CFOs and corporate tax departments of Delaware corporations beware:
Delaware’s unclaimed property liability disclosure period ends June 3, 2014. See the announcement below for details. You may reduce your company’s liability very substantially.
Delaware VDA Program Alert
Your company may have substantial unclaimed property liability to Delaware whether or not you have and office or transact business in Delaware. For a good primer and warning about the issues, see the article Unclaimed Property: Basics and New Developments by Stanford Stevenson on p. 14 of the issue of Delaware Lawyer below:
I continue to be amazed at the amount of leakage in America’s corporate finances. By leakage, I mean money that goes unclaimed by corporations that is eventually escheated to state unclaimed property agencies. Where do these unclaimed assets come from? Mostly from checks gone astray in the mail or otherwise. Sometimes they are balances left over when bank accounts are closed and utility company deposits which are not collected. Sounds like small potatoes. However, I have seen numerous cases where those small potatoes add up to more than $1 million in lost assets for one company. I was recently retained by a major American company to recover unclaimed property, including almost $200,000 from one state alone.
Businesses should understand that state unclaimed property agencies are not going to notify them of the unclaimed assets held by the state. Since the states deposit most unclaimed money in a general revenue fund, there is a disincentive for the states to seek out unclaimed property owners; notwithstanding protestations to the contrary. For instance, California, years ago, had a department within its controller’s office charged with locating and notifying owners of unclaimed property received by the state. No more. Now, California makes it difficult for corporations to find and recover unclaimed assets held by the state.
California isn’t alone. In a case in New Jersey several years ago, brought by a corporation attempting to get information about unclaimed assets held by the State, the judged asked the State’s lawyer, “Why doesn’t the State notify claimant that it holds these funds?” “We couldn’t find them” replied the Assistant Attorney General. “You couldn’t find them?” replied the judge incredulously, “The plaintiff employs 20,000 people in this State, counselor. What do you mean you couldn’t find them?” A New York judge recently wrote “The legislature has created a system to swell the coffers of the State Treasury. . . at the expense of the public without giving sufficient notice to the public . . .”
Once corporate property is reported to state unclaimed property agencies, it is difficult for the corporate owner to locate that property and to recover it. Small potatoes? Maybe, but in some instances those potatoes add up to a lot of money.
Liquidators often overlook assets, owned by debtors, which are held by state unclaimed property agencies. Sometimes the value of those overlooked assets is substantial.
Several years ago, a debtor reopened its S.D.N.Y. Chapter 11 liquidation case, which had been closed for over three years, to recover over $1 million in assets held in debtor’s name by the New York State abandoned property fund. In another case, it was $300,000 of unclaimed funds that were discovered by bankruptcy counsel after the case was closed.
These are only two of many cases I’m know of in which Chapter 11 liquidators have failed to collect their unclaimed assets.
Of course, not every liquidation has unclaimed assets. It depends on the business of the debtor. For instance, financial institutions very often have many items of unclaimed assets. Entertainment and media companies, although they typically have fewer items, do have some large royalty items that go astray.
How Do These Assets Get To The Various States?
All 50 states have enacted some version of the Uniform Unclaimed Property Act which requires businesses which cannot locate creditors, shareholders, or others they owe money or other assets to, to deliver or “escheat” that property to the state of the owner’s last known address. The state then holds that property in its unclaimed property fund until the owner asserts a claim to it. These funds are a significant source of revenue for the states which typically can use the funds until the owner shows up and asserts a claim. New York State, for instance, holds $12 billion in unclaimed assets. California has over $6 billion. These funds increase every year.
Although these assets are often remote and difficult to recover, liquidators should be aware of them and, where appropriate, consider selling them along with other remnant assets of the debtor. Often these sales are the last transaction a liquidator makes before closing the case and they include all the residual assets known and unknown uncollected by the debtor.
Another class of assets typically overlooked by liquidators are unclaimed dividends deposited in U.S. Bankruptcy Courts.
