Borden: “States around the country are targeting foreign-owned shares for extra revenue”

The Wall Street Journal  recently highlighted a major unclaimed property case with implications around the nation. The article addresses pending litigation regarding Delaware’s sale of stocks owned by two foreign investors.  Delaware escheated the stock and liquidated it without notifying its owners, Dr. Gilles Gosselin and Dr. Jean Louis Imbach.

Both doctors alleged that the state wrongfully seized their shares in Idenix Pharmaceuticals Inc. and sold the stock for $1.7 million to pad the state budget in 2009. The stock is worth more than $13 million.

“Delaware isn’t alone. States around the country are targeting foreign-owned shares for extra revenue,” said Jennifer Borden. “Illinois, South Dakota and Tennessee have made it easier this year for officials to seize and sell securities they deem abandoned. That’s putting an undue burden on foreign shareholders to protect their investments.”

To read the entire story, click here.

STA Newsletter: Reform to unclaimed property laws prompt call for advocacy

Jennifer Borden recently penned an article that appeared on the cover of the July 2017 STA Newsletter discussing the need for advocacy on behalf of both consumers and holders as states begin to introduce their own versions of the Revised Uniform Unclaimed Property Act. Borden was an Official Observer to the Uniform Law Commission’s Drafting Committee focusing primarily on the securities-related provisions and has worked diligently with the SSA and STA to insure that each state implements a version of the RUUPA that works from a practical perspective and incorporates constitutional protections for consumers and holders.

To read the article, click here.

FinOps Report weighs in on the headaches that new unclaimed property laws may cause in Delaware, Illinois

The FinOps Report, which attempts to dig deep into issues facing U.S. and global financial services professionals, has weighed in on the proposed new unclaimed property laws in both Delaware and Illinois.

Jennifer Borden was quoted throughout the article, particularly on Delaware’s attempts to escheat shares of foreign shareholders, even if the foreign address is known. She also discusses Illinois’ confusing trifurcated system that will require transfer agents to make significant system updates to monitor the three-tiered escheatment requirements.

To read the entire story, click here.

Bloomberg BNA: Illinois may face legal challenges by implementing unclaimed property laws retroactively

In an article published in the July 17 edition of Bloomberg BNA’s “Daily Tax Report: State” regarding the implementation of the Revised Universal Unclaimed Property Act (RUUPA) in Illinois, Jennifer Borden said that the state could face legal challenges if they attempt to enforce the law retroactively as is currently proposed.

Said Borden: “That’s a retroactive application of the statute. That’s clearly unconstitutional, and that will have a really, really negative impact on Illinois businesses. So businesses incorporated the law exactly the way it was into their operations for a number of years, and now, all of a sudden, they will be penalized with payments to Illinois. It doesn’t make any sense.”

To read the entire article, click here.

Temple-Inland Decision in Delaware Changes Landscape in Unclaimed Property

Over the Fourth of July holiday, we celebrated our nation’s birthday and independence. The United States of America was formed 240 years ago with a Constitution that guaranteed certain liberties and promised a government that would not be as oppressive as King George’s rule.

Due process is the cornerstone of a government that is not arbitrary and is accountable to its citizens, which is why it was so fitting to kick off the Fourth’s festivities with a major win for the holder in Temple-Inland v. Cook.

In this closely-watched case, the holder challenged Delaware’s methodology in audit, alleging that the extended lookback period without a corresponding record retention requirement violated due process, as did the multi-state exposure. Temple-Inland also asserted that the state’s estimation methodology constituted a taking.

Holders and advocates rejoiced that after nearly eight years of litigation,[1] an objective tribunal had finally reviewed the facts and law relevant to an unclaimed property audit and rendered a decision that resonated. As Judge Sleet observed, “To put the matter gently, defendants have engaged in a game of ‘gotcha’ that shocks the conscience.”

More specifically, Judge Sleet denounced the defendants for: waiting 22 years to audit Temple-Inland; exploiting loopholes in the applicable statute of limitations; failing to notify holders properly regarding the need to maintain unclaimed property records for longer than is standard; employing an unsound method of estimation; failing to articulate any legitimate state interest in the retroactive application of §1155; and ultimately subjecting Temple-Inland to multiple liabilities.

