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UNCLAIMED PROPERTY FOCUS is a blog written by and for UPPO members, featuring diverse perspectives and insights from unclaimed property practitioners across the U.S. and Canada. We welcome your submissions to Unclaimed Property Focus. Please contact Tim Dressen via tim@uppo.org with any questions about submitting a blog post for consideration and refer to our editorial guidelines when writing your blog post. Disclaimer: Information and/or comments to this blog is not intended as a substitute for legal advice on compliance or reporting requirements.

 

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Mergers and Acquisitions Present Unclaimed Property Risks

Posted By Contribution from Troy Wangen, 2017/18 UPPO Second Vice President, Tuesday, January 16, 2018

The mergers and acquisitions (M&A) activity outlook in 2018 is very positive, and most experts foresee a renewed focus in larger deals. Unfortunately, no matter the M&A climate, companies often inadvertently inherit an unknown liability from the companies that they acquire (targets). That liability is unclaimed property, and it can remain hidden until long after the deal closes. 

 

All companies can generate unclaimed property, which arises when some liability of the company, such as a check to a vendor or a customer credit balance, isn’t resolved in a timely manner. These liabilities, which can go back for decades, are often overlooked by standard due diligence, and are often unknowingly acquired along with a target’s assets or stock. 

 

Common Mistakes in M&A Due Diligence Regarding Unclaimed Property

Some of the most common mistakes related to reviewing a target’s potential unclaimed property liabilities in the due diligence process include:

  • No one asked about unclaimed property. Probably the single most common mistake is that no one asked, or knew about, unclaimed property during due diligence.
  • The belief that an asset purchase does not generate successor liability. The common misconception around asset purchases is that the liability for unclaimed property prior to the acquisition remains with the seller. However, this isn’t always true, and a thorough review of the contract is always necessary to determine exactly which liabilities remain with the seller. 
  • Target’s poor record retention or target only provides one or two years’ worth of records. A standard look-back period under an unclaimed property audit or VDA can be 10-15 years or more. Without historical records, jurisdictions may use estimations to create factious liabilities for earlier years.
  • Buyer loses target’s history by eliminating staff over the first year. Knowledge of pre-acquisition practices is critical under a unclaimed property audit, such as understanding historical policies and procedures in order to assert that certain programs don’t constitute unclaimed property.
  • Target acquired other entities and assumed successor liabilities as part of their M&A transactions. The target you acquired may have been blind to the successor liabilities that it inherited in earlier transactions.   
  • Believing unclaimed property will not have an effect on purchase price. In some cases, a target’s potential unclaimed property liabilities can be so large that they significantly reduce the value of the target, especially when the Target is small or the bulk of its revenue comes from a single source (e.g., gift cards or royalties). A thorough review of one target revealed that the only reason it was profitable was that it was incorrectly taking unclaimed property into income.

 

Questions that should be asked during due diligence

The due diligence checklist of any target should always address unclaimed property, and should include the following:

  • Does the Target have a unclaimed property filing history, and if so, for how long?
  • Has the target ever been under a unclaimed property audit or entered into voluntary disclosure agreements with any jurisdictions?
  • Does the target use third-party administrators to administer any programs such as payroll, benefits, rebates or shareholder services?
  • Does the target have internal policies specific to unclaimed property or specific policies for the handling of outstanding checks and aged credit balances?
  • Does the target have a history of voiding/writing off aged checks and/or credit balances or has it maintained a tolerance write-off policy?
  • Have all available bank statements/reconciliations and all electronic accounts receivable aging reports been provided vs. just the most recent years?

 

Divesting? 

It is equally important to understand your unclaimed property exposure during a divestiture, especially when determining whether you or the buyer will be responsible for any historical unclaimed property liability. 

 

For greater insight into issues surrounding mergers and acquisitions, register for UPPO’s Mergers and Acquisitions webinar on Feb. 7, 2018, and attend the Mergers & Acquisitions: Before, During and After session at the UPPO Annual Conference, March 4-7, 2018, in Tampa, Florida. 

Tags:  acquisitions  M&A  mergers 

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Unclaimed Property Trends Shape Annual Conference Sessions

Posted By Administration, Monday, January 8, 2018

For better or worse, this is not a dull time to be an unclaimed property professional. In recent years, numerous state legislatures have considered (and often approved) updating their unclaimed property statutes. Courts continue to look at state unclaimed property practices, including controversial audit practices. And companies from coast to coast and border to border face the ongoing challenge of minimizing their unclaimed property risk.

 

Throughout 2017, UPPO helped members keep up with the trends affecting unclaimed property professionals. Many of these same trends shape the agenda for the 2018 UPPO Annual Conference, March 4-7, 2018, in Tampa, Florida.

 

Delaware

In February 2017, Delaware Gov. John Carney signed S.B. 13 into law, triggering significant changes to the state’s unclaimed property practices. Since then, the state has adopted new audit rules and encouraged holders currently under audit to convert to the state’s VDA program.

