- Delaware’s Overhaul of Its Unclaimed Property Laws
- February 7, 2017 | Authors: Wilson G. Barmeyer; Kristine M. Ellison; Amy F. Nogid; Holly H. Smith; Phillip E. Stano; Steuart H. Thomsen; Mary Jane Wilson-Bilik; John Allen Zumpetta
- Law Firms: Eversheds Sutherland (US) LLP - Washington Office; Eversheds Sutherland (US) LLP - New York Office; Eversheds Sutherland (US) LLP - Washington Office; Eversheds Sutherland (US) LLP - New York Office
Facing widespread criticism about the enforcement of its unclaimed property laws, Delaware has just completed a wholesale revision of its unclaimed property statute. The statutory overhaul has passed both houses of the legislature and is awaiting signature by the Governor, after which it will be effective immediately. The legislation deletes the prior unclaimed property statute in its entirety and replaces it with a new statute based in large part on a blending of the prior statute and the 2016 Revised Uniform Unclaimed Property Act. The new statute impacts many key elements of unclaimed property law, for both Delaware and non-Delaware companies. It significantly changes the treatment of specific property types and the process for audits and voluntary disclosure agreements (VDAs). A summary of key takeaways is below.
Hot Issues: Estimation, Statute of Limitations and Record Retention
A clear purpose of the new statute was to address some of the concerns raised by the federal court decision in Temple-Inland v. Cook, -- F.3d --, 14-cv-654 (D. Delaware June 28, 2016), which held that Delaware’s audit estimation methodology was a violation of the U.S. Constitution’s substantive due process clause. The Temple-Inland court struck down Delaware’s use of estimation to assess a liability back to 1986. The court found that Delaware avoided the six-year statute of limitations by “exploit[ing] loopholes” under dubious circumstances, gave holders no notice that they needed to retain unclaimed property records for periods beyond standard retention periods, and used estimation based on amounts escheated (or excluded) by other states to assess a liability due to Delaware.
The new Delaware statute makes some key changes in an effort to address some of these concerns. Specifically, Delaware has added a new statute of limitations that limits the lookback period for audits and VDA to 10 reporting years. This is longer than the current statute of limitations (three years from the date a report was filed, or six years for underreporting of 25% or more), but offers protection to companies that have not filed reports and also should provide less flexibility for Delaware and its auditors to circumvent the period as they had sought to do frequently under the old statute. Consistent with the 10-year lookback period, the statute adds a record retention period of 10 reporting years.
The statute does not, however, clarify the estimation methodology. Instead, the statute directs the State Escheator to promulgate regulations regarding the method of estimation. The regulations, to be issued by July 1, 2017, shall provide guidance on permissible base periods, items to be excluded, and the definition of what records are researchable. Although not specifically addressed in the statute, it is expected that Delaware will continue to take the controversial position that it can estimate a 50-state liability for companies incorporated in Delaware for the periods where complete records are not available.
Treatment of Specific Property Types
As a wholesale revision, the new statute necessarily impacts a number of specific property types. Some of the treatment is based on the new 2016 Uniform Act, but with Delaware-specific nuances in particular instances.
Gift Cards and Stored Value Cards. The statutory provisions on gift cards and stored value cards are greatly expanded from the prior law, which referred only to gift certificates. Many of these provisions are modeled after the 2016 Uniform Act, which provides a broad definition of stored value card. Similar to the 2016 Uniform Act, there is a specific exemption for certain loyalty programs that are not redeemable in cash, though Delaware has not carried over the specific exclusion for “game-related digital content.” In an early draft of the legislation, “virtual currency” was listed as a property type, but was removed in an amendment. Delaware has carried forward a unique provision from Delaware law that the reportable amount for a gift card is the amount representing the maximum cost to the issuer of the merchandise, goods or services represented by the card.
Individual Retirement Accounts. The new statute adds a provision specifying that, absent activity, an account is presumed abandoned three years after the date of a required minimum distribution or three years after the holder has knowledge of the death of the owner.
Securities. The new statute imposes an activity standard for dormancy, which means that accounts with no activity are presumed abandoned after three years, except that a non-returned mailing of Form 1099 constitutes activity in accounts with an automatic reinvestment of dividends, including mutual fund accounts and brokerage accounts. There are also new provisions on liquidation of securities that require Delaware to provide notice to the owner before liquidation and allow the owner to recover full market value if a claim is made within 18 months of the liquidation notice.
Life Insurance. The statute adopts a “knowledge of death” standard for dormancy, similar to the 2016 Uniform Act, and specifies that a match against the Death Master File constitutes knowledge of death where the match has been validated by the insurer.
Changes to Audit and VDA Process
Delaware has enacted a number of process changes that impact the audit and VDA process, specifically for companies already under audit.
For companies currently under audit. There are several new options for companies currently under audit.
VDA. First, the new statute permits a company currently under an audit that was authorized on or before July 22, 2015 (except for a company under a securities examination for which estimation is not required) to opt in to the VDA program in lieu of the audit. To comply with the program, a VDA and payment plan must be entered into within two years from the date of the holder’s intent to enter into the VDA program. The bill, as currently drafted, references two inconsistent deadlines for opting into the VDA program: (1) July 1, 2017 and (2) within 60 days of the adoption of the estimation regulations. The interest and penalties that are set forth in the new statute are waived if the holder completes the VDA program (or an expedited audit) within two years and in good faith.
Expedited audit. Alternatively, a company currently under audit may opt in to an expedited audit process. An expedited audit will be completed within two years, if the holder responds within the time and manner established by the State Escheator to all requests for records, testimony and information. A holder must opt in to an expedited audit within 60 days of the adoption of the above-referenced estimation regulations.
For companies not currently under audit. The new statute also impacts companies that are not currently under audit or not currently participating in the VDA program. Carried forward from the prior law is a provision which requires Delaware to give notice of the option to enter the VDA program before initiating a new audit against a company. Notably, however, there are various exceptions to this option, including, for example, if Delaware joins an audit initiated by a sister state. In addition to full audits, the statute also creates a new process called a “compliance review” that is initiated by the State Escheator by requesting the company to file a “verified report” regarding the property it may be holding. The State Escheator may then conduct a “compliance review” and assess a deficiency. The specifics of a compliance review are not specified in the statute. The compliance review does not preclude the company from entering the VDA process, and cannot be converted to a full audit absent notification of the VDA option.
The full impact of the Delaware unclaimed property overhaul is unknown at this time, since the State Escheator has yet to propose regulations governing estimation, and companies under audit are weighing their options for a VDA or expedited audit. The legislation was fast-tracked through the legislature with few amendments, and subsequent legislative changes cannot be ruled out.