BUTZ, J. —
Consistent with unclaimed property laws nationwide that derive from a uniform act on the subject, California's Unclaimed Property Law (the UPL; Code Civ. Proc., § 1500 et seq.)
At issue in this appeal is section 1571, subdivision (a) (hereafter section 1571(a)) of the UPL, which states: "The [State] Controller may at reasonable times and upon reasonable notice examine the records of any [entity] if the Controller has reason to believe that the [entity] is a holder [of property] who has failed to report property that should have been reported pursuant to [the UPL]." Pursuant to this section, the trial court here granted a preliminary injunction to plaintiff, the State Controller (the Controller), to examine the records of defendant American National Insurance Company, a life insurance company (American National).
We conclude (1) The trial court erred in granting the preliminary injunction — which mirrored the Controller's request for a permanent injunction — because the court did so without a trial on the merits; (2) the standard of "reason to believe" in section 1571(a) means specific articulable facts that
We will proceed immediately to discuss these conclusions, and set forth in those discussions the pertinent facts. As we shall explain, these conclusions are as far as we can go on the truncated record before us.
American National contends the trial court abused its discretion by ignoring the irreparable injury American National would suffer from a preliminary injunction that granted the Controller the ultimate relief the Controller sought in its lawsuit; in short, says American National, the trial court's decision deprived it of an opportunity to defend itself on the merits. We essentially agree.
Pursuant to a multistate investigation that California joined to determine life insurance industry compliance with state laws on unclaimed property — an investigation that included a look into the procedures the life insurance
The Controller and American National went back and forth over what records the Controller could examine. This dispute eventually centered on American National's refusal to allow the Controller to examine its in-force life insurance policies.
To resolve the dispute, the Controller sued American National for injunctive relief under section 1572. Section 1572 allows the Controller to file a lawsuit to undertake record examination authorized by section 1571. (§ 1572, subd. (a)(1).)
In its complaint, the Controller requested preliminary and permanent injunctive relief enjoining American National from refusing to comply with the UPL and requiring American National to (1) permit a full and timely examination of all its books and records; (2) provide full and accurate responses to all data requests from the Controller, including the policy data download for all life insurance policies and annuity contracts currently in force and that have been in force going back to January 1, 1992 (with the fields that were provided in the sample policy data download); (3) provide prompt access to knowledgeable personnel; (4) respond promptly to all questions asked in the audit process; (5) provide data and information in a form reasonably calculated to be auditable; and (6) confirm that all current company procedures have been produced for determining death and annuity payouts that require escheatment by operation of law.
The trial court heard, and then granted, the Controller's preliminary injunction request, as specified in the preceding paragraph. The trial court did so after denying the Controller's motion to consolidate the trial on the merits with the preliminary injunction hearing and after denying American National's motion to continue the preliminary injunction hearing to allow American National to obtain discovery before the hearing.
If a lawsuit seeks a preliminary and a permanent injunction, as the Controller's lawsuit does here, the order for a preliminary injunction does not
For guidance on remand, we will define the "reason to believe" standard. We turn to that issue now.
American National contends the Controller had no "reason to believe" that American National had failed to report property under the UPL concerning its active, in-force policies, because the UPL, under section 1515, subdivision (a), imposes a duty to report life insurance or annuity contract funds only when, according to company records, those funds are due and payable and have been unclaimed and unpaid for more than three years.
In its request for a preliminary injunction, the Controller presented the following evidence.
There have been long-standing practices in the life insurance industry whereby insurers have allowed life insurance policies to remain designated as "in force" long after the insureds have died; and insurers have done this by not taking reasonable steps to identify these deceased insureds. One such practice, for example, concerns antiforfeiture provisions in life insurance policies. These provisions automatically pay due and unpaid premiums out of a policy's built-up cash value; where an insured has died and therefore fails to pay premiums when due, the cash value in the policy may be entirely depleted over time if an insurer fails to take appropriate actions to learn of the insured's death. These practices persist notwithstanding the existence of accurate and long-accessible death records, such as the Social Security Administration's Death Master File.