 

As we approach the one-year mark since S.B. 13, its effects continue to unfold. The Delaware Reforms: One Year Later session at the 2018 UPPO Annual Conference will examine the status of changes in Delaware and their ramifications. The Advocacy Efforts in the Age of Reform session will shine a light on UPPO’s work to promote fair unclaimed property requirements not only in Delaware, but in all states.

 

Audits

Fueled by activity in Delaware, controversy continues to swirl around state audit practices. The use of third-party auditors incentivized by contingency fees has been the focus of litigation and advocacy efforts. As states update their unclaimed property statutes, some, such as Michigan, are enacting new audit standards. Some states also help offer a fairer playing field for holders by providing the opportunity to appeal audit assessments. The examination process, particularly that of multi-state audits, often strains holder resources, as it stretches over several years.  

 

The Audit 101, Navigating Your Audit and Mock Trial sessions, along with several of the Industry Focus sessions, at the 2018 UPPO Annual Conference will provide attendees with insight into strategies holders can employ when facing examination.

 

Litigation

The courts have provided several favorable rulings for holders in recent months. Appeals court rulings in cases brought by Plains All American Pipeline, Bed Bath and Beyond, and Marathon Petroleum have yielded positive results. Similar cases, including those brought by Office Depot and the multi-state squabble over MoneyGram official checks, continue to proceed through the courts.

 

Attendees at the 2018 UPPO Annual Conference will learn about these and other relevant litigation trends during the Legislative and Litigation Update session.

 

Operational Practices

In addition to exploring unclaimed property trends, the 2018 UPPO Annual Conference agenda is packed with sessions to provide practical knowledge attendees can apply to be more effective at their jobs. Sessions will examine a wide range of topics, including: state reporting basics, managing due diligence, self-assessments, record retention, exemptions and deductions, fraud, policies and procedures, foreign jurisdictions and much more.

 

View complete details about educational sessions and other 2018 UPPO Annual Conference events. The early-bird registration deadline is Jan. 10, so register today for the best rate.

Tags:  audits  Delaware  litigation  trends 

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Marathon Decision Signals Big Win for Holders

Posted By Administration, Thursday, January 4, 2018

Marathon Petroleum Corporation et al. v. Secretary of Finance, State of Delaware et al.

 

On Dec. 4, 2017, the Third Circuit Court of Appeals overturned a lower court’s dismissal of Marathon Petroleum’s lawsuit against Delaware. The appeals court decision is exciting for holders for multiple reasons:

  1. It provides holders reassurance that they can sue for violations of federal common law.
  2. It limits states’ ability to look at subsidiaries only to confirm that they’re legitimate and not simply alter egos of the parent company.
  3. It reassures holders that they can “just say no” when faced with unreasonable information requests.

Background

Marathon uses a gift card management company incorporated in Ohio, a state that exempts such property from escheatment. After Marathon objected to an $8 million estimated liability for gift certificates for which the company said it had issuance and redemption records, third-party auditor Kelmar – on behalf of Delaware – requested records related to the gift card company’s creation and operations. 

 

Among the information requested were contracts, meeting minutes, vendor agreements and accounting records. Marathon refused, arguing that such a request is outside of Delaware’s jurisdiction. Again, Kelmar suggested it would turn over the issue to the attorney general for enforcement action. 

 

In February 2016, Marathon filed suit. arguing violation of the federal priority rules and the Fourth Amendment. The Marathon case also took issue with the state’s estimation practices. 

 

Delaware argued that Texas v. New Jersey applies only to disputes between states, not audits of private entities. The defendants also argued that Marathon’s claims were premature, as they would have their chance to make their case in state court if they continued to resist turning over requested documents. Attorneys for Marathon took issue with the state’s interpretation of federal law and compared the nine-year audit of the company to a “fishing expedition.”

 

The Decision

On Sept. 23, 2016, a U.S. District Court agreed with Delaware’s arguments and dismissed the case. In overturning the District Court ruling, the Third Circuit Court of Appeals stated, “…we disagree with [the] conclusion that private parties cannot invoke federal common law to challenge a state’s authority to escheat property.”

 

The Appeals Court, however, agreed with the earlier court’s ruling that the case was not yet “ripe.” “To the extent the companies are challenging the scope or means of the examination in this case, the claim is not ripe, since the state has taken no formal steps to compel compliance with the audit,” the court wrote.

 

The case has been referred back to the District Court to clarify that the case’s dismissal is without prejudice, giving the plaintiffs time to refile the lawsuit at a later date.

 

Effects of the Decision

Through its decision, the appeals court confirmed that holders can rely on the federal common law priority rules from Texas v. New Jersey. The decision tells holders that the priority rules apply to all relationships involving the remittance of unclaimed property to a state, not just disputes between states.

 

“To finally have confirmation that holders have standing to sue under the federal common law rules for violations and potential alleged violations is a really big win for holders,” said Jameel Turner, attorney at Bailey Cavalieri LLC. “It forces the states to negotiate audit settlements in good faith because any audit or audit dispute could lead to a federal lawsuit.”

