On January 12, 2017, significant unclaimed property legislation, SB13, was introduced in the Delaware General Assembly. If enacted, which appears likely, SB13 would make numerous changes to the state’s much-maligned procedures for enforcing its abandoned and unclaimed property laws. Legislation has been widely expected in the wake of last summer’s summary judgment decision against Delaware in Temple-Inland Inc. v. Cook, 1:14-cv-00654 (D. Del. filed May 21, 2014). In Temple-Inland a federal district court invalidated many of the unclaimed property audit practices authorized by Delaware and implemented by the state’s contract auditors (See our prior coverage Federal District Court Holds Delaware’s Unclaimed Property Enforcement Practices “Shock the Conscience” and Delaware Unclaimed Property Litigation Update). The parties agreed to dismiss the Temple-Inland case before the court could consider remedies to the substantive due process violations it found, and thus, the state was left with the opportunity to pass legislation likely in an effort to preserve the stream of unclaimed property receipts that have become one of Delaware’s largest sources of revenue. Among other changes, the proposed legislation addresses some of the federal district court’s concerns, and provides a path to the state’s voluntary disclosure agreement (“VDA”) program for companies already under audit. Descriptions of some of the more significant provisions of SB13 follow. Unless otherwise specified, the provisions below would be effective upon enactment of the legislation.
Reduced Audit Look-Back Period – SB13 limits the audit look-back period to the previous 10 years, plus the statutory dormancy period (which is generally five years). Given Delaware’s five-year dormancy period for most types of property, the look-back period would generally result in an examination of transactions going back 15 years from the notice of audit. The reduced look-back would apply across the board, covering both ongoing and future audits. This change is clearly a direct response to the severe criticism in the Temple-Inland decision of Delaware’s former decades-long examination period.
Records Retention Requirement – SB13 imposes a requirement that holders retain records related to an unclaimed property report for 10 years after the date the report was filed. This provision is also a response to Temple-Inland, in which the court criticized Delaware for effectively punishing companies for not keeping records even though Delaware law did not provide a specific requirement for doing so.
Subpoenas Authorized – SB13 grants the State Escheator the authority to issue subpoenas and provides that they may be enforced in the Delaware Court of Chancery. The State Escheator’s power to compel responses to information and document requests, or rather, the historic lack of such power, is currently being litigated in Department of Finance v. Blackhawk Engagement Solutions (DE), Inc., No. 11737-CB (Del. Ch., filed Nov. 20, 2015).
Conversion of Audit to VDA – SB13 permits companies that are already under audit to enter Delaware’s VDA program. Since July 22, 2015, Delaware’s unclaimed property laws have required that the state offer companies the opportunity to enter its VDA program prior to conducting an audit. However, the state would not allow companies already under audit to enter its VDA program (unlike some other states). SB13 expands the VDA program to companies already under audit, so long as the audit was authorized on or before July 22, 2015. An eligible company wishing to convert an audit to a VDA would have to notify the Secretary of State (who runs the VDA program) of the company’s intent to do so within 60 days of the enactment of SB13. The VDA look-back period is the same as the general look-back period (discussed above). The VDA program likely eliminates the participation of contingent fee auditors, and provides for a waiver of interest and penalties. While the Delaware VDA program is onerous, as it operates as a thorough self-audit that is closely monitored and reviewed, many companies will find it preferable to the contingent fee driven contract audit process. However, for companies with significant issues that are unlikely to be agreed upon in the VDA process, it may be preferable to retain the right to protest the state’s audit findings, which cannot be done in the context of a VDA.
Expedited Audit Option – SB13 provides that companies currently under audit may elect to enter into an expedited audit, so long as that election is made prior to July 1, 2017. The expedited audit process requires a company to complete the audit within 2 years, and comply with all document request deadlines in the process. If that is done, interest and penalties will be waived. If the company cannot successfully complete the expedited audit process, penalties and interest would be imposed. Given the history of Delaware’s contract auditors setting unreasonable deadlines and making voluminous document requests, and the fact that compliance with these deadlines and requests is not subject to review, this expedited audit process remains of questionable value. Further guidance is likely necessary to make this audit “fast track” a viable option for most companies.
Estimation Regulations – SB13 places additional requirements on the use of estimations by the state, in both the audit and VDA contexts. The Secretary of Finance (the government department ultimately responsible for audits), in consultation with the Secretary of State, is required to promulgate regulations regarding estimation methodology, including the base periods, excluded items, aging criteria for outstanding and voided checks, and the definition of what constitutes complete and researchable records. These regulations must be issued on or before July 1, 2017. While SB13 does not address many of the worst of Delaware’s estimation practices, this requirement to issue detailed regulations is clearly intended to fill some of the gaps
Mandatory Interest – The imposition of interest would become automatic under SB13. There would no longer be a reasonable cause exception for any late-filed property remitted after July 1, 2017. The Secretary of State would retain the authority to waive interest under the VDA program. The amount of interest imposed could be .5% per month, up to 50% of the amount due.
The proposed legislation leaves a lot of questions unanswered, and does not effectively address some of the most significant problems at the heart of the ongoing controversies surrounding Delaware unclaimed property audits, e.g., the use of contingent fee contract auditors, and the practice of extrapolating unclaimed property liability to Delaware based on the total unclaimed property owed to any state. Nevertheless, this is largely the most recent in a string of positive developments in this area. Effected companies should carefully monitor further developments, of which there are sure to be several in the coming months, and consult with their advisors on the most appropriate path forward.