BILL ANALYSIS �
AB 1011
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Date of Hearing: April 23, 2013
ASSEMBLY COMMITTEE ON JUDICIARY
Bob Wieckowski, Chair
AB 1011 (Salas) - As Introduced: February 22, 2013
SUBJECT : UNCLAIMED PROPERTY: INTEREST PAYMENTS
KEY ISSUE : GIVEN THAT THE STATE CONTROLLER IS NOT
CONSTITUTIONALLY OBLIGATED TO PAY INTEREST ON CLAIMED PROPERTY,
SHOULD THE CONTROLLER NEVERTHELESS BE STATUTORILY REQUIRED TO
PAY INTEREST ON ANY CLAIM FOR UNCLAIMED PROPERTY FOR THE LENGTH
OF TIME THE PROPERTY WAS HELD IN THE STATE'S UNCLAIMED PROPERTY
FUND, ESPECIALLY GIVEN THE STATE'S SEVERELY CHALLENGING BUDGET
CONDITIONS?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
This bill, sponsored by the State Controller, seeks to require
the Controller to add a specified interest payment to the amount
of any claim paid to the owner of property that was on deposit
in the Unclaimed Property Fund. In addition, this bill extends
the same interest requirement in limited circumstances where the
former property holder, rather than the state, makes the payment
to the owner after the property has escheated to the state, thus
ensuring that the property owner is paid interest in either
scenario.
The payment of interest on claimed property was first added to
state law in 1976. Existing law since 2003, however, provides
that no interest shall be payable on any unclaimed property
claim paid by the Controller under the Unclaimed Property Law
(UPL). In reversing this rule and requiring the Controller to
add interest to such claims, this bill seeks to restore
statutory language for this precise calculation of interest that
was enacted in 2002 and subsequently repealed in 2003. In 2009,
the 9th Circuit held that the state is not constitutionally
obligated to pay interest when it returns property to owners
under the UPL. While the payment of interest would be
beneficial to owners of unclaimed property, the Committee may
wish to consider whether there are compelling reasons to require
the state to add interest payments to claims when none is
required, and so many other important needs go without funding.
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The California New Car Dealers Association opposes the bill
unless amended to further clarify the discretionary nature of
the practice of a holder paying an owner directly for property
that has already been transferred to the Controller, and then
seeking reimbursement from the Controller.
SUMMARY : Requires the Controller to add interest, as specified,
to the amount of property claimed by an owner from the Unclaimed
Property Fund. Specifically, this bill :
1)Requires the Controller to add interest, at the rate of 5
percent per year or the bond equivalent rate of 13-week United
States Treasury bills, whichever is lower, to the amount of
any claim paid to the owner for the period the property was on
deposit in the Unclaimed Property Fund. Further specifies the
criteria with which the bond equivalent rate of 13-week United
States Treasury bills shall be defined.
2)Requires a former holder of property, who compensates the
owner of property that has escheated and been remitted to the
state, to also pay interest, as similarly specified, in
addition to the value of the property.
3)Provides that upon payment of the principal and interest
pursuant to this act, the owner shall be deemed to have
forfeited his or her interest in the escheated property and
the former holder may seek and receive reimbursement from the
Controller in the amount that the former holder paid to the
owner of the escheated property after properly submitting the
request for reimbursement in the form prescribed by the
Controller.
EXISTING LAW :
1)Provides that no interest shall be payable on any unclaimed
property claim paid by the Controller under the UPL. (Code of
Civil Procedure Section 1540(c). Unless otherwise stated, all
further references are to this code.)
2)Requires the Controller, at the end of each month, to transfer
to the General Fund all money escheated to the State and held
in the Abandoned Property Fund in excess of fifty thousand
dollars ($50,000). (Section 1564(c).)
3)Provides that the state has no constitutional obligation to
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pay interest when returning funds to claimants under the
Unclaimed Property Law. (Suever v. Connell (2009) 579 F.3d
1047.)
COMMENTS : This bill, sponsored by the State Controller, seeks
to require the Controller to add a specified interest payment to
the amount of any claim paid to the owner of property that was
on deposit in the Unclaimed Property Fund. In addition, this
bill extends the same interest requirement in circumstances
where the former property holder makes the payment to the owner
after the property has escheated to the state.
Author's stated need for the bill . According to the author:
Owners and claimants seeking to reclaim their property
from the State Controller's Unclaimed Property
Division frequently protest that the State ought to
pay interest on the principal amount for the duration
that it is held by the State. The degree to which this
is a source of contention is exacerbated at times when
owners feel as though they were not properly or
sufficiently notified by holders prior to their
property escheating to the State. In many cases,
interest would have continued to accrue had the
property remained with the holder. Further, since
interest was paid on the principal amount of a claim
prior to 2003, the cessation of interest payments has
not gone unnoticed by owners claiming their property.