As background, in 2008, Temple-Inland received notice that it would be audited in order to determine its compliance with Delaware’s Unclaimed Property Law (“UPL”). The audit was to cover a 22-year time span (1986 through 2002).[2] The defendants relied on §1158, Delaware’s statute of limitations for state action against holders, to justify this extensive look-back period. That section permits the State Escheator to bring an action “at any time” if a holder fails to file an unclaimed property report in a given year.

Judge Sleet noted, however, that such reliance on §1158 assumes that in the years in which Temple-Inland did not file a report to Delaware, that the company had unclaimed property but failed to file a report. He then proceeded to point out that it is just as possible that Temple-Inland had no unclaimed property due to Delaware in those years, and in accordance with Delaware’s own guidance, did not file a negative report. It is also possible that Temple-Inland did in fact file annual reports that were subsequently lost or destroyed in accordance with Temple-Inland’s 10-year record retention policy.

Because any of these three possibilities provides a rational explanation for the absence of the records sought by Delaware, Judge Sleet found that “it is troubling that [the] defendants’ [assumption] depends on accepting only one explanation for why reports cannot be found (i.e., that [Temple-Inland] had unclaimed property and did not file a report).” Judge Sleet was further concerned that the state’s ability to advance an irrebuttable presumption was benefitted by its own actions, including telling holders that they need not file negative reports, not telling them that they need to retain all their unclaimed property reports, and not keeping copies of all unclaimed property reports actually filed with the state.

Accordingly, Judge Sleet took issue with the fact that Temple-Inland “would be left with few means to defend against overreaching in an unclaimed property audit unless it retained all of its records forever.” After the defendants themselves admitted that corporations do not typically maintain records for longer than seven years, Judge Sleet sardonically noted the defendants’ “surprise” that Temple-Inland “took a ‘calculated risk’ or failing to anticipate an audit covering 22 years.”

Statistical sampling has long been considered a valid audit tool if such sampling is properly performed. Citing numerous cases, Judge Sleet noted, “an estimation is properly performed when it is based on the principle that the unclaimed property in the reach-back years has ‘all the same qualities and characteristics’ as unclaimed property in the base years . . . due process violations arise where the estimation methodology creates misleading results.” Section 1155 of Delaware’s UPL allows the use of reasonable estimation in unclaimed property audits.

Kelmar (Delaware’s contract auditor) calculated Temple-Inland’s net liability for each year between 1986 and 2002 in which Temple-Inland could not provide the records requested by Kelmar. Kelmar employed a ratio estimator which was calculated using the data available for the years in which the company did have records (the base years). The base period liability was determined by adding the sum of all unclaimed property reported to any state, any funds returned to the rightful owner not in the ordinary course of business, and any amounts not remediated.

Kelmar’s base period liability calculation thus includes unclaimed property reported to other states and unclaimed property for which the last known address was not Delaware. Judge Sleet was not distracted by the numbers, percentages, dollar amounts, and baseless justifications put forth by the defendants and concluded that Kelmar’s methodology “relies heavily on property escheatable only to other states to increase the amount of unclaimed property owed to Delaware.” Kelmar’s “logic is contrary to the fundamental principles of proper estimation. . . [creating] significantly misleading results.”[3]

Next, in response to the contention that the application of §1155 for a period of 22 years violates substantive due process, the defendants attempted to argue that they were not relying on that provision to justify an estimation of Temple-Inland’s liability. That argument was quickly dismissed by the Judge as he indicated that it was “difficult to comprehend how [the] defendants can argue that they are not relying on Section 1155 when the Audit Manager [for the state of Delaware] specifically told [Temple-Inland] that Section 1155 authorized [the] use of estimation in [the] unclaimed property audit.” He then further chastised the defendants by stating that they “cannot evade the issue of retroactivity by claiming that they did not rely on Section 1155, and the court does not believe it is a productive exercise to delve into the defendants’ subjective intent to determine when they are, or are not, relying on statutes that authorize their actions.” While the length of the retroactive period does not, in and of itself, establish a violation of substantive due process, the defendants offered no credible reason for using estimation as it did in [the] audit other than to raise revenue.”