In a bankruptcy case, the bankruptcy trustee “dividend” checks to creditors of the debtor in payment of allowed claims. Since payment of these claims often take years, a creditor’s address may change and some of these checks get lost and go uncashed. At the conclusion of the bankruptcy case, the trustee is obligated to turnover the proceeds of uncashed checks to the bankruptcy court with a list of the payees. The court eventually remits those funds to the U.S. Treasury.
A creditor who discovers that it is owed an unclaimed dividend can claim payment from the court at any time. It is a difficult job to search for these unclaimed dividends since most bankruptcy courts do not have a list of those unpaid creditors online. Some courts will send a copy of the list upon written request. Other courts require you to personally appear and review records in the courthouse – – a tedious procedure to be sure.
Some of these unclaimed dividends are substantial. I know of a case in which the former attorneys for a liquidated debtor, in a case long closed, received a $300,000 check in the mail, payable to its now-defunct client, in payment of a claim filed by the client in another bankruptcy case years ealier.
The liquidated debtor reopened the case years after it had been closed to deal with the new-found money. Fortunately, in this case, the check was mailed to a law firm rather than to the creditor itself. Had it been mailed to the creditor, it would have been returned as undeliverable and wound up in the federal treasury for use by the U.S. Government rather than the creditors of the bankrupt.
How can a bankruptcy trustee know if its debtor has pending claims in bankruptcy? It’s nearly an impossible task to find an answer to that question with any certainty. The best a trustee can do for the creditors in the bankruptcy is to try to sell contingent and known and unknown assets. The trustee thereby fulfilled its obligation to maximize asset value by realizing some money for these unknown and unclaimed funds.
Corporate liquidators often discover that there are security positions (stocks or bonds) registered in the name of the liquidation estate. Discovery may come about through receipt of a bond interest check which means there is a bond outstanding in the name of the payee or a cash dividend on a stock. In my experience, most liquidators will abandoned the security positions if they cannot find the certificates in the corporation’s records since the liquidator cannot be sure that the corporation did not endorse and transfer the certificate before the liquidator was appointed. It is also my experience that some of these security positions can have substantial dollar value and should not be abandoned.
To be sure, beneficial ownership of these security positions cannot be determined with certainty if the debtor’s records are scattered. However, since the stock record of an issuer of securities is presumptive proof of ownership of its securities, for liquidators to presume otherwise is unfair to its creditors. The liquidator can typically request a transcript of the corporation’s security positions with an issuer and get some clues as to ownership through those records. However, that is not always perfect.
Several years ago, a client recovered a substantial sum based on a corporate bond that had been outstanding in the name of its liquidation estate for more than a decade. The client had no record of ownership of the bond other than the record of the bond issuer. When the bond matured, the issuer had escheated its face value and accrued dividends in accordance with the appropriate abandoned property law. Based on the registered ownership and no record of a transfer of the bond, the client asserted a claim to the state holding the funds for recovery of that unclaimed property and was paid the full value of the bond and accrued dividends.
Several years later, after contacting the bond issuer and being told that the value of the bond had been escheated, an actual holder of the missing bond tried to recover the value of that bond from the state. Of course, the state denied the claim because it had previously paid out the proceeds of the bond. The holder then contacted my client who referred the matter to me.
The holder had the original bond, endorsed by my client’s predecessor that he had found it in his father’s safe deposit box and said it had “been there for a long time.” After reviewing the holder’s documents, I concluded it was more likely that his father’s estate had the right to the value of the bond rather than my client. Although there were defenses to the holder’s claim to the bond based on the passage of time, on my advice the client paid the holder the value of the bond and accrued dividends it received from the state.
Since the state could have been on the hook for a second payment of the bond to the holder, it was relieved of that liability when my client paid the estate of the holder.
Chasing actual ownership of securities is not a straight line. Forensic accounting is often necessary.