On January 27, 2017, the Delaware House of Representatives passed Delaware Senate Bill 13 (“S.B. 13”), finalizing Delaware’s legislative body’s fast-track effort to overhaul the state’s unclaimed property laws. The bill will now be sent to Governor John Carney, who has indicated he will sign it. The legislature’s approval of S.B. 13 is a much anticipated development in the unclaimed property world, as Delaware attempts to address the scrutiny it has endured over the last few years, which culminated in July 2016 with the critical decision in the Temple-Inland case. Although S.B. 13 addresses many of the areas on which corporations and unclaimed property practitioners have been seeking guidance, a few key issues in the current Delaware act have yet to be addressed. Following are some of the key changes for those areas the Senate Bill has definitively addressed.
Look-Back Periods, Statute of Limitations, and Record Retention
One of the main areas of contention with Delaware’s escheat act has been its audit look-book period and statute of limitation provisions. As Delaware’s act is currently written, a holder may be subject to a reach-back period of 20+ years, which is especially problematic because such a lengthy audit reach-back period typically far exceeds generally accepted corporate document and data retention policies. In recognition of this clear misalignment, S.B. 13 stipulates a 10 year look-back period for ongoing and future audits. The look-back period is based on the calendar year in which the Delaware audit notice was mailed to the holder. Accordingly, the look-book period for holders already subject to a Delaware audit will vary depending on the age of the specific audit. To ensure consistency, the look-back for the Voluntary Disclosure Agreement (“VDA”) program will also be amended to 10 years. We note that this change for VDA’s merely represents a codification of what occurred administratively this past summer following the Temple-Inland decision.
Under S.B. 13, the statute of limitations increases to 10 years from 3 years (or 6 years in cases where a report contained an omission of unclaimed property that was more than 25% of the value disclosed in the report). This 10-year statute is tolled if a holder is placed under audit or if the Delaware State Escheator determines that the report contained a fraudulent or willful misrepresentation.
Another key component of S.B. 13 is the introduction of a record retention policy to the Delaware act which better aligns data retention requirements with the length of the look-back period. The state now requires a 10-year record retention requirement, which commences on the date that the annual report is filed. If a holder does not maintain the required records, the State Escheator may determine the amount of property due using a reasonable method of estimation based on all information available, including extrapolation and the use of statistical sampling. Key to this provision is that S.B. 13 also requires that the Secretary of Finance in consultation with the Secretary of State promulgate regulations regarding the method of estimation to create consistency in any examination or VDA. These regulations are due to be finalized by July 1, 2017 and will be a critical piece of information as holders and unclaimed property professionals seek to understand the full effects of S.B. 13.
Converting Audits into VDAs or Expedited Audits
S.B. 13 holders that were under audit as of July 22, 2015, have the option to convert the audit into a VDA (and by virtue of the conversion, have all potential penalties and interest waived). This election must be made within 60 days of the adoption of regulations regarding the method of estimation and may represent Delaware’s attempt to incent holders to convert to a VDA. Although interest and penalties would generally be waived under the program, holders would likely have to agree to Delaware’s current methodology for any extrapolations. It is important to note that the VDA election would not be considered a continuation of the audit, and would allow the holder to present its findings in accordance with the Delaware VDA guidelines. These considerations, along with the specific facts of a holder’s audit will require consideration when weighing the costs v. benefits of a contemplated conversion to the VDA program.
In addition to the VDA conversion options, an expedited audit option will be available to any holder that is under audit at the time S.B. 13 is adopted. The election for this option must be made within 60 days of the adoption of regulations regarding the method of estimation. Under this option, the state must provide all requests within 18 months of the date the holder opts into the program, and must deliver the audit report within 24 months of the holder’s opt in date. If the state concludes that the holder is failing to comply with the timeline, it has the ability to terminate the expedited process and place them back in the regular audit program. Although under the expedited audit option the state must waive interest and penalties, the ambiguity around the state having sole discretion in determining whether a holder is complying with the audit timeline may raise concerns, due to the detailed nature and volume of records that are typically required in a Delaware audit.
Penalty & Interest Assessments
S.B. 13 includes some impactful additions and changes to the penalties and interest for late reported property. For property that is filed late after July 1, 2017, mandatory interest on the outstanding amounts will apply at a rate of .5% per month and will be capped at 50% of the outstanding amounts (an increase from the current 25% threshold). For annual reports and audits, the State Escheator will have the discretion of waiving up to 50% of the interest for “good cause,” while interest will be waived in the Secretary of State VDA program and expedited audits conducted by the State Escheator. S.B. 13 also includes a new civil penalty provision, which will be in addition to the existing penalty provisions for failure to file, failure to pay and filing a fraudulent report. The new civil penalties allow for the assessment of $1,000 for each day the obligation is evaded or the duty not performed, up to a maximum of $25,000, plus a 25% civil penalty based on the value of any property that should have been but was not reported, paid or delivered. The penalty and interest modifications are not only statutory changes, but will also represent a change from the state’s prior practices of not actively assessing penalties and interest for late filed property.
Due Diligence & Compliance Reviews
S.B. 13 includes a due diligence mailing requirement, which provides that before non-securities properties valued at $50 or more are turned over to the state, the holder must send the owner a due diligence letter via first class mail. This provision applies to owners that, according to the holder records has an address sufficient to direct the delivery of first-class United States mail, which the holder’s records do not disclose to be invalid. Previously, Delaware required due diligence outreach for securities, but not for general ledger property.
The bill also includes a provision for a compliance review of any filed annual reports that the state believes are inaccurate, incomplete or false. The compliance review is limited to the contents of the report and the state may request further information to support it. If a deficiency is found, the state must notify the Holder within one year of the review of any deficiency. In turn, the holder must pay the deficiency within 90 days, or else be subject to enforcement of payment or being recommended to join the Delaware VDA program.
Jurisdiction & Priority Rules
S.B. 13 modifies the current Delaware standard for determining the jurisdiction to which a property is subject to escheatment by moving away from the “address sufficient for the delivery of mail”, to “a description, code, or other indication of location of the owner on the holder’s books and records which identifies the state of the last known address of the owner”. S.B. 13 also includes language codifying Delaware’s jurisdiction over property owed to a foreign last known address if the holder is domiciled in Delaware. Currently, this provision is not part of the Delaware unclaimed property statute and has resulted in a great deal of debate between Delaware and holders.
S.B. 13 continues to make gift cards subject to escheat, but includes language to specifically carve out loyalty cards, which are characterized as “a record given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate or promotional program that may be used to obtain good or services or a discount on goods or services”.
Information Sharing & Joint ExaminationsS.B. 13 introduces several key provisions that will augment Delaware’s ability to generate unclaimed property revenue. Specifically, the bill allows for the State Escheator to request the books and records of any Delaware internal agency, board, division or commission for the purposes of determining compliance with the state escheat laws. It also allows the state, as part of their examination process, to utilize any and all reliable data including external databases in their review process. It also permits the State Escheator to authorize an examination without notifying the holder, by joining an examination initiated by another state. As part of this process, Delaware will not being required give the holder the option to enter into the VDA program
While S.B. 13 addresses a number of the key issues on which Delaware is being challenged, there are other areas where further clarity will be necessary to completely understand the full effect of the bill. Specifically, how Delaware will ultimately address its current extrapolation practices and audit enforcement program will be of keen interest to holders currently under audit as they consider whether to continue with the current audit process, convert to an expedited audit, or join the Secretary of State VDA program.
If you have any questions about the legislation or assessing your current position, please contact:
Jon D'Amato David Poehler
T 404.264.8554 T 404.857.1894