KeepUP™ Blog

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?    

On February 2, 2017, Delaware Governor John Carney signed into law Delaware Senate Bill 13 (“S.B. 13”), which represents Delaware’s effort to overhaul the state’s unclaimed property laws.  Although S.B. 13 addresses many of the areas on which corporations and unclaimed property practitioners have been seeking guidance (see previous blog: DE Approves Legislation to Overhaul Their UP Laws) a few key issues in the current Delaware act have yet to be addressed.

Among these is how Delaware will ultimately address its current extrapolation practices.  As included in S.B 13, the Delaware State Escheator must promulgate regulations regarding the method of estimation to create consistency in any examination or Voluntary Disclosure Agreement.  These regulations are due to be finalized by July 1, 2017. 

For holders currently under audit, these regulations will be a critical piece of information as they consider whether to either continue with the current audit process, elect to convert to an expedited audit or join the Secretary of State’s VDA program.  As per the requirements of the bill, this election must be made within 60 days of the adoption of the estimation regulations.  Accordingly, it is critical that holders perform the necessary modeling and analysis of their unclaimed property situation ahead of time so that they are armed with all the necessary information to make an informed decision.

Organizations need to be mindful of changing legislation and the impact it can have on their escheat compliance program. If you have any questions about the legislation or assessing your current position, we encourage you to contact us for expert guidance. 

Jon D'Amato                                             David Poehler                                                                     T. 404.264.8554                                         T. 404.857.1894               jon.damato@marketsphere.com               david.poehler@marketsphere.com

Clive Cohen                                                                                                                                            T. 917.538.8900                                                                                                                                       clive.cohen@marketsphere.com

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.

Constitutional due process is one of the most potentially contentious issues being bandied about in the unclaimed property world. It’s a question of fairness and also a question of appropriate government power. Due process implies the government does have the right to seize property when there’s a question of ownership or when property has been abandoned, but it most clearly reflects the idea that government can’t swoop in and take property without making a reasonable effort to find owners and give them a chance to retrieve what they own.

This makes me think of the Sheriff of Nottingham in the story of Robin Hood. The sheriff was an unscrupulous character who swooped in and took property he wanted without any due process whatsoever—never mind that there were no ownership questions or periods of dormancy to justify his actions.

In today’s world (at least in developed nations), we have few real Sheriff Nottinghams, and it’s easy to imagine most legislators and state unclaimed property administrators truly do have owners’ best interests in mind. However, with recent developments in unclaimed property law, namely drastically reduced dormancy periods and gratuitous due diligence, it may seem to some we are leaning Nottingham-way.

In the recent tug of war between Delaware, MoneyGram and several other states over the escheatment fate of uncashed “official checks,” one of the most interesting points is the potential involvement of the Supreme Court.

Regardless of the landscape-changing unclaimed property legislation that has been passed in the last couple of years in many states, certain legislative bills related to unclaimed property are not passing, which is a bit of a surprise. What exactly is going on?

If you believe state unclaimed property laws are backed by federal law, you would be in good company. When someone first becomes involved in unclaimed property, it’s common to assume the protection of property owners would be something the federal government would want to govern.

In fact, the precursor to modern unclaimed property laws—English Common Law—was all about the rights of the kingdom to claim abandoned property. But if you believe there is federal law backing state unclaimed property laws, you would be wrong. The United States federal government hasn’t passed unclaimed property laws.

Question: If that’s the case, then where does state jurisdiction in this matter come from?

Abandoned and unclaimed property legislation is evolving rapidly as holder companies take a stand against what they believe is overreaching enforcement by auditors and states. States continue to press the boundaries of the law to protect the rights of consumers.

MarketSphere keeps an eye on current developments in unclaimed property law and the way the laws affect our clients. In the last year, we have seen a flurry of legislative adjustments related to contingent fee auditors—an area of great concern to holders, who believe the condition of contingent fees creates incentive for auditors to unfairly assess past due amounts. Other legislation of note is related to the overall audit process, due diligence and Delaware’s new VDA and audit manual.