Compliance Bulletin

Inactivity Fees Under California’s Unclaimed Property Law
March 18, 2013

This Regulatory Compliance Bulletin was prepared by Ted Teruo Kitada (1),  Senior Company Counsel at Wells Fargo and Chair of the CBA Legal Affairs Committee.

I.   Introduction.

During the course of a regular examination conducted by the California Department of Financial Institutions, a state chartered financial institution (“Bank”) had one of its fees questioned by an examiner. The examiner suggested that this fee violates California’s Unclaimed Property Law (“UPL”) (2). The fee at issue is the Bank’s inactivity or dormancy fee. The Bank assesses a monthly inactivity fee of $5 against savings accounts and time deposit accounts for a one-year period when such accounts have been inactive for over a 24-month period. The fee ceases after the running of this one-year period. 

Because the Bank questioned the examiner’s legal conclusion, the Bank through its legal counsel submitted a number of questions, seeking an opinion from the California State Controller’s Office. In response to these questions, counsel to the State Controller set forth in a response his analysis of the UPL and answers to the questions thereunder. A copy of the response issued by counsel to the State Controller through a letter, dated January 31, 2013, accompanies this Bulletin.

II.   Inactivity fees under California’s Unclaimed Property Law

A. State Controller’s legal position on inactivity fees.  Under California Code of Civil Procedure (“CCP”) section 1522, counsel to the State Controller observed that inactivity fees are generally prohibited against inactive or dormant property subject to escheat under the UPL, with emphasis:

No service, handling, maintenance or other charge or fee of any kind which is imposed because of the inactive or unclaimed status contemplated by this chapter, may be deducted or withheld from any property subject to escheat under this chapter, unless specifically permitted by this chapter.

Even when specifically permitted by this chapter, such charges or fees may not be excluded, withheld or deducted from property subject to this chapter if, under its policy or procedure, the holder would not have excluded, withheld or deducted such charges or fees in the event the property had been claimed by the owner prior to being reported or remitted to the Controller.

This broad statutory prohibition against fees of any kind which are imposed against property because of the inactive or unclaimed status of the property contemplated by the UPL has been cited by counsel to the State Controller as the legal basis to declare the Bank’s inactivity fee as unlawful.

Having cited CCP section 1522, counsel in his analysis next turned to CCP section 1513(a)(1)(A) to indicate specifically an instance in which an inactivity fee (3) may be assessed within the exception recognized in CCP section 1522 by a banking organization, (4) with emphasis:

(a) Subject to Sections 1510 and 1511, the following property held or owing by a business association escheats to this state:

(1)(A) Except as provided in paragraph (6), any demand, savings, or matured time deposit, or account subject to a negotiable order of withdrawal, made with a banking organization, together with any interest or dividends thereon, excluding, from demand deposits and accounts subject to a negotiable order of withdrawal only, any reasonable service charges that may lawfully be withheld and that do not (where made in this state) exceed those set forth in schedules filed by the banking organization from time to time with the Controller, when the owner, for more than three years, has not done any of the following:

(i) Increased or decreased the amount of the deposit, cashed an interest check, or presented the passbook or other similar evidence of the deposit for the crediting of interest.
(ii) Corresponded electronically or in writing with the banking organization concerning the deposit.
(iii) Otherwise indicated an interest in the deposit as evidenced by a memorandum or other record on file with the banking organization.

As shown from the above, inactivity fees under this CCP section 1513(a)(1)(A) may only be assessed under the following four conditions in order to fall within the permitted fees exception in CCP section 1522:

• The inactivity fees may only be assessed against demand deposits and accounts subject to a negotiable order of withdrawal (“NOW” accounts).
• The inactivity fees must be reasonable.
• The inactivity fees must only be lawfully withheld (consistent with the terms of an enforceable contract between a banking organization and an account owner) (5)
• The inactivity fees must not exceed those set forth in schedules filed by the banking organization from time to time with the State Controller. 

Because the Bank’s $5 monthly inactivity fee is assessable solely against savings and time accounts, counsel to the State Controller concluded that its practice violated this section 1513(a)(1)(A).

B. Questions advanced by the member

Having laid his statutory foundation with regard to the UPL, counsel to the State Controller answered the following questions advanced by the member:

1. Question: Is it correct that CCP section 1513(a)(1)(A) has no application until an account has been inactive for more than three years?

Answer: No.

