Delaware Unclaimed Property Legislation – Lipstick on a Pig?

On January 12, 2017, the Delaware General Assembly introduced a bill (SB 13) that would significantly rewrite the Delaware unclaimed property statute by repealing the three current subchapters and replacing them with a single unclaimed property subchapter. The bill is primarily sponsored by Senator Bryan Townsend and Representative Bryon Short, with five co-sponsors in each chamber. Because it is not specified otherwise, the legislation would be effective upon being signed into law. While this legislation would retain a large portion of the existing law, it also includes a host of significant changes. Below are some of the highlights.

Periods of Limitation and Record Retention

Under current Delaware law, the period of limitation on a proposed deficiency is three years after the date the report is filed, or six years if there is a 25 percent understatement in the report. See Del. Code Ann. tit. 12, § 1158. Unfortunately, Delaware has found numerous reasons why this provision is inapplicable to holders. The legislation provides a new limitations period. It extends the period to “10 years after the duty arose.” See § 1157(b). The legislation would also create a new requirement that holders retain records for 10 years after the date the report was filed. See § 1145. The Revised Uniform Unclaimed Property Act (RUUPA) provides a five-year statutory period for all types of property if a holder files a return and a 10-year statute of repose.

These provisions appear to be the only acknowledgement of the opinion in Temple-Inland. It remains to be seen whether choosing only a few of the issues raised by the judge is sufficient to save Delaware’s audit methodology.

Gift Cards, Loyalty Cards and Virtual Currency

Gift cards remain subject to the Delaware Act under similar provisions as the previous gift certificate rule. However, loyalty cards are expressly excluded from the definition of “property” subject to a reporting obligation. “Loyalty card” is defined as “a record given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate, or promotional program that may be used or redeemed only to obtain goods or services or a discount on goods or services. The term does not include a record that may be redeemed for money or otherwise monetized by the issuer.” This definition is consistent with the definition included in RUUPA.

The legislation would also expressly include virtual currency within the definition of “property” subject to escheat. This revision is consistent with the proposal submitted by the National Association of Unclaimed Property Administrators during consideration of RUUPA, which was ultimately adopted by the Uniform Law Commission.

Audits, VDAs, “Compliance Reviews” and Enforcement

The proposed revisions to the Delaware Act are not entirely clear regarding overlaps between audits, voluntary disclosure agreements (VDAs) and something called “compliance reviews.”

The legislation allows the Escheator to “authorize a compliance review” of a report if the Escheator believes that the holder filed an “inaccurate, incomplete, or false report.” § 1174. The compliance review is “limited to the contents of the report” and supporting documents. This review is not subject to the limitations period.

The Delaware legislation maintains the provision that regular audits (not compliance reviews) may not be initiated until the holder is provided the opportunity to enter into a voluntary disclosure. §1176(a). This does not apply if the audit is initiated by another state and Delaware signs on. The VDA program administered by the Secretary of State is maintained. §1177. However, the new 10-year look-back is not reduced for participants. This raises the question of why a holder would proactively initiate a VDA, as there is no longer a look-back benefit (this has been the informal case since the Temple-Inland decision).

Of note to holders under audit by Delaware, the legislation would allow certain holders currently under audit (i.e., those authorized by the State Escheator on or before July 22, 2015—the date of the enactment of SB 141) to notify the Secretary of State of their intent to enter into the VDA program by July 1, 2017. The look-back period for this election would be 10 years prior to when property is presumed abandoned pursuant to this chapter from the calendar year in which the State Escheator provided the original notice of examination. For property types with a five-year dormancy period, this would result in a look-back of 15 years from the original examination notice. While the look-back is not great, the ability of holders under audit to utilize the VDA program pursuant to the legislation is significant, as all current and former iterations of the VDA program have barred holders under audit from participating. However, holders will have to consider the benefit of certainty and the waiver of interest versus the detriment of relinquishing the right to challenge the State’s conclusions.

Holders under an audit authorized by the Escheator before the effective date of the legislation may also notify the Escheator in writing of an intent to expedite the audit which would require all requests to be issues within 18 months and the audit to be completed (including an exam report) within 2 years from the date of receipt of the written notification. Expedited audits provide for waiver of interest and penalties. To successfully complete and expedited audit, the holder must meet all of the document information request deadlines and must respond in the manner requested by the auditor. § 1176(c). Whether the holder meets this requirement is not reviewable by a court. This raises due process concerns given the arbitrariness of some deadlines and document form requests.

