Key takeaways
- The Michigan Supreme Court heard oral argument on October 10, 2024 in Dine Brands v. Eubanks, concerning how the statute of limitations applies to unclaimed property enforcement.
- The Court of Appeals had held that the state was barred from enforcing unclaimed property audit findings issued more than ten years after the property was originally reportable (or five years for transactions between 2 or more associations).
- On appeal, the Treasurer argued that an examination is a "proceeding" that is required to be initiated within the limitations period, but that it has an unlimited amount of time to conduct the audit and additional time to enforce payment of any findings.
- As unclaimed property examinations notoriously extend for many years, a favorable holding from the Michigan Supreme Court could mean relief for many holders subject to claims for old transactions for which records are unavailable
On October 10, 2024, the Michigan Supreme Court heard oral arguments in the ongoing Dine Brands litigation concerning whether an examination is an "action or proceeding" and how the limitations period applies to audit findings. The Treasurer argued that holders have no right to dispute unclaimed property findings of contingent-fee auditors and that the state could need 20+ years to review corporate records.
Background
Michigan law, MCL 567.250(2), provides that "an action or proceeding shall not be commenced by the administrator with respect to any duty of a holder under ... [Michigan's unclaimed property law] more than 10 years... after the duty arose."1 Michigan had initiated an audit against two holders in 2013 but did not present findings until 2021. The holders then filed suit in circuit court seeking a declaratory judgment and injunction against Michigan on the grounds that the audit took so long that, by the time the audit was complete, the state was out of statute for enforcing some of the years included in the findings. The circuit court granted declaratory judgment and an injunction in favor of the holders, and in a January 19, 2023 decision, the Court of Appeals affirmed. The Court of Appeals concluded that an audit is distinct from "an action or proceeding" and does not toll the statute of limitations for the Treasurer to enforce findings. In other words, the court found that unclaimed property reporting years can become barred from enforcement during the course of an ongoing audit.
The Michigan Treasurer appealed to the Michigan Supreme Court, and on September 15, 2023, the Michigan Supreme Court issued an order remanding the case to the Court of Appeals with directions to consider the following questions: "assuming that an examination is a 'proceeding' for purposes of MCL 567.250(2): (1) whether the commencement of the examination tolled the statute of limitations in MCL 567.250(2); and (2) whether the Treasurer must still file a lawsuit within the applicable time frame to avoid the lawsuit being time-barred." The Michigan Supreme Court's September 15, 2023 order was not a decision on the merits, and did not decide whether an examination is an action or proceeding for purposes of MCL 567.250.
On November 9, 2023, the Michigan Court of Appeals issued an advisory opinion on remand holding that, assuming that an examination is an "action or proceeding," the state does not need to file a lawsuit to enforce unclaimed property liability within the statute of limitations. This marked a significant change from the Court of Appeals prior decision in Dine Brands, which had held the state must file a lawsuit to enforce unclaimed property audit findings within the statute of limitations, even if the state had started an examination of the holder within the statute of limitations.
The Arguments
The Treasurer's argument centered on policy as opposed to statutory construction, positing that an audit acts like a quasi-judicial proceeding and that the "intake of abandoned property" under Michigan's unclaimed property law "is designed to operate without judicial involvement." In other words, the Treasurer's interpretation contemplates no process to dispute audit findings, other than participation in the audit itself. For that reason, the Treasurer can conclude an examination at any time, and the company must simply pay the demand.
The Treasurer's counsel asserted that a holder is obligated to pay the amount demanded by the state or is guilty of a crime. Failure to pay, according to the Treasurer's counsel, would restart the Treasurer's time to file suit from the date of the demand, without regard to the limitations period imposed by MCL 567.250(2). Chief Justice Clement expressed skepticism as to this construction of the statute, and asked if the Treasurer's position is that Michigan has ten years to initiate an audit, plus an unlimited time to complete the audit, and an additional ten years to file court action to enforce the audit. The state confirmed, relying in part on its position that there was no dispute as to the holders' rights in the property and that no judicial action should be necessary. The state also claimed that it competes for "the same property" as other states such that any time limitation would adversely impact Michigan residents by hindering its ability to participate in multistate examinations.
