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MarketSphere Unclaimed Property Specialists has learned that the State of Delaware began sending out a significant number of unclaimed property audit notices in early January 2019.

Pursuant to 12 Del. C. § 1172(a), the State of Delaware cannot initiate a new abandoned or unclaimed property examination unless the company has first been notified in writing by the Secretary of State that it may enter the Delaware VDA program. 

As we advised in our December blog entitled “Delaware Unclaimed Property Notice Letter”, Delaware had been busy filling companies’ mailboxes with Voluntary Disclosure Agreement (“VDA”) program invitations. Companies had 60 days to respond to the invitation or be referred to the Department of Finance for audit.  Following up on these invitations, the State has now begun mailing unclaimed property audit notices to companies that did not respond timely to these invitations. 

MarketSphere has been made aware that holders may be receiving notices from the State of Delaware.  The following is a recent posting to the Unclaimed Property Professionals Organization (UPPO) website concerning these notices detailing interaction with the Delaware State Escheator. 

UPPO recently received reports that Delaware unclaimed property staff has notified some holders that they are required to submit a copy of their policies and procedures as part of their annual filing. In response, UPPO reached out to Delaware State Escheator Brenda Mayrack, requesting clarification. Following is her response:

In December 2018, Univar, Inc. filed an action in U.S. District Court asking the Court to stop an existing unclaimed property audit being conducted by Kelmar Associates, LLC.  In their complaint, Univar seeks a declaratory judgement that the audit violates several matters, including Delaware’s Escheat law, federal common law and certain clauses of the U.S. Constitution.

 In December 2015, Delaware issued an audit notice to Univar, indicating that the audit would be conducted by Kelmar as the state’s agent. Univar disputed the legitimacy of the audit including calling into question Kelmar’s audit protocols. On October 30, 2018, Delaware issued a subpoena to Univar requiring Univar respond to Kelmar’s document requests, which Univar had not responded to. In response to the subpoena, Univar filed this complaint to stop the audit. Among other matters, the complaint alleges:

On September 21, 2018, a Delaware jury found Overstock.com guilty of failing to report and remit nearly $3M in unredeemed gift card balances that should have been reported to the State of Delaware as unclaimed property.
The verdict is the latest in a series of on-going cases that has already resulted in the payment to Delaware of over $25 million in unpaid gift cards and penalties from other retail card issuers who settled before trial.

Under Delaware law, gift card issuers are required to turn over unredeemed gift card balances to the state after a period of 5 years.  However, this and other lawsuits has exposed a common practice in the gift card industry, where significant numbers of cards go unredeemed and issuers keep these balances.

In the Overstock case (The State of Delaware ex. rel. William Sean French v. Overstock.com, Inc. [Superior Court of Delaware C.A. No. N13C-06-289 PRW CCLD]), the defendant declared that it had transferred unredeemed gift card balances to an Ohio-based business, CardFact Ltd (now known as Card Compliant).  As Ohio does not require the escheatment of unused gift card balances, this transfer allowed CardFact and Overstock to keep these balances.

On March 19, 2018, the California Assembly introduced a bill, AB 2773, that proposed the creation of a voluntary disclosure program through the introduction of a new section, 1577.6, into California’s Code of Civil Procedures. 

 Under existing law, property held by a person that belongs to another and that is unclaimed for more than specified periods escheats to the state. Existing law requires persons holding unclaimed property to report and deliver it to the Controller within a prescribed time-period, and imposes interest payments, at a 12% statutory rate, and penalties, for a failure to do so.

AB 2773 would require the Controller to create a program for the voluntary disclosure of unclaimed property consistent with specified requirements. The bill would require the Controller to waive interest and penalty charges for holders who are accepted into the program, complete the voluntary disclosures in good faith, and act consistent with program requirements. The program would be open to all holders who aren’t currently under audit, whether they have previously filed or not, and the look-back period would cover 10 prior report years.

Effective January 1, 2018, Illinois’ new Unclaimed Property Act, entitled Revised Uniform Unclaimed Property Act (IL RUUPA), became law.  The IL RUUPA is an implementation of the Uniform Law Commission’s 2016 Revised Uniform Unclaimed Property Act (ULC RUUPA).   

The IL RUUPA includes almost all aspects of the ULC RUUPA, including the following:

• record retention requirements (10 years after the later of the date the report was filed or the last date a timely report was due to be filed)
• electronic due diligence
• a reduction in general dormancy periods from 5 to 3 years
• the exclusion from reporting of loyalty cards and game-related digital content 

However, the most significant aspect of the IL RUUPA affects business to business (B2B) transactions in two important ways.

Firstly, the IL RUUPA no longer exempts B2B transactions.