In emphasizing the underlying goal of unclaimed property laws to reunite owners with their lost or abandoned property and echoing the concerns of all holders, Judge Sleet reiterated that “unclaimed property laws were never intended to be a tax mechanism whereby states can raise revenue as needed for the general welfare. States violate substantive due process if the sole purpose of enacting an unclaimed property law is to raise revenue.”

In addressing whether Delaware was in fact helping to reunite owners with their property, he pointed to some troubling statistics: unclaimed property is a “vital element” in the state’s operating budget and an estimated 90% of the property collected by Delaware is “owner-unknown” property, thus Delaware has no incentive to seek to have holders (or the state) improve record-keeping which would lead to the recovery of property. Further, Delaware has returned very little of the property collected, and did not do a decent job of processing claims until 2014. He also noted that the use of estimation likely decreases the chances of an owner being reunited with her property. Judge Sleet pointed to Delaware’s instructions for filing a claim, which provide that, “if property is not found in the owner’s name . . . a claim cannot be initiated.” The state seemingly confirmed that likelihood with its admission that it was “unable to give an example of when estimated property was returned to an owner.”

Not only does the state’s use of estimation decrease the owners’ chances of being reunited with their property, it also creates the possibility of multiple liability for holders, since other states may also estimate a holder’s liability. Accordingly, the estimation methods employed by Delaware are unreasonable, lead to misleading results and create multiple liabilities for holders. As such, the methodology employed is unconstitutional.

However, a reasonable method of estimation will not in and of itself violate due process. Judge Sleet did not impose any one method of estimation on the parties, deferring remedies to a future date. However, he seemingly invited the state to overhaul its practices, noting that “[the] defendants are best able to know which remedy will be the most palatable in its anticipated efforts to normalize the enforcement of its unclaimed property laws.”

So where do we go from here? Delaware will likely appeal, since its third largest revenue source is about to disappear, or at least diminish significantly. In the meantime, what should happen with the hundreds of audits currently pending? The state will not likely suspend all audits pending the results of an appeal.

However, holders should not accept demands that rely on unreasonable estimation methods. Perhaps Delaware-incorporated holders should insist on an error rate that includes only Delaware-addressed and owner unknown liabilities in the numerator, as hinted at in the Temple-Inland decision.

More interestingly, what about the VDAs, in which holders are ostensibly voluntarily agreeing to the same methodology that the federal court has just held should not be imposed in an audit? Does the voluntary nature of the VDA remove the specter of a due process violation? Arguably not, since the single largest justification for entering into a VDA is the desire to avoid the methodology debunked in Temple-Inland. If the whole premise for entering into the VDA has been invalidated, can continued participation in the VDA still be deemed to be voluntary? It would be unusual for the state to seek to enforce contracts which are not consistent with federal law. Clearly, Temple-Inland changes the landscape significantly for both audits and VDAs.

Finally, hundreds of millions of dollars have been escheated to the state of Delaware under this flawed methodology. Are refunds in order? That may be the most critical question moving forward.

_________________________________________________________________

[1] Since 2008 many holders have attempted to litigate the same issues that are present in Temple-Inland. For a variety of reasons, most of which have nothing to do with unclaimed property, all other plaintiffs have settled their matters with Delaware without significant rulings or analysis from any state or federal court.

[2] The court found that when Temple-Inland received its audit notice in 2008, Delaware was one of only four states that had not adopted a statutory retention provision for unclaimed property records.

[3] Judge Sleet also discredited Kelmar’s exclusion of ACH payments from the denominator in order to increase the ratio estimator. He noted that the exclusion resulted in a million-dollar increase in the amount demanded, as well as the fact that upon administrative appeal, even the Secretary of Finance adopted the opinion of the state’s independent reviewer that the ACH exclusion was not appropriate. Interestingly, Kelmar continues to attempt to exclude ACH payments in its liability calculations in on-going audits, notwithstanding its client’s decision in the Temple-Inland administrative action.

