Thursday, September 9, 2010

The State as Custodian, Except When it Isn't

Those who deal with unclaimed property on a regular basis are familiar with the theory that state unclaimed property laws are "custodial" in nature.  The state acquires possession of, but not title to, property that is reported under the law.  In non-legalese, that means the state gets to hold the property, but not necessarily to keep it.  As one state puts it, "[t]he purpose of the [unclaimed property] act is to provide a central repository in each state where citizens can seek any lost property that belongs to them."  Though the view of the state as mere custodian is taken for Gospel, it is far from always the case.  In fact, there are many types of property where the state is not acting as custodian for the "rightful owner" because that owner is either unknown or does not exist.  For example:

Owner-Unknown Property -- We start with the granddaddy of them all.  Under Texas v. New Jersey, unclaimed funds for which the holder does not have owner name or address information gets reported and remitted to the holder's state of incorporation.  By definition, this property is not likely ever to be claimed by its rightful owner, because neither the state nor the holder know who that is.  This is not a minor issue; in many states -- I'm looking at you, Delaware -- the amount of owner-unknown property received annually dwarfs the amounts held for known owners.

Estimated Property -- In connection with an audit of a holder's compliance under the 1995 Uniform Unclaimed Property act, and more recently, under Delaware law, the auditor is expressly permitted to estimate a holder's unclaimed property liability for years where the holder has failed to maintain the required records.  This estimated property is not really "property", but rather an estimation of the holder's liability.  Of course, such estimated amounts paid to the state will never be subject to reclaim by the rightful owner. 

Aggregate Reporting -- This last method, though meant to streamline reporting for holders, is perhaps the least in keeping with the "purpose" of unclaimed property laws.  Most states allow holders to report items under a certain dollar amount (generally $50) in the "aggregate" -- i.e., in one lump sum without owner name or address information.  Because owner name and address is not provided in the report, of course, it cannot be published in a public notice or on the state's website to be found by its rightful owner.  While some states merely give holders the option of reporting in the aggregate, some states take the position that items under the threshold "must" be reported in the aggregate.  To their credit, some states, such as Wyoming, request that holders having name and address detail refrain from aggregate reporting, even though it is permitted by the Uniform Act.  While it is more of an administrative burden to report and remit every name and address, doing so is more in keeping with the stated purpose of the unclaimed property laws.

Of course, as we have explored this week, reuniting owners with their property is not the only motive.  Indeed, in a short statement from the Uniform Law Commissioners (the authors of the various Uniform Unclaimed Property Acts) regarding "Why States Should Adopt the 1995 Uniform Unclaimed Property Act" the very first reason given is "REVENUE."  Accordingly, while a significant purpose of modern unclaimed property laws is to preserve property for its rightful owner, modern escheat laws have developed such that it is not the only purpose.


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