On July 6, 2017 the Illinois House of Representatives passed Public Act 100-0022 (Public Act), the revenue bill that supports Illinois’ fiscal year 2017/18 budget.  This Act is the former Illinois’ Senate Bill 9 (SB9), which was amended in the days before the Public Act vote to include a revised version of House Bill (HB) 2603, the Illinois Unclaimed Property Bill. 

Article 15 of the Public Act, which takes its’ wording directly from the revised version of HB 2603, is a complete rewrite of Illinois’ unclaimed property law, and is entitled Revised Uniform Unclaimed Property Act (IL RUUPA).  The IL RUUPA is an implementation of the Uniform Law Commission’s 2016 Revised Uniform Unclaimed Property Act (ULC RUUPA), and becomes effective January 1, 2018.

The IL RUUPA includes almost all aspects of the ULC RUUPA, including the following:

• Record retention requirements (10 years after the later of the date the report was filed or the last date a timely report was due to be filed)
• Electronic due diligence
• Reduction in general dormancy periods from 5 to 3 years
• The exclusion from reporting of loyalty cards and game-related digital content

However, the IL RUUPA no longer exempts various items that were previously exempted including, most significantly, business-to-business transactions.

EXECUTIVE SUMMARY

 On 8/1/17, Delaware issued an updated version of proposed DE Unclaimed Property regulations, originally issued on 4/1/17

The updated proposed regulations make changes to various areas, including stored value cards/gift cards, indication of owner interest, record retention, notice of examination, confidentiality and non-disclosure agreements, audit opening conference, examination and remediation

Of significant note to holders, no changes were made to areas dealing with estimation, projection and complete and researchable records.

The public comment period for the updated regulations ends on 8/31/17.                                                                                                                              

On August 1, 2017, the Delaware Department of Finance released updated proposed regulations relating to its’ Abandoned or Unclaimed Property Law.  These proposed regulations can be found at http://regulations.delaware.gov/register/august2017/proposed/21%20DE%20Reg%20123%2008-01-17.pdf

These proposed regulations are an update of draft regulations issued on April 1, 2017.   For an analysis of these earlier proposed regulations, please see our prior blog Delaware Releases Draft Estimation Regulations. 

The public comment period for these updated proposed regulations will end on August 31^st .It is anticipated that Delaware will issue final regulations shortly thereafter.

The updated draft regulations include changes in various sections dealing with the following:

There were many educational sessions at this year’s UPPO Annual Conference held in March in beautiful Austin, Texas. This year, MarketSphere had the privilege to co-present three sessions including “The Changing Dimensions of Unclaimed Property Audits”.  The session discussed how the multi-state audit process has changed over time and what organizations, either under audit or possibly exposed, can do to avoid being caught flat-footed.

The following are some of the takeaways from the session that can assist holders with their planning and decision making.

• The likelihood of an audit has increased in recent years due to several factors, including the proliferation of new third-party auditors, realization by states that significant amounts are involved, and the widespread reporting of unclaimed property litigation.
• Most state statutes permit the use of third-party auditors and allow for contingent fee arrangements. Certain states (e.g., IL, OH and VA) ban the use of contingent fee examiners for in-state businesses.  Additionally, NC has completely banned the use of contingent fee auditors.
• In the last several years, many states including, DE, MI and AZ, have provided statutory guidance for the conduct of audits, thereby allowing holders to better understand the states’ audit policies and procedures.
• Estimation is permitted by the various Uniform Acts and certain state laws, with some states (e.g., TX and MI) now including in their statues the permitted use of “reasonable” estimation methods. However, it should be noted that there is a lack of statutory interpretation as to what is meant by “reasonable”.  Also, Delaware has recently introduced draft regulations specifically focused on estimation.  See our blog for more information on this topic.

In the State of Delaware, the Department of Revenue is responsible for overseeing unclaimed property audits. The Delaware Secretary of State’s office is responsible for overseeing unclaimed property Voluntary Disclosure Agreements (VDAs).

This split of unclaimed property duties in Delaware and a “softening” of statutory requirements came about in the last few years as an effort on the part of the state to encourage holders to participate in the VDA program. The changes may have indicated a willingness of the state to acknowledge holder complaints that unclaimed property audits sponsored by Delaware, sometimes through aggressive third-party auditors, had been too rigorous and even unfair.

In June, those complaints seem to have been upheld by a federal court opinion in the case of Temple-Inland, Inc. v. Cook, in which US. District Court Judge Gregory Sleet ruled that Delaware violated due process and exploited loopholes in the state’s statute of limitations during its audit dealings with Temple-Inland. Within his 39-page opinion, Judge Sleet wrote, “To put the matter gently, defendants have engaged in a game of ‘gotcha’ that shocks the conscience.”