Foreign Property and U.S. States' Unclaimed Property Laws Introduction

Journal of Multistate Taxation and Incentives Volume 23, Number 7, October 2013 Department: PROCEDURE

Foreign Property and U.S. States' Unclaimed Property Laws

By: MARK A. PAOLILLO AND SAMUEL SCHAUNAMAN

MARK A. PAOLILLO, CPA, is a Principal and Practice Leader with the Abandoned and Unclaimed Property Practice at Ryan LLC, a global tax services firm in Boston, Massachusetts. SAMUEL SCHAUNAMAN, J.D., is a Senior Manager with the same practice group, in Tulsa, Oklahoma. Both authors have previously written for The Journal. (Note: Ryan LLC is not a CPA/accounting firm.) This article appears in and is reproduced with the permission of the Journal of Multistate Taxation and Incentives, Vol. 23, No. 7, October 2013. Published by Warren, Gorham & Lamont, an imprint of Thomson Reuters. Copyright (c) 2013 Thomson Reuters/Tax & Accounting. All rights reserved.

As companies continue to expand their operations overseas, an increasingly important issue in their unclaimed property compliance program is the extent to which foreign property may be subject to U.S. unclaimed property laws. In this regard, it is useful, first, to consider what we believe are the main types of transactions that give rise to foreign unclaimed property. A general examination of state legislation in this area is also helpful, as well as an analysis of pertinent case law. And, of course, a look at relevant laws of other countries. We begin, however, with a brief introduction regarding foreign unclaimed property generally.

Introduction

While not a "tax," unclaimed property nevertheless has become a significant source of funds for many states. The field of unclaimed property (also referred to as "abandoned property" or "escheat") concerns the requirement that businesses holding such property (the "holders") report the property to state governments. Unclaimed property can include various intangible property, including stocks, bonds, and other securities, and funds represented by uncashed checks; and also tangible personal property, including the contents of safe deposit boxes. Generally, after a period of time established by statute (the "dormancy period"), a state will have the right to acquire an interest in the unclaimed property, subject to the actual owner's right to reclaim the property in the future.

Two of the seminal rules in this area emanate from the Uniform Unclaimed Property Act of 1981 (the "1981 Act"); they are found also in the Uniform Unclaimed Property Act of 1995 (the "1995 Act").1 First, §3(5) of the 1981 Act provides in pertinent part that "intangible property is subject to the custody of this State as unclaimed property if ... the last known address, as shown on the records of the holder, of the apparent owner is in a foreign nation and the holder is a domiciliary ... of this state...." "Domicile" is defined in §1(6) of that Act as "...the state of incorporation of a corporation and the state of the principal place of business of an unincorporated person."

What is the pertinent authority for this rule? Interestingly, the Commentary of the Uniform Law Commissioners to §3 states, in part: "Paragraph (5) provides that, when the last known address of the apparent owner is in a foreign nation the state in which the holder is domiciled may claim the property. This issue was not dealt with by the Supreme Court in Texas v. New Jersey, but is a rational extension of that ruling." In Texas v. New Jersey,2 the U.S. Supreme Court set forth priority rules pursuant to which unclaimed property is returned to (1) the state of the property owner's last known address, or, (2) if no address is known, the state in which the business holding the funds is incorporated (or, in the case of unincorporated entities, the state in which the business maintains its principal place of business).

Second, §36 of the 1981 Act provides that "[t]his Act does not apply to any property held, due and owing in a foreign country and arising out of a foreign transaction." Authors of a leading treatise in this area state that "[t]he 1995 and 1981 Uniform Unclaimed Property Acts have similar provisions and commentary relating to the escheat of foreign accounts."3 More than 40 states have enacted a version of the Uniform Unclaimed Property Acts, and presumably, many have enacted, as part of their respective unclaimed property laws, provisions similar to those delineated above.

Principal Types of Foreign Unclaimed Property Transactions Based on our experience in this area, we have found that three principal types of foreign unclaimed property transactions tend to arise.