The State Controller’s counsel observed that CCP section 1513(a)(1)(A), in conjunction with CCP sections 1510 and 1511, provide the conditions for the escheat of certain deposits and accounts held by a banking organization (except funds held in an individual retirement account or under a retirement plan for self-employed individuals or similar account or plan) (6). This section establishes conditions triggering the commencement of the three-year escheat period for these properties. This section 1513(a)(1)(A) more importantly identifies the only deposits and account types against which a banking organization may assess fees for inactivity during the three-year inactivity period: demand deposits and NOW accounts.  In short, CCP section 1513(a)(1)(A) expressly exempts solely demand deposits and NOW accounts from the general prohibition against inactivity fees set forth in section 1522, according to counsel. 

Further, counsel takes the position that the only property subject to escheat under the UPL is the amount of funds held by a banking organization in a deposit or account, plus any accrued interest thereon, less any permissible fees, at the conclusion of the running of the three-year escheat period.  He takes the position that the authority in CCP section 1513(a)(1)(A) permitting the assessment of fees against demand deposits and NOW accounts only applies to such deposits and accounts prior to the running of the applicable escheat period of three years. Counsel asserts that the UPL provides no authority to deduct any inactivity fee from property after it has escheated.

2. Question: Does section 1513(a)(1)(A) prevent a bank from assessing a service charge to a CD or other savings account that has been inactive for a period less than three years? 

Answer: Yes.

Counsel to the State Controller maintained that CCP section 1513(a)(1)(A) specifically allows fees to be deducted only from demand deposits and NOW accounts. Therefore, by implication, banking organizations are prohibited from deducting fees from all other types of deposits and accounts, including, without limitation, savings and time accounts.

Additionally, as provided in CCP section 1522, counsel asserted that fees are prohibited against inactive property, unless specifically recognized under the UPL. Again, counsel repeated that section 1513(a)(1)(A) only permits inactivity fees against demand deposit and NOW accounts. Accordingly, based on that section, pursuant to section 1522, a fee could only be assessed against demand deposits and NOW accounts, and not savings and time accounts as such fees are not specifically permitted under the UPL.

3. Question: If so, may a bank assess any other charges, such as a returned mail fee, to a savings account which has been inactive for less than three years? 

Answer: No, if the fee is assessed due to the inactive status of an account.

To this question, counsel to the State Controller replied that if the fee is assessed because of the account’s inactive status, the fee is prohibited.  However, CCP section 1513.5(b) permits a banking or financial organization to impose a service charge on an account for the notice required thereunder in an amount not to exceed the administrative cost of mailing or electronically sending the notice and in no case to exceed $2.

4. Question: If a bank does assess a service charge on an inactive account, and the account is later added to the escheat report after three years of inactivity and is transferred to the State Controller, must the service charge be returned to the account? 

Answer: Yes.

To this question, counsel to the State Controller replied: Yes the funds must be returned to the account because the banking organization has assessed an impermissible fee under section 1522 (7)
 
C. Rebuttal to the State Controller’s position. 

I would like to rebut the position advanced by counsel to the State Controller. 

1. The reading of CCP section 1513(a)(1)(A) by counsel to the State Controller is contrary to the meaning and intent of that section. 

For the purpose of this rebuttal, let us first review closely the language of CCP section 1513(a)(1)(A) anew. In that connection, let us establish an elementary characteristic of deposits and accounts: Any deposit or account held or owing by a banking organization is daily “inactive,” unless and until an activity occurs. In other words, unless and until a statutorily prescribed activity within that CCP section 1513(a)(1)(A) occurs, any deposit or account is inactive each day. The statutorily prescribed activities in that CCP section 1513(a)(1)(A) are:

(i) Increased or decreased the amount of the deposit, cashed an interest check, or presented the passbook or other similar evidence of the deposit for the crediting of interest.
(ii) Corresponded electronically or in writing with the banking organization concerning the deposit.
(iii) Otherwise indicated an interest in the deposit as evidenced by a memorandum or other record on file with the banking organization.

If counsel’s position is accepted, during periods of a deposit or account’s inactive status, a banking organization may not assess any inactive fee or service charge, unless and until the following four conditions in CCP section 1513(a)(1)(A) are satisfied:

•  The inactivity fees may only be assessed against demand deposits and NOW accounts.
• The inactivity fees must be reasonable.
• The inactivity fees must only be lawfully withheld (consistent with the terms of an enforceable contract between a banking organization and an account owner).
• The inactivity fees must not exceed those set forth in schedules filed by the banking organization from time to time with the State Controller. 

