Boeing and its transfer agent Computershare are in a legal battle against a former shareholder who claims that they improperly escheated her shares to the state of Missouri.
According to court documents, Lana Weinbach had 2,589 shares of The Boeing Company in 2008, when the shares were deemed abandoned and turned over to the Treasurer of Missouri as unclaimed property. Weinbach says that Boeing nor its transfer agent Computershare complied with notice (aka due diligence) requirements prior to escheating the shares.
After holding the shares for two years, the Treasurer sold the reported shares. Fortunately for Boeing, their stock prices have continued to increase since October 2010. Unfortunately for Ms. Weinbach, she has not been able to participate in these gains since the shares had been sold.
In 2017, Weinbach filed a substantially similar case against Starwood Hotels, alleging negligence per se. In that case, Starwood Hotels was granted a Motion for Judgment on the Pleadings, ending the case. The Court found the the Missouri unclaimed property act does not create a private cause of action for negligence per se. On October 9, 2018, Weinbach filed a new lawsuit against Marriott, as successor in interest to Starwood Hotels.
In March 2018, Weinbach sued Boeing and Computershare in federal court for negligence, conversion, and breach of fiduciary duty. Last week, the case survived a motion to dismiss filed by the Defendants. Only the breach of fiduciary duty claim was dismissed by the Court.
Importance of Due Diligence
Due diligence is an important requirement in the unclaimed property framework. While many corporate holders may see it as merely a nuisance, owner notification serves as a vital step in securing the owners' due process rights. Remember, for owners, their property is being sent to the state government. In the case of stock or tangible items from safe deposit boxes, those items are often liquidated, sometimes immediately. As share prices rise, there is the potential for significant impact on owners that were expecting the full current value of the stock.
That's what happened here in Weinbach vs Boeing and also in JLI Invest v Cook, a Delaware case for over $12 million of losses from the sale of escheated stock.
The California two-step reporting process came as a result of litigation that temporarily shut down the program while the state worked on a solution for owner notification. While the Supreme Court denied to hear the California case, the denial of cert was accompanied with a note that it would take up a different case, should one present itself, to review the sufficiency of notification requirements under due process rules.
Meanwhile, Minnesota fought and won a case in 2017 where the state's due diligence requirements were under fire.
After Pennsylvania and Delaware amended their unclaimed property laws, in 2016 and 2017, respectively, all states require due diligence prior to reporting unclaimed property. While the specific rules differ by state, generally, all states require that holders send notice to owners in the months immediately preceding the filing of the unclaimed property reports. Many states permit companies to skip this step for low dollar items, as the cost of mailing may outweigh the benefit and likelihood of returning the property to the owner.
Not only is it the law, but it is good business practices, to comply with all state due diligence requirements. Holders should maintain copies of all outgoing due diligence letters as part of their unclaimed property compliance document retention.
Holders are permitted to outsource this function, to companies like Barganier or Computershare. However, the holder is still responsible for ensuring compliance with the due diligence requirements. Holders should obtain copies of all due diligence letters sent on its behalf and routinely monitor for compliance.
Securities Debate During Model Act Revisions
In 2016, the Uniform Law Commission completed a years long task of updating the Uniform Unclaimed Property Act. The ULC model act serves as the basis for many state legislatures when they work to modernize their unclaimed property acts. For holders, this process is beneficial - uniform acts across all states would allow a consistency of laws, making compliance easier.
While the debate for the 2016 act was ongoing, one major issue was how to handle escheated stock - should states be required to hold the stock indefinitely until the owner comes back to claim the shares or should states be able to sell the shares? The states say that it costs a substantial amount of money for them to hire a custodian to maintain the stock on their behalf. Meanwhile, if the states sell the stocks, the owners could be out significant amounts if they later claim the shares. On the other hand, if the share price was declining, selling the stock could preserve the value invested.
A bargain was struck in the final version of the Revised Uniform Unclaimed Property Act. Under Section 702, the state unclaimed property administrator may not sell or liquidate a security for three years after the security was received and gives the apparent owner notice that it is holding the security. However, under Section 703, if the administrator sells the securities after three years but the owner claims the property before six years post escheatment, then the administrator may elect to deliver either the replacement of the security or the market value at the time the claim is paid. This actually provides an incentive to the administrator to hold securities for the full six years instead of the three years in Section 702, while still maintaining a certain amount of flexibility to sell earlier.
Contact Barganier for More Information
If you have questions about your company's due diligence responsibilities or for assistance with your corporate unclaimed property compliance program, please contact Patricia Barganier or Kimberly DeCarrera to discuss in more detail.