 

Looking at the holder-subsidiary relationship, the court tackled the long-standing question of what extent the state can investigate subsidiaries incorporated in in another jurisdiction as part of an audit examination. The court confirmed that states have the ability to conduct an inquiry into subsidiaries to determine if they are legitimate and not just alter egos of the parent.

 

“If the holder asserts that its gift card subsidiary is incorporated in Virginia and holds the company’s gift card liabilities, then producing a certificate of good standing, the articles of organization and a sample journal entry to show how liabilities are booked should be sufficient,” Turner said. “Beyond that, there’s no need to go down a rabbit hole with the state and look at voluminous card-level detail and other irrelevant documents that are typically requested. To receive some clarity about what records holders need to produce relative to their gift card subsidiaries is a significant win for the holder community.”

 

These limits reassure holders of the ability to “just say no” to information requests outside states’ audit authority. If the state disagrees, it would need to sue and let a court decide.

 

“I think this case will embolden holders to stand firm in their legal rights,” Turner said. “When they think a state is making information requests that are outside the scope of the state’s audit authority, holders will be more apt to just say no. Marathon provides holders with legal authority to say no to unlawful information requests and force a state to file an enforcement action.”

 

Disclaimer: This case summary contains a general description of the case. It is not intended as business, financial, legal, tax, reporting or compliance or other professional advice or services. This summary blog is not a substitute for such professional advice.

Tags:  gift cards  litigation 

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New Year’s Resolutions for Unclaimed Property Professionals

Posted By Administration, Thursday, December 21, 2017

As the end of 2017 approaches, you may have begun thinking about new year’s resolutions for 2018. To help you with your list, UPPO offers several options for your consideration. Much like state legislatures evaluating the Revised Uniform Unclaimed Property Act, you may choose to adopt this list in its entirety, implement specific sections or stick with the same resolutions you’ve had in place since 1995.

 

Get at least seven hours of sleep nightly. Consider it your “required dormancy period.”

 

 

Travel somewhere you’ve never been. We hear Delaware is supposed to be pretty nice, plus you’ll have a chance to see where you send all that money.

 

 

Claim only reasonable exemptions. Stop justifying that nightly ice cream binge as a diet exemption by claiming calories are units of heat, but ice cream doesn’t count because it’s cold.

 

 

Don’t hold extended grudges. Take a lesson from Delaware S.B. 13 and Tennessee H.B. 420, and reduce your “lookback period.”

 

 

Implement a VDA program for your significant other. Encourage voluntary compliance with your “no major purchases without my approval” rule by offering to waive penalties in exchange for simply admitting that those obviously new golf clubs haven’t really been in the basement for ages. You probably snuck them in when I wasn’t home. I’m no fool. Just admit it, why don’t you?

 

 

Cut down on the use of “escheat” as a curse word.


 

 

Good luck and happy holidays from UPPO!

 

All images from giphy.com

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Industry Conference Calls and Sessions Provide Open Forums for Sharing Information

Posted By Contribution from Marilyn Henry, 2017/18 UPPO First Vice President, Tuesday, December 19, 2017

One of the most beneficial aspects of attending the UPPO Annual Conference every year is the opportunity to learn from other unclaimed property professionals in the same industry. The Industry Focus Breakout Sessions perfectly complement the traditional educational workshops and speakers to provide a well-rounded combination of formal and informal learning at the event.

 

These industry focus breakout sessions have been so popular that attendees have suggested developing a way to continue the valuable open forum discussions throughout the year. As a result of these requests, UPPO held a Banking and Finance Industry Conference Call in August. Like the annual conference breakout sessions, the call provided the chance for participants to raise questions, share solutions and chat about common issues.

 

August’s call was successful, with nearly 100 attending. Since then, another call was held in November, and the third call is scheduled for Jan. 16.

 

When I first attended unclaimed property conferences 20 years ago, one of the things that was most valuable was the ability to pick up little bits of information and advice from other people who had more experience in unclaimed property. For that reason, the UPPO Annual Conference and Industry Focus Conference Calls can be especially helpful for new UPPO members and novices to unclaimed property compliance.

 

Even for those of us who have been involved in unclaimed property for a long time, however, the incentive to participate remains strong. With regulatory changes happening within the states at such a rapid pace now, having more opportunities to learn about how others are responding is very useful. If I pick up just one new piece of information or useful tip, the investment of my time to attend is worthwhile.

 

Thanks to the success of the Banking & Finance Industry Conference Calls, UPPO leadership is currently evaluating developing similar calls for another industry in 2018.

 

If you are involved in the banking and finance industry, I recommend participating in the next call. If not, take a look at the UPPO Annual Conference agenda, register and participate in the Industry Breakout Sessions. I think you’ll find that the friendly, comfortable environment is perfectly suited for sharing information, comparing strategies and getting real-world advice from industry peers. I hope to see you there!

Tags:  UPPO 

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