Foreign to foreign. The first type is the "foreign to foreign" transaction. For example, consider a company, organized under the laws of France, that sends a vendor check from its office in France to a business in Germany that was organized under German law. The check is returned as undeliverable. There is no U.S. involvement in the transaction. Accordingly, this type of transaction should not be subject to the reach of most U.S. state unclaimed property laws because it falls under the "foreign to foreign" exemption delineated in §36 of the 1981 Act, quoted above, as well as in §26 of the 1995 Act.

Domestic to foreign. The second type is the "domestic to foreign" transaction. For example, "Company X," domiciled within the U.S., mails a vendor check from its offices in the U.S. to a vendor located overseas. The check is returned as undeliverable. What result? Company X's state of domicile likely would claim any unclaimed funds emanating from that transaction as subject to its laws, based upon the first seminal rule, in §3(5) of the 1981 Act, as discussed above, as well as in §4(5) of the 1995 Act.

But consider the views of unclaimed property analysts who have stated: "However rational this provision appears to be, the question is whether or not any extension of a U.S. Supreme Court ruling, no matter how logical, is binding on property due and owing to a resident of a foreign country?" 4 These analysts note that the Texas v. New Jersey ruling did not deal with "jurisdiction over an individual who is not a U.S. citizen" and note further that the key issue is "[c]an a state legislate beyond or outside of the Texas v. New Jersey guidelines?" 5

Foreign to domestic. The third type is referred to as the "foreign to domestic" transaction. For example, an entity organized under foreign law and operating overseas discovers that it owes funds to an individual whose last known address was within the U.S. It cannot locate that individual, however. Is there a duty to report and remit such funds to the applicable U.S. state?

Although the issue may not be entirely clear, one leading treatise in this area states: "A foreign nation corporation does have a duty to report and deliver unclaimed property held by it to the state where the last known address of the person owed the property is located because a state has the power to legislate regarding the disposition of property presumed abandoned and due to its resident, and exercising that power, state unclaimed property law imposes upon a holder a duty to report and deliver unclaimed property into the protective custody of the state. In a suit brought by a state to enforce this duty, a court would have personal jurisdiction over the foreign nation corporation only if that corporation has certain minimum contacts with the state such that the maintenance of the suit would not offend traditional notions of fair play and substantial justice." 6

This third type of transaction, however, is subject to the maxim that it is applicable only as long as it does not interfere with, or violate, international law (which, in itself, is a complex subject beyond the scope of this article). In other words, the laws of the country where the foreign entity was organized would also need to be taken into account.

General Overview of State Laws

How do the unclaimed property laws of the various states address the treatment of foreign property? In general terms, states may be divided into three categories for this purpose.

States adopting Uniform Unclaimed Property Act. The first category consists of those states that have adopted a version of either the 1981 Act or the 1995 Act, and thus presumably have incorporated into their laws the two seminal rules regarding foreign property discussed above. According to the Uniform Law Commission (ULC), the 1995 version of the Act was enacted in 16 states, while the 1981 version was enacted in 29 states.7

Nonadopting states with their own provisions regarding unclaimed foreign property. The second category consists of those states that have not adopted a version of either the 1981 or 1995 Act but nevertheless have provided for the disposition of abandoned foreign property in their laws. According to one source, the following six states are in this category: California, Connecticut, Hawaii, Massachusetts, Mississippi, and Texas.8 Nonadopting states with no provisions regarding unclaimed foreign property. The third category consists of those states that have neither adopted a version of the 1981 or 1995 Act nor explicitly provided for foreign property in their unclaimed property laws. According to that same source, this category consists of Delaware, Illinois, Kentucky, Missouri, Nebraska, New York, Ohio, and Pennsylvania. 9 In discussing this third category, this source further states: "These states, to the extent they claim foreign property, utilize the articulated extension of the Supreme Court in Texas v. New Jersey."10

Some of the states in this category also may assert a claim to certain foreign property under the "miscellaneous" or "catch all" provision found in the various states' laws. (Note that the preceding discussion is not intended to represent what a particular jurisdiction may or may not state in its laws with regard to foreign unclaimed property. Rather, it is intended to show merely that the treatment of foreign property has been handled differently by different states, similar to the manner in which other areas of unclaimed property have been addressed.)

