The California Court of Appeal’s 6th District recently overturned a superior court’s grant of summary judgment in a ruling that may have far-reaching implications on the availability of an immunity defense under unclaimed property law, both in California and elsewhere.1
Under Title 10 of the California Civil Procedure Code,2 "unclaimed property" is essentially all property that is currently (or will become) unclaimed, abandoned, escheated or otherwise transferred to the state. Under Sections 1510-1523, generally all unclaimed property escheats to California if it is unclaimed for three years, including intangible property like stock and dividends.
Every entity holding property that has escheated to California is statutorily obligated to make an annual report of all escheated property in its possession, and to deliver or pay over said property to the state no sooner than seven months after and no later than seven months and fifteen days after the filing of the report.3 Naturally, the delivery of property to the state by escheat can cause conflicts between the owners and the transferors upon discovery of the transfer. However, Section 1321 provides that transferors of unclaimed property to California under unclaimed property law will generally be immune from any and all claims that may arise with reference to the transfer. Transferors have a statutory obligation to hand over escheated property to the state, and thus, they rely on these immunity provisions to protect them from lawsuits by the missing owners.
In Vondjidis v. Hewlett Packard, the Court of Appeal ruled that this immunity provision is only available to transferors that establish that they have complied with the statutory requirements. In holding that that the transferor in the case, Hewlett-Packard, had not met this obligation under the statute, it appears the court may have significantly limited the availability of immunity for future transferors.
Factual and Procedural Background
At issue in Vondjidis is whether the defendant, Hewlett-Packard (HP), was permitted to avail itself of California’s immunity protections for the transfer of unclaimed property. HP maintains a corporate policy that regards shareholders as "lost" if multiple stock-related mailings are returned as undeliverable. After a shareholder is regarded as lost for an appropriate amount of time, HP begins the process of transferring the apparent unclaimed stock to the state, including hiring an escheatment vendor to facilitate the transfer, and sending a final mailing to the shareholder’s address of record with notice of the imminent escheat.4
The plaintiff (Vondjidis) was an employee at HP’s Athens office from March 1974 to October 1978.5 During the course of his employment, Vondjidis purchased HP shares through an employee stock purchase plan. HP policy with regard to stock owned by employees working in foreign offices was to send stock-related mailings and dividend checks to the foreign office at which the employee worked. As part of this policy an employee was responsible for providing HP with a current address once he or she left the employ of HP. For four years after Vondjidis left HP, he was contacted numerous times by other employees from the Athens office regarding his mail they had received. Further, Vondjidis was provided with a change of address form at least four times, which he never completed, and therefore he received no mailings from HP after 1982, when HP’s Athens office was closed.
According to company policy, in 1993, after receiving returned mail regarding Vondjidis’ stock for more than a decade, HP utilized an escheatment vendor to transfer Vondjidis’ shares to California. Vondjidis eventually learned of the transfer in 2001, and filed suit against HP in superior court for various claims, alleging that HP had known his identity and address, but had failed to provide notice and failed to perform proper due diligence before transferring the shares to California.6
HP answered the complaint and affirmatively pleaded the defense that it was immune from suit under California unclaimed property law.7 HP moved for summary judgment in December 2004, and was granted its motion in August 2006 on the ground that HP was indisputably immune from suit, and the superior court entered judgment in HP’s favor.8 Vondjidis filed an appeal to the California Court of Appeal’s 6th District on the ground that HP could only avail itself of the immunity provision if HP could establish that it had complied with the provisions of Title 10 of the California Civil Procedure Code.9
Appeal and Reversal of Summary Judgment
On November 25, 2008, the Court of Appeal ruled in favor of Vondjidis, reversing the grant of summary judgment and remanding the case to the superior court.10 In its decision the Court of Appeal adopted Vondjidis’ argument, holding that HP had failed to establish that it had complied with the provisions of Title 10, and thus did not demonstrate that it was entitled to summary judgment.
The court held that the plain language of the immunity statutes restricted the availability of general immunity to transfers "under the provisions" of Title 10,11 and immunity for stock transfers made "under subdivision (b) of Section 1516."12 Citing California Supreme Court precedent,13 the court held that the objective of the unclaimed property act is to protect missing owners by locating them, and stated that this purpose was evident from the plain language of Section 1516(b), requiring that the transferor corporation would have not known the location of the owner at the end of the three-year period in order to have a proper escheat of stock to the state.
