This advisory addresses two recent developments of particular importance to holders of unclaimed property: (1) Delaware’s promulgation of a regulation impacting the look-back period for unclaimed property audits and (2) the U.S. Supreme Court’s denial of certiorari in the ongoing New Jersey stored value card litigation.
Delaware Promulgates Audit Look-Back Regulation
In what is described as part of a “larger revenue stabilization initiative,” the state of Delaware has provided holders with some long-awaited relief with respect to the audit enforcement of its unclaimed property laws. The Delaware Department of Finance promulgated Final Regulation 530 on November 1, 2012, entitled “Regulation on Practices and Procedures for Records Examinations by the State Escheator” (the “Regulation”). The Regulation, which is effective December 1, 2012, limits the audit look-back period to January 1, 1986 (as opposed to Delaware’s current look-back of January 1, 1981), for holders that are currently under audit or who become the subject of an audit before December 1, 2012. The Regulation specifically provides:
- For all persons who are now the subject of a records examination under 12 Del. C. § 1155, or who become the subject of an examination before the effective date of this regulation, no records created before January 1, 1986, will be included in the determination of compliance with the provisions of 12 Del. C. Ch. 11, provided that the examination is completed by June 30, 2015.
- For all persons who become the subject of examinations on or after the effective date of this regulation, and for all other persons whose examinations are not completed by the close of business on June 30, 2015, the State Escheator will continue his existing policy of examining records created on or after January 1, 1981, to determine whether the person under examination has complied with any provision of 12 Del. C. Ch. 11.
16 DE Reg. 530 (emphasis added).
Since Delaware typically audits a holder’s records back to 1981, the Regulation provides holders with a five-year reduction in the look-back period. For those holders that are covered under the Regulation, this may provide a significant benefit by avoiding Delaware’s estimation of liability for those older years (1981- 1985) where holder records typically do not exist. Notably, the final version of the Regulation provides that “an examination is deemed to be complete for any category of property as of the date on which the Audit Manager mails the statement of findings and request for payment … for that category of property.” Thus, the limited look-back period will be applied on a property-by-property basis. (This clarification was added to the final regulation in response to practitioner comments on the proposed regulation, which was introduced by the Department in July 2012.)
While this Regulation is another positive step taken in 2012 toward the equitable administration of Delaware’s unclaimed property laws (see also SB 258, discussed in Alston & Bird’s July 2, 2012, Advisory), the Regulation is far from ideal. Notably, the Regulation does not provide a permanent reduction of Delaware’s look-back period; holders must be currently under audit or subject to audit before the effective date of the regulation and complete the examination by June 30, 2015. In addition, even with the shortened look-back period, Delaware’s audit procedures are still far less holder-friendly than those of the vast majority of states that, either by statute or as a matter of practice, apply a 10-year (or less) look-back period.
Supreme Court Denies Cert. in N.J. Stored Value Card Litigation
In late 2010, various stored value card issuers filed a lawsuit (N.J. Retail Merchants Association v. Sidamon- Eristoff) seeking a preliminary injunction against the enforcement of certain provisions of New Jersey’s 2010 unclaimed property legislation, which impacted the treatment of stored value cards (the “N.J. Act”). The U.S. District Court for the District of New Jersey enjoined (1) the retroactive application of the N.J. Act to stored value cards redeemable only for merchandise or services, finding such retroactive application of the law to those cards would likely violate the Contract Clause of the U.S. Constitution; (2) the N.J. Act’s place-ofpurchase presumption, finding that presumption in conflict with and hence pre-empted by the Supremacy Clause and the Texas v. New Jersey cases; and (3) the N.J. Department of Treasury’s enforcement of the third-priority rule contained in N.J. Rev. Stat. § 46:30B-10(f) (as announced in Treasury Announcement 2011- 03), finding that rule also in conflict with the rules adopted by the Supreme Court in Texas v. New Jersey and hence pre-empted under the Supremacy Clause. However, the district court denied the plaintiffs’ motion for a preliminary injunction of the N.J. Act’s data collection requirement, and it also rejected the plaintiffs’ commerce clause claim and substantive due process and federal preemption claims under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “CARD Act”). The U.S. Court of Appeals for the Third Circuit affirmed the district court’s order in its entirety on January 5, 2012.
The New Jersey legislature subsequently enacted S. 1928 on June 29, 2012, which repealed the placeof- purchase presumption and increased the dormancy period for stored value cards, among other things. S. 1928 did not, however, make any changes to or repeal the third-priority rule. (Alston & Bird’s July 2, 2012, Advisory also addresses this legislation.)
Unwilling to concede that issuers of stored value cards could keep the unredeemed balances by being incorporated in a state that exempts such cards from escheat, New Jersey filed a petition for writ of certiorari with the U.S. Supreme Court on July 23, 2012, challenging the district court’s and Third Circuit’s holdings that enforcement of the third-priority rule was preempted by the Supremacy Clause under Texas v. New Jersey and its progeny. The state argued that “nothing in this Court’s jurisprudence suggests that federal common law affords private corporate debtors a right to a windfall superior to the states’ sovereign right to hold unclaimed property.” Accordingly, “the lower court’s decision errs by extending federal common law beyond this Court’s rulings and by announcing a rule of law that conflicts with the Court’s precedent concerning owners’ rights, states’ rights, and the limited ability of debtors to hold unclaimed property.”
The Supreme Court denied the state’s petition on October 29, 2012. Thus, the Third Circuit’s holding—that the third-priority rule conflicts with the Texas v. New Jersey priority rules and thus is preempted by the Supremacy Clause—remains valid.