United States: Key Takeaways From Delaware's Unclaimed Property Overhaul

A bill has been introduced in the Delaware Senate that would overhaul Delaware's unclaimed property law. The bill is on a fast track and could be enacted by the end of January. If enacted, companies currently under audit will have a limited window in which to make some key decisions.

After much speculation about an anticipated response by Delaware to the Temple-Inland decision1, a bill has been introduced in the Delaware Senate that would overhaul Delaware's unclaimed property law. Senate Bill 13 would rewrite Delaware's abandoned and unclaimed property law, using the recently completed Revised Uniform Unclaimed Property Act of 2016 as a baseline. The bill is on a fast track and could be enacted by the end of January.

The proposed amendments are sweeping and, in many cases, the legislation enshrines in statute, existing audit practices that have spurred much litigation by holders against Delaware. This alert addresses the significant time-sensitive issues contained in the Bill. Additional alerts in the future will address other significant changes.

10-Year Look-back

The bill provides for a 10-year look-back applicable to both audits and the Voluntary Disclosure Agreement (VDA) program. Delaware's current unclaimed property statute is silent on the look-back period for audits for non-filers, but provides a look-back period for VDAs. Under the bill, the look-back for audits would be 10 report years from the date of the audit notice. The bill similarly proposes to increase the current three-year statute of limitations to 10 years from the date when the property became reportable. The statute of limitations for a report year is tolled once a holder has been provided with notices of an audit.

A 10-year document-retention period is also proposed. Current Delaware law has no document-retention requirement. We understand that regulations will be promulgated to provide more detailed guidance on the types of documents to be retained, but the statute requires that holders retain: (1) the verifiable information required to be included in the report; (2) the date, place, and nature of the circumstances that gave rise to the property right; (3) the amount or value of the property; (4) the last address of the owner, if known to the holder.

Provisions Impacting Audits

The legislation grants holders under audit as of July 22, 2015, the opportunity to transfer report years under audit to the state's unclaimed property VDA program administered by the law firm of Drinker Biddle on behalf of the Secretary of State. Transfer to the VDA program, however, is not available for any securities examinations in which estimation is not required. Some pros and cons of the VDA program are discussed in more detail below. Holders wishing to transfer report years from audit to the VDA program must elect to do so by July 1, 2017.

The bill expressly authorizes the State Escheator to issue a subpoena duces tecum (a legal demand for documents) to holders in the course of an audit. Such authorization resolves an issue in the pending Blackhawk litigation2. Further, the bill provides the State Escheator the authority to enforce such subpoenas. As a consequence, holders who challenge the validity of auditor requests for information will have the opportunity to challenge subpoenas and present arguments against production to a Chancellor in the event the State Escheator seeks to enforce a subpoena in court. Holders with concerns about data security can present those arguments to the court and hopefully obtain protections governing the disclosure of sensitive information and/or information protected from disclosure by other statutes. Whether the state will issue subpoenas for documents that holders currently will resist producing, and whether holders should comply with such specific document requests from third-party auditors in the absence of a subpoena, are questions holders likely will face.

Under the Bill, holders under audit will have the option of choosing a newly created two-year fast track audit option. A holder currently under audit may take advantage of this option by providing written notification to the State Escheator by July 1, 2017. After notice is provided, the audit is required to be completed within two years from the date of notice. Interest and penalties will be waived. Holders choosing this option are required to respond to all audit requests for records within 18 months of providing notice.

Third-party auditors will still be authorized to conduct audits. Holders will be subject to interest, up to 50% of the unclaimed property liability, although interest assessed will be subject to waiver under certain conditions at the discretion of the state.

In addition, under the Bill, the state is still required to use a "reasonable" estimation to assess liabilities for periods for which records no longer are available. We understand that the estimation method to be applied will continue to be the method that the court in Temple-Inland found was "misleading," and based on a "troubling" interpretation of the priority rules in Texas v. New Jersey.

As a consequence, holders may still have to challenge any estimated liability based on the methodology used in Temple-Inland. For holders that have been undergoing an audit for some years, the opportunity may exist to challenge such an assessment in federal court without the need to exhaust administrative remedies. Many of the same arguments presented in Temple-Inland likely will continue to apply to such holders. Other holders may have to exhaust administrative remedies, depending on the circumstances, before filing suit in state or federal court.

The legislation requires the Secretary of Finance, in consultation with the Secretary of State, to promulgate regulations on or before July 1, 2017, regarding the method of estimation the state may use in both VDAs and audits. The content of these regulations will be a key factor in whether holders make the conversion election afforded by the legislation, as they are to address permissible base periods, items to be excluded from estimation, aging criteria for outstanding and voided checks, and the definition of what complete and researchable records are. Holders and their representatives must stay alert to developments regarding the regulations.

Provisions Impacting the VDA Program

For holders participating in the state's VDA program, interest and penalties will continue to be waived. While participants in the VDA program will continue working with Drinker Biddle, they will be required, under the Bill, to provide more extensive documentation than is currently mandated. The Secretary of State does not make any changes to the estimation methods required in the VDA program under the current Bill. Thus, any holder considering the move from an audit to a VDA, must consider the effects of waiving its rights to contest the estimation methodology after the Temple-Inland case.

Conclusion

Companies currently under audit will have to decide between now and July 1, 2017, regarding whether to transfer report years from audit to the VDA program or to opt into the fast-track two-year. In addition, companies should consider the advisability of attempting to enter into a settlement with the state, rather than transferring to the VDA program or continuing with an audit, depending on how far along the company is in the audit process. Thus holders must consider the tradeoff between (1) converting to a review under the state's VDA program and agreeing to be subject to the estimation methodology found unconstitutional in Temple-Inland, but avoiding an interest assessment, or (2) continuing with an audit, thereby potentially being assessed interest, but preserving the right to challenge the estimation methodology employed to calculate an assessment. These factors will vary based on each company's discrete set of facts, so we encourage you to consult with legal counsel.

Whether holders will benefit from a shortened look-back period is questionable in any given case, because Delaware does not appear inclined to abandon its use of the estimation methodology that the Temple-Inland decision found to be deficient and unlawful. It appears that by allowing companies currently under audit to convert to a review under the state's VDA program, the state is hoping to avoid further legal challenges to its estimation methodology similar to those raised in the Temple-Inland case. At the same time, the Bill would make small changes to the law to bolster the state's position on certain constitutional questions should such challenges nevertheless arise. For example, if the Bill were enacted, companies coming under audit for the first time under the new statute would be unable to claim they had no notice concerning the state's audit methodologies, which are made explicit in the Bill.

But for those companies currently undergoing Delaware unclaimed property audits or participating in Delaware's unclaimed property VDA program, it remains to be seen just how willing Delaware will be to limit the use of an estimation methodology that the United States District Court for the District of Delaware has stated "shocks the conscience."

We will provide updates on this Bill as it progresses through the legislative process.


  1. Temple-Inland, Inc. v. Cook, No. 1:14-cv-00654 (D. Del. 2016)
  2. Department of Finance v. Blackhawk Engagement Services, Docket No. 11737-CB (Del. Ch., filed Nov. 20, 2015).

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.