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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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UPPO is heading to the ULC Annual Meeting & reviews RUUPA

Posted By Administration, Monday, June 29, 2015
Updated: Friday, June 26, 2015

Since the February 2015 Uniform Law Commission (ULC) Drafting Committee to Revise the Uniform Unclaimed Property Act (drafting committee) meeting, UPPO has kept busy preparing for the second  Revised Uniform Unclaimed Property Act (RUUPA) draft release and its consideration at the ULC Annual Meeting on July 14; Williamsburg, Va.

In preparation for the upcoming meeting, UPPO has thoroughly reviewed the RUUPA to analyze the areas that will be embraced by UPPO members and those that still need work. Here’s the analysis:

Overall opinion
The second draft of the RUUPA embraces change, fairness, modernization, and clarity and incorporates many of the positions UPPO and various industry-specific stakeholders have been advocating from the beginning. “UPPO is pleased with the work that has been done by the ULC drafting committee to support fairness for all stakeholders, and the willingness of the reporter and co-chairs to embrace significant change,” says Dana Terry, UPPO president. Though there are many positive developments for the holder community, UPPO will remain fully engaged in the process to ensure the areas of concern can be improved, and the RUUPA is an act that the holder community encourages state legislatures to adopt in full.

Highlights of the provisions that UPPO supports


Specific definitions that promote clarity – Section 2

  • Address: The definition of address currently included in the RUUPA is practical and two-fold. The first part identifies that there may be an address that is separate than priority and can be used to direct mail to. The second part identifies which state is able to make claim and establish priority of the property.
  • Securities-related property has been defined by like characteristics including: restricted securities, non-freely transferable securities, and worthless securities.

Holder due diligence to the owner - Section 10
Though there are some consistency issues with this language in other areas of the RUUPA that need to be fixed, currently the required timing of the due diligence notice is drafted as “not less than 60 days before filing the report”. In addition, due diligence letters don’t need to be sent if the amount of the property is less than $50 and the address is known to be incorrect. The RUUPA also provides general language to include in a due diligence letter. 

 

Record retention – Sections 19(c) and 21(a)
The record retention requirement and statute of repose are capped at 10 years.


Encouraging transparent audit practices – Section 20

Section 20 still has provisions that UPPO would like to see fleshed out in greater detail and/or altered but there are many positive inclusions within the RUUPA that encourage transparency and fairness within the audit environment, such as:

  • Requiring state administrators to make third-party auditor contracts public
  • A  provision that requires state administrators ensure that conducting audits internally isn’t economically feasible
  • Requiring administrators to produce audit income reports annually to individuals overseeing the program

Highlights of the areas that need further consideration

Derivative Rights Doctrine – Sections 2(22)(a)(ii), 3(g), 19(a)
UPPO considers the Derivative Rights Doctrine to be a critical component of these laws and urges the ULC to formally recognize the Derivative Rights Doctrine as a very real limitation on the extent of states’ legal authority. 


Business to Business Transactions – Section 3(c)

Currently, there are two alternatives that exempt B2B property. Alternative A is narrower only exempting property that is generated through the normal course of business. Whereas, Alternative B is broader, exempting all B2B property regardless of when the property was generated. UPPO supports the inclusion of Alternative B in the RUUPA.


Indication of Owner’s Interest (Contact) - Section 3(e)(i - viii)

UPPO supports a comprehensive list of activities that constitute indications of interest by an owner.  Additionally, UPPO would support affirmative inclusion of the provisions concerning automatic transactions without brackets.


Administrative Appeals – Section 22
Holders deserve an unbiased arbiter to whom they can present their disagreements with audit results, as an alternative to formal litigation. Alternatives A and B presented in the RUUPA do not remove the state administrator as the decision-maker in this process. An administrative appeals process overseen by a truly independent decision-maker (i.e., not selected by or accountable to the state administrator) is essential to a fair and balanced result. UPPO advocates reconsideration of including the two alternatives provided.

 

Foreign Transactions/Property - Section 26 and Section 23 Comment
UPPO urges the ULC to remove the brackets from Section 26 and to exclude all foreign address property from the RUUPA as supported by principles of comity and the Supremacy Clause, the Due Process Clause, and the Foreign Commerce Clause of the U.S. Constitution.  UPPO further urges the ULC to restore the prior phrasing of Section 26 which did not premise such exclusion on the foreign country or non-US location having “laws which entitle it to take and hold unclaimed property of its citizens” – this condition essentially renders most foreign property subject to states’ claims, as the reporter’s Comment to Section 23 acknowledges. Hence, the Comment to Section 23 should be revised to ensure consistency with Section 26 as revised.

 

More information

Check out UPPO’s advocacy page to view the past submissions to the ULC

Tags:  compliance  draft  reform  revised uniform unclaimed property act  ULC  unclaimed property  Uniform Law Commission  UPPO 

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