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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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The Derivative Rights Doctrine: A Primer

Posted By Administration, Thursday, November 5, 2015

When a state takes possession of unclaimed property, it does so as a custodian of that property, taking on the absentee owner’s role. The Derivative Rights Doctrine is the premise that the state’s rights are then equal to those of the owner. Acting on behalf of the owner, the state should have identical rights to the property that the owner would otherwise have.

 

Actions taken by the states regarding unclaimed property, however, often surpass what original property owners could do on their own. As a result, the Derivative Rights Doctrine has been a point of contention between the holder community and the states as the Uniform Law Commission (ULC) works on the Revised Uniform Unclaimed Property Act (RUUPA).

 

How does the Derivative Rights Doctrine apply to unclaimed property?

One of several areas where the Derivative Rights Doctrine applies is the use of gift cards. When a company issues a gift card, it has an obligation to provide goods or services to the bearer of the card. Someone possessing a $100 Target gift card is entitled to $100 worth of Target merchandise, for example. It does not, however, entitle the gift card owner to $100 in cash from Target. If that gift card is unused, and a state requires Target to escheat $100 in cash so it can return that cash to the owner, it exceeds the rights of the owner, who would not have the authority to claim that cash from Target directly.

 

“Target isn’t a bank,” says Ethan Millar, partner with Alston & Bird LLP and American Bar Association (ABA) advisor to the ULC Drafting Committee to Revise the Uniform Unclaimed Property Act (drafting committee). “It isn’t holding cash for the owner of the gift card. The money belongs to Target. It shouldn’t have to pay that money to the state as unclaimed property. By requiring that, the state interferes with the contractual arrangement between the owner and Target, and converts an obligation to provide merchandise into an obligation to pay money”

 

Similar examples where the Derivative Rights Doctrine applies are movie tickets, prepaid spa packages and prepaid personal training sessions—anything where someone pays money in advance for a service that isn’t rendered or a good that isn’t delivered. Typically, either contractual terms or a legal statute of limitations dictates how long an owner has the ability to claim the purchased goods or services. State unclaimed property laws, however, are increasingly overriding these terms.

 

“Unclaimed property laws in many states have adopted contractual anti-limitations provisions,” Millar says. “These provisions attempt to nullify contractual limitations, such as expiration dates, regardless of the circumstances. However, there are already consumer protection laws that govern the validity of contractual limitations provisions. Thus, if businesses are exploiting someone, consumer protection laws already provide protection. The unclaimed property laws ignore this and seek to eliminate contractual restrictions regardless of what was agreed to and regardless of what is legally permissible under the consumer protection laws, effectively overriding these other laws.”

 

A personal trainer may offer a promotional package of 10 prepaid sessions for $500 to be used within six months. If at the end of that time, the purchaser has used only seven sessions, both parties understand that the contractually agreed upon time period has run its course. Under the Derivative Rights Doctrine, the three unused sessions would not be considered unclaimed property. The obligation expired, so the owner is entitled to no compensation. If unclaimed property laws require the business to escheat the value of those unused sessions, it is overstepping the original contract and giving the owner something not covered under the agreement.

 

The Derivative Rights Doctrine also applies when considering which party has the legal burden of proving a debt exists. Debtor/creditor laws say the burden of proof falls on the creditor—in the case of unclaimed property, the owner. Under the Derivative Rights Doctrine, the states should also have the burden when acting on behalf of unclaimed property owners. However, according to Millar, the states argue that the mere existence of a credit on a company’s accounting records shifts the burden to the holder to disprove that the credit represents unclaimed property. A creditor/owner doesn’t have the right to shift the burden of proof by simply pointing to the accounting records of a debtor/holder, so neither should the states under the concept of derivative rights.

 

Derivative Rights Doctrine in ULC drafting committee discussions

Though other holder groups, including UPPO, have supported the Derivative Rights Doctrine through written and verbal commentary to the drafting committee, the ABA is the leader in the push to include the Derivative Rights Doctrine in the RUUPA. In comments to the ULC, the ABA requests that the RUUPA incorporate the Derivative Rights Doctrine to ensure states truly represent unclaimed property owners but do not receive additional property rights.

