Department of Revenue and Suzan Delbene, Director, State Department of Revenue
On March 4, 2011, Costco Wholesale Corporation ("Costco"), a Washington corporation, filed a Complaint in Washington Superior Court against the Washington State Department of Revenue, and Suzan Delbene, in her official capacity as Director of the Washington State Department of Revenue ("DOR"). By way of background, the DOR conducted an examination of Costco's customer rebate program. As indicated in Exhibit 1 to the Complaint, on February 4, 2011, the DOR sent its audit report, including schedules and interest worksheets, to Costco in which it summarized the findings of its audit, made demand for the above-mentioned sum, and indicated payment of about $3.3 million was due on or before March 4, 2011. If the sum in question was not paid by March 4, the DOR letter indicated, various monetary penalties could be assessed, as well as criminal sanctions. The audit report indicated various property types had been identified as due and owing to the state, namely (i) Washington uncashed rebate checks, (ii) certain property "without the last known name or address of the apparent owner", which the DOR indicated was to be reported to the holder's state of incorporation or domicile, (iii) certain uncashed rebate checks for owners with a last known address in Maryland, and (iv) certain property with a last known address in a foreign country, which the DOR indicated was to be reported to the holder's state of incorporation or domicile. Costco paid the $3.3 million under protest, and filed suit to recover the funds.
After receiving the approximate sum of $3.3 million from Costco in early March under protest, the DOR states in the Answer and Counterclaim to Enforce the Unclaimed Property Act (collectively referred to as the "Answer") that "On March 30, 2011 it refunded Costco's payment, plus approximately $31,000 of interest accrued at the rate of 12%." Apparently the refund was made per Costco's assertion they were entitled to the funds as the owner of the property, i.e., an owner claim.
Before turning to the regulatory issues, a few key facts should be mentioned. According to the factual situation delineated by the DOR in its Answer, Costco maintained a program for "rebate promotions for multiple products sold at its warehouses during the period 2004-2010", and maintained a "rebate department", which managed such program. Costco, per allegations in the Answer, apparently required its suppliers to enter into contracts with it that specified its customers would receive rebate promotions for products sold at Costco warehouses. Costco allegedly contracted with Continental Promotions Group, Inc. ("CPG") to provide fulfillment/rebate processing services, such as processing the rebate forms and issuing the rebate payments. Costco would provide CPG with funds to cover the payments, apparently on a weekly basis. CPG would issue the rebate checks. The Answer stated that in its contracts with suppliers, "...the supplier allow Costco to take a credit against the supplier's account payable for the rebate amount at the time the customer was issued a rebate check"
The DOR essentially indicated that as Costco didn't cooperate in furnishing records pertinent to the rebates, it sought to obtain them directly from CPG. However, those efforts were initially unsuccessful, as CPG filed for bankruptcy in Federal court in Florida in Nov., 2008. The DOR then indicated it obtained pertinent CPG records from ACS, which had conducted a multi-state audit of Costco's rebate program. ACS had contracted with a digital forensics firm, which created a backup copy of CPG's available computer hard drives, including records of rebates it processed for Costco. It should be noted that Costco argued in the Complaint that it is not the holder. Rather, it stated that CPG is the holder. The DOR disagreed, stating in Paragraph 52 of its Answer "Costco is the holder of the uncashed rebate checks issued to its customers by CPG because Costco, not CPG or the manufacturer, is the person that contracted with the customer to pay the rebate amount." The Answer further stated "CPG had no independent contractual obligation to pay Costco's customers." As Costco is incorporated in Washington, the DOR claimed three types of uncashed rebate checks as follows: (i) those with last known addresses ("LKA") in WA, (ii) those with LKA in a state that does not escheat this property type, and (iii) those where Costco's records do not reflect any LKA of the person entitled to the property.
The DOR alleged in its Answer that Costco failed to furnish any information with respect to its customer rebate program, and responded that the DOR's inquiry was "inappropriate" for two reasons. First, Costco insisted that it "had no obligation to its members to pay any rebates". Second, Costco asserted that it "...did not receive the funds associated with those uncashed checks; thus it did not hold and does not hold any UP associated with those uncashed rebate checks." Costco alleged CPG was the holder, and that the DOR should look to CPG as "...the person that contracted with the customer to pay the rebate amount." In summary, the last two pages of the Answer-captioned "Request for Judgment" indicates that the DOR seeks (i) the cash value of the unreported UP attributable to the uncashed rebate checks, (ii) an Order directing Costco to "produce for examination all pertinent records concerning the handling and disposition of uncashed rebate payments", (iii) interest and penalties, and (iv) attorneys fees and costs.
On April 25, 2011, Plaintiff Costco filed an Answer to Defendants' Answer/Counterclaim, referred to hereinafter as "Plaintiff's Answer." Plaintiff, in such document, denied that Defendants have a valid claim to require Costco to turn over the proceeds of any uncashed rebate checks issued by CPG. Plaintiff further denied the allegation alleged in the Defendants' Answer/Counterclaim that it had not "filed with the Department an unclaimed property report disclosing information about payees and the unpaid amount due on its unclaimed rebates." Plaintiff noted that such allegations "erroneously imply that Costco is obligated on rebate checks implicated by Defendants' claims", and denied the allegations in full. Plaintiff's Answer further stated that Costco "was not, and is not, the holder of the 'uncashed rebate checks' allegedly implicated by Defendants' claims." In summary, Plaintiff's Answer asserted a number of legal and equitable defenses to the Defendants allegations made in their Answer/Counterclaim, noting, for example "Costco already made payment to CPG of the amounts of money sought by Defendants; for the government to collect again what Costco has already paid would constitute an unconstitutional taking and a violation of due process, as well as being inconsistent with Washington's Unclaimed Property Law." Among other defenses and affirmative defenses, Plaintiff's Answer noted that Defendants' claims were barred by the equitable doctrine of laches, waiver, and estoppels. Plaintiff requested dismissal of Defendants' Counterclaim with prejudice, granting of relief requested in its Complaint, and attorney fees. In short, absent a settlement of this matter, it appears the lawsuit may continue for some time.
Planning Steps
In order to minimize exposure in this area, companies should be aware of several planning steps. First, each agreement with a third party administrator, fulfillment company, payroll or other agent, should be carefully reviewed from an unclaimed property perspective, and responsibility for unclaimed property compliance should be clearly delineated in the agreement. If such responsibilities are sought to be delegated to a third party agent or contractor, the company's legal counsel should be satisfied that appropriate indemnity or similar provisions are in place to protect the company. Second, if it is believed that provisions of federal law – such as ERISA – supersede the unclaimed property laws, appropriate review and documentation of that fact should be obtained up front from the company's legal counsel. Third, in situations where internal planning techniques are utilized to clarify who is the "holder" – such as "giftcos" – it is important that all requisite corporate documents needed to accomplish that goal be executed and implemented. Finally, in companies that are decentralized with multiple payment locations, an overall compliance plan is needed to ensure that each subsidiary or independent payment location is aware of, and understands the importance of compliance with the unclaimed property laws.
In summary, as certain conflicts and lack of clarity remain between the definitions of a holder among the Uniform Acts, state statutes, case law, and contractual limitations contained within third party agreements, the real question for purposes of unclaimed property compliance becomes "will the real holder please stand up"? As indicated by the complexity of the court cases discussed above, what started as a simple threshold question can, at times, turn into a fairly complex issue.
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