Unclaimed Property Legislative and Litigation Update

This month’s Client Alert provides an update regarding new legislation enacted in the State of Arizona that impacts gift card issuers and an important common law decision analyzing retroactive application of state unclaimed property laws. Below we provide our opinion of the potential impact of Arizona Senate Bills 1264 and 1412 as well as provide a brief summary of a recent state court decision in United Insurance v. Florida Department of Financial Services, which is relevant to any holder that is under audit or participating in a voluntary disclosure program.

Legislative Updates

Arizona Senate Bill 1264 – Prohibition of Fees and Expiration Dates

Arizona Senate Bill 1264 (“SB 1264”) was approved by the Governor of Arizona on April 17, 2018.  SB 1264 prohibits expiration dates on the “underlying funds” of a gift card and prohibits any gift card from being subject to a service fee, dormancy fee or other fee.  SB 1264 does not apply to gift cards that are distributed pursuant to an awards, loyalty or promotional program when the consumer has not paid consideration or anything of value for receipt of the gift card. SB 1264 applies to all gift cards issued out of Arizona-domiciled entities or issued to Arizona residents after July 20, 2018.

Arizona Senate Bill 1412 – Prohibition of Diversion of Personal Property and Transitional Provision

Arizona Senate Bill 1412 (the “SB 1412”) was approved by the Governor on March 23, 2018 and is effective as of July 20, 2018. The Law amends the Arizona Revised Statutes by adding Section 10-2071 and by revising Sections 44-321 and 44-329. SB 1412 contains new, troubling provisions that may jeopardize the ability of a gift card issuer to take breakage income out of a GCSs organized in Arizona because of the Bill’s prohibition against “diverting . . . personal property” into income.”

Section 2 of SB 1412 amends Section 44-321 of the Arizona Revised Statutes and revises the Periods of limitation section by adding, in relevant part, the following:

An individual, corporation, business association or other organization may not act through an amendment of articles of incorporation, an amendment of bylaws, a private agreement or any other means to do any of the following:

  1. Take or divert monies or personal property into income.
  2. Divide monies or personal property among patrons or stockholders that are able to be located.
  3. Divert monies or personal property by any other method for the purpose of circumventing the unclaimed property process. (italics ours). 

The language of Sections 1 and 2 of the Law arguably make it unlawful for the members of a GCS organized in Arizona (that intentionally does not collect names and addresses of gift card purchasers for unclaimed property planning purposes) to take gift card breakage into income and distribute that income to its members.

While we disagree with the notion that gift card breakage amounts to a “diversion” of personal property, it is troubling for gift card issuers that the Law could be interpreted to prohibit the personal property of gift card purchasers from being distributed to members of a GCS.  Moreover, when combined with the Law’s “transitional provision,” the Law could be interpreted to provide the State with the authority to make an unclaimed property claim for breakage income taken out of an Arizona-domiciled GCS all the way back to January 1, 2001.

Transitional Provision

Prior to this Law’s enactment, the Transitional provision of Section 44-329 of the Arizona Revised Statutes provided that the Bill’s provisions did not apply to property that would have been presumed abandoned within ten (10) years before the effective date of the chapter. Section 3 of SB 1412 amends the Transitional provisions to make its application retroactive: the Law’s provisions now apply to property that would have been presumed abandoned at any time after January 1, 2001. It is our opinion that this retroactive application is unconstitutional, but the amended statute nevertheless makes Arizona GCSs susceptible to the potential for a costly and time-consuming challenge. While Arizona law has consistently exempted the unredeemed balances of gift cards from unclaimed property reporting, the language of the transitional provision provides a basis for the State to make the argument that taking breakage amounts to “circumventing” the State’s unclaimed property law.

Recommendations

Based on this sudden and seemingly targeted change to Arizona’s statutes, we recommend that any clients with a GCS organized in Arizona begin looking into options for reorganizing in other states.

We will continue to monitor the interpretation of this newly-enacted legislation and its potential impact on companies with GCSs organized in Arizona, and we will provide you with new information as it becomes available. 

Litigation Update

United Insurance Company of America, et al. v. Jeff Atwater, in his official capacity of Chief Financial Officer of the State of Florida and the Florida Department of Financial Services, 2016-CA-001009 (Cir. Ct. Fla. April 20, 2018).

