If you buy partial interests in notes long enough, this will happen to you: the note pays off, and the person who sold you the partial, and who is owed part of the balloon, can’t be found. Funds have sat in escrow for years waiting for original note holders to claim them. Here is one reader’s case and an expert’s answer.
The reader’s question
Several years ago I bought a partial note in my IRA. The original note holder was to receive part of the balloon.
Three years ago the note paid off and the original note holder is nowhere to be found. The property owner heard she had fled the country because of criminal problems (maybe that’s why she sold me the note). Registered letters come back “moved, left no forwarding address.”
My IRA administrator has her $30,000 in his trust account. He wants an independent opinion as to when it should be turned over to me. Have you ever had this experience with any of your partials? (Ken A. Engle, Fresno, CA)
The question went to William L. Exeter, then Vice President and Chief Financial Officer of Security Trust Co., a California member firm of the Chicago Title and Trust companies and an expert in using notes in retirement plans.
Why the partial buyer can’t claim the money
“Mr. Engle’s letter describes a problem more common than people realize. Unfortunately, the solution is not what most people want to hear.”
Mr. Engle’s self-directed IRA bought a portion of a note in a California transaction. The original note holder was to receive $30,000 from the balloon payment at maturity, about three years earlier. Attempts to find her had failed, and the IRA administrator was holding the funds.
According to Exeter, the $30,000 is now abandoned, or unclaimed, property. Mr. Engle cannot claim it. He has no legal ownership or vested interest in the money, so what happens to it is governed by the state’s abandoned or unclaimed property laws.
What unclaimed property law requires of the holder
In this case, the Unclaimed Property Law in California’s Code of Civil Procedure appeared to apply. Generally, the law requires the holder of unclaimed property to:
- Make every reasonable attempt to notify the rightful owner (here, the original note holder).
- Escheat, or forward, the property to the state after a set period, usually three to seven years depending on the type of property or account (at the time of writing).
Holders of unclaimed property should consult legal counsel to make sure they comply with local laws. The California State Controller’s Division of Unclaimed Property publishes the law, its regulations and reporting instructions for holders.