Review of Case Law

There is a paucity of case law that deals with the treatment of unclaimed foreign property.11 A California lawsuit, Screen Actors Guild, Inc. v. Cory, 12 is one of the few cases to discuss this issue. In this case, the Screen Actors Guild brought an action in the California Court of Appeal seeking a declaratory judgment that unclaimed residuals paid to the Guild for distribution to its members were not subject to California's Unclaimed Property Law (UPL).

The SAG case. The Screen Actors Guild is a labor union representing some 30,000 actors, stuntmen, and other performers. As the representative of those performers (who are also its members), the Guild negotiated collective bargaining agreements regulating the production of movies, television productions, foreign telecasting, commercials, etc. Pursuant to those agreements, under certain circumstances, producers transfer to the Guild "residuals" for transmission to the entitled performers. As explained by the court, "[t]hese residuals constitute additional compensation to these performers for the reruns of television programming, foreign telecasting, theatrical exhibition of television motion pictures and supplemental market use of both television and theater motion pictures." The court noted that typically, the residuals are delivered to the Guild "in the form of checks from producers, payable to the order of the entitled performers." The Guild would mail these checks to the performers' last known addresses. If a check is returned, the Guild deposits it in an interest-bearing trust savings account. According to the court, the Guild "spends approximately $250,000 a year in processing residuals and in attempting to locate the performers entitled to them. Under a specific section of [the Guild's] bylaws, if after six years a member does not claim his residual funds, they are automatically assigned to [the Guild] for the use of its membership."

The court observed that some of the unclaimed residuals were deposited in an account with Toronto Dominion Bank of Canada, located in Canada. Among its other arguments, the Guild cited a section of the state's UPL (Cal. Civ. Proc. Code §1502(a)(4), as in effect for the period at issue in the case) as expressly exempting "[a]ny funds held only in a foreign country." The court rejected the Guild's argument, citing the definition of "holder" (now in Cal. Civ. Proc. Code §1501(e) but apparently unchanged since the period at issue) as meaning "any person in possession of property subject to [the UPL] belonging to another, or who is [a] trustee in [the] case of a trust...." Applying that statutory definition to the facts of the case, the court concluded that the Guild "is in constructive possession of the funds which it has deposited in the Canadian bank. It is also quite clearly a trustee with respect to the trust under which those funds are held in the Canadian bank. Consequently the right to these funds is held in California by [the Guild], even though the funds themselves are physically located, at least in part, in Canada. In sum, the residuals on deposit in Canada are not ‘funds held only in a foreign country.’" (Emphasis added by the court.)

Thus, the court agreed with the trial court's conclusion that "‘residuals,’ partially held abroad by [the Guild] on behalf of its members and pursuant to a specific bylaw, are held, nevertheless, subject to escheat to the State of California after they have been unclaimed for a period of seven years by their owners under the Unclaimed Property Law (UPL) administered by defendant, the State Controller."

The Vondjidis case. Another case that concerned foreign property was Vondjidis v. Hewlett Packard Corporation.13 Here, the plaintiff, Alexander Vondjidis, a Greek citizen, was employed during the 1970s by the defendant, Hewlett Packard Corporation, at its office in Athens, Greece. Vondjidis owned shares of the company's stock that he purchased through an employee stock purchase plan. Although the company was aware of the plaintiff's home address in Athens, for administrative convenience it sent periodic stock mailings to the corporate office in Athens. After that office closed in 1982, the plaintiff ceased receiving any such mailings, despite the fact that he maintained his Athens home address. The facts, as delineated in the opinion, indicated that Vondjidis moved to Canada in 1981 but, nevertheless, continued to maintain the same home address in Athens, Greece and continued to receive mail that was sent to that address. In 1993, Hewlett Packard, a California corporation, transferred the plaintiff's shares into the custody of the state of California as unclaimed property. Prior to the transfer, however, Hewlett Packard failed to provide any type of notice to the shareholder.