Borden’s views on reform of Uniform Unclaimed Property Law featured in STA newsletter

BCG founder Jennifer Borden’s views on potential changes to the Uniform Unclaimed Property Law were featured as the cover story in the April 2015 edition of the STA newsletter. With permission from the STA, below is the reprinted content of that article:

Report on Efforts to Reform the Uniform Unclaimed Property Act

By Jennifer Borden
Founder, Borden Consulting Group

In March a federal court issued a bombshell decision in the unclaimed property world, denying Delaware’s motion to dismiss an action challenging many aspects of the state’s audit program. Fortune 1000 companies who have suffered through lengthy audits and seven-figure demands rejoiced at the prospect of a trial in which Delaware’s practices will be reviewed objectively. Additionally, the holding gave unclaimed property practitioners hope that in the near future the case translates to reform, given that the judge referred repeatedly to the Uniform Unclaimed Property Act (“UUPA”). Federal court attention to the UUPA increases the likelihood of widespread adoption of needed reforms in order to protect shareholder value and simplify compliance.

The Uniform Law Commission (“ULC”) has already worked for more than a year on revising the UUPA, with the first draft revealed in February. The Commissioners of the ULC reviewed thousands of pages of submissions from more than a hundred organizations, experts, and interested parties. Last updated in 1995, changes in technology, law, and business practices require an updated UUPA. For example, when the UUPA was last issued, SEC Rule 17Ad-17 had not yet been enacted; only a handful of states recognized limited liability companies, and the internet was in its infancy. Clearly we need a law that reflects the current environment. This article will describe the current revisions impacting securities, what still needs to be done, and what the STA members can do to advance improvements.

The single most important issue for the STA, issuers, and security holders alike is utilization of a “lost” standard for purposes of triggering dormancy and escheatment, as opposed to a “contact” or “activity” standard. Due to Rule 17Ad-17, transfer agents can ascertain with certainty whether or not an account is lost, thus triggering the start of the escheatment process. Compliance with the Rule is easily auditable, and understandable. To the contrary, there are no uniform standards for what constitutes contact with an owner or activity on an account. When the STA surveyed the states on the issues of contact and activity, no two states answered identically as to what would satisfactorily prove either concept. As such, compliance is complex, and accounts that are not abandoned are at risk of escheatment if the lost standard is not utilized.

After lobbying by the STA, SIFMA, the ICI and UPPO, the ULC adopted the lost standard for securities, including those enrolled in DRPs. However, there is also text which provides that securities may be presumed abandoned, “three years after the owner’s last indication of interest in the property for owners who do not receive communications from the holder by United States mail.” Accordingly, for non-dividend payers, or individuals who receive notifications electronically, the activity standard is still in play. Therefore, the STA must continue to build a case for the lost standard, by highlighting the losses that can occur with using an activity standard.

The STA’s Unclaimed Property Committee recommended numerous activities which could be deemed “indications of interest” sufficient to prevent escheatment. These activities were debated intensely, and all of our recommendations were adopted by
the ULC, except automatic payments or deductions from an account, which will not be deemed to be an indication of interest. While this will not be of concern for DRPs if the adoption of the lost standard remains in the UUPA, there may be other accounts that are negatively impacted, particularly for issuers who do not pay dividends, or shareholders who have opted for electronic communications and automated deposits.

In order to prevent negative tax consequences due to escheatment of tax advantaged accounts, the ULC adopted a thirty-year dormancy period for 529’s and similar plans. The states opposed, and this approach may change in the next draft. Accordingly, interested parties should be prepared to propose alternatives to this extended dormancy period.

Bonds issued by municipalities or non-profits are also now specifically escheatable as if they were corporate bonds. As such, STA members may have new reporting responsibilities for their issuer clients. While this is simply another compliance issue that STA members are well-equipped to handle, issuers will expect their transfer agents to be versed in this change to the law.

Property owed to foreign shareholders will not be escheatable under the UUPA. This is highly relevant to the STA, particularly considering all of the M&A activity pending with non-U.S. companies. The UUPA allows for voluntary remittance of foreign property for issuers who want to escheat and are not concerned with the risks of over reporting.

The current draft of the UUPA makes many improvements in the area of due diligence and reporting. It recognizes that in the reporting process the protection of the PPI of shareholders is of concern for securities issuers and transfer agents. New language requires the states to maintain the same degree of confidentiality of owner’s records as the issuer. Further, due diligence letters should not include any sensitive or non-public information concerning the owner’s property. E-mail would be an acceptable method for due diligence, if the owner has elected to receive notifications electronically. If the email fails, a second notice would be required by U.S. mail.