Background of the UPL: The Unclaimed Property Law, enacted in
1958, establishes procedures for the escheat of unclaimed
personal property. Property escheated to the state means the
state has custody of the property in perpetuity, until the owner
claims the property. Under the UPL, there are three significant
parties: the owner, the holder, and the state. The "owner" is
the person to whom the property actually belongs. The "holder"
is the person or entity who has possession of the property. The
holder might be a bank or other money depositary (e.g., holds
deposits of owner's money, holds property in a safe deposit
box), or a business that has issued a check to an individual or
other business, or a life insurance or annuity. Holders of
unclaimed property have no interest in the unclaimed property.
(Bank of America v. Cory (1985) 164 Cal.App.3d 66, 74.) A
holder is simply a trustee of the property while the property is
in the possession of the holder. However, while the property is
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in the custody of the holder, the holder generally uses the
funds or the property as an asset.
The UPL has dual objectives: (1) to protect unknown owners by
locating them and restoring their property to them; and (2) to
give the state, rather than the holders of unclaimed property,
the benefit of its retention, since experience shows that most
abandoned property will never be claimed. (State v. Pacific Far
East Line, Inc. (1962) 261 Cal.App.2d 609, 611; Douglas Aircraft
Co. v. Cranston (1962) 58 Cal.2d 462, 463.) The state, through
the Controller, acts as the protector of the rights of the true
owner. (Bank of America v. Cory, supra, at 74.)
The UPL establishes procedures to be followed when property goes
unclaimed, generally for a period of three years, and escheats
to the state. Under existing law, the holder must annually
report on unclaimed property and turn the property over to the
Controller. (Code of Civil Procedure Secs. 1530 and 1532.) In
turn, the Controller is required to mail a notice to each person
who appears to be entitled to unclaimed property according to
the report filed by a holder, in addition to the requirement of
publication of unclaimed property owners in a newspaper of
general circulation. (Secs. 1531 and 1531.5.) A person with an
interest in escheated property may file a claim to recover the
property from the state. (Secs. 1540-1542.) The Controller
maintains a web site ( http://www.sco.ca.gov ) where members of
the public may search a database to discover if the state is
holding any of their property, and may submit claims to recover
the funds or property.
According to data provided by the State Controller, his office
receives approximately $600 million annually as escheated
property. Existing law requires that all but $50,000 of these
funds are transferred to the General Fund on a monthly basis.
(Section 1564.) The Controller reports maintaining current
accounts of approximately $6.4 billion for monies that have been
remitted to the Controller and transferred to the General Fund.
As of FY 2011-12, there were approximately 21.5 million owner
accounts (individuals and organizations) in the Controller's
database, and in that year a total of $240 million in cash was
disbursed with an average payment of $837. (State Controller,
"Unclaimed Property Division, Information Worksheet FY
2011-12".)
Legislative history of interest payments on claimed property.
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The payment of interest on claimed property has a long and mixed
history of being alternately embraced and rejected by the
Legislature. Payment of interest was first added in 1976 after
passage of AB 3547 (Ch. 1151, Stats. 1976.) In 2002, the
Legislature passed AB 3000 (Ch. 1122, Stats. 2002), which
changed the interest calculation from compounded annually to
simple interest, and changed the low end referenced interest
rate from the Pooled Money Investment Account rate to the
13-week U.S. Treasury bill rate.
Just one year later, however, the Legislature reversed itself
and passed AB 1756 (Ch. 228, Stats. 2003), which deleted the
interest-payment language now proposed for reintroduction by
this bill, and replaced it with the simple sentence "No interest
shall be payable on any claim paid under (the Unclaimed Property
Law)."
In requiring the State Controller to add a specified interest
payment to any claim paid on unclaimed property, this bill seeks
to re-enact the former language of subdivision (c) of Section
1540, which was enacted by AB 3000 (2002) and subsequently
repealed by AB 1756 (2003).
Recent 9th Circuit decision establishes no constitutional
obligation to pay interest. In the intervening years since
2003, the issue of whether the state is required to add interest
to claims it pays under the UPL has been extensively litigated
in court. On October 12, 2007, the U.S. District Court for the
Northern District of California held that the state is
constitutionally obligated to pay interest when returning funds
to claimants under the UPL. (Suever v. Connell, 2007 U.S. Dist.
LEXIS 79265, C-03-00156 RS.) The case was on appeal with the
9th Circuit Court of Appeal when this Committee heard AB 1291
(Niello) on April 21, 2009. In light of the Northern District's
ruling at that time in Suever, this Committee passed on consent
a version of AB 1291 containing the same language requiring
interest payments that is contained in this bill (and that
existed in Section 1540(c) for one year before being repealed in
2003.) The author later amended AB 1291 on the Assembly floor
to remove the interest payment provisions.
In 2009, there was another significant legal development highly
relevant to the present analysis. On August 26, 2009, the 9th
Circuit overruled the district court's ruling in Suever that the
state is constitutionally obligated to pay interest when it
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returns property to owners under the UPL. (Suever v. Connell
(2009) 579 F.3d 1047.) In its opinion, the 9th Circuit reasoned
that reversal of the district court was required by its 2008
decision in Turnacliff v. Westly, in which the 9th Circuit
"squarely rejected the proposition that property owners have a
compensable Fifth Amendment right to interest earned on
unclaimed property that escheats to the State of California."