Vondjidis sued for damages and Hewlett Packard attempted to claim immunity under California's indemnification clause. The California Court of Appeal, in finding for the non-U.S. shareholder, ruled essentially that Hewlett Packard could not rely upon the statutory immunity provision set forth in the UPL because the company had not followed the due diligence/owner notification scheme prescribed by the UPL.14 This case reaffirms one of the two principles discussed above—namely, that a "domestic to foreign" transaction can be covered under the ambit of a state's unclaimed property law.

Unclaimed Property Laws of Other Countries

It is apparent that unclaimed property laws are becoming more common throughout the world. According to analysts in this area of escheat, "[f]oreign legislation on unclaimed property is expanding."15 The National Association of Unclaimed Property Administrators (NAUPA) indicates that Puerto Rico and the U.S. Virgin Islands each has a type of unclaimed property law.16 More specifically, the Uniform Law Commission (ULC) indicates that the Virgin Islands adopted the 1995 Uniform Unclaimed Property Act.17

In addition, some form of unclaimed property legislation has been enacted in Australia, Belgium, Canada, France, Germany, Hong Kong, Italy, Kenya, New Zealand, and the United Kingdom.18 Various Canadian provinces have become increasingly active in this area. For example, effective 9/1/08, Alberta enacted a comprehensive unclaimed property law, entitled the "Unclaimed Personal Property and Vested Property Act."19 In addition, Ontario apparently is considering adopting a comprehensive unclaimed property law.20 The Ontario Ministry of the Attorney General has prepared a paper titled "An Unclaimed Intangible Property Program for Ontario," providing background information on what such a law would seek to accomplish and soliciting feedback with respect to "all aspects of the proposed Unclaimed Intangible Property Program."21

Conclusion

Foreign property is one area of escheat that generally presents more questions than answers, due to the complexities of international law, the myriad of factual situations that can arise, and the paucity of case law in this area. Accordingly, considerable uncertainty exists with regard to unclaimed property from foreign transactions.

As indicated above, the issue of foreign property was not dealt with by the U.S. Supreme Court in Texas v. New Jersey. Rather, as the Uniform Law Commissioners stated in their Commentary to the 1981 Act, the foreign property rules are "a rational extension" of that Court ruling. Reasonable people can certainly differ, however, on whether that is a "rational extension." As the authors of a leading treatise in this area state: "Therefore, with foreign- addressed property, it is fair to say the state of the law is somewhat unclear."22

When dealing with foreign transactions, the wording of each applicable state's escheat laws should be carefully checked to determine what the specific provisions are with respect to the treatment of the related unclaimed property. As those treatise authors caution, "the legislature of a particular state may not have adopted the ‘foreign property’ rule exactly the same as the Uniform Acts."23 In summary, the foreign unclaimed property area seems likely to grow in importance, particularly for the many businesses that now have international dealings and for service providers who consult or practice in the area of escheat. []

Practice Note: Read More About Escheat

We again remind readers that The Journal has published several articles dealing generally with the area of unclaimed property, as well as with various specific aspects of this increasingly important—albeit not strictly "tax"—topic. See, for example:

 McTaggart and Frazer, "Escheat: Are Significant Legal Changes—and Potential Liability—Ahead?," 13 J. Multistate Tax’n 14 (Mar/Apr 2003).

 Sangiuliano, "Unclaimed Property: An Overlooked Area of Responsibility for Tax Practitioners," 16 J. Multistate Tax’n 20 (October 2006).

 Peters and Beintum, "Going Fishing: State Budget Deficits Drive an Expanding Net of Unclaimed Property Collections," 19 J. Multistate Tax’n 26 (July 2009).

 Green-Kelly, "Complying With Unclaimed Property Laws: Two Decisions Add Burdens, Create Uncertainties," 19 J. Multistate Tax’n 34 (July 2009).

 Shop Talk, "Enforcement Trends in Unclaimed Property: What Companies Need to Know," 19 J. Multistate Tax’n 34 (February 2010).

 Hall, Ryan, Turner, Browdy, and Elzholz, "Delaware's Authority to Claim Abandoned Property Owed to a Non-U.S. Last-Known Address," 20 J. Multistate Tax’n 24 (January 2011).

