On January 12, 2017, Senator Bryan Townsend and Representative Bryon Short, as well as other co-sponsors, introduced Senate Bill 13 (“S.B. 13”or the “Act”) designed to significantly revise the Delaware unclaimed property law (UPL). The Act addresses some of the concerns arising out of the recent Temple-Inland court case and also updates the UPL by incorporating some significant provisions found in the 2016 Revised Uniform Unclaimed Property Act (RUUPA). Highlights of the legislation are as follows.
Audit Look-Back Period/Statute of Limitations
The Act provides that the State Escheator may not commence an action to enforce the UPL more than ten years after the duty to report and remit arose. However, the Act provides two exceptions to the general rule. First, the period of limitations is tolled by the State Escheator’s delivery of an examination notice. Second, it is tolled if the State Escheator reasonably concludes the holder has filed a report containing a fraudulent or willful misrepresentation.
Record Retention
The Act requires a holder to retain records for ten years after the date the report was filed, unless a shorter period is provided by rule of the State Escheator. In practice, records should be maintained for ten years plus the dormancy period, which is generally five years in Delaware.
Election to Convert Audit to VDA
The Act generally affords entities currently undergoing a Delaware unclaimed property audit that was authorized by the State Escheatoron or before July 22, 2015 an opportunity to convert their current audit into a review under the Secretary of State’s Voluntary Disclosure Agreement (VDA) program. This election is made by giving written notice to both the State Escheatorand Secretary of State by July 1, 2017, in a manner provided by both officials. However, securities audits in which estimation is not required are not eligible for this election. The Act provides a special look-back period for such “converted VDAs,” which is ten years prior to when property is presumed abandoned under the UPL from the calendar year in which the State Escheator provided the original audit notice. A potential advantage to making the election to convert to a VDA is that penalties and interest generally are not assessed under the VDA program. Moreover, entities remaining under audit may be subject to the new mandatory interest provisions of the Act, which are described in more detail under the “Interest and Penalties” heading of this Alert. A decision to make this election is fact intensive and merits discussion with a holder’s designated advocate.
Election to Expedite Completion of Audit
In the event a holder under audit does not elect to convert an eligible audit into a VDA under the Secretary of State’s program, an entity under audit alternatively can request an expedited completion of the audit via written notification to the State Escheator by July 1, 2017. This election can be pursued for any examinations authorized by the State Escheator up to the effective date of the Act. There are two potential advantages to requesting an expedited audit. First, the Act provides that the State Escheator is to conclude the expedited audit within two years of the date of receipt of the written request. Second, all penalties and interest assessments must be waived, provided auditees respond within the time and the manner established by the State Escheator to all requests for records, testimony, and information. A potential disadvantage of the expedited audit program is the Act does not provide for any judicial or impartial review of whether a holder responded in a timely manner. Rather, the Act provides the criteria as being within the complete discretion of the State Escheator and subject only to the review of the Secretary of Finance. As with the above option, the election to expedite an ongoing audit is very facts and circumstances driven, and as such, should be discussed in detail with the holder’s advocate.
VDA Look-Back Period
The Act provides two general rules for look-back periods for Secretary of State VDA programs. First, with respect to any person who enters into a VDA and makes payment in full or entered into a payment plan no later than June 30, 2016, the look-back period applies to transaction years beginning June 1, 1996. Second, with respect to any person who enters into a Secretary of State VDA and makes payment in full or enters into a payment plan on or after July 1, 2016, the look-back period shall start “… the first of January for the prior 10 years (plus 5 year Delaware dormancy period) from when the property is presumed abandoned starting from the calendar year in which the person’s intent to enter into a VDA was accepted by the Secretary of State.” Certain exceptions to the general rules are delineated in the legislation.
Interest and Penalties
The Legislative Synopsis to the Bill states: “This Act mandates that interest be assessed on any late-filed unclaimed property, as a means to incentivize voluntary compliance.” Thus, the Act provides that for any late-filed unclaimed property that is reported and remitted on or after July 1, 2017, interest accrues at 0.5% per month on outstanding unpaid amounts, with the assessment commencing when the property was first due. However, interest cannot exceed 50% of the amount required to be paid. There are several major exceptions to the general rule that interest will be mandatory on any late-filed unclaimed property. First, the Secretary of State is authorized to waive interest under its VDA program. Second, the Act further provides interest shall be waived with respect to any holder who requests an expedited examination from the State Escheator on or before July 1, 2017, provided the holder acts in good faith to complete the audit or VDA. The legislation also allows for the State Escheator to “waive up to 50% of the calculable interest” related to this provision. Significant penalty provisions are also provided for in the Act.