Hundreds of millions of dollars in life insurance proceeds go unclaimed annually. The National Association of Insurance Commissioners estimates that unpaid life insurance benefits exceed $1 billion nationwide.
In 2009, as part of a nationwide investigation concerning how life insurers determine if insureds have died, an auditing company (Xerox Unclaimed Property Clearinghouse; UPCH) began an unclaimed property audit of American National on behalf of multiple states. In 2012, California joined this audit of American National, retaining UPCH as its auditor; by this point, the audit of American National had already uncovered significant potentially escheatable property.
UPCH — which is the largest auditor of unclaimed property in the United States, having provided such services to over 18,000 organizations — has concluded that American National's audit-based document production, pursuant to the multistate unclaimed property audit, is incomplete. For example, based on American National's 2010 annual statement, UPCH expected to receive data for over one million insurance policies and annuity contracts for which American National had not processed or paid a death benefit; instead, UPCH received only 200,000.
By the time the Controller requested a preliminary injunction against American National in 2013, the Controller had initiated audits of over 40 life
In deciding to conduct an unclaimed property audit of American National, the Controller relied upon both the fact that numerous other states had decided to audit American National and that UPCH had recommended such an audit.
Section 1571(a) is a remedial statute that involves an administrative examination of a regulated entity's records to unearth an undeserved private windfall. Because of this, the standard of "reason to believe" (or reasonable belief) is certainly "no stricter" than the constitutional standard the United States Supreme Court applies when an administrative agency is required to seek a search warrant to inspect the premises of a regulated business for compliance with governing law. So concludes Lincoln Bank & Trust Co. v. Oklahoma Tax Com. (1992) 1992 Okla. 22 [827 P.2d 1314, 1322] (Lincoln Bank), a decision from the Oklahoma Supreme Court that construed the phrase "reason to believe" in a state statute substantively identical to section 1571(a). (Lincoln Bank, at p. 1322.) Lincoln Bank involved the statutory administrator's request to inspect a bank's financial records for compliance with Oklahoma's unclaimed property law. This request was based largely on evidence that the bank had not reported items consistently reported by other comparably sized banks, and that noncompliance with the unclaimed property law was "`widespread'" among Oklahoma banks; out of the 75 banks that had been examined, all had unreported property. (Lincoln Bank, supra, 827 P.2d at pp. 1315, 1323.)
The United States Supreme Court decision relied on by Lincoln Bank in defining the "reason to believe" standard is Marshall v. Barlow's, Inc. (1978)
But we find even more persuasive the decision in PHH Corp., supra, 717 A.2d 950. In PHH Corp., the Maryland Court of Special Appeals expanded the Lincoln Bank standard in construing a substantively identical statute to section 1571(a), in the context of an administrative examination of a leasing company's records. (PHH Corp., supra, 111 A.2d at pp. 951, 953.) PHH Corp. reasoned that a specific violation of law or a general plan of enforcement are not the exclusive means by which the "reason to believe" standard can be met. (PHH Corp., supra, 111 A.2d at pp. 958-959.) PHH Corp. held the standard is met whenever the statute's administrator can point to "specific articulable facts that would justify a belief by a reasonable person, knowledgeable in the field of unclaimed property, that a person or business entity [is] not reporting [unclaimed] property as required by the [UPL]." (Id. at p. 959.)
At its core, the Controller's section 1571(a) record examination of American National seeks to verify whether policies listed by American National as in force are, legitimately, in force — for example, whether the cash value of policies is being used to pay premiums to keep policies in force after insureds die. As noted, American National, relying on section 1515, subdivision (a) of the UPL, contends the Controller could have no "reason to believe" that American National has failed to report property under the UPL concerning its active, in-force policies, because the UPL imposes a duty to report life
The trial court's preliminary injunction ruling cogently decimates American National's contention: "The purpose of the [section 1571(a)] audit is to allow the State to review all potentially escheatable property.... [The Controller] does not, and need not, accept [American National's] word that it has, on its own, correctly identified and segregated its own `in-force policies.' The very purpose of the audit is to verify the information contained in [American National's] books and records, to verify whether the company has, in fact, been in contact with policyholders in the last three years, to verify the company's representations that policyholders have been paying the premiums, and to otherwise review [American National's] data and underlying records to ensure that the company has not failed to identify and report unclaimed property that should have been reported...."