 

“The purpose of the UUPA is simply to return unclaimed property to the rightful owner and not be used as a ‘back door’ to impose additional substantive regulations that may impact the debtor’s obligations to a creditor,” ABA writes.

 

NAUPA takes issue in its comments to the drafting committee with the premise that states’ rights should be identical to those of the unclaimed property owners they are representing. NAUPA also warns that making states’ unclaimed property rights equal to those of owners would spell the end of meaningful unclaimed property laws.

 

“Because a holder can easily invent some business purpose for any restriction on its obligation to the owners, surely all would do so,” NAUPA writes. “Any holder issuing a payment instrument or credit of any form—check, rebate, refund, traveler check, money order, stored value card, credit balance—would require that the instrument or credit be cashed or used within a time period fixed so that the holder can confiscate the funds.”

 

The ULC is seeking a balance between the opposing views, as gaining support from both sides is essential to the RUUPA’s adoption. Support from states and holders will likely play a significant factor in whether lawmakers ultimately embrace the revised act. Both have the ability to put pressure on lawmakers, so the ULC faces the difficult task of trying to draft an act that both sides will support and achieve the ultimate goal – uniformity.

 

The most recent RUUPA draft addresses the Derivative Rights Doctrine in its discussion of gift cards, but not other key issues, such as statutes of limitation, contractual limitations and burden of proof. The drafting committee continues to work on its next draft, which will likely be completed before its March 2016 meeting.

 

More Resources

Debrief of UPPO’s ULC Issues Refinement Submission

UPPO’s Advocacy page

 

Tags:  ABA  Derivative Rights Doctrine  NAUPA  reform  revised uniform unclaimed property act  RUUPA  ULC  unclaimed property  Uniform Law Commission 

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Unclaimed Property Reform – The Time Is Now

Posted By Ethan Millar, GRAC member and panelist at the 2013 Holders Seminar, Tuesday, September 10, 2013
Updated: Tuesday, September 10, 2013

Reform is the hot topic these days in the unclaimed property community. As discussed at the UPPO Holders Seminar earlier this month, two separate efforts are currently underway to update and improve state unclaimed property laws. Holders and their representatives have an opportunity – and are indeed encouraged – to participate in both of these efforts to make sure their views are known and considered. Organized efforts to reform unclaimed property laws are quite rare – the most recent effort was in the early 1990s when the Uniform Law Commission (ULC) last revised the Uniform Unclaimed Property Act. Thus, taking part in these reform efforts may be a once-in-a-generation opportunity for holders.

The first of the new reform efforts was started by the American Bar Association (ABA) in 2011, and is an effort by the ABA Business Law Section’s Unclaimed Property Subcommittee to create a "Model” Unclaimed Property Act. This act strives to create "ideal” unclaimed property laws that are based on and further the core principles that underlie such laws, which include returning property to its rightful owner and basing a state’s substantive right to claim property on the holder’s legal obligations to the owner. The Model Act is also designed to promote certainty, simplicity and uniformity, to be fair and equitable, and to be consistent with federal law. Thus, although the ABA Unclaimed Property Subcommittee will take into account all comments submitted by holders, states and owners (and their representatives), the Model Act will ultimately be based on what is optimal to further the aforementioned policy objectives. The ABA Unclaimed Property Subcommittee has created a task force to draft the Model Act, which is comprised of lawyers who specialize in unclaimed property. The task force has already created draft provisions on certain important issues, including model rules for determining when states may take custody of unclaimed property, a model statute of limitations provision and a model provision for the escheat of securities property. Many more provisions are currently in progress, including a model business-to-business exemption, model life insurance provisions, model prepaid card provisions, model due diligence rules, and a model administrative appeals procedure.