HP asserted that the immunity provisions applied even without perfect compliance with all of the unclaimed property provisions, and that its corporate policies regarding contacting shareholders and escheatment were sufficient for Title 10 under a good-faith compliance standard. HP argued that if these immunities were restricted to cases with strict compliance, it would provide immunity only in cases where it was not needed, as transfers made perfectly would be beyond reproach.14 HP argued that without the protection of immunity, holders of property will have a disincentive to consider certain property as escheated and to transfer it to the state for productive use. The court rejected HP’s argument holding that the state had no proper interest in encouraging delivery of property that was not qualified as unclaimed property.15
The court held that HP failed to conclusively show that it did not know Vondjidis’ location, because HP had Vondjidis’ Athens address at all times within its personnel records, regardless of whether it appeared in HP’s shareholder records.16 Accordingly, the court held that the evidence appeared to show that HP had specifically not satisfied the requirements of Title 10, and at least there were issues of material fact to be determined at trial. Thus, the case was remanded back to superior court and the summary judgment order vacated.
Pepper Perspective
The immediate effect of the court’s ruling is that the superior court will now hear a case that raises various factual and legal issues regarding the duties of transferors of unclaimed property. Essentially, this superior court case will address significant issues, such as determining the extent of due diligence required of a transferor under Title 10, and what particular efforts may satisfy such a due diligence requirement. In this case, the court appeared to give little consideration to the fact that Vondjidis refused to provide a change of address form, despite repeated efforts by HP to obtain one. This suggests that this court places all responsibility on the transferor, and gives no weight to any actions on the part of the owner that may have caused the transfer to not be perfectly compliant with the unclaimed property law. The court also did not give deference to HP’s own internal policies and procedures with respect to turning over escheat property to the state.
From a practical perspective, uncertainty regarding what due diligence actions a transferor must take and what corporate policies and procedures the transferor must have in place creates a huge potential compliance pitfall for all businesses, not only those subject to California unclaimed property law. In all states, holders of property for owners have duties to perform certain tasks, such as properly disposing of an owner’s property and paying over money due, like interest and dividends. However, all states also impose statutory duties on businesses to account for unclaimed property, for which they are subject to a number of enforcement actions, such as audits and penalties for failure to comply.17 The immunity provisions are intended to shift the burden of these competing interests to the states, and are of particular importance for multistate businesses whose policies may only substantially, but not fully, comply with the black letter of certain states’ unclaimed property law.
A case such as Vondjidis adds increased complexity to the compliance burden, effectively requiring multistate businesses in California to adopt an escheat policy that perfectly follows the unclaimed property procedures, or face potential exposure to audit and penalties from California as well as civil suits by claimants. However, adopting a California-based policy may leave the business open to Vondjidis-like challenges in any state where the California-based escheat policy is not perfectly congruent with the procedural hurdles or with other states in which the business operates. As such, it behooves all multistate businesses to review their current escheat policies, gauge their potential exposure, and determine if modification of their escheat policies for one or several states.
Endnotes
1 Vondjidis v. Hewlett Packard, 168 Cal. App. 4th 921 (Cal. Ct. App. 2008).
2 References to "Section" hereinafter will refer to the California Civil Procedure Code, unless otherwise noted.
3 Cal. Civ. Proc. Code §§ 1530 & 1532.
4 Id. at 927.
5 168 Cal. App. 4th at 925-27.
6 Id. at 927-28.
7 Cal. Civ. Proc. Code §§ 1321 & 1532(d).
8 Order Granting Hewlett-Packard Company’s Motion for Summary Judgment, and Entering Judgment in Hewlett-Packard’s Favor, Vondjidis v. Hewlett Packard, No. 1-03-CV-815388 (Santa Clara Co. Super. Ct. Aug. 28, 2006).
9 Id.
10 168 Cal. App. 4th 921 (Cal. Ct. App. 2008).
11 Cal. Civ. Proc. Code § 1321.
12 Cal. Civ. Proc. Code § 1532(d).
13 Douglas Aircraft Co. v. Cranston, 58 Cal. 2d 462 (1962).
14 168 Cal. App. 4th at 932.
15 168 Cal. App. 4th at 933.
16 168 Cal. App. 4th at 935.
17 See, e.g., Cal. Code Civ. Proc. §§ 1571-1576; 765 Ill. Comp. Stat. 1025/23-26; N.Y. Aband. Prop. Law §§ 1400-1422; 72 Pa. Stat. Ann. §§ 1301.23-.26; Va. Code Ann. §§ 55-210.24-.26:1.
Lance S. Jacobs
