What in the World is “UNCLAIMED PROPERTY”? …and Why Does it Matter to Your Business? –

Every state in the U.S. has some form of an unclaimed property
law, or UPL. State UPLs generally require businesses that are
holding property due and owing to another (i.e., usually money) to
hand over that property to the appropriate state government if the
business loses contact with the owner for a statutory period known
as a “dormancy period.” Dormancy periods for various
property types range from one to seven years.

So, if businesses are obligated to comply with state UPLs in
situations where they are holding property that is due and owing to
another, why is it that so many businesses have never heard of
unclaimed property or filed an unclaimed property report?

Unclaimed property at a glance

To get some sense of why unclaimed property law compliance is
not on many business’ radars, we have to start with some
historical context about where the concept originated. In medieval
England, the doctrine of bona vacantia was developed to
ensure that lands and other property owned by deceased or absent
owners would not go unclaimed or unattended. The doctrine of bona
vacantia required unclaimed personal property and lands to revert
to the Crown because the benefit to society was considered to be
more important than the benefit to the individual finder or
possessor of the unclaimed property. Over the years, bona vacantia
evolved under English common law and carried over to the United
States common law; it was recognized judicially as early as 1905.
At that time, the development of unclaimed property law concepts in
the United States was disjointed and nonuniform, which created
competition, and often disputes, among states over which state had
the most superior claim to unclaimed property.

In order to bring uniformity, order and predictability to the
administration of unclaimed property, the National Conference of
Commissioners on Uniform State Laws released its first Uniform
Unclaimed Property Act in 1954. A second version was released in
1966, a third version was released in 1981, a fourth version in
1995 and a fifth version in 2016. Forty-one states have enacted at
least one version of the Uniform Act. Coincidentally, Ohio is among
the few states that have enacted their own UPL and not adopted any
version of the Uniform Act.

In the 1960s, the Supreme Court of the United States established
federal common law rules that govern which state has the most
superior right to take custody of unclaimed property. In Texas
v. New Jersey, the Supreme Court established the Primary and
Secondary Rules of Escheat.i Under the Primary Rule, the state with
first priority to take custody of unclaimed property is the state
of the owner’s last known address according to the books and
records of the holder of the property. Under the Secondary Rule, if
the owner’s last known address is unknown, the state of the
holder’s incorporation or organization may take custody of the
property. When a state asserts jurisdiction over unclaimed property
through its UPL, this is colloquially referred to as
“escheat”; however, the concept of escheat typically
refers to a permanent taking of property or taking title to
property. Under state UPLs, the states’ rights in unclaimed
property are custodial in nature, meaning the state merely has
authority to hold the property until the owner of the property
comes forward to claim it.

In order to compel compliance with the UPL, the UPLs permit the
states to audit businesses for unclaimed property law compliance.
These audits are typically conducted by auditors compensated on a
contingent[1]fee basis, meaning the auditor’s fee is paid out
of the unclaimed property located during the audit. Auditing
businesses for unclaimed property compliance is the primary
enforcement mechanism used by states to “encourage”
compliance with the UPLs.

Businesses comply with UPLs by filing annual unclaimed property
reports and paying the properties identified in the report to the
appropriate state government to hold in trust until the true owner
comes forward. Despite the fact that the vast majority of
businesses, large and small, have an obligation to file annual
reports and pay unclaimed property liabilities, less than 2 percent
of businesses in the United States file unclaimed property reports
as required by law.

What are some examples of unclaimed property held by
businesses?

Unclaimed property has two forms – tangible (i.e.,
physical property – tables, chairs, etc.) and intangible
property (e.g., money, uncashed checks, credit balances, stock
shares, etc.). Most state UPLs do not require unclaimed tangible
property to bereported, so we will not address that here. A
majority of businesses, however, generate a significant amount of
unclaimed intangible property on an annual basis in the ordinary
course of business through payroll, customer and/or vendor credit
balances, voided and uncashed checks, lost stockholders, and
mergers and acquisitions. Businesses that fail to comply with state
UPLs and do not file reports where required risk the dreaded
“audit lottery.” Unclaimed property audits typically last
three to seven years and cause a significant amount of business
disruption and human resource allocation. The contingent-fee
auditors running the audits routinely issue extremely voluminous
and overbroad information requests and often take unreasonable
positions given their pecuniary interest in the outcome of the
audit. Consequently, unclaimed property audits more closely
resemble fishing expeditions than a process to enforce a legitimate
state interest. Companies that willfully fail to comply with state
UPLs and take their chances with the audit lottery likely face
significant interest charges and other penalties when their numbers
eventually come up.

How can I help my client comply with the UPLs?

If your client has never filed an unclaimed property report,
there are some steps that you can help them take to begin the
journey toward full compliance. First and foremost, you should
inform them about opportunities to voluntarily come into
compliance. Many states offer amnesty or Voluntary Disclosure
Programs, which allow businesses that are out of compliance to
voluntarily report their unclaimed property in exchange for a
waiver of interest and penalty. Second, evaluate which areas of
your client’s business create unclaimed property exposure and
advise them on how to fill those gaps and prevent liability from
continuing to accrue. Businesses that are newer and have not
accrued several years of historical unclaimed property liability
can come into compliance by filing annual reports as required by
law. For the more unfortunate businesses that have already received
a Notice of Examination and have been selected for audit, ensure
that the auditors play by the rules (and consult an unclaimed
property professional as necessary).

The worst approach you can take is to ignore your client’s
unclaimed property obligations or take the position that the
business does not generate unclaimed property. Noncompliance with
state UPLs over a long period of time can lead to millions of
dollars of liability. For more general information on unclaimed
property laws and how they impact your clients (or you, if you own
your own law firm), check out UPPO. org and the Ohio Division of
Unclaimed Funds website – https://www.com.ohio.gov/unfd/ .

Originally published in Columbus Bar Lawyers Quarterly
Winter 2022

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.