Tuesday, August 27, 2013

Escheat Law: The Revenue Motive

Modern escheat law is the process by which the state designates property held by one party but owned by another as "abandoned" and seizes it from the current holder. Most people have heard very little about modern escheat law, and for good reason: While states claim that the escheatment of unclaimed property is intended to look out for the rightful owners of the property, many would be surprised to know how much revenue is generated for state governments in the process.

Aside from the obvious criticisms that can be made against the state being an effective protector of property rights (see: eminent domain, asset forfeiture, property taxation, etc.), I will argue here that the primary, and perhaps sole motivation for modern unclaimed property law is the revenue motive. The various points of evidence toward this conclusion are: (a) the low percentages of property reunited with owners once in the hands of state treasuries; (b) court opinions which have explicitly referred to these laws as revenue raisers; (c) the large percentage of property abrograted which goes to the state's general fund rather than a dedicated trust fund for claimants; and (d) recent moves by state governments to shorten the period of inactivity required to deem property as "abandoned."

(a) Percentages of property reunited with owners after escheatment is much lower than one would expect, were the state's primary motivation to return the property to the owners. The state of New York, for example, has received over $10.5 billion since the implementation of their Abandoned Property Law in 1943, of which less than 20% has been claimed to date.1 In one of the most extreme examples, Delaware (which is the domicile for many corporations and corporate accounts) has returned less than 3% of the $1.7 billion it has seized since 20072, making escheated property the state's third largest source of revenue. One would expect these percentages to be much higher if the state were taking custody of property with the intent of dedicating resources toward reuniting them with the owners. Indeed, horror stories abound in which state governments seemingly made little effort to find the owners, and dragged their feet even when a claim was made.

(b) In legal opinions on the constitutionality of these sorts of laws, courts have referred to them as revenue generators for the state, and in fact have upheld the laws primarily for this reason rather than the "safer custodian" argument. In life insurance, the Supreme Court held in Connecticut Mutual Life Insurance v. Moore that

"It is naive beyond even requirements of the judicial office to assume that this lately manifest concern of the states over abandoned insurance proceeds reflects only solicitude for the unknown claimants. If it did, the states' claims might reconcile more easily. But escheat of these interests is a newly exploited, if not newly discovered, source of state revenue."
More recently, the Sixth Circuit Court of Appeals upheld a reduction of the inactivity period required for escheatment of travelers' checks in American Express Travel Related Services Company v. Kentucky, primarily on the grounds of the revenue generated by escheat law in general.
"American Express attempts to demonstrate that, despite this general proposition, revenue raising is an illegitimate legislative objective in the context of the 2008 amendment, which is an escheat law enacted pursuant to the General Assembly’s police powers. This argument must fail. . ."
It is clear that, at the very least, the courts recognize the revenue motive, even if their decisions may rest on other legal grounds.

(c) In many states, a large majority of the revenue generated via unclaimed property laws is simply added to the general fund of the state. To continue the example of Delaware: All escheat revenue in Delaware is deposited into the State's general fund (12 Del. Code § 1131). California keeps a mere $50,000 in a dedicated "Abandoned Property Account", moving any excess into the state's general fund each month (CAL. CCP. CODE § 1564). 

This would seem an odd thing for a purportedly altruistic state to do; one might expect them to place this revenue in a dedicated trust fund to ensure that any claimants can be paid promptly. It should be noted that not all states are so egregious here: Florida, for example, maintains an Unclaimed Property Trust Fund of $15 million, and moves the excess to the State School Fund as opposed to a general fund (§ 717.123, Fla. Stat.).

(d) Many states have consistently passed amendments to their unclaimed property laws to reduce the "dormancy periods", the duration of inactivity required for a property to be considered "abandoned." According to this 2011 article, dormancy periods have been drastically reduced from their original lengths.

"Massachusetts has decreased its dormancy period tenfold for bank accounts from 30 years in 1907 to three years in 1992. Delaware reduced the dormancy period for property held by banking organizations from 25 years to seven years in 1985, and to five years in 1988. 
California has steadily reduced the dormancy periods for bank accounts from 20 years in 1913, to 15 years in 1959, seven years in 1977, five years in 1989, and finally three years in 1990. Even the legislative director of the California State Controller’s Office had acknowledged that the office is looking at lengthening the escheatment period: 'Three years appears quite low and we’re looking at what should be the appropriate period before property escheats.' In 2007 legislation was proposed in California to increase the dormancy period from three to five years for most property; the legislation was not enacted."
In short: the body of evidence seems to overwhelmingly suggest state use of escheat law as a form of non-tax revenue for general budget use. In insurers, real estate managers, and financial institutions, states have a captive, steady supply of property which may fit the ever-widening abandonment criteria and thus seized by the state. This revenue is more politically palatable for elected officials as it does not necessitate changes in formal tax rates. More worrisome, however, is the seizure of property for revenue which does not adhere to due process. At some future date, I will look at further problems with the practice of escheatment in one field in particular: life insurance contracts.

In very short: States want money. (You may also be surprised to learn that water is wet.)

1 - Hartley, Devin. "A Billion Dollar Problem: The Insurance Industry's Widespread Failure to Escheat Unclaimed Death Benefits to the States." Conn. Ins. LJ 19 (2012): 363-399.

2 - Gregory, Teagan J. "Unclaimed Property and Due Process: Justifying Revenue-Raising Modern Escheat." Mich. L. Rev. 110 (2011): 319.

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