The second reform effort is the ULC’s project to revise the Uniform Unclaimed Property Act, which was last amended in 1995. The ABA Unclaimed Property Subcommittee had proposed that the ULC revise the Uniform Act in 2009, but it was not until this year that the ULC adopted that proposal. The primary goal of the ULC effort is uniformity, and the ULC seeks to achieve that goal through a process whereby the ULC considers the interests of all stakeholders (including states, holders and owners) and tries to reach a compromise that is generally acceptable to most stakeholders, thereby increasing the odds of state legislatures adopting the new Uniform Act. For instance, in some circumstances, the ULC may adopt a provision that represents a compromise between the positions advanced by states and holders, or it may adopt some provisions that are favorable to states and others that are favorable to holders, in the hope that in the end, some balance between the interests of states and holders will be achieved. Thus, it is anticipated that the ULC project will resemble a more conventional legislative drafting process, rather than the more normative policy-based approach of the ABA’s Model Act project. The ULC is in the process of appointing a drafting committee that will draft the revised Uniform Act. The drafting committee will be comprised of ULC state-appointed commissioners, one or more ABA advisors and one or more reporters. In addition, both the National Association of Unclaimed Property Administrators and UPPO have requested they be allowed to appoint an advisor to the drafting committee.

Despite the difference between the two reform efforts in terms of goals and procedures, the two efforts also have many similarities. Most importantly, both are broadly focused on reforming unclaimed property laws as a whole, and thus virtually any unclaimed property issue is fair game. Accordingly, everything from issues related to the application of the priority rules (e.g., what is necessary or sufficient to constitute an "address” for purposes of application of the first priority rule), to the rules applicable to different property types, to appeal and refund procedures, the estimation and the use of contingent fee audit firms, will be on the table and considered by both the ABA and ULC. One of UPPO’s core strategic initiatives is to advance the principles of fairness and consistency in the development and application of unclaimed property laws and regulation. UPPO is working with both the ABA and ULC to advance this strategic goal. The ULC’s Uniform Act project is anticipated to be completed by mid-2015. The ABA’s Model Act project has no specific target deadline, but will likely also be completed in 2015 or 2016.

UPPO’s Board of Directors and Government Relations and Advocacy Committee (GRAC) met in Chicago on August 14 to discuss the results of the membership advocacy priority survey conducted in July. Based on feedback from UPPO members, strategies were developed to focus GRAC’s attention on many of the issues being reviewed by the ULC and ABA. In the next few weeks, holders will hear more about these strategies and will be invited to get involved in a variety of ways to be part of the process.

Getting involved with these reform efforts is very easy, and again is highly encouraged by UPPO, the ABA and the ULC. To get involved with UPPO’s advocacy process, please contact UPPO’s Executive Director, Toni Nuernberg at toni@uppo.org or (763) 253-4314. To participate in the ABA project, please contact ABA Unclaimed Property Subcommittee Chair Ethan Millar at ethan.millar@alston.com or (213) 293-7258 to be added to the Model Act distribution list. Also, if you are an ABA member, please consider joining the ABA Unclaimed Property Subcommittee in the Business Law Section. To participate in the ULC project, please contact ULC Executive Director John Sebert at john.sebert@uniformlaws.org or (312) 450-6603 to be added to the list of Observers to the Uniform Act revision project. Once added to the appropriate group lists, you will receive updates on these projects and be entitled to submit comments on any draft provisions or issues that are being considered.

More Resources 

Consider upgrading to govWATCH Plus to receive legislative and regulatory updates relevant to your industry

Subscribe to the State Administrator Outreach Forum to get instant updates of the news added to the Forum

Tags:  ABA  legislative  Model Act  ULC  unclaimed property  unclaimed property reform  Uniform Act 

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Let’s Talk About Unclaimed Property Reform

Posted By Administration, Tuesday, July 30, 2013
Updated: Tuesday, July 30, 2013

UPPO is keeping a watchful eye on unclaimed property reform and inserting its voice as the leading unclaimed property organization. At the Holders Seminar, Aug. 14-15, Ethan Millar and Jennifer Borden, UPPO members, will be presenting on the topic of reform. Below is the interview with Jennifer and Ethan.

