KeepUP™ Blog

Over the last several years the use of block-chain technologies and their associated cryptocurrencies have grown tremendously. As with many new areas of commerce, growth is usually followed by an onslaught of challenges brought on as governments and regulatory agencies try to decide how to adapt to or fit this new square peg into the round hole of already established laws and regulations.

In the world of unclaimed property, cryptocurrency is just now being recognized in various new statutes and proposed legislation.  Many states, including IL, KY, NV, TN and UT, have adopted some form of the 2016 Revised Uniform Unclaimed Property Act, which includes “virtual currency” in the legislative definition of “property”.  In addition, NY has recently introduced legislation calling for unclaimed cryptocurrency to be escheated to the state upon abandonment.

Whether you are a company that has emerged as a part of the support system to the cryptocurrency world (e.g., coin exchanges) or simply a company that has begun to accept Bitcoin or other similar cryptocurrencies as payment, it will be important that you are prepared for these challenges and are proactively addressing potential issues that can emerge. One often overlooked area for consideration, is the impact of the various states’ unclaimed property laws and regulations.

On April 16, 2019 Colorado joined the growing group of states that has adopted RUUPA, when the governor signed S.B. 19-088, the Revised Uniform Unclaimed Property Act (“Act”) into law.  The Act is effective July 1, 2020 and while it contains many of RUUPA’s provisions it also includes certain provisions that are not contained in RUUPA. 

The legislation makes many changes to the existing statute, the highlights of which include repealing the existing reporting deduction, stipulating record retention requirements, allowing use of estimation methods for the failure to retain records, imposing interest and penalties for failure to act in a timely manner and providing a transitional provision.

Reporting deduction eliminated

Colorado’s current unclaimed property statute provides that “A holder may voluntarily, prior to payment or delivery of said abandoned property, deduct and retain [2%] of the value of the property or [$25] whichever is more per item…”. The Act does not include a similar provision.

Retention of records

The Act provides that “a holder required to file a[n unclaimed property] report … shall retain records for ten years after the later of the date the report was filed or the last date a timely report was due to be filed, unless a shorter period is provided by rule of the administrator”.

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.

In what seems like the never-ending story concerning Illinois and its unclaimed property statute, the latest twist occurred last week when Governor Bruce Rauner vetoed a bill (Senate Bill 2921) that barely touched on unclaimed property.  In his veto letter, Rauner indicated that he would pass SB 2921 if the legislature would add certain language to it amending 2017’s Senate Bill 9; specifically, Section 15, The Revised Uniform Unclaimed Property Act.

If you have followed Illinois’ unclaimed property legislation over the last year, you will know that the state has made significant changes to its unclaimed property laws by adopting a version of the 2016 Revised Uniform Unclaimed Property Act (‘RUUPA’), see our related blog Illinois’ New Unclaimed Property Act – Impact on Business to Business Transactions.

The two key parties involved in the disagreement, Illinois State Treasurer, Michael Frerichs, and Governor Rauner have been at odds since SB9 was introduced and eventually passed. (Governor Rauner made an attempt to veto SB9 prior to it becoming law, but his veto was ultimately overruled by a three-fifths majority vote in the Illinois Senate). In what appears to be a continued effort to reform the adopted RUUPA, Governor Rauner states in his SB 2921 veto letter, that the RUUPA is ‘deeply flawed’. Rauner goes on to say;

On May 14^th, the Supreme Court legalized sports betting, overturning a 1992 federal law which barred most states from permitting sports gambling. As a consequence of the decision, each state will be allowed to introduce and pass legislation for sports betting within its jurisdiction. Almost twenty states, as shown in the map below, have already enacted legislation or introduced bills to legalize sports wagering [1].

Note - Oregon, Delaware and Rhode Island appear to be readying for sports betting through their lotteries [1]. 

Considering the success of online companies who specialize in fantasy sports contests, we anticipate the legalization of sports betting to only spur the industry as a whole, while also generating a new source of revenue for states.

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.

In late 2016, the Uniform Law Commission (“ULC”), with the input from state unclaimed property administrators, holders, and holder advocates, completed an update to the Uniform Unclaimed Property Act, entitled the Revised Uniform Unclaimed Property Act (“RUUPA”). Since the release of the RUUPA, four states, Delaware, Illinois, Tennessee, and Utah have adopted some form of the act. The acts adopted by Delaware and Illinois made significant changes to prior legislation and MarketSphere has covered those in previous blogs, Delaware Governor Signs Legislation to Overhaul their Unclaimed Property Laws and Illinois’ New Unclaimed Property Act – Impact on Business to Business Transactions. 

In 2017, Nebraska, Maine, Minnesota and Vermont have proposed bills to adopt RUUPA. And, kicking off  2018, the District of Columbia and state of Washington have proposed legislation to adopt the 2016 RUUPA. 

The recently proposed bills for both the District of Columbia and Washington include changes to definitions, including additions of property types, changes to what constitutes contact with an owner, and various other updates consistent with the 2016 RUUPA. 