 Hopkins and Hedstrom, "Unclaimed Property Laws: Custodial Safekeeping or Disguised Tax?," 21 J. Multistate Tax’n 22 (January 2012).

 Shop Talk, "Minnesota Launches Voluntary Disclosure Program for Holders of Unclaimed Property," 22 J. Multistate Tax’n 39 (October 2012).

 Shop Talk, "New Jersey's New Unclaimed Property Rules Regarding Gift and Other Stored Value Cards," 23 J. Multistate Tax’n 40 (Mar/Apr 2013).

 Schaunaman, Matchett, and Millar, "Unclaimed Property and Employee Benefits: What Businesses Need to Know," 23 J. Multistate Tax’n 30 (May 2013).

 Schaunaman, Han, and Finkelson, "A Tale of Two Cases: The Impact of Federal Common Law on State Unclaimed Property Law," 23 J. Multistate Tax’n 26 (July 2013).

______END NOTES

1 The original version of these Acts was drafted in 1954. Revisions were drafted in 1966, 1981, and 1995. Such "uniform acts" are proposals intended to provide the states with rules and procedures that are consistent from state to state. While they are offered to the states for incorporation into their own statutes, a state may reject an entire act, or adopt it in whole or in part or with modifications. These acts (and similar acts dealing with other areas of state law) are developed and drafted by the National Conference of Commissioners on Uniform State Laws (NCCUSL), a nonprofit, unincorporated association created in 1892 and comprised of more than 300 "uniform law commissioners," all members of the bar qualified to practice law. The commissioners, who receive no compensation for this work, are practicing lawyers, judges, law professors, and legislators who are appointed by the states (as well as by the District of Columbia, Puerto Rico, and the U.S. Virgin Islands) to research and draft uniform and model laws on matters where state uniformity is desirable and practical, and they work toward enactment of those models by the state legislatures. The NCCUSL is now known as the Uniform Law Commission (ULC); see the website at www.uniformlaws.org.

2 379 US 674, 13 L Ed 2d 596 (1965).

3 Houghton, et al., 74-2d T.M. (BNA, Corporate Practice Series, Rev. 2009), Unclaimed Property, page A-27b. Compare the cited 1981 Act provisions with §§4(5) and 26 of the 1995 Act.

4 Spotswood and Walwyn, "Foreign Unclaimed Property Reporting," page 7, as presented at the Unclaimed Property Professionals Organization (UPPO) Annual Conference (March 2009). As described on its website (www.uppo.org), the UPPO is a membership-based, nonprofit entity dedicated to advancing industry best-practices for unclaimed property practitioners across a variety of professions. The UPPO's primary mission is "to educate and share information among holders of unclaimed property and the companies that provide products and services to unclaimed property professionals."

5 Spotswood and Walwyn, supra note 4, page 8.

6 Epstein, Unclaimed Property Law and Reporting Forms (Matthew Bender), Vol. 1, §2.05(9)(a), "Duty of Foreign National Corporation to Report Unclaimed Property Due to U.S. Resident."

7 See "New ULC Study Committee on Uniform Unclaimed Property Act" (Uniform Law Commission, 1/16/13), available on the ULC's website at www.uniformlaws.org. (For more on the ULC, see note 1, supra.) For a review of which states have adopted what version of the various Uniform Acts, see Houghton et al., supra note 3, Ch. IV. For an "Enactment Status Map" showing those jurisdictions that adopted the 1995 Act, see the ULC's website at http://uniformlaws.org/Act.aspx?title=Unclaimed Property Act (note spaces in web address).

8 Spotswood and Walwyn, supra note 4, page 5. The ULC "1995 Act" map, supra note 7, however, indicates that Hawaii has adopted the 1995 Act, and that enacting legislation was introduced in Mississippi in 2013.

9 Spotswood and Walwyn, supra note 4, page 5. We understand, however, that Delaware's administrative position is that since the Delaware legislature did not expressly exempt foreign property in its unclaimed property laws, the state believes it is a covered category under the law. See, e.g., Hall, Ryan, Turner, Browdy, and Elzholz, "Delaware's Authority to Claim Abandoned Property Owed to a Non-U.S. Last-Known Address," 20 J. Multistate Tax’n 24 (January 2011).