The legislation authorizes the Escheator to issue administrative subpoenas that may be enforced in the Court of Chancery. § 1175(3), (4).

Authorization of Estimation

Unlike the current statute, the legislation also expressly authorizes the use of extrapolation and statistical sampling when a person does not retain the required records. See § 1180(a). However, the legislation also requires the Secretary of Finance, in consultation with the Secretary of State, to “promulgate regulations regarding the method of estimation to create consistency in any examination or voluntary disclosure. These regulations must include permissible base periods, items to be excluded from the estimation calculation, aging criteria for outstanding and voided checks, and the definition of what constitutes complete and researchable records” on or before July 1, 2017. § 1180(b). This is great news for holders, and we encourage the Secretary of Finance and Secretary of State to reach out to the holder community for input as these important regulations are drafted and promulgated.

Notice and Reporting

The legislation would implement mandatory web-based reporting beginning March 1, 2018. § 1142. The bill also strikes aggregate reporting for items valued at $50 or less, and requires holders (or their agents) to independently report each property—no matter how small.

Limitation on Assignment or Transfer of Liability

The revised unclaimed property chapter proposed by the Delaware bill would prohibit a holder from assigning or otherwise transferring its unclaimed property obligation, other than to a parent, subsidiary or affiliate of the holder. Further, unless otherwise agreed to by the parties to the transaction, the holder’s successor by merger or consolidation (or any person that acquires all or substantially all the holder’s capital stock or assets) is responsible for fulfilling the holder’s unclaimed property obligations. See § 1147. This is likely to have an impact on how unclaimed property is handled in the M&A context.

Contract Auditors

Unsurprisingly, the proposed legislation affirmatively provides that the State Escheator may contract with a person to conduct compliance reviews and examinations in accordance with the unclaimed property chapter. The bill maintains and reinforces the restrictions previously adopted to prevent conflict of interest problems. With no exceptions, no person shall be assigned more than 50 percent of the number of all compliance reviews and examinations undertaken after January 1, 2015. See § 1182(a). Furthermore, every contract between the State and persons conducting examinations and providing any unclaimed property examination or consulting services on a contract basis must (1) be for a term of no more than five years and (2) contain a non-compete clause that provides that no such person shall hire, retain or compensate in any way any employee of the Delaware Division of Revenue or the Department of Finance who functions in a senior supervisory role related to unclaimed property, including, without limitation, the Secretary of Finance, any Deputy Secretary of Finance, the State Escheator or Audit Manager, for a period of two years from the time such employee leaves the employ of the State.

No Business-to-Business Exemption

The legislation maintains and clarifies that there is no business-to-business exemption, including for current relationships between a holder and an owner. § 1130(16)(c)(1).

Limitations on Liability

Delaware attempts to address litigation issues in the bill, including its liability for liquidation of securities. The bill provides that the State has no liability for the liquidation of securities beyond the proceeds it actually received, even if the State did not follow the statutory notice procedures. §1150(c). The bill also provides a strong limitation on the holder’s liability for property turned over to the state. §1154(a).

Privacy

The bill allows the State Escheator to list owners’ last known addresses in a searchable database. § 1150(f). This may raise privacy concerns.

Overcoming Presumption of Abandonment

The legislation fails to adopt many of the provisions in RUUPA that spell out how a holder can overcome the presumption of abandonment for records indicating an unpaid debt or undischarged obligation. § 1179. Notably, RUUPA provides three classifications of checks, drafts or similar instruments that overcome the burden, which were omitted from the introduced Delaware law. These include instruments that are (1) issued but for which there was a failure of consideration; (2) voided within a certain period of time after issuance for a valid business reason set forth in a contemporaneous record; or (3) issued but not delivered to the third-party payee for a sufficient reason recorded within a reasonable time after issuance. See RUUPA, § 1005(c).

Interest and Penalties

Interest would be imposed even if the failure to remit the unclaimed property was due to reasonable cause and not willful neglect as provided in the current statute. § 1187 (compare with § 1159 of current code). This provision applies to any late-filed property remitted on or after July 1, 2017 (with certain exclusions for holders in the VDA program).

A new penalty has been added for a holder that “enters into a contract or other arrangement for the purpose of evading an obligation under this chapter.” The penalty is $1,000 for each day of evasion up to $25,000, plus 25 percent of the amount of property not remitted as a result of the evasion. § 1188.