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Immunity Under The California Unclaimed Property Law

California’s Unclaimed Property Law (UCL), found at CCP §1500 et seq., requires businesses, associations, financial institutions and insurance companies to deliver specified property to the California Controller if there has been no activity on the account or contact with the owner for a period of time delineated in the statute, usually three years. Property subject to the UCL includes, among other things, stocks and other securities, bank accounts, stock deposit box contents, CDs, mineral interests and royalty payments, but does not include real property.

The UCL is not a true escheat statute. Property delivered to the California Controller pursuant to the UCL can be claimed by its owner at any time. The UCL transfers the use of unclaimed property from the business to the state, and also provides one central location where persons can search for their property.

With respect to stock, the UCL requires corporations to deliver to the Controller a duplicate certificate of unclaimed corporate stock if (1) the owner has not claimed a dividend and has not corresponded in writing or otherwise indicated an interest in the stock for over three years, and (2) the corporation does not know the owner’s location at the end of the three-year period. Before reporting the stock to the Controller, the corporation must make reasonable efforts to notify the stock’s owner of the impending “escheat.”

Section 1532(d) of the UCL provides that a corporation that delivers unclaimed stock to the Controller “shall be relieved from all liability of every kind to any person...for any losses or damages resulting to that person by the issuance and delivery to the Controller of the duplicate certificate....” The California Courts of Appeal were split as to whether the immunity provided by Section 1532 is absolute or is conditioned on compliance with the other provisions of the UCL.

The California Supreme Court resolved this issue last year in Azure Limited v. I-Flow Corporation, 46 C4th 1323, 96 CR3d 501 (2009). Plaintiff Azure Limited alleged that I-Flow Corporation treated Azure’s approximately 19,000 shares of I-Flow stock as abandoned property even though it knew Azure’s location at all relevant times. When Azure learned that the stock had been transferred to the Controller, it requested that the Controller return the shares. However, the Controller previously had sold the share for $4.62 per share, and delivered the proceeds from the sale to Azure. However, the stock then was selling for $17.72 per share. Azure sued I-Flow for breach of fiduciary duty for transferring the stock to the Controller without legal justification, and by failing to give Azure notice of the transfer as required by the UCL.

The California Supreme Court held that the immunity provided by the UCL is available only if the corporation complies with the requirements of the UCL for delivering stock to the Controller, including the notice requirement. Although the noticed requirement was added to the UCL after the immunity provisions were already a part of the statute, the Court rejected that argument that compliance with the notice requirement was not a condition to the immunity provided. Consequently, a corporation must comply with all requirements of the UCL in order to be entitled to the immunity provided by the UCL.

Edward T. Swanson is a former staff attorney with the Securities and Exchange Commission and a former president of the CCBA. His practice focuses on corporate and securities law matters. He can be reached at etswanson@att.net.

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