A recent Florida state court case rejected the notion that unclaimed property statutes that place new obligations on holders can be applied retroactively.  If upheld on appeal, this case would serve as the latest example of federal and state courts favoring the constitutional rights of holders of unclaimed property in the face of state legislative action intended to increase revenue through retroactive application of new unclaimed property reporting duties.

At issue in United Insurance Company of America v. Atwater was a 2016 change to Florida’s unclaimed property law (the “Amended Insurance Law”) which: (i) altered the applicable dormancy triggers to unclaimed life insurance benefits (the “Escheat Amendment”), (ii) imposed an annual Death Master File matching requirement on insurance companies (the “Search Amendment”), and (iii) imposed new obligations to contact beneficiaries of a policy after the death of the policyholder and inform the beneficiary of benefits (the “Contact Amendment”).  The Florida Legislature required the majority of insurers to apply these requirements retroactively to all policies issued after January 1, 1992 (the amended law also required certain categories of insurance companies to apply the new law retroactively to ALL in-force policies).  The Amended Insurance Law took effect on April 12, 2016.

United Insurance challenged the Amended Insurance Law, arguing that applying the law retroactively violated United Insurance’s due process rights. The Circuit Court of the Second Judicial Circuit in and for Leon County, Florida (“Court”) agreed with United Insurance in a well-reasoned decision issued on April 20, 2018.

While the Court recognized that “remedial and procedural laws” may be constitutionally applied retroactively, the Court noted that “substantive laws” cannot.  The Court discussed that “remedial statutes operate to further a remedy or confirm rights that already exist and procedural laws provide the means and methods for the application and enforcement of existing duties and rights.” (emphasis added) In contrast, substantive law prescribes legal duties and rights, and once those rights and duties are vested, due process prevents the legislature from retroactively abolishing or curtailing them.” In the Court’s view, the Due Process Clause prevents a law that “imposes or creates a new obligation or duty in connection with a previous transaction or consideration” from being applied retroactively.  The Court outlined that clear intent from the legislature to apply a law retroactively must be present, and, if such intent is present, the Court next must evaluate whether the retroactive application violates any constitutional principles.

Here, United Insurance argued that the Escheat Amendment, the Search Amendment and the Contact Amendment could not be remedial in nature because each impose “new and different obligations” on insurers.  The previous law did not require DMF matching and did not require insurers to pay life insurance benefits to beneficiaries until such time that the insurers received “due proof of death.”  The Court determined that the Contact Amendment and the Search Amendment were undoubtedly substantive in nature because they imposed new obligations and that neither could be applied retroactively.  Similarly, the Court determined that the Escheat Amendment “changed and redefined” United’s “obligations and duties” under Florida’s escheat law as it applied to unclaimed life insurance benefits.  Accordingly, because the Escheat Amendment also imposed “new obligations and duties” it also could not be applied retroactively.   The Court reasoned that the Due Process Clause required the Amended Insurance Law to only be applied prospectively.

Commentary

The United Insurance decision is important to holders at this juncture in unclaimed property jurisprudence because of a number of recent unclaimed property law changes that state legislatures are seeking to apply retroactively.  The State of Delaware, for example, amended its unclaimed property law in February of 2017, adding provisions that purportedly grant the state authority to take custody of property owed to an owner with a last known address in a foreign country.  Delaware’s prior unclaimed property law did not include this authority to assert jurisdiction over property owed to a foreign last known address; therefore, it is logical to conclude that Delaware’s amended unclaimed property law imposes new obligations on holders that cannot be constitutionally applied retroactively.  Similarly, many states have enacted or have proposed the enactment of some iteration of the Revised Uniform Unclaimed Property Act (RUUPA), which contains a “transitional provision” that unmistakably applies RUUPA’s new provisions to property that was not reportable under previous versions of state unclaimed property laws (See AZ SB 1412 above).  Accordingly, the Court’s reasoning in United Insurance provides additional legal precedent for holders to rely on when challenging states that are overreaching in the retroactive application of their own amended unclaimed property laws.  It also continues the current common law trend of state and federal courts explicitly recognizing the constitutional rights of holders in the context of unclaimed property reporting and unclaimed property law enforcement.

If you have any questions or would like to discuss the information provided in this Client Alert in more detail, please do not hesitate to contact us.