Q: Could you describe the initial processes involved with reforming federal unclaimed property laws?

A: Since unclaimed property is generally regulated by the states rather than by the federal government, there is no real effort that we are aware of to adopt federal unclaimed property reforms. At the state level, reform can take many forms, but the American Bar Association (ABA) and the Uniform Law Commission (ULC) are both focused on creating "model” or "uniform” acts that states can look to for guidance in revising its own unclaimed property laws.

Q: Generally speaking, how does the ABA’s Model Unclaimed Property Act differ from the current incarnation of the law?

A: The ABA Model Unclaimed Property Act (Model Act) is currently in the process of being drafted, so no provisions have been finalized. However, the Model Act is intended to be based on and further the core principles underlying states’ unclaimed property laws, and in particular the derivative rights doctrine, which is often not followed under current law. The Model Act is also intended to be consistent with federal law, and unfortunately many existing laws are not.

Q: Could you describe the reasons why reform is needed, and what advantages holders might gain from future reforms?

A: Reform may be needed for a variety of reasons, including to make state laws more fair or more uniform, to address changes in technology or business practices, and to correct errors or inconsistencies under current law. Holders may benefit from reform in many ways, including potentially reduced or simplified compliance obligations, greater certainty on specific issues, and stronger protection of their property rights. Some of the major areas of reform include:

  • making the state laws consistent with the federal priority rules
  • eliminating state inconsistencies with the derivative rights doctrine
  • exempting business-to-business transactions from state unclaimed property laws
  • changing the treatment of certain property types (e.g., prepaid cards, securities insurance, etc.)
  • updating the due diligence or reporting rules
  • restricting the use of statistical estimation
  • establishing formal and independent appeals processes

Q: How do the activities of the ABA and ULC differ and where are they similar? Do you feel they complement each other or provide conflicting views?

A: One difference is that the ABA is focused on creating a "model” unclaimed property law that is intended to best reflect the purposes and principles underlying unclaimed property laws, whereas the ULC appears to be more focused on creating an unclaimed property act that is generally acceptable to both states and holders, and thus is perhaps more likely to be widely adopted as a practical matter. The ULC is also generally focused on creating an act that will be adopted in its entirety by the states, whereas the ABA is drafting the Model Act with the intent that it may be adopted either in whole or in part.

The ABA and the ULC do have a long history of cooperating together. Both organizations worked together to draft the current Uniform Unclaimed Property Acts.

Q: What is UPPO’s role in advising the ULC Study Group and/or ABA activity? How can UPPO ensure that holders’ views are heard and their rights protected during this process?

A: The ABA is actively soliciting input from UPPO and its members regarding the Model Act (as well as other interested parties), and UPPO’s Government Relations and Advocacy Committee has appointed a subcommittee to specifically provide comments on the ABA Model Act. The ABA takes these comments very seriously. UPPO will have a similar role in the ULC effort, by providing commentary on issues and draft provisions being considered by the ULC.

Q: What additional information about your presentation would you like attendees to know before the Holders Seminar?

A: The presentation will discuss more details regarding the ABA and ULC reform efforts. This will include the procedures followed by both organizations in drafting these acts, who the decision-makers involved in the reform are, among other things.The presentation will also identify the draft provisions of the ABA Model Act that are currently in progress, and which substantive areas of reform both organizations will focus on in the future. We will also discuss why UPPO members should get involved in both of these efforts, and how to do so.

To hear more from Ethan and Jen on unclaimed property reform, register for the Holders Seminar!

 

More Resources

Join UPPO now and receive an exclusive member registration price at the Holders Seminar

Listen to UPPO’s webinar exclusively on the Uniform Law Commission

Modernizing the Uniform Disposition of Unclaimed Property Act

John Sebert, ULC Executive Director will be leading a session at the Holders Seminar


Tags:  ABA  Education  Holders Seminar  Reform  ULC  Unclaimed Property  UPPO 

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