In response, the holders' counsel pointed out that the purported property at issue is related to checks the holders had voided in the ordinary course of their business, so the holders dispute that any property is owed in the first instance. Holders' counsel further noted that the audit permits no opportunity for any hearing or discovery by the holder, so the audit cannot constitute a quasi-judicial proceeding under the law. The justices questioned what the term "proceeding" could mean if not an audit, and counsel explained that the comments to the Uniform Act from which the language derives reflect it means some type of judicial process. Holders' counsel suggested that it was intended to be a "catch all" to reflect any judicial or quasi-judicial process, as the term "action" could be interpreted more narrowly, rather than to expand the stature's scope to non-judicial activities such as audits.
The holders' counsel also reminded the court that it is the state's burden to bring an action in order to prove and enforce its demand. The legislature limited the Treasurer's ability to prove its demand through a court action, from the date when the property was originally due to be reported. Thus, the period clearly does not run from any other purported duty under the act, such as a failure to pay a demand as the state had suggested. Counsel finally explained that the time period was reasonable and even "generous." Counsel referenced Michigan's own rules that state the expectation that audits should be completed in eighteen months as well as pointed out that other states routinely complete audits in two years.
The Policy Angle:
The Treasurer's argument sets out a policy of elevating the state's ability to take custody of property it determines to be owed, over the rights of the company purportedly holding such amounts. It suggests that the state can participate in multi-state audits for an unlimited period of time, and that there should be no right of the holder to dispute audit findings other than through the appeals process. Once it identifies property for the company to pay, criminal liability attaches for any dispute, and the Treasurer then should have ten more years to bring an enforcement action in court. Any other holding would harm the state's ability to collect unclaimed amounts to which it is entitled to custody and interfere with its perceived competition for that property with other states.
By contrast, the company's argument seeks a more balanced process, in which the Treasurer may audit to identify property it views as reportable, but such audit must conclude within ten years from when the putative property was reportable to the state originally. To the extent there is a dispute, the Treasurer may seek to enforce its position through a judicial action, also within those ten years. Where the Treasurer fails to do so, it is clearly and ambiguously barred from enforcement by MCL 567.250(2).
The Unclaimed Property Professionals Organization, or UPPO, is a trade organization that offers unclaimed property compliance education, networking, and advocacy. Reed Smith attorneys, in conjunction with other holder advocates, filed an amicus brief on behalf of UPPO in this case. UPPO argued that the Department often struggles to complete examinations within the statute of limitations because of its reliance on third party-auditors with an economic incentive to conduct far-reaching exams. UPPO's brief cited a survey of its members concerning the length of unclaimed property audits, provided examples of broad requests for numerous records over an extensive period of time, and noted recent court disapproval of the audit methodologies imposed. In light of that backdrop, UPPO highlighted the policy interests in certainty, finality, and efficiency underpinning MCL 567.250(2)'s statute of limitations and the harm that would be done to those policy interests if the Court were to adopt the Treasurer's construction of the statute.
The Michigan Supreme Court's decision in Dine Brands has the potential to impact any holder with an outstanding Michigan audit or with potential unclaimed property exposure in Michigan. Thus, holders with pending unclaimed property audits in Michigan should consider how to view the statute of limitations period for their audits and consider other legal arguments that may be available to mitigate exposure. Holders should also consider the impact that this decision and any further developments in the Dine Brands litigation could have in the other states that have statutes of limitations with language similar to Michigan's.
Footnote
1. See MCL 567.250(2). For more information, see our prior alerts.
This article is presented for informational purposes only and is not intended to constitute legal advice.