On April 1, 2017, Delaware issued proposed regulations to establish instructions and guidelines for the administration of the state’s newly enacted abandoned and unclaimed property statute, SB 13. The proposed regulations would repeal and replace the existing unclaimed property regulations in Delaware and would be the primary guidance for implementing SB 13. SB 13 was introduced in the Delaware General Assembly in early January and was, ultimately, signed into law on February 2, 2017. SB 13 was enacted, in part, to address concerns raised in recent litigations, especially those constitutional concerns raised by the federal court in Temple-Inland Inc. v. Cook, 1:14-cv-00654 (D. Del. June 28, 2016) (“Temple-Inland”). (See our prior coverage Delaware Proposes Unclaimed Property Legislation).
While it was anticipated that the proposed regulations would fill the gaps left in the statute, especially given that the statute explicitly calls for the Secretary of Finance (the state government body ultimately responsible for audits), in consultation with the Secretary of State, to promptly promulgate regulations regarding matters related to estimation methodology, the newly issued proposed regulations largely fail to effectively clarify and address such matters.
Fails to Cure Constitutional Issues Regarding Delaware’s Estimation Practices
First, the proposed regulations do not depart from Delaware’s severely criticized estimation practices used to determine unclaimed property liability for historic years for which a holder no longer has books and records (“reach-back years”). The proposed regulations simply reflect Delaware’s much-maligned, “same old” procedures for estimating unclaimed property liability and continue to afford Delaware wide discretion with how to employ estimation. Especially problematic, the proposed regulations provide that the “names and addresses identified in the base period shall not be used to determine which state has the priority claim to the abandoned property estimated to be due over periods where records of owners’ addresses do not exist.” Thus, Delaware continues to assert that it can estimate a holder’s unclaimed property liability for reach-back years based on all unclaimed property in the base period, even property escheatable to other states. This Delaware estimation technique directly conflicts with Temple-Inland, where the federal court specifically determined that it “created significantly misleading results” and was “contrary to the fundamental principle of estimation.” Id. at 31. In total, the proposed regulations flat out ignore some of the most important constitutional concerns raised in Temple-Inland regarding Delaware’s estimation practices.
Fails to Provide Adequate Guidance
Beyond the proposed regulations failure to address constitutional concerns regarding estimation, the proposed regulations do not provide any guidance on the new statutory audit “fast-track” option. As a general matter, SB 13 provides that a company currently under audit may elect to enter into an expedited audit and, should a company successfully complete the expedited audit process and compliance requirements, penalties and interest will be waived. Without any regulatory guidance, the expedited audit option remains of questionable value given the history of Delaware’s contract auditors unreasonable scheduling deadlines and voluminous document requests.
Creates New Pitfalls for Holders
Lastly, the proposed regulations may create some new pitfalls for holders of unclaimed property. The proposed regulations provide that once records are produced, a holder will be required to make a binding representation regarding certain matters related to the availability of records. Subsequently, should any representation be found to be false, it will be deemed a “willful misrepresentation made with intent to mislead the State Escheator” potentially triggering penalties for evasion of unclaimed property obligations.
Overall, the proposed regulations offer little in terms of guidance and do not significantly depart from the aggressive and highly criticized Delaware audit practices called into question in recent and ongoing unclaimed property controversies. The proposed regulations will be open to public comment until May 3, 2017. Holders currently under audit in Delaware or with potential unclaimed property liability exposure may want to consider commenting, as well as consulting their advisors regarding potential ramifications and the most appropriate path forward. Should the proposed regulations be adopted, we can expect that Delaware will continue to face more unclaimed property disputes and litigation.