However, because a deposit or account has daily an inactive status, unless and until an activity occurs, counsel’s position means that a banking organization may not assess any service charge or fee against any such inactive deposit or account, unless and until these four conditions are satisfied, and only against demand deposits and NOW accounts, because such a charge or fee would be a “service charge” as defined in CCP section 1513(b). 

This reading by counsel of CCP section 1513(a)(1)(A) is clearly not a reasonable reading of that section. This reading is plainly inconsistent with current banking fee assessment practices. The impact of that construction would be to render virtually any service charge or fee unlawful under the UPL, save the except perhaps the $2 notification fee under CCP sections 1513.5(b), 1516(d), and 1520(b). 

I would advance the following reading of section 1513(a)(1)(A).  The key to this reading is the introductory sentence, with emphasis: “(a) Subject to Sections 1510 and 1511, the following property held or owing by a business association escheats to this state: . . ..”  While we commonly consider escheat as the process of reporting unclaimed property to the State Controller annually before November 1 under CCP section 1530(d) or delivering unclaimed property to the State Controller annually under CCP section 1532(a) between June 1 and 15 of the year subsequent to the reporting, a more accurate description of escheat is a process that occurs daily by operation of law. As to a deposit or account, a banking organization’s relationship with the deposit or account owner is one of debtor-creditor, with the account owner as the creditor and the banking organization as the debtor (8).  When the applicable three-year statutorily prescribed inactive period runs under the UPL as to that deposit or account, the deposit or account escheats by operation of law, the relationship of the banking organization with the deposit or account owner automatically changes: the banking organization becomes a “holder,” (9) similar to a state as a custodian of the escheated property (10),  barring related accounts (11). As CCP section 1513(a)(1)(A) stipulates, upon satisfaction of specified conditions, property escheats, including certain deposits and accounts. However, service charges may be withheld or deducted from escheated demand deposits and NOW accounts prior to the actual delivery of such escheated property, provided the four conditions are satisfied within CCP section 1513(a)(1)(A).  

This analysis is also supported by the definition of “service charges” for purposes of CCP section 1513, as follows, with emphasis:

(b) For purposes of this section “service charges” means service charges imposed because of the inactivity contemplated by this section. 

The inactivity contemplated by this CCP section 1513 is the inactive or unclaimed status detailed above, subsequent to the running of the applicable escheat period.  The inactivity contemplated by this CCP section 1513 is the unclaimed status of property upon running of the applicable escheat period of three years.

Thus, in summary under my analysis a banking organization under CCP section 1513(a)(1)(A):

• May assess under an enforceable contract an inactivity fee against a demand deposit and a savings, time, and NOW account prior to the running of the three-year escheat period.
• May assess an inactivity fee only against demand deposits and NOW accounts after the running of the three-year escheat period, provided the conditions therein are satisfied.
• May not assess an inactivity fee against savings and time accounts after the running of the three-year escheat period.

2. CCP section 1522 prohibition against inactive fees only applies to escheated property, having escheated by operation of law. If the above reading of CCP section 1513(a)(1)(A) were accepted, then a similar reading of CCP section 1522 may be advanced. For that purpose, please read the highlighted language from that section below:

No service, handling, maintenance or other charge or fee of any kind which is imposed because of the inactive or unclaimed status contemplated by this chapter, may be deducted or withheld from any property subject to escheat under this chapter, unless specifically permitted by this chapter.

Even when specifically permitted by this chapter, such charges or fees may not be excluded, withheld or deducted from property subject to this chapter if, under its policy or procedure, the holder would not have excluded, withheld or deducted such charges or fees in the event the property had been claimed by the owner prior to being reported or remitted to the Controller. In summary, CCP section 1522 prohibits a banking organization from assessing a fee “…because of the inactive or unclaimed status contemplated by this chapter [UPL]…” against “…any property subject to escheat under this chapter….” To paraphrase, these highlighted phrases can only mean that the prohibition against assessing an inactive fee only applies to property having escheated by operation of law: the property must have an unclaimed status contemplated by the UPL and thus subject to escheat as a condition precedent to the applicability of the injunction set forth in CCP section 1522. The applicable escheat period of three-years as to deposits and accounts must have run for such property before the property assumes an unclaimed status and becomes subject to escheat under the UPL. 

