Delaware SB 13 Proposes Sweeping Reforms to the State’s Unclaimed Property Program

 
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Authored by Cathleen Bucholtz, Managing Director and Matthew Chenowth, Senior Manager

Proposed Changes To Delaware Statutes

On January 12, 2017, Senate Bill (“SB”) 13 was introduced in Delaware, potentially significantly impacting the state’s existing unclaimed property program.  If enacted the bill, which was cosponsored by Senator Bryan Townsend and Representative Bryon Short, would effectively rewrite some key provisions of Chapter 11, Title 12 of the Delaware Code.

Why Now?
It appears that many of the provisions in SB 13 were created to address recent challenges to Delaware’s unclaimed property program, including the constitutionality of Delaware’s practices in managing its current unclaimed property program that were at issue in the recent decision by the Delaware District Court in Temple-Inland, Inc. v. Cook et al., No. 1:14-cv-00654 (D. Del. June 28, 2016).

The bill’s synopsis also provides that some of the proposed changes were influenced by the 2016 Revised Uniform Unclaimed Property Act (“RUUPA”) developed by the Uniform Law Commission.  In addition, the bill also adopts some recommendations from the Delaware Unclaimed Property Task Force, which was formed under Senate Concurrent Resolution No. 59 of the 147th General Assembly. 

Legislation Highlights
The changes proposed in SB 13 cover 36 pages and address many areas of Delaware’s existing unclaimed statutes.  Among the most significant changes proposed by SB 13 to Delaware’s existing unclaimed property program are the following:

  • 10 Year Look Back Period.  SB 13 proposes a reduction in the look back period of all voluntary disclosure agreements (“VDAs”) and audits to 10 report years (plus 5 year dormancy period).  For an audit, that would mean that the audit would cover a period of 15 years (dormancy plus 10 report years) from the date the audit notice was received.
     
  • 10 Year Statute of Limitation and Record Retention Policy.  SB 13 would create a 10 year statute of limitations from the date when the holder had a duty to report the property for Delaware to seek payment of unclaimed property.  In addition, Delaware’s record retention requirement for companies would also be 10 years, which would align the state’s statute of limitations with its look back period.
     
  • Ability to Convert an Audit to a VDA.  Any company currently under a Delaware audit that began prior to July 22, 2015 would have the opportunity to convert its audit into a VDA by entering into the Secretary of State’s Voluntary Disclosure Agreement program.  The current language in the proposed statute would give holders under audit until July 1, 2017 to make the election.  While one of the benefits to a company in converting an audit to a VDA is the waiver of interest and penalty assessments, the potential downside is the company could be giving up its right to challenge the state’s conclusions in court by converting to a VDA.  In addition, companies subject to multi-state audits should be aware that only the Delaware portion of the examination would be eligible to be converted to a VDA.  Companies would still have to address ongoing audits by the other participating jurisdictions.
     
  • Expedited Audits.  SB 13 provides that all companies under audit, regardless of when they received their notice of examination, would have the option of notifying the State Escheator by July 1, 2017 that they want to participate in an expedited audit.  An expedited audit must  be completed within 2 years from the date of the request, but would provide for waiver of interest and penalties.  Additionally, in order to qualify for the benefits of an expedited audit, companies must meet the state’s timeline in responding to all information requests.
     