The STA and UPPO had proposed language that would not require the reporting of stock that is not freely transferrable. Stock would be deemed worthless if the cost of reporting, delivery, and liquidation exceeds its value. Restricted stock need not be reported unless and until the conditions of the restrictions have been lifted. The Reporter did not include this language, but it was apparently an oversight. The STA is resubmitting the language, and we expect it will be included in the next draft.

This UUPA provides for the issuer and the transfer agent to be indemnified by the state for property that is reported. Unfortunately, the indemnification provided does not encompass appreciation of stock, so it is of limited value. Due to the states’ tendency to liquidate, this is a concern. The STA and other groups lobbied for no liquidation, or an extended holding period in order to protect the value of the owners’ property, and reduce the risk of litigation for transfer agents and issuers. However, the states convinced the ULC that they need the cash, and liquidation after three years was adopted. This is an improvement over many states, which currently allow for liquidation “upon receipt” or “within one year” of reporting. While the STA will continue to lobby for protections for shareholders, at least the three-year rule increases a shareholder’s chances to claim the property prior to liquidation.

The STA will continue to monitor the revisions to the ULC, to insure that members’ and shareholders’ interests are being served. Additional education and lobbying may be necessary to preserve the gains made in the current draft. Most importantly, once the UUPA is finalized – which is still over a year away – members must lobby for its adoption in the states, or else all of the work will have been in vain. The federal courts and national media are finally focusing on this area of the law – STA members can continue the positive trends by sharing their knowledge and participating in the process.

Jennifer Borden is an attorney who has specialized in unclaimed property law for more than two decades. She is currently representing the STA as an official observer to the Uniform Law Commission.

Borden honored with “Leaders in Law” award by Mass. Lawyers Weekly

Massachusetts Lawyers Weekly, a leading newspaper reporting on legal matters, rulings and decisions in the Bay State, recently awarded its annual Leaders in the Law award to Borden Consulting Group founder Jennifer C. Borden.

Leaders in the Law demonstrate innovative and practical business and legal skills, either as general counsel or staff attorneys. They are corporate in-house lawyers who are leaders in the community, forward thinkers and best exemplify the noble tradition of the legal profession.

Recipients of the Leaders in the Law awards are nominated by their colleagues, clients and other legal professional.

“It is an incredible honor to be recognized with such a well-respected tribute in the legal industry here in Massachusetts,” said Borden.  “I was especially proud to be joined by, and congratulate, fellow honorees Kevin Cloherty, Karen O’Toole, and Mark Weiss, whose work I have respected for years.  The evening was really special because the Boys & Girls Clubs of Boston was the event’s charitable partner, and I have volunteered for the Club for more than three decades.”

“The honorees selected this year were chosen for a variety of reasons,” said Susan Bocamazo, publisher and editor-in-chief of Massachusetts Lawyers Weekly. “They work in a variety of industries, facing the daily challenge of balancing legal constraints against business needs in a changing economy.

“They devote significant time to community outreach, are heavily involved with state bar organizations, and work to improve diversity in their profession.”

Borden began her career working in the Massachusetts Office of the State Treasurer where much of her work involved the abandoned property division. It was then, 20 years ago, where unclaimed property law began to take shape, and Borden has played a role in its development ever since.

After her time with the Commonwealth, she moved to Ernst & Young where her work involved unclaimed property compliance and audit defense. She then headed to Holland & Knight to concentrate on litigating unclaimed property matters.

Borden moved to Unclaimed Property Recovery & Reporting in 2010, a company that focused on compliance with state escheat laws. While there, she maintained a private law practice which led to the recent launch of Borden Consulting Group.

For the past year and a half, Borden has served as an official observer assisting the Uniform Law Commission in its drafting of the Revised Uniform Unclaimed Property Act.

“The ULC’s drafting process has been one of the most educational and rewarding experiences of my career, and I am privileged to be part of the process,” said Borden.

A total of 38 individuals – 25 in-house counsel and 13 from area law firms and associations – were recognized as Leaders in the Law.