10 Spotswood and Walwyn, supra note 4, page 5.

11 For example, in one treatise's discussion of unclaimed property litigation, under the heading "Foreign Funds," only one case was cited regarding foreign property. See Andreoli and Spotswood, Guide to Unclaimed Property and Escheat Laws, 2d Edition, Vol. 1 (Prentice Hall, 1993), supplement: "Comparative Table of Issues and Unclaimed Property Categories."

12 91 Cal App 3d 111, 154 Cal Rptr 77 (2d Dist., 1979), rev. den. Cal. S.Ct., 7/5/79.

13 85 Cal Rptr 3d 806, 08 CDOS 14641, 2008 Daily Journal DAR 17485, 2008 WL 4988915 (Cal. Ct. App. 6th Dist., 2008) rev'g Cal. Super. Ct., Trial Div., No. 1-03-CV-815388, 8/28/06, 2006 WL 5536083 .

14 The California Supreme Court had initially granted a petition for review in Vondjidis v. Hewlett Packard Corporation, rev. granted 90 Cal. Rptr. 3d 344, 202 P3d 427 (2009), but deferred briefing, pending its consideration of a related issue in another case. It subsequently dismissed that request for review (rev. dismissed, cause remanded 100 Cal. Rptr. 3d 447, 217 P3d 816 (2009)) upon its issuing a decision in that other case, Azure Ltd. v. I-Flow Corporation, 46 Cal.4th 1323, 96 Cal. Rptr. 3d 501, 210 P3d 1110 (2009), aff'g 163 Cal. App. 4th 303, 77 Cal Rptr 3d 463, 08 CDOS 6451, 2008 Daily Journal DAR 7725, 2008 WL 2173870 (4th Dist., 2008). In Azure, the high court held that a holder was immune from liability for the sale of "abandoned" stock only to the extent that it complied with notice provisions of the unclaimed property law. For more background and more analysis on Vondjidis, see Green-Kelly, "Complying With Unclaimed Property Laws: Two Decisions Add Burdens, Create Uncertainties," 19 J. Multistate Tax’n 34 (July 2009).

15 Spotswood and Walwyn, supra note 4, page 9.

16 See the NAUPA website at either www.unclaimed.org or www.naupa.org. The home page has a map and a "Select a State" drop-down menu that delineates U.S. states, territories, and possessions, and Canadian provinces that have unclaimed property laws. As described on its website (click on "About NAUPA"), the Association is a nonprofit organization affiliated with the National Association of State Treasurers and the Council of State Governments. Members represent all 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, and various international governmental entities. NAUPA's mission is to promote and strengthen unclaimed property administration and interstate cooperation in order to enhance states' return of unclaimed property to the rightful owners and provide a forum for the open exchange of information and ideas.

17 See the "1995 Act" map on the ULC website, supra note 7.

18 Spotswood and Walwyn, supra note 4, pages 12-17.

19 The legislation is available online via the map and "Select a State" feature on the NAUPA website, supra note 16, or directly from the website of the Alberta Treasury Board and Finance, at www.finance.alberta.ca/business/unclaimed_property/. That website also has links to additional information about Alberta's escheat procedures.

20 For example, Darren Jack, a Director with Impact 360 Degrees, Inc., in Ontario, Canada, a service company involved with, among other things, recovering unclaimed assets, gave a presentation on Canadian unclaimed property law developments at the Unclaimed Property Professionals Organization (UPPO, see supra note 4) 2013 Annual Conference (San Diego, California, March 24-27, 2013), attended by the authors. He indicated that there was a good chance Ontario could enact unclaimed property legislation in 2013 or 2014.

21 The paper is available online via the website of the Ontario Ministry of the Attorney General, at www.attorneygeneral.jus.gov.on.ca (search for "unclaimed property," which also retrieves additional information regarding the proposed program).

22 See Houghton et al., supra note 3, page A-27(c).

23 Id.