The Legal Intelligencer

Authors: Sara A. Lima

Type: Articles Published

On June 16, 2015, the West Virginia Supreme Court ruled that the state’s unclaimed property statute trumped contract terms and regulatory law, imposing affirmative duties on insurers. The implications of the decision could extend beyond the insurance industry to upset virtually any contract defining property rights, including shareholder buyout agreements and class action settlement agreements.

All fifty states have unclaimed property reporting requirements. Pursuant to those laws, companies must remit abandoned or unclaimed intangible property to the state of the owner’s last-known address, or their own state of incorporation, if it is held for a specific period of time (usually between one and three years). For example, uncashed paychecks must be remitted to the appropriate state. In recent years, states increasingly have employed private audit firms to identify and review the books and records of companies to locate unreported amounts. The U.S. Chamber Institute for Legal Reform found in an April 2014 report on “Best Practices for State Administrators and the Use of Private Audit Firms,” that such firms “have taken an increasingly aggressive approach to the interpretation and enforcement of unclaimed property laws.” One approach involves construing unclaimed property laws to broaden property rights – sometimes in contrast to contractual terms. By doing so, states find unclaimed “property” that companies were never aware existed in the first instance.

In Perdue v. Nationwide Life Ins. Co., No. 14-0100, 2015 BL 190680, the West Virginia Treasurer filed actions against sixty-nine insurers for violating the state’s unclaimed property laws. The Treasurer alleged that the insurers had “failed to truthfully report” unclaimed property with respect to life insurance benefits, because they had not consulted a government computerized database in order to determine individuals’ dates of death. The insurers argued, and the lower court agreed, that there was no obligation to search the database and no duty to pay the claims to the beneficiaries. Rather, unless the beneficiaries submitted proof of death in order to make a claim, there was no property that could become unclaimed.

The insurers based the claims on three grounds. First, their insurance contracts require beneficiaries to provide proof of death before the insurers are obligated to pay a claim. Second, West Virginia insurance law, W. Va. Code §§ 33-1-1, 10(a), 14, and 25, provides that life insurance is payable only “upon receipt of due proof of death.” Third, the state’s unclaimed property statute, W. Va. Code § 36-8-1(13), applies only to property that is a “fixed and certain interest,” “due and payable under the terms of an . . . insurance policy.” The mere running of time, without proof of death, therefore, does not create property that is “fixed,” “certain,” “due,” or “payable.” As a result, the lower court agreed there was no property to report.

But the West Virginia Supreme Court looked to the general language in the state’s unclaimed property law – W. Va. Code § 36-8-2(e) – that makes property “payable or distributable . . . notwithstanding the owner’s failure to make demand.” Referencing a 1948 U.S. Supreme Court case, Connecticut Mutual Life Insurance Co. v. Moore, 333 U.S. 541, the court construed that language to mean that the insurers have an obligation to pay even where the claimant does not present proof of death. The court found this to be true despite the apparently conflicting provisions of state insurance law. The court held that because the unclaimed property statute lacked ambiguity, it was improper to analyze the insurance statute. Ultimately, the West Virginia Supreme Court held that insurers have an affirmative duty to determine whether an insured has died so as to comply with unclaimed property law.

The decision is just one in a line of cases addressing whether unclaimed property law can impose substantive obligations that override contractual terms and regulatory law, regardless of the underlying industry. For example, in Highland Homes Ltd. v. State, 448 S.W.3d 403 (Tex. 2014), the Texas Supreme Court overturned an appeals court, which had invalidated a cy pres provision agreed to by the parties to a class action settlement as contrary to unclaimed property law. In doing so, the Texas Supreme Court found that its unclaimed property statute did not require owners to actually collect their property to rebut the presumption of abandonment, but merely to claim it. Contrary to the lower court decision, the Texas Supreme Court allowed the parties to “claim” property through the terms of the class action settlement agreement.

But other courts have disagreed, holding that even where a payee agrees to what would happen to amounts that go uncashed, such terms may contravene unclaimed property law. In Screen Actors Guild, Inc. v. Cory, 91 Cal.App.3d 111 (App. 2nd Dist. 1979), for example, a California appeals court invalidated provisions of a trade organization’s bylaws that would have allowed members’ unclaimed wages to revert to the organization.

These cases indicate that all holders—all companies—even outside the insurance industry, should pay particular attention to unclaimed property laws when crafting the terms of any agreement, so as to avoid the potential for state administrators and courts to ignore stated terms. This is particularly true for contracts that require a party to act in order to receive a benefit. For example, the same argument that West Virginia applied could be used to ignore deadlines for the presentment of shares in merger buy-out agreements, to disregard the proof of purchase requirement for rebate qualification, or to set aside cy pres provisions in class action settlement claims. The decision essentially imbues unclaimed property law with substantive rules that alter contractual boundaries defining property rights. Such conclusions are especially frightening in light of states’ outsourcing enforcement of these laws to private, contingent-fee auditors.

As a result of this trend in unclaimed property law, general counsel would be well advised to review existing agreements in light of the increasing relevance of unclaimed property rules and to obtain legal opinions from counsel with respect to whether certain provisions would be upheld in the face of state challenges.

Reed Smith advises clients on all aspects of unclaimed property issues, from bringing organizations into compliance, to audit defense and planning opportunities, to advising on merger issues, as well as on contractual negotiations and terms and conditions.

Reprinted with permission from the August, 12, 2105 edition of the Legal Intelligencer© 2015 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382 - reprints@alm.com or visit www.almreprints.com.