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In these difficult times as financial institutions, including credit unions, face a potential liquidity crunch, it is imperative that these institutions conserve their capital. That conservation effort, in addition to managing investment and loan portfolios, should address their missing and unclaimed assets. By "missing and unclaimed assets," I mean funds and securities that are held by federal and state unclaimed property agencies for the benefit of credit unions. The states collectively hold some $70 billion in unclaimed assets belonging to "missing owners." Much of that $70 billion is owed to American businesses.
Where do these unclaimed assets come from? For financial institutions, mostly from dividend payments, bond interest payments and in some instances bond redemptions, which are not received by the institutions. Another source of unclaimed assets is old and probably written off bankruptcy claims. It is not unusual for a commercial bankruptcy case to take five to 10 years to resolve before dividends are paid to creditors. In that five- to 10-year period, files and claims are abandoned, offices close or move, companies change their name or merge, and employee turnover leaves gaps in the collection process. So, when the bankruptcy trustee mails checks to creditors under a former name, to a former address or to the attention of a former employee, those checks are often lost, misplaced or never received by the financial institution. Under federal bankruptcy law, the trustee is then compelled to turn over the unclaimed funds to the clerk of the Bankruptcy Court, who eventually sends them to the U.S. Treasury. Those funds remain available to be claimed by their owners. However, without a robust asset recovery plan, those assets will be lost to their owners forever.
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Credit unions and other businesses lose assets on account of mismanaged receivables and lost checks remitted in payment of those receivables. Like the bankruptcy claims, employee turnover, office closures, address changes, organizational restructuring and name changes are the typical causes of these uncollected receivables being unintentionally abandoned. The holders of these abandoned and unclaimed assets are required by law to pay them over to the various state unclaimed property agencies. All states in the U.S. have abandoned property or escheat laws that require businesses to turn over or escheat to state unclaimed property agencies any assets that the businesses are unable to deliver or remit to the apparent owners.
The states then hold those unclaimed assets in trust for the owners. Notwithstanding the so-called trust arrangement, the states can use these unclaimed assets, mostly interest-free, until the owner successfully asserts a claim and collects its property. Since these unclaimed funds are free revenue for the states, they are not terribly anxious to locate and pay the owners of those funds. A paltry 2% to 4% of the billions in assets the states hold is returned to owners by the states annually. Some of the states actually take in twice as much money in unclaimed assets each year as they return to owners. It's plainly a moneymaking proposition for the various states at the expense of property owners.
How much of those billions are owed to credit unions? It is difficult to tell since most states do not disclose the value of unclaimed items until a claimant proves ownership. A cursory search of abandoned properties in one commercial state reveals over one thousand unclaimed items designated for credit unions. Many are quite small, many exceed $5,000, and one is valued at over $50,000. Another quick search in that same state for a single credit union revealed 82 individual unclaimed assets. The largest was just under $15,000. Recently, a New York law firm recovered a single missing asset worth $1.5 million for a client from a state unclaimed property agency. So, I'm inclined to believe that credit unions are owed a bundle!
This problem is not unique to credit unions. It's a significant issue for all American businesses. What is particularly problematic for financial services organizations, including credit unions, is that their inventory is made up of money and financial instruments. If a manufacturing company misplaces or abandons a container of widgets, there is no escheat or government seizure of those abandoned widgets. On the other hand, if a financial services company misplaces or abandons some of its inventory (money or financial instruments), abandoned property laws are triggered and that inventory is seized by state agencies, and in some instances the federal treasury, and held for the benefit of the owners until that owner asserts a claim. Without a robust asset-recovery plan, those assets could be forever lost by their owners.
I have represented financial services companies in unclaimed property matters for nearly half a century. I have no hesitation in asserting that there are no financial services organizations that do not have significant unclaimed assets waiting to be collected. The question is, how much? In some cases, the amounts are material. In all cases, management has a duty to preserve a company's assets. Remember, even if the unclaimed assets are not large, it is still the company's money and should be in the company's till.
Since credit unions are managed by their boards of directors and those directors have a nondelegable duty to manage the assets of the credit union, the failure to collect all material outstanding assets should be of concern to those directors. What constitutes "material outstanding assets" is often in the eye of the beholder, which may be a plaintiff's lawyer or government regulator. An active asset recovery plan should reduce the value of missing assets and address management's duty to preserve and collect those assets.
Do credit unions need to hire asset recovery lawyers to do this asset recovery work? At our law firm we have long urged our business clients to involve their legal department or outside counsel in recovery of unclaimed and abandoned property. There is a risk of overlooking something in the chain of title, which could result in a business collecting unclaimed funds that do not belong to it. That would be embarrassing, at best, and possibly unlawful. Attorneys are obligated to assure themselves that a claim is valid before a claim is asserted on behalf of clients.
It is imperative to do the forensic work necessary to determine if a company is in, and remains in, the chain of title to unclaimed assets. Sometimes assets sold by businesses remain in the name of the seller after the sale closes. Lawyers have to parse that out through business records and only assert claims that they are convinced belong to their client.
That level of due diligence, which is mandated by lawyers' Codes of Professional Responsibility, is what is necessary to avoid collecting assets that belong to someone else and why we suggest that businesses use attorneys to recover these assets.
Since the agencies holding the unclaimed assets can use the money interest-free until the owner shows up, there is little motivation to search out those entitled to the funds and the level of resistance to paying it out to the rightful owners varies from agency to agency. But I think it is fair to say that all the government agencies holding unclaimed assets become somewhat proprietary regarding those assets. For them, it is a free revenue source – hence the need for an asset-recovery lawyer to assure that owners get all they are entitled to.
Robert Poulson Robert J. Poulson, Jr., Esq. is an Attorney at Law at Poulson Law Offices in Cooperstown, N.Y.
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