Service Charges, Deductions & Exemptions (Do As I Say, Not As I Do)

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1 Service Charges, Deductions & Exemptions (Do As I Say, Not As I Do) Presented by: Chris Hopkins Crowe Horwath LLP Dennis Rimkunas Jones Day

2 UPPO Presentation Disclaimer Use of the Unclaimed Property Professionals Organization, Inc., (UPPO) name of copyrighted materials in this presentation does not constitute an endorsement by UPPO of a member, vendor, product or service. The content represents the opinions of the author and not necessarily those of UPPO. This information is not intended as legal advice and should not be used to replace the advice of legal counsel.

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4 Today s Agenda Service Charges and Deductions Exemptions and Preemptions Issues

5 Service (Dormancy) Charges Some History Uniform Model Act of 1981 Generally limited to bank deposits and funds in financial organizations, with restrictions ( 6(c)) However, state may deduct numerous charges ( 23) (do as I say, not as I do )

6 Service (Dormancy) Charges Some History Uniform Model Act of 1995 added provision ( 5, emphasis added): A holder may deduct from property presumed abandoned a charge imposed by reason of the owner's failure to claim the property within a specified time only if there is a valid and enforceable written contract between the holder and the owner under which the holder may impose the charge and the holder regularly imposes the charge, which is not regularly reversed or otherwise canceled. The amount of the deduction is limited to an amount that is not unconscionable.

7 Service (Dormancy) Charges Some History Gift Cards (more later) Proliferation of service charges when plastic first came into vogue Generally ineffective for minimizing escheat obligations Akin to a series of expiration dates Statutory prohibitions Federal Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act )

8 Service (Dormancy) Charges Previous attempts Some History Retail (People v. Marshall Field & Co., 404 NE2d 368 (1980)) Banks Trade union (Screen Actors Guild, Inc. v. Cory, 91 Cal. App. 3d 111 (1979) Yet to be challenged Affinity and loyalty programs (e.g., hotels and airlines, credit cards)

9 Service (Dormancy) Charges Colorado Statutory Provisions 1. A holder may deduct and retain two percent of the value of the property or twenty-five dollars whichever is more per item. 2. demand, savings, or matured time deposit or funds held or owing under an insurance policy or annuity contract, the holder may deduct and retain two percent of the value of the property or twentyfive dollars, whichever is less. (Colo. Rev. Stat (b)(I) and (II), emphasis added)

10 Service (Dormancy) Charges Statutory Provisions Codification of 1995 Model Act or similar New York cost of certified mail Alabama reasonable restocking fee for layaways of $25 or less Specific rules for banks in many states (e.g., Md. Regs. Code tit. 03, )

11 Service (Dormancy) Charges Proceed with Caution Must be disclosed (generally) Must be statutorily permissible Reasonable; not unconscionable Avoid contractual waiver (see, e.g., N.Y. Abandoned Property Law 1415(b))

12 Florida Statutory Exemptions De Minimis Credit balances, customer overpayments, security deposits, and refunds having a value of less than $10 shall not be presumed unclaimed. (Fla. Stat. Ann (1)(h)) Arizona B2B $50 or less Idaho property with value of $50 or less (Idaho Code (2)(e))

13 Statutory Exemptions De Minimis Payroll checks under $50 Kentucky Michigan Ohio Statutory aggregation limit is not a de minimis threshold, but acts as such for states

14 Statutory Exemptions B2B 15 states or so Rationale General rule every state is different Definition of business organization Sole proprietor? Government? Certain property held by financial institutions may be excluded

15 Statutory Exemptions B2B Really a deferral Arizona (over $50) Missouri (effective as of August 28, 2014) Tennessee Texas

16 Statutory Exemptions B2B Credits but not checks? Indiana Iowa Massachusetts (after 2004) Michigan North Carolina Wisconsin What if uncashed check is replaced with A/P credit?

17 Statutory Exemptions B2B Generally broader provisions Illinois Ohio Kansas Virginia Maryland

18 Statutory Exemptions B2B Recent changes Michigan property created on or after April 1, 2009 A good start: Missouri B2B, effective as of August 28, 2014 Going in the wrong direction: New York B2B deferral policy rescinded in 2014

19 Statutory Exemptions Gift Certificates & Gift Cards A majority of states have some type of exemption even Delaware! General rule every state is different Various limitations

20 Gift Certificates & Gift Cards Exemption Limitations Cannot expire or include dormancy charges ( service fees ): a) A gift certificate or gift card which is not assessed any fees and does not have an expiration date shall not be presumed to be abandoned. b) A gift certificate or gift card which contains an expiration date or requires any type of postsale finance charge or fee which is unredeemed for a period of three years from the date of issuance shall be presumed abandoned (Neb. Rev. Stat , emphasis added)

