By Karen Anderson, Vice President – Reporting Compliance
& William King, Associate General Counsel & Project Manager
As summer heats up, so too is the amount of litigation being brought by holders challenging the unclaimed property audit processes and third-party auditor assertions to certain classifications of property. The last month has brought two bold, new lawsuits in federal courts seeking declaratory and injunctive relief as a result of unclaimed property audits.
While each suit has its own facts and circumstances, they raise similar issues and address common concerns that have been voiced by holders over the last several years as states and auditors have aggressively interpreted and enforced unclaimed property laws. In this first of two entries, we will focus on National Freight, Inc. v. Sidamon-Eristoff, et.al.
National Freight, Inc. v. Sidamon-Eristoff
National Freight, Inc. (NFI) is a private, family-owned transportation logistics corporation located in New Jersey. In November, 2010 NFI received notice from the State of New Jersey that it had been selected for unclaimed property audit. The audit scope period covered transaction years 1995-2010 for payroll and 1991 – 2007 for all other property types. On July 24, 2013 – almost three years after the start of the exam, an audit report was issued that outlined a liability of $328,983.12 and $145,305.59 in interest. NFI made a partial payment and appealed some of the audit findings, after which New Jersey reduced the liability assessment (to $242,031.58) but increased the interest calculation (for a grand total of $500,547.28). The ultimate findings consisted of:
- $93,150.00 in penalties for failure to maintain records, calculated as an estimate of unclaimed property liability that included amounts subject to exemptions in other states and owed to owners with addresses outside of New Jersey;
- $127,461.73 for NJ-addressed property, no address, or foreign property;
- $21,225.56 for property owed to an owner with an address in a state that exempts the property from reporting on a business-to-business (B2B) basis;
- $194.29 for property owed to an owner where the dormancy period is tolled as the result of a continuing business relationship;
- $258,515.70 in interest on these liability amounts.
NFI made additional partial payments which had to be directed toward uncontested liability amounts to halt interest from accruing rather than automatically applied to interest as the state did with NFI’s initial partial payment.
With regard to customer credits, a separate findings report was issued on April 30, 2015 for the period 1990 to July 30, 2007 asserting a finding of $1,951.506.31. The liability was based on identified customer payments that could not be matched to an open invoice (so-called “P” credits). Specifically, it consisted of:
- $17,510.81 in actual P credit liability identified as owed to owners with last known addresses in New Jersey or a foreign country or an unknown last known address;
- $18,566.34 in P credit liability for owners with a last known address in a state with a B2B exemption;
- $794,862.00 in estimated P credit liability for a period of time (1999-2005) where NFI’s records did not distinguish between P credits and other types of customer credits, without regard to the allocation of P credits and other credits from other periods and including a methodology that New Jersey cannot claim under Texas v. New Jersey.
Payment was demanded by June 1, 2015, however on May 27th, NFI filed suit against the New Jersey State Treasurer, unclaimed property administrator, and chief auditor. In the complaint NFI seeks a declaratory judgment and an injunction against the enforcement of the assessments. In support of its request, NFI asserts that:
- The federal common law “priority rules” set forth by the Supreme Court in Texas v. New Jersey pre-empt the New Jersey unclaimed property statute and therefore preclude New Jersey from asserting a liability that includes property over which other states have jurisdiction;
- NFI’s status as a common carrier subject to the Interstate Commerce Commission Termination Act of 1995 (ICCA), implicates the ICCA’s preemption of state laws that impact price, route, or service of a motor carrier with respect to the transportation of property. Specifically, NFI asserts that enforcement of New Jersey’s unclaimed property law against the customer credits would impact customer refund policies and increase costs for NFI and thereby impact rates in violation of the ICCA.
- The assessments violate the Commerce Clause of the United States Constitution. NFI argues the federal interest in uniformity of deregulation of motor carriers with respect to fees, routes and services outweighs New Jersey’s more narrow interest is returning funds to New Jersey owners. In addition, NFI contends that New Jersey’s actions may affect a significant amount of commerce as requiring motor carriers to escheat credits would logically extend to credits held by other transportation medium such as airlines, railroads, etc.
- NFI asserts that the assessments violate the New Jersey unclaimed property statute. They contend that the New Jersey auditor applied the record retention requirement effective in 2002 retroactively to outstanding property prior to that year and estimated. Correspondingly, NFI contends that the estimation permitted by the statute is a penalty for not maintaining books and records and that New Jersey could not validly perform estimation for the years prior to 2002.
Keane will continue to monitor the developments in this case and report same through its blog.