We also find that the Controller will meet the "reason to believe" standard we have adopted here if the Controller can establish, at trial on the merits, the significant facts set forth above in the Factual Background of this Discussion (see pt. II.B., ante, at pp. 459-460). In doing so, the Controller will have shown the requisite "specific articulable facts" by showing that its record examination of American National proceeded from a general plan of UPL enforcement based on neutral sources.
But because the proceedings before us are so truncated (i.e., whether a preliminary injunction should have been issued), our review on appeal is necessarily truncated. To be clear, we have decided only (1) that the trial court erred in granting the preliminary injunction; (2) that the "reason to believe" standard of section 1571(a) is defined in terms of the "specific articulable facts" principle set forth above; and (3) that if the Controller proves, at trial on the merits, the significant facts underlying its preliminary injunction request, the Controller will have met this "reason to believe" standard with respect to examining the records of American National's in-force policies.
The order granting the preliminary injunction to the Controller is reversed. We remand this matter to the trial court for further proceedings consistent with this opinion. American National is awarded its costs on appeal. (Cal. Rules of Court, rule 8.278(a)(2).)
Blease, Acting P. J., concurred.
HULL, J., Concurring and Dissenting. —
I concur in the majority's holding that (1) the trial court erred in granting the preliminary injunction because the court did so without a trial on the merits, and (2) the standard of "reason to believe" as set forth in Code of Civil Procedure section 1571, subdivision (a) means specific articulable facts that would justify a belief by a reasonable person, knowledgeable in the field of unclaimed property, that an entity was not reporting property as the Unclaimed Property Law (UPL) requires.
As to the majority's final holding, that "if the Controller proves, at trial on the merits, the significant facts underlying its preliminary injunction request, the Controller will have met this `reason to believe' standard with respect to examining the records of American National's in-force policies," we part company and I dissent. (Maj. opn., ante, at p. 462.)
In my view, once we have determined the trial court has erred and we return the matter to the trial court for an evidentiary hearing on the merits, the appropriate course is to allow the trial court to conduct the necessary hearing with the opportunity for the parties to present relevant evidence and then for the trial court to determine, in the first instance, whether the Controller has proven that there is reason to believe that appellant has not reported property as the UPL requires. This court cannot know, at this juncture, the scope of the evidence to be presented by the parties in the trial court on both sides of the question and cannot know the credibility of that evidence. It may be that, on a full evidentiary hearing on the matter, the "significant facts" underlying the preliminary injunction request are not the whole story on the issue of "reason to believe."
By taking this final step, the majority gives with one hand and takes away with the other. It agrees with appellant that the court erred and that the matter must be remanded for a full evidentiary hearing in the trial court, but then says, in my view, if the Controller presents the very same evidence on remand that it did in support of the Controller's preliminary injunction request, the Controller shall prevail. Appellant's opportunity to prove, based on evidence that this court does not now know, that there is no reason to believe that appellant is not fulfilling its responsibilities under the UPL seems, at best, evanescent.
While I agree that the law requires a full evidentiary hearing in the trial court, one must wonder about its practical necessity when this court, in effect, predicts its outcome.
And, while I appreciate that the majority has noted that its reference to evidence sufficient to constitute a "reason to believe" appellant is in violation of the UPL is "simply meant to illustrate one way in which our `reason to believe' standard may be satisfied" and is not meant to "circumscribe ... the evidence that may be presented at trial" (maj. opn., ante, at p. 462, fn. 7) that should be of little comfort to appellant once this court has said, in effect, that if the Controller proves up later what the Controller proved up before, the Controller shall win.
I do not know what evidence may be presented in the trial court that would lead to a different result. But that is the point. While I cannot know that, neither can the majority.
In effect, the majority's holding today takes away the trial court's discretion to decide whether there is reason to believe appellant is violating the UPL if, in the trial court's view, the very same evidence does not constitute a reason to believe there is a violation under the standard we state today.
I would let this matter hereafter follow the normal procedural course. It should be remanded to the trial court for a full evidentiary hearing. The trial