Estimation
The Act provides that if a holderhas filed reports and retained records for the prescribed periods, estimation may not be used in an audit without the holder’s consent. However, if a holder has not retained the required records, the Secretary of Finance, in consultation with the Secretary of State, is directed to promulgate estimation regulations by July 1, 2017. These regulations are required by the Act to include “…permissible base periods, items to be excluded from the estimation calculation, aging criteria for outstanding and voided checks, and the definition of what constitutes complete and researchable records.” Presumably, the pre-Temple-Inland estimation methodology is still in place for Delaware VDA and audit purposes. However, the regulations should assist in bringing clarity and transparency to a very gray area, particularly if holder and industry group assistance is sought in the drafting process.
Limitation on Assignment of Liabilities
The Act provides that a holder may not assign or otherwise transfer its obligation to hold for, pay to, deliver property, or to comply with the duties of this chapter, other than to a parent, subsidiary, or affiliate of the holder. A new penalty is associated with holders entering into contracts or other arrangements “for the purpose of evading an obligation under this chapter or otherwise willfully fails to perform a duty imposed on the holder under this chapter.” The penalty amount is $1,000 per day, with a cumulative maximum of $25,000, plus 25% of the amount or value of identified property that should have been reported and remitted “as a result of the evasion or failure to perform.” The Act authorizes the State Escheator to waive penalties related to this, in whole or in part. This proposed anti-assignment provision raises a number of issues that are currently being litigated in a major Delaware whistleblower gift-card case.
Exemptions
The Actexempts several categories of property by excluding them from the definition of property, including uninvoiced payables, layaway accounts issued or maintained by any person in the business of selling tangible personal property at retail, and certain loyalty cards which cannot be redeemed for money or otherwise monetized by the issuer. In addition, holders who are issuers of gift cards are entitled under the Act to retain their maximum cost of merchandise, as well as their cost for goods and services, when reporting unredeemed gift cards.
Web-Based Report
The Act requires, beginning March 1, 2018, that all reports must be in a web-based record format. The State Escheator may not accept the report in any other medium.
Owner Notification/Due Diligence
A new owner notification provision would require that holders send written notice by first-class mail to the apparent owner not more than 120 days, or less than 60 days, before the property is reported to the state as unclaimed property for amounts $50 or more. Previously, there was only a requirement to send notice on securities-related property.
Securities
The State Escheator generally is required to send notices to all owners of securities prior to liquidation, unless the Escheator determines that the notice would not be received by the owner. Subsequently, Delaware will not be liable for any amounts exceeding the security’s liquidation amount. However, if an owner makes a claim within 18 months of when the state’s notice was mailed, the owner is entitled to either the current market value of the security or replacement of the security, at the State Escheator’s discretion.
Life Insurance
The Act does not mandate that life insurance holders must utilize the Social Security Administration’s Death Master File (DMF). However, the Act does provide that “knowledge of death” can be identified through various sources, such as a copy of a certified death certificate, or certain DMF matches.
Compliance Review
The Act authorizes the State Escheator to conduct a new type of limited “compliance review” if the Escheator has reason to believe that the holder filed an inaccurate, incomplete, or false report. Such review must be limited to the contents of the report and all supporting documents related to the report.
Direct Appeal to Court of Chancery
The Act provides that a holder may file a new type of direct appeal to the Delaware Court of Chancery, provided the appeal is made within 90 days after the State Escheator had mailed its statement of findings. The holder may seek a declaration from the court that the determination is unenforceable, in whole or in part.
Summary
Overall, the Act, assuming it ultimately is enacted into law in substantially its current form, represents some holder-friendly improvements over the current version of the Delaware UPL for the following reasons:
- Articulates helpful definitions of a number of terms which were not previously addressed in the law.
- Delineates several exemptions that were not previously discussed and provides additional helpful guidance on the parameters of the gift-card “exclusion for cost” feature.
- Outlines guidance on record retention and look-back periods.
- Incorporates a number of provisions from the 2016 RUUPA, with which many in the holder community are generally familiar.
- Articulates guidance on when estimation may be used by the state, and directs Delaware regulatory officials to provide specific guidance in the form of regulations.
- Provides for a new, direct appeal mechanism to a Court of Chancery.
As we have also outlined, some of these provisions (such as the ones related to interest and penalties and the limitation on assignment of liabilities) are not as holder friendly. While there are undoubtedly a number of other provisions the holder and holder advocate community would like to see in the Act, overall the Act represents a step in the right direction for holders seeking more clarity and transparency.
Holders seeking additional clarification on how these matters relate to their specific factual situations may contact their designated Ryan AUP representative.