Unclaimed property: Michigan Supreme Court takes steps to curtail endless examinations

In litigation challenging unclaimed property examination findings, the Michigan Supreme Court took a first step towards curtailing the seemingly never-ending examination process, but left open an opportunity for the State to argue on remand that it can still enforce its assessment going back more than two decades. In a unanimous decision,¹ the court held that a protracted multistate examination that lasted more than eight years did not toll the statute of limitations in Michigan – in other words, the examiner had to complete the exam (not merely start the exam) within the statute of limitations. The case has been sent back to the court of appeals to consider the State’s final argument that issuance of an exam assessment resets the statute of limitations. If not, then most of the exam findings would be time-barred. Because unclaimed property examinations typically go on for many years, and because many states have statutes similar to Michigan, this case has the potential to shake up unclaimed property examinations nationwide.

This decision has been much anticipated by companies (holders) facing unclaimed property examinations because the litigation challenged two of the most notorious aspects of these exams: (1) a protracted examination process that can take more than ten years to complete in some cases, and (2) lengthy examination periods that can stretch back decades by the time the exam is completed. The key issue was how to count the State’s 10-year statute of limitations on state enforcement and whether the period is counted from the opening of the exam or from the completion of the exam.

Case Background and Court Holding

In the Michigan litigation, two companies challenged state assessments that covered transactions as far back as 2002. Because the State had initiated the exam in 2013, and because the State has authority for enforcement of 10 prior years (plus a 3-year dormancy for most transactions), the State took the position that transactions back to 2002 were within the proper scope. After a protracted examination by a third-party exam firm that lasted more than eight years, the State completed the exam and issued an assessment alleging that the companies owed significant amounts for unreported unclaimed property. The companies asserted in the first instance that the amounts were not owed, and they also challenged the exam based on the statute of limitations. The companies argued that the State does not have unlimited time to conduct an examination. Instead, the companies argued that the State’s 10-year authority for enforcement is based on when the State completes the exam, not when the exam started, and that the lengthy examination period meant that most of the State’s claims were now time-barred.

The legal issues hinged on the interpretation of the Michigan statute, under which the State has 5 years or 10 years (depending on the type of property) “after the duty arose” to commence an “action or proceeding.”² The Michigan Supreme Court considered three legal issues:

1. Whether an examination constitutes an “action or proceeding”;
2. Whether the commencement of an examination “tolls” the statute of limitations; and
3. Whether the “duty arose” at the time the funds were initially due to the State (many years ago in an annual unclaimed property report), or whether the State’s completion of an exam (and demand for payment of the exam findings) imposes a new duty with a new limitations period.

On the first question, the court held that an “action or proceeding” encompasses both judicial lawsuits and administrative procedures, including examinations. On the term “action,” the court agreed with the holders that an “action” refers to a lawsuit commenced in a court. On the term “proceeding,” however, the court concluded that the term is broader than “action” and encompasses formal administrative proceedings or investigations. And because an unclaimed property examination (including its processes and procedures) is part of an administrative undertaking, the court reasoned that a “proceeding” includes an unclaimed property examination. Accordingly, the State must initiate an examination to determine whether a holder has complied with its annual unclaimed property reporting requirements within 5 or 10 years (depending on the type of transaction) of the date that legal duty arose.

Second, and most significantly, the court concluded that the mere initiation of a timely examination “does not toll the statute of limitations.” This means that the State’s authority to look back 10 years is not fixed and frozen at the start of the examination. Instead, the 10-year time period continues to run and is counted based on when the State completes its exam and demands payment of any findings. In reaching this conclusion, the court contrasted Michigan law with statutes in several other states (including Delaware) that specifically provide for tolling during an examination, whereas Michigan law does not. For the examinations at issue in this litigation, because the exams lasted more than eight years, applying this principle would time-bar nearly the entirety of the exam findings.

Third, however, the court decision leaves open an opportunity for the State to argue a novel theory that the statute of limitations begins to run anew at the closing of the examination rather than when the unclaimed property was initially due. This question has been remanded to the lower courts for further decision. In the appeal, the State argued that issuing a final notice of exam determination creates a new and distinct legal “duty,” and that the statute of limitations applies to post-examination enforcement efforts of this new duty. Taken to its extreme, this argument could nullify any time limits; in theory, the State could initiate an examination, allow the exam to drag on indefinitely with no deadline, and then “restart” the clock by issuing an exam determination and starting post-examination enforcement efforts. The holders argued that any post-examination enforcement efforts are nothing more than enforcement of their original reporting duties because the examination findings are for properties that the State alleges should have been reported but were not. The holders will likely reassert these arguments on remand before the court of appeals.