More Changes to Delaware's Unclaimed Property Law
More Changes to Delaware's Unclaimed Property Law
Updated August 2022
On June 30, 2022, Governor John Carney, Jr., signed into law Delaware Senate Bill 281 (SB 281) with another round of updates to Delaware’s Unclaimed Property Law i. The legislation follows earlier amendments in Delaware Senate Bill 104 (SB 104), which was signed into law by the governor exactly one year earlier. For more information regarding on SB 104, see our previous alert.
The new law makes many additional changes, including some substantive ones, such as expanding audit powers. According to the synopsis, SB 281 “clarifies various aspects of the State’s unclaimed property laws.” As with SB 104, certain sections of SB 281 will apply retroactively to any claims, examinations, voluntary disclosure agreements or litigation pending as of the effective date of the new law ii.
Verified reports / compliance reviews - expands audit powers
Perhaps the most significant change to Delaware’s law is made by Sections 8 and 9 of the bill. Previously, under Del. Code Ann. tit. 12, § 1172, holders had to be notified of the opportunity to enter into a voluntary disclosure agreement with the Delaware Secretary of State before they could be audited. One exception was under Del. Code Ann. tit. 12, § 1170, which allowed the State Escheator to request a verified report from holders who: (i) have not filed a report and/or (ii) are believed to have filed an inaccurate, incomplete or false report by the State Escheator. SB 281 significantly expands Delaware ability to request verified reports and conduct compliance reviews iii, giving the State Escheator more leeway to circumvent § 1172’s VDA notice requirement. See sample Notice Requesting Verified Report.
The new expanded authority is twofold. First, Section 8 allows the State Escheator to initiate a compliance review for any reason, removing the “reason to believe” requirement that a report be inaccurate. Section 9, in turn, allows the State Escheator to initiate an audit of any holder that fails to respond to requests made pursuant to a verified report or compliance review or to complete a verified report or compliance review. Under SB 281, any of the following situations could now trigger an audit:
Failure to complete the compliance review within the time specified (i.e., one year).
Failure to respond to a request for a verified report or compliance review.
Failure to pay a notice of deficiency within the time specified (i.e., 90 days).
Presumably, the additional exceptions to the requirement that a holder be invited to participate in a voluntary disclosure agreement (VDA) prior to being subject to audit increases audit risk for all organizations. In the first instance, Delaware can use the “verified report / compliance review” process on a holder that has not filed a return or filed a negative return. If not satisfied with the review, an audit may be issued. Secondly, without the reason-to-believe requirement, even compliant holders including holders that have filed reports with amounts or negative returns may now be subject to a compliance review that could lead to an examination.
Government property exclusion
Another important change is made by Section 1, which adds the following to the list of property that is not subject to reporting to Delaware:
Foreign government property.
Federal government property.
Other state government property.
Local or municipal government property outside of Delaware.
This section also excludes any payment or credit arising under the 2022 Delaware Relief Rebate Program.
Record retention requirements
SB 281 further clarifies Delaware’s record retention requirements. Specifically, Section 2 requires holders who have received a notice of examination or elected to enter into a VDA to maintain records for 10 years plus the applicable dormancy period until the conclusion of the exam, VDA, or any related appeal or litigation. The requirement begins at the earliest of the following:
Date of delivery of the notice of examination.
Date of delivery of the VDA invitation.
Date of the holder’s written election to enter into the VDA.
The new law also requires holders to maintain such records for items that were not reported as unclaimed property. Notably, this section applies retroactively.
The predominant effect of this change will increase costs for holders in maintaining books and records for long periods of time. Moreover, the scope of the records to be maintained include both Delaware-sourced property (e.g., Delaware address property, foreign address property, unknown address property) and all other state address property iv.
SB 281 also makes significant changes to Delaware’s law surrounding the liquidation of securities reported to the state and notice to owners. According to the bill synopsis, Section 3 “clarifies and confirms current practice regarding the timing of the liquidation of securities and the mailing of written notice to owners to eliminate litigation risk for the State.” In essence, Section 3 & 4 allow the State Escheator to send notice to owners after it has liquidated securities. Section 3 also allows the State Escheator to correct, update or validate owner addresses. State Escheator and the State of Delaware are not liable to an owner based upon liquidation of the security or non-monetary interest if one of the following applies:
Notice has been sent to the owner.
State Escheator has not acted unreasonably in determining that mailed notice would not be received by the owner.
On reasonable inspection, State Escheator does or does not take reasonable steps to correct, update or validate the last-known address of the owner as contained in the records of the holder as provided to the State Escheator to make it more likely that the notice may be received by the owner.
Finally, Section 5 clarifies how to determine the value of claims for securities property. Similar to record retention provision, this section applies retroactively as well.
The above change, which intends to eliminate litigation, likely will invite more litigation, as it may cut-off rights that an apparent owner would have otherwise had under the law. If it were the case that an equity was sold at a pre-optimal market value price and then the apparent owner is located thereafter, one could see the dilemma this presents given notice being sent post liquidation. One might argue that this is unfair, i.e., that the apparent owner has to accept liquidation of its equities on a date and at a price that may undercut its value significantly, without sufficient notice prior to doing so.
SB 281 also clarifies and confirms current practices related to claimant appeals to the Tax Appeal Board, as well as updates related to the professional finder industry.
MoneyGram Case Update
The Supreme Court of the United States will hear oral arguments in the case of Arkansas v. Delaware, Dkt. Nos. 22O145 & 22O146, on October 3, 2022. This latest of Supreme Court cases about unclaimed property involves a dispute between Delaware and 20 other states over MoneyGram official checks and which state has the right to escheat. Money orders, traveler’s checks and similar written instruments are governed by the Disposition of Abandoned Money Orders and Traveler’s Checks Act (Act)v, which gives priority to the state of purchase, as opposed to the state of incorporation. Delaware argues that these checks do not fall under the purview of the Act, while the other states argue that they do. On May 21, 2021, the special master, assigned to the case, issued an interim report, finding that the abandoned checks are not third-party bank checks, as Delaware argued, but instead likely money orders or “similar written instruments.” If the Supreme Court agrees with the special master, escheatment of the checks would be controlled by the Act, which would require them to be escheated to the state of purchase, not the state of incorporation of the holder.
BDO’s National Unclaimed Property Practice is here to assist with questions, concerns and escheatment needs. We have represented hundreds of clients before Delaware over the years in both audits and voluntary disclosure filings and are very familiar with their process, expectations and ongoing compliance requirements.
i 12 Del. Code §1130 et seq.
ii It is unclear whether retroactive application of law change to holders is permittable under state and federal law. BDO is not a law firm and cannot comment on legal matters. Holders should discuss such provisions with their in-house and external legal counsel as they see fit.
iii State Escheator may require a holder to file a verified report or initiate a compliance review, regardless of whether the holder does or does not file an escheatment report. The verified report must do all the following: (1) state whether the person is holding property reportable under this chapter, (2) describe property not previously reported or about which the state has inquired or about which there is a dispute as to whether it is reportable under this chapter, and (3) state the amount or value of the property. A compliance review is typically a review conducted by the Delaware Department of Finance where they ask for written unclaimed property policies and procedures, supporting documents for amounts filed on current-year returns under review; this could include accounts receivable agings, check registers, void listings, remediation, due diligence letters, etc., that support current-year filing.
iv See generally Siemens USA Holdings Inc. v. Geisenberger, No. 20-2991 (3d Cir. 2021) (challenging in part Delaware authority to request non-Delaware-source property for purposes of auditing by arguing that such requests violate federal common law and thus are preempted).
v 12 U.S.C. §§ 2501–03.