21 Gift Certificates & Gift Cards Exemption Limitations Redeemable for merchandise (only?): Any credit due a retail customer that is represented by a gift certificate, gift card, merchandise credit, or merchandise credit card, redeemable only for merchandise. (Ohio Rev. Code Ann (B)(2)(d), emphasis added)

22 Gift Certificates & Gift Cards Exemption Limitations Issuer is a retailer that sells stuff: A gift certificate, gift card, or in-store merchandise credit issued or maintained by any person engaged primarily in the business of selling tangible personal property at retail. (Ala. Code (b)(1), emphasis added) Does not extend to merchandise credits in some states, e.g., Minnesota

23 Gift Certificates & Gift Cards Exemption Limitations Limited to percentage of unredeemed amount 1995 Model Act escheat 60% Delaware Escheat maximum cost (12 Del. C. 1198(11)) Restaurant gift certificates of $5 and under (Id.) Exemption may not apply to GCs issued by banks or redeemable by unrelated parties ( universal cards)

24 Gift Certificates & Gift Cards Unique Rules Colorado gift certificates only, not gift cards (CO Attorney General opinion, April 13, 2005) Idaho gift certificates/gift cards with expiration date are exempt New Jersey data (zip code) collection requirement repealed (S.B. 2235) Florida The consideration paid for an unredeemed gift certificate or credit memo is the property of the issuer of the unredeemed gift certificate or credit memo. (Fla. Stat. Ann (1))

25 Gift Certificates & Gift Cards Final Comment Virtually all escheated unredeemed gift certificate and gift card amounts are kept by states (do as I say, not as I do )

26 Other Exemptions Certain non-profit entities Kentucky IRC 501(c)(3) Ohio certain hospitals Washington State Museum or Historical Society Delaware uninvoiced payables (GR/IR) (12 Del. C. 1211) Stray animals of any type (Kan. Stat. Ann , et seq.) Practice or policy

27 Preemptions Overview Preemption vs. exemption Supremacy Clause of U.S. Constitution

28 Preemptions ERISA What is ERISA? Case law, unfavorable Aetna Life Insurance Co. v. Borges, 869 F2d 142 (1989) 2nd circuit court ruled that the impact of Connecticut s UP laws were too remote as to require preemption

29 Preemptions ERISA Case law, favorable Commonwealth Edison v. Vega, 174 F3d 870 (1999) 7th circuit court state unclaimed property laws interfere with the administration of ERISA plans Commonwealth Edison Arguably broader applicability More recent

30 Preemptions Other U.S. Government Bankruptcy Transportation Telecommunications? Healthcare?

31 Issues Uncertainty States often differ ERISA conflicting case law (covered above) Limited case law Biogen v. Treasurer, Supreme Judicial Court of Massachusetts, No. SJC (July 2, 2009) Mason and Dixon Lines, Inc. v. Eagerton, 555 F. Supp. 434 (M.D. Ala. 1982) New Jersey, et al. v. U.S., No (3rd Cir. June 27, 2012)

32 Issues Jurisdiction Texas v. New Jersey part 2 of secondpriority rule : if the last-known address is in a state that does not provide for the escheat of the property, the state of the holder s domicile has the right to claim the property For domiciliary entities, New Jersey claims property with addresses in B2B exemption states

33 Issues Jurisdiction Full Faith and Credit Clause Conflict of laws Exemption vs. exclusion

34 Issues Anti-Limitations Provisions 1981 Model Act, 29: The expiration of any period of time specified by contract, statute, or court order, during which a claim for money or property can be made or during which an action or proceeding may be commenced or enforced to obtain payment of a claim for money or to recover property, does not prevent the money or property from being presumed abandoned or affect any duty to file a report or to pay or deliver abandoned property to the Administrator as required by this Act Model Act is similar (see 19(a))

35 Issues Anti-Limitations Private escheat Provisions Prevent circumvention of escheat laws (1980 Model Act comments) Derivative rights doctrine

36 Issues Financial Statement Treatment If it s not unclaimed property is it income? Little guidance in accounting literature Exemption/preemption does not necessarily abrogate obligation When does obligation become remote? Applicability of UCC? What about Colorado and Florida (gift certificate) statute?

37 That s all folks! Chris Hopkins, chris.hopkins@crowehorwath.com Dennis Rimkunas, drimkunas@jonesday.com