Sweeping Changes to Delaware Unclaimed Property Law Present New Opportunities for the Holder Community, But Proceed with Caution

by Maureen Ferrari 17. February 2017 13:59

Delaware has long been known for its aggressive position on unclaimed property audits that included prolonged lookback periods, debatable extrapolation methods and no express period for record retention.

Caution Sign

Despite improvements, there are still areas that remain unclear and require further definition. Holders considering taking any action in Delaware should carefully consider all of their options and risk tolerances and make an educated and informed decision that best suits their organizational goals.

Finally, in June 2016, the Federal District Court in Delaware issued a decision in the Temple-Inland v. Delaware case affirming that these practices amounted to a “game of gotcha” that “shocked the conscience” and further violated the due process rights of Temple-Inland.

As a result of this case, and after years of Delaware-incorporated companies complaining about the State’s aggressive position on unclaimed property, Delaware has made attempts to update and clarify its outdated unclaimed property law and provide holders with more opportunities for voluntary compliance by passing Delaware Senate Bill 13.

With Bill 13 the State has adopted some of the provisions of the Federal 2016 Revised Uniform Unclaimed Property Act[1]. Notable attempts at clarification in Bill 13 include:

· Defining an “indication of owner interest” which now includes written or oral communication and accessing account information. It also recognizes that activity in one account equals activity for all other accounts linked to the same owner.

· Defining “last known address” as the description, code or other indication of the location of the owner which identifies the state of the address of the owner.

· Defining the process and timeframe for disposal of securities being held by the state and provides options for owners claiming securities. It also affirms the current law that owners of securities must receive due diligence notice prior to sale of the security.

· Defining the record retention period at 10 years from the date the unclaimed property report is submitted.

· Adopting and defining the “knowledge of death” concept as a trigger for dormancy for life-insurance proceeds.

· Adding the terms “goods” and “services” into Delaware’s gift card provision, stating “the amount unclaimed is the amount representing the maximum cost to the issuer of the merchandise, goods or services, represented by the card”.

· Addressing the transfer of liability and providing that liability can only be transferred to related entities.

 

While attempting clarification, the law also seems to address the specific issues that arose in the Temple-Inland v. Delaware case, including:

· Reducing the lookback period to 10 years for both audits and VDAs.

· Setting the statute of limitations at 10 years from the date the unclaimed property obligation arose.

· Mandating that the state must adopt extrapolation methodologies by July 1, 2017.

· Eliminating the administrative review process and giving the state court the authority to review questions of law relating to an unclaimed property examination.

· Prohibiting Delaware from taking property into custody that is exempted by the first priority rule. (Under the first priority rule, property containing a last known address is reported to the state of the owner’s last known address. If no address is known, it is reported to the state of incorporation, which in many cases is Delaware.)

Finally, the changes in law present some opportunities to holders that could be beneficial to those currently under audit or those that find themselves out of compliance, including:

· A two-year accelerated audit program is offered to holders currently under audit. This means that the state has two years to complete the audit but there is a caveat to the holder, the holder must respond to the auditor’s requests for information “within the time and in the manner established by the State Escheator”.

· Conversion from audit to VDA. Holders under audit as of July 22, 2015 may enter into the VDA program and be relieved of penalties and interest that could be assessed in an audit.

· Creation of a compliance review program – permitted when the State Escheator believes that the report filed was inaccurate, incomplete or false.

All of the states need to update, clarify and define vague and outdated unclaimed property laws and we will see many states adopting portions of the 2016 Uniform Unclaimed Property Act in the months and years to come. Delaware may have been forced into early adoption due to the Temple-Inland case, but their efforts to take action are a step in the right direction. There are many opportunities for the holder community, particularly those who may be under audit or find themselves out of compliance, to give careful consideration. However, there are still areas that remain unclear and require further definition. Holders considering taking any action in Delaware should carefully consider all of their options and risk tolerances and make an educated and informed decision that best suits their organizational goals.


[1] an effort by the Uniform Law Commission, with representation from the holder, state and industry-related associations, to update the 1995 Uniform Unclaimed Property Act and address electronic commerce and other means of doing business that have evolved over the last twenty plus years.

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