  • Compliance Reviews.  SB 13 introduces provisions that would allow Delaware to conduct a “compliance review” of a holder’s unclaimed property report if it believes that a holder has filed a report that is inaccurate, misleading or incomplete.  While a compliance review would be limited solely to the contents of the report under review and the supporting documentation provided by the company, it would not be subject to the 10 year statute of limitations.
  • Estimations Allowed.  If a company does not have complete records for all periods under review during the examination, SB 13 introduces language that would specifically authorize Delaware to estimate the company’s potential liability for the periods where information is missing.  While SB 13 does not mandate the use of specific extrapolation, statistical or other estimation methodologies, it requires that the State Escheator create regulations outlining the proper scope and use of estimations by July 1, 2017. 
  • Limited Liability for State.  Possibly in response to ongoing litigation, including JLI Invest S.A. v. Cook, C.A. 11274-VCN (Del. Ch. Ct. July 9, 2015), SB 13 provides that if a claim for a security is made within 18 months after a notice is sent to the rightful owner by the State Escheator, the rightful owner will receive the replacement of the security, or the market value of the security at the time the file is claimed.  However, if the claim is made more than 18 months after the notice was mailed, the owner is only due the net proceeds from the sale of the security.
  • Increased Interest and Penalties.  There is a general consensus among the holder advocate community that interest and penalty assessments are expected to be more regularly assessed prospectively.  SB 13 has several provisions to increase the interest and penalties that can be assessed by Delaware for non-compliance.  Currently, interest can be assessed by Delaware at a rate of 0.5% per month, with a cap of 25% of the underlying liability.  Under the proposed legislation, the cap increases to 50% of the underlying liability.  Penalties for failure to pay were reintroduced at 0.5% per month with a cap of 25% of the underlying liability. 

Finally, in what may be another salvo in Delaware’s ongoing challenge to gift card planning structures, SB 13 includes a provision for “Other Penalties” to be assessed if a person enters into a contract to evade an unclaimed property obligation, including a civil penalty of $1,000 per day, up to $25,000, plus 25% of the value of the property that should have been reported.

  • Information Sharing and E-Filing.  Other items of interest to holders include provisions that allow Delaware to share information relating to unclaimed property examinations with other jurisdictions as long as the other state has confidentiality requirements “substantially similar” to Delaware’s, as well as a requirement, beginning March 1, 2018, that all reports filed in Delaware must be in a web-based record.

What This Means To Holders
It’s too early to predict whether all changes proposed by SB 13 will make it through the legislature unchanged, but the bill will undoubtedly have a significant impact on how Delaware manages its unclaimed property program.  Any company that is currently undergoing an unclaimed property audit by Delaware will want to review the pros and cons of the new options that may be available to them through converting their audit to a VDA or entering into an expedited audit program.  In addition, any company that is facing the use of estimation to determine its potential unclaimed property liability, including those participating in the current voluntary disclosure program, should be on the lookout for the State Escheator’s regulations outlining the scope and use of estimations (due on July 1, 2017). 

In Closing
While we can’t predict whether or when the bill will be signed into law, during the past week it has passed the Senate with no dissenting votes as it moves to the House for review.  True Partners will continue to monitor this and other legislation impacting your company as it arises, and will release relevant updates as additional information is available.

About Unclaimed Property…
Unclaimed property is any intangible property that is owed by a company and has gone unclaimed for a specific period of time by the rightful owner.  Every company is likely to generate unclaimed property and has a legal responsibility to report and remit that property to the appropriate jurisdiction.  Generally, there is no statute of limitations on a Holder’s unclaimed property liability, and a holder’s state of incorporation can estimate a holder’s potential liability for periods where actual records are not available.  Companies not in full compliance with the states’ unclaimed property laws often have many concerns about getting into compliance, including the likelihood of triggering interest and penalty assessments or being selected for an examination.  However, once aware of the various rules and processes, every holder should consider taking advantage of the various opportunities available to get into compliance for any past-due property.

Our Expertise
True Partners Consulting’s Unclaimed Property Management Solutions Team is comprised of a national group of professionals with a wealth of experience and knowledge and diverse backgrounds, including industry and government.  Our team can offer your company the best combination of experience, expertise, and resources to assist your company, regardless of your company’s industry.  We encourage you to contact one of our professionals to discuss any questions or concerns that you may have regarding unclaimed property.

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Contacts:

Cathleen A. Bucholtz
Managing Director
(818) 650-5801
Cathleen.Bucholtz@TPCtax.com

Jim Sadik
Managing Director

(508) 667-3408
Jim.Sadik@TPCtax.com

Robert M. Tucci
Managing Director
(972) 338-3673
Robert.Tucci@TPCtax.com
 

 

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