For example, if a holder reports property subject to escheat as of yearend, we may posit the following.  A deposit account becomes escheatable by operation of law on July 1, 2012, and thus reportable as of yearend 2012 (assuming that the holder elects to report as of “…the fiscal yearend next preceding…”(12)), for the unclaimed property report due by November 1, 2013. I would contend that the prohibition against inactivity fees under CCP section 1522 applies to the period between July 1, 2012, and the ultimate delivery of the property under CCP section 1532(a), i.e., between June 1 and 15, 2014, as to that escheated property.

This reading of CCP section 1522 is consistent with the second paragraph of that section, providing as follows:

Even when specifically permitted by this chapter, such charges or fees may not be excluded, withheld or deducted from property subject to this chapter if, under its policy or procedure, the holder would not have excluded, withheld or deducted such charges or fees in the event the property had been claimed by the owner prior to being reported or remitted to the Controller.

In short, prior to reporting the escheated property under CCP section 1530(d) by November 1 annually or prior to delivering the escheated and reported property the following year under CCP section 1532(a), service charges or fees permitted under the UPL cannot be withheld or deducted from property subject the UPL if the holder would not have withheld or deducted such charges or fees in the event the owner had claimed the property prior to such reporting or delivery. The prohibition in this paragraph again applies solely to the property having escheated by operation of law, but prior to reporting or delivering the property. 

If the position taken by counsel to the State Controller is correct, the prohibition against inactivity fees under CCP section 1522 would commence promptly upon opening of any deposit or account, as again, all deposits and accounts are inactive, unless and until activity occurs.

III.   Conclusion 

Notwithstanding the rebuttal above to the position taken by counsel to the State Controller with regard to inactivity fees, a banking or financial organization (13) may risk regulatory criticism and liability under the UPL if it were to assess such fees against deposits and accounts, particularly savings accounts and time deposit accounts.  While the rebuttal may be reasonably well reasoned, the author could not identify any definitive authority separate and apart from the plain meaning of the CCP sections cited. The result as a matter of law may differ for banking or financial organizations with a federal or national charter as they may enjoy benefits under the doctrine of federal preemption.  Prior to the escheat of property by operation of law, the UPL should not apply to such organizations under this doctrine.

The above analysis was submitted to counsel to the State Controller for review, response, and comment. Counsel declined to provide further responses or comments.

(1) Mr. Kitada can be reached at (415) 396-5461 or kitadat@wellsfargo.com.
(2) California Code of Civil Procedure section 1500 et seq.
(3) In CCP section 1513, the term “service charges” is defined as follows: (b) For purposes of this section “service charges” means service charges imposed because of the inactivity contemplated by this section. 
(4) CCP section 1511(b) defines a “banking organization” as follows: (b) “Banking organization” means any national or state bank, trust company, banking company, land bank, savings bank, safe-deposit company, private banker, or any similar organization.
(5) Ca.Admin.Code, Title 2, Subchapt. 8, section 1160.
(6) CCP section 1513(a)(6).
(7) By implication, if such charges and fees are not restored to the inactive account prior to escheat, the banking organization continues to hold such charges and fees as unclaimed property under the UPL
(8) Copesky v. Superior Court (1991) 229 Cal.App.3d 678.
(9) CCP section 1501(e) defines a “holder”: (e) “Holder” means any person in possession of property subject to this chapter belonging to another, or who is trustee in case of a trust, or is indebted to another on an obligation subject to this chapter.
(10) David. J. Epstein, Unclaimed Property Law and Reporting Forms, Vol. 1, section 1.06[2] (Rel. No. 57, Sept. 2012).
(11) CCP section 1513(a)(1)(B).  Note that upon reporting a deposit or account prior to November 1 annually, a holder could become a debtor again in the event the owner of the deposit or account claims the property prior to delivery of the property to the State Controller under CCP section 1532(a).
(12) CCP section 1530(d).
(13) CCP section 1511(d) defines a “financial organization” as follows: (d) “Financial organization” means any federal or state savings and loan association, building and loan association, credit union, investment company, or any similar organization.

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice.  Please consult with your counsel for more detailed information applicable to your institution.

© This CBA Regulatory Compliance Bulletin is copyrighted by the California Bankers Association, and may not be reproduced or distributed without the prior written consent of CBA.

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