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 June 29, 2017, Delaware Governor John Carney signed into law DE Senate Substitution No.1 for Senate Bill 79 (“DE SS1/SB79”), which makes certain technical corrections to the May 5, 2017 original SB 79.  (see previous blog from 6/21/17). These technical corrections mark yet another adjustment to Delaware’s ongoing efforts to overhaul their escheat laws, which began in February 2017 with the passage of Delaware SB13 (see previous blog: Delaware Governor Signs Legislation to Overhaul Their Unclaimed Property Laws), and includes Delaware’s proposed draft estimation regulations from early April (see previous blog: Delaware Releases Draft Estimation Regulations).       

Key Updates of DE SS1/SB79

• Adoption of Regulations - The date by which the Delaware Department of Finance (“DOF”) must adopt regulations (including those pertaining to estimation) has been pushed back to December 1, 2017 from the original July 1, 2017 date. Holders will still have a 60 day window starting with the date the regulations are finalized to elect whether they would like to convert their existing audit to a VDA or expedited audit.
• Due Diligence - The requirement for due diligence letters to be sent to owners commences on July 1, 2017. These notices must be sent not more than 120 days nor less than 60 days before filing the report.
• Interest and Penalties
  • Under the VDA program, the Secretary of State continues to have the authority to waive interest and penalties.
  • For expedited audit conversions, the State Escheator must waive interest, and may waive penalties for good cause. It remains to be seen how interest and penalties will be treated for holders subject to an expedited audit, who are deemed not to have acted in good faith to complete the expedited audit process.
  • For holders who do not elect a VDA or expedited audit conversion and remain in the audit process, up to 50% of interest and 100% of penalties continue to be waivable for good cause.

On April 1, 2017, The Delaware Department of Finance release proposed regulations relating to its  Abandoned or Unclaimed Property Law.   These proposed regulations can be found at: "Delaware Proposed Regulations 4/1/2017". 

The public comment period for these proposed regulations end on May 3rd. It is anticipated that Delaware will issue final regulations shortly thereafter.

As required by Delaware’s recently enacted SB13, these proposed regulations include sections dealing with many aspects of estimation, including permissible base periods, items to be excluded from the estimation calculation, sampling, funds returned and aging criteria for outstanding and voided checks.  In addition, there are sections dealing with projection and complete and researchable records.

In light of recent and pending litigation, of most interest to the holder community are sections of the draft regulations dealing with the following:

• Estimation The State may utilize any available dormant records to estimate an unclaimed property liability for the period of time for which the holder does not possess complete and researchable records. In addition, if the holder fails to retain sufficient dormant years of records, the State and the holder shall discuss which records are to be utilized for the base period.  In the absence of agreement, the State shall possess the sole authority to make a reasonable determination for the base period in order to prepare an estimate.  Base periods shall consist of complete and researchable records and shall consist of at least three years from the universe of complete and researchable records. However, depending on the unique facts and circumstances of each holder, the State may consider including non-dormant periods in the base periods.  
• Items To Be Excluded from Estimation Calculation This section excludes items payable to a US federal department or agency and funds returned in the normal course of business prior to the issuance of the examination notice. However, it does not exclude items with non-Delaware addresses or items with addresses in states where specific statutory exclusions exist.
• Sampling Statistical sampling, generally in the form of stratified sampling, may be employed. However, if a holder wishes to research an entire population, this research must be performed “in a reasonable time”.  No definition is provided as to what constitutes “in a reasonable time”.   In addition, the State may elect to sample and test a number of entities of a holder in lieu of testing all Delaware entities and then extrapolate these results to non-tested Delaware entities.
• Funds Returned Funds returned in the normal course of business prior to the issuance of an examination notice will not be included in the population of potential unclaimed items. However, funds returned outside of the normal course of business (i.e., change in process) after issuance of the examination notice will be included in the population of potential unclaimed items.
• Aging Criteria Checks that remain outstanding less than 90 days after issuance and checks that are voided within 30 days of issuance are to be excluded from any testing populations. However, the State may adjust these periods, if, in its’ sole discretion, a redefined outstanding period is necessary.
• Projection Projection techniques may be used to calculate amounts due for periods where records do not exist. However, to the extent permitted by law, names and addresses identified in a base testing period, shall not be used to determine which state has the priority claim to the abandoned property estimated to be due for periods where records do not exist.  This appears to challenge what Judge Sleet stated in the Temple Inland case. The State “failed to follow the fundamental principle of estimation where the characteristics of the sample set are extrapolated across the whole”.   In addition, all sampling, projection and estimation techniques used by an auditor shall be approved by Delaware prior to use.  However, the ultimate decision to employ a particular technique is at the sole discretion of the State.  The holder may challenge this decision at the close of the examination.
• Complete and Researchable Records Where a holder may not have the expected 7-8 years of researchable records, the State and the holder may discuss the circumstances and use an alternative data set with fewer years. In addition, Delaware is also stating that “Researchable records are records to which the holder may research the resolution of an item.  At a minimum, researchable records shall include those items that contain a last known address of the owners of property.”  It is unclear what this last sentence means.  Is Delaware stating that, at a minimum, the only attribute a “researchable” record must have is an address?