Due diligence is the process in which an owner is notified that property will be reported as unclaimed property. Most states have requirements that holders perform this activity prior to reporting. Recent litigation is asking "what are the requirements to notify owners prior to the state taking custody of property?" These cases may lead to additional due diligence requirements or reporting obligations for the unclaimed property holder.
The 15 year old case that won't quit - Taylor v. Yee plaintiffs are now asking the U.S. Supreme Court to review the California unclaimed property process, asking the Court to require additional efforts from the State prior to taking custody of the property. In particular, Taylor would require the State to access various databases it has, such as driver's license and car tag databases, as well as income tax filings, to ensure that it is notifying owners that their property will be turned over to the State prior to the State taking custody of the property. Already, California requires a two-report filing process to allow for the State to send out its own letters to owners prior to holders remitting the property.
California was also the site of a lawsuit brought by a life insurance beneficiary against an insurer for not paying the beneficiary. The insurer was able to rely on the California indemnity provision, which requires a holder to perform due diligence and report property to the state, in its defense. The insurer was able to convince a Federal Court District Judge to dismiss the case in part because of their compliance with state due diligence requirements.
Investors and shareholders sued the State of Delaware in 2015 alleging that the State improperly seized their stock, resulting in a $12 million loss to the shareholders. The State of Delaware does not require holders to perform due diligence on most types of properties, although there are requirements for certain stocks and equity property. According to the complaint, neither the holder nor its transfer agent performed due diligence, or the shareholders never received the letters, prior to escheatment.
In April 2015, claimants filed a lawsuit against the State of Minnesota alleging that they were deprived of their property without due process of law, saying that the State should have done more to notify them prior to the state taking custody of the property. Earlier this month, a Ramsey County District Court judge denied the State's motion to dismiss the case. In the order, the judge expressed skepticism that the efforts to notify the owners were insufficient under Minnesota law.
Most states require holders to perform due diligence, a process in which the holders send letters via US Mail to the owners, prior to escheating property to the state. Many states have a threshold, below which due diligence is not required. At a minimum, holders should comply with each state's mandated due diligence requirements. Barganier recommends that holders perform due diligence in all states, whether the state requires it or not.
Companies with best practices may also perform additional owner notification efforts prior to escheatment, including phone, email and website efforts. The earlier that a company tries to contact the owner, the more likely that the company will be able to return property directly to the owner without resorting to unclaimed property. These efforts also reduce potential liability in the case of an audit.
Due diligence for the 2016 spring filing period has already begun! Are you ready for the next round of reporting due dates? Find out if Barganier can help your company become a best in class corporate citizen.