(Turnacliff v. Westly (2008) 546 F.3d 1113, 1119-20.)
Seven months later, on March 23, 2010, the Committee heard AB
2117 (Niello), another measure by the author of AB 1291 that,
among other things, would have reinstated the interest payment
provisions contained in this bill. Notwithstanding its earlier
consent to the same provisions in AB 1291, the Committee
rejected AB 2117, particularly in light of the 9th Circuit's
decision in Suever v. Connell that had not been issued when AB
1291 was previously heard. The Committee analysis of AB 2117
noted that "Without the imprimatur of legal authority that was
cited in support of this proposal when it was part of AB 1291,
the author in this case has not offered a compelling reason why
the state should now add interest to all claims paid under the
UPL when it is not constitutionally or otherwise obligated to do
so."
In addition to the author's stated need for the bill, the
Committee may wish to consider whether there are compelling
reasons to resume the payment of interest from the General Fund
on claims paid under the UPL when such payment is not required,
and so many other important needs go without funding.
Requiring the State to Add Interest Payments on Claims When None
is Required. If the Committee were to approve the payment of
interest on unclaimed property as proposed by this bill, it
would be doing so in spite of the 9th Circuit's recent decisions
in Turnacliff and Suever, as well as the Legislature's own
policy determination to not require payment of interest, as
reflected in existing CCP Section 1540(c) enacted in 2003. On
the other hand, approving this bill would, as the Controller
notes, restore the state's policy of paying interest on
unclaimed property that existed from January 1977 to August
2003, albeit with a different formula for calculation of
interest.
According to data provided by the Controller, if this bill were
to become effective in January 2014, the impact on the general
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fund is projected as follows:
For January 2014 to June 2014, the estimated interest
paid on claims would be $80,000.
For July 2014 to June 2015, the estimated interest paid
on claims would be $346,000.
For July 2015 to June 2016, the estimated interest paid
on claims would be $410,000.
These funds would remain in the General Fund if no interest was
paid on claimed property.
Procedure for reimbursement when holders pay a claim instead of
the Controller. According to the Controller, sometimes a holder
is contacted by an owner and rather than referring them to the
State to submit a claim, the holder will go ahead and pay the
owner the amount owed at that time, and then may submit a claim
to the Controller for reimbursement. Existing law permits but
does not require this practice, which is something a holder may
elect to do for customer service reasons, i.e. to satisfy a
customer who has remembered their property with the holder and
is requesting to have it returned immediately. Holders may
submit a "Holder Claim for Reimbursement" to the Controller to
recover the amount they paid to the owner.
In such cases where the former holder elects to pay the owner
directly and seeks reimbursement, this bill would require the
former holder to also add interest to the amount paid to the
owner, as the Controller would have, and allows the holder to
seek reimbursement from the Controller for the total amount
(including interest) paid to the owner.
ARGUMENTS IN OPPOSITION : This bill is opposed by the California
New Car Dealers Association (CNCDA), who express concerns about
the above provisions relating to reimbursement of former holders
of property who elect to pay a claim directly. CNCDA states:
AB 1011 would be detrimental to our members because
they often hold unclaimed property such as refunded
DMV fees, forgotten customer deposits, customer
rebates, uncashed checks to vendors, and unclaimed
wages and commissions. For example, occasionally
dealers issue refund checks when they over charge
consumers for new tires due to the tire fee. These
checks can be as low as $1.75. Dealers and other
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businesses would spend more money tracking the
unclaimed property and notifying the consumer than the
consumer would make off the interest that would
accumulate from such a diminutive amount.
Additionally, AB 1011 creates an incentive for
consumers to leave their checks uncashed. It would
require the Controller to "add interest at the rate of
5 percent per year or the bond equivalent rate of
12-week United State Treasury Bills, whichever is
lower, to the amount of any claim paid?" The average
savings account receives an interest rate of .01%,
which is significantly lower than what the consumer
would make if they chose to leave their checks
uncashed. AB 1011 is flawed because it costs
businesses more money to track the unclaimed property,
than the consumer would make off the interest payment,
and also creates a damaging incentive for consumers to
leave their checks uncashed and use their employer as
an alternative to a bank to receive higher interest
rates.
When contacted by the Committee, CNCDA clarified that they
oppose the bill unless amended to clarify the discretionary
nature of a holder paying an owner after the property has
already been transferred to the Controller. Because direct
payment to the owner after escheat is already discretionary and
is not changed by this bill, it appears that such clarification
may be unnecessary. Nevertheless, at the time of this analysis,
CNDCA was engaged in discussions with the author but had not yet
officially removed its opposition to the bill.
REGISTERED SUPPORT / OPPOSITION :
Support
State Controller's Office (sponsor)
Opposition
California New Car Dealers Association (CNCDA)
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334
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