Delaware Unclaimed Property Legislation Confirms Current Practice and Addresses Recent Court Decisions

July 2021

BY

Joe CarrTax Partner, National Unclaimed Property Leader

Andres MacellaroManager, State and Local Tax

On June 30, 2021 Delaware Senate Bill 104 (SB 104) was signed into law by Governor John Carney, Jr. According to its synopsis, SB 104 “clarifies various aspects of the State’s procedures to operate its unclaimed property program, including promoting and determining holder compliance, processing owner claims, and preventing fraudulent claims.” The law is in part a reaction to the recent litigation involving Delaware, where courts have questioned the state’s use of contingent-fee based, third-party, multi-state auditors and addressed the limits of Delaware’s subpoena power.[1] While some provisions of SB 104 take effect on August 1, 2021 and only apply prospectively, other provisions became effective upon signature by the Governor and “apply retroactively to any claims, examinations, or litigation pending as of the effective date of this legislation.”  

SB 104 makes numerous changes to Delaware’s unclaimed property program, ranging from simple technical corrections for consistent nomenclature to establishing a permanent expedited examination program. Below is an explanation of the material changes SB 104 makes to Delaware’s Unclaimed Property Law[2] and how it impacts the Department of Finance’s audit program and the Secretary of State’s voluntary disclosure program (VDA).
 

Exam Initiation and Review of Records

Section 15 of SB 104 significantly expands the State Escheator’s authority to audit in two ways. First, it clarifies that the State Escheator has the authority to examine or investigate not only the holder, its agents, representatives, subsidiaries and affiliates, but also any party that is in possession of records related to the examination. Next, SB 104  allows the State Escheator to authorize an unclaimed property examination or investigation for any reason and states that the State Escheator is not required to provide any reason or justification other than the fact that a request is related to an examination to determine compliance with Delaware’s Unclaimed Property Law.

Further, Sections 1 and 13 of SB 104 expand the State Escheator’s authority to review records, seemingly addressing the Delaware Chancery Court’s decision to quash a Delaware subpoena in Delaware v. AT&T.[3] These provisions grant the State Escheator authority to review information to verify the completeness and accuracy of the records provided by the holder, even if these records will not identify property that is reportable to Delaware.
 

VDA Outreach Program

In a welcome change, SB 104 allows companies more time to respond to a Secretary of State request to enter into a VDA, increasing the time to respond from 60 days to 90 days. In addition to  the opportunity to enter into a VDA, companies will now also have the option to request to enter into the new permanent expedited audit program, discussed below.  
 

Permanent Expedited Audit Program

Perhaps the most material change made by SB 104 is the creation of a permanent expedited audit program. Section 14 of SB 104 allows the following categories of holders to request to expedite their examinations:
  1. Holders who receive a VDA notice from the Secretary of State after August 1, 2021;
  2. Holders who are currently under examinations authorized after February 2, 2017 and before August 1, 2021: and
  3. Holders under examination authorized after August 1, 2021.
The biggest distinction between these three categories relates to the steps necessary to request an expedited audit. Holders falling into the first category need only notify the State Escheator of their request on a form provided by the State Escheator within 90 days of delivery of the Secretary of State’s VDA request. Holders falling into the second and third categories will need to submit a request to expedite on a form provided by the state, along with a workplan for completing the examination and responses to all outstanding requests. The major difference is timing. Holders in Category 2 must do so within 60 days of the law becoming effective, while holders in Category 3 can presumably make a request at any time as there is no prescribed timing in the statute.

Once a request is received, the State Escheator must accept or deny the request to expedite within 60 days, or work with holder to revise the work plan and schedule for completion so that State Escheator can accept the request. It is important to note that the determination to accept or deny the request is entirely at the discretion of the State Escheator and is only subject to the review by the Secretary of Finance. 

Assuming the request is accepted, and the holder abides by the requirements of the State Escheator regarding timing and sufficiency of document production, the State Escheator will complete the examination and issue an examination report within two years. Notably, the law requires the examiner to make requests within 18 months. As with the previous expediated audit program, the State Escheator may terminate an expedited examination if it is determined that the holder has not responded in appropriate time and manner. This determination is also at the sole discretion of the State Escheator and may only be reviewed by the Secretary of Finance.
 

Waiver of Interest and Penalties

While SB 104 does not make any changes to the calculation of interest and penalties that may be assessed by the state (interest remains at 0.5% per month up to 50% of the amount owed, including estimated amounts), the State Escheator’s ability to waive interest has been modified as follows:[4]
  Interest waived for holders that complete the VDA in good faith.
Interest under Former Delaware Unclaimed Property Law
VDA   Interest waived for holders that complete the VDA in good faith.
Conventional Audit   State Escheator could waive half of calculable interest.
  (Mandatory interest = 25%+)
Expedited Audit   Interest waived for any holder who completed expedited audit.
  (No mandatory interest)
 
Interest Under new Delaware Unclaimed Property Law as revised by Senate Bill 104
VDA   Interest waived for holders that complete the VDA in good faith.
Conventional Audit   State Escheator can waive all but minimum required 20% interest.
  (Mandatory interest = 20%+)
Expedited Audit   Interest set at 1% of past due liability for any holder who completes
  expedited audit.
 

Third-Party Audit Firms

Likely in response to long-standing pressure from the holder and advocate community, as well as court opinions criticizing the use of third-party auditors incentivized by contingency fee arrangements, examination by third-party auditors will now be compensated on an hourly basis.[5]  There are two exceptions:
  • Securities examinations
  • Life insurance examinations

Due Diligence

Due diligence requirements are modified by SB 104, giving the State Escheator the authority to send letters directly, or to direct a holder to send them at any time.[6] 
 

Limitation of Indemnification

SB 104 excludes penalties imposed by another state from the indemnification afforded to holders who deliver property to Delaware that is later claimed by another state.
 

Examination and VDA Records

Addressing holder and advocate concerns regarding confidentiality of records, which were also raised in Delaware v. Univar,[7] the new law requires the holder’s written consent before records obtained in and examination or voluntary disclosure can be used in a joint examination.[8]

   
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. 


 
[1] See State of Delaware v. AT&T, Inc., DE Court of Chancery, Trans ID 64508991, Case# 2019-0985 (December 10, 2019.
[2] 12 Del. Code §1130 et seq.
[3] See State of Delaware v. AT&T, Inc., DE Court of Chancery, Trans ID 64508991, Case# 2019-0985 (December 10, 2019); See also State of Delaware Department of Finance v. AT&T Inc., Supreme Court of the State of Delaware, Case # 303,2020 (Affirming Court of Chancery decision).
[4] Delaware Senate Bill 104, § 21, modifying 12 Del. Code § 1183 and § 22, modifying 12 Del. Code § 1185.
[5] Id. at § 19, modifying 12 Del. Code § 1178.
[6] Id. at § 4, modifying 12 Del. Code § 1148 and § 13, modifying 12 Del. Code § 1171.

[7] See State of Delaware v. Univar, Inc., DE Court of Chancery, Case# 2018-0884-JRS (October 29, 2020).
[8] Delaware Senate Bill 104, § 17, modifying 12 Del. Code § 1174.