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Victory? Delaware Suggests an End to Contingency Compensation for Unclaimed Property Contract Auditors

For years, Delaware has used contract audit firms to enforce their unclaimed property laws and paid them based, at least partially, on the amount recovered. Motivated by this financial reward and empowered as an agent of the state, the contract-auditing firms with the State’s complicity harass holders, inflate liabilities by deploying aggressive estimation techniques and engage in other questionable practices to maximize their bounty. Maybe not anymore. In a federal court filing on January 10, Delaware’s brief appended as an exhibit its most recent contract signed December 31, 2019, with Kelmar, one of the more notorious unclaimed property contract audit firms. The new contract states that Kelmar will be paid at set hourly rates for general ledger work, instead of their prior compensation, which was largely seen to be contingent upon recovery. (Securities-related work remains contingency-based.) It will be welcome news if this heralds an end to the madness of...

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Delaware Starts Unclaimed Property “Compliance Reviews” (Different from Audits)

If the Delaware Office of Unclaimed Property believes that a person may have filed an “inaccurate, incomplete, or false report,” the State Escheator may authorize a “compliance review” under Del. Code Ann. tit. 12, § 1170(b). This is not a standard audit and as a result, the target is not entitled to the option of entering the state’s voluntary disclosure program rather than being subject to the audit. Nevertheless, the compliance review can result in a finding of liability. Correspondence between the Unclaimed Property Professionals Organization and the Delaware State Escheator’s Office acknowledges that several holders have been selected for this review. According to the Escheator’s Office, if a holder has no report or a negative report, the state will typically request a copy of the holder’s unclaimed property policies and procedures that would support the lack of property due to the state. By statute, the state may review the filed reports and “all...

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Washington Legislature Introduces Revised Uniform Unclaimed Property Act

On January 10, 2018, a bill was introduced in the Washington State Legislature that would substantially enact the Revised Uniform Unclaimed Property Act (RUUPA) finalized by the Uniform Law Commission (ULC) in late 2016. The bill, House Bill (HB) 2486, is sponsored by Representative Paul Graves at the request of the ULC and would be effective beginning January 1, 2019. The House Committee on Finance conducted a public hearing on the bill on January 16, 2018, but only the sponsor testified and the bill was held for further consideration. While similar (or identical) to RUUPA in most respects, the bill contains a number of significant deviations. Below is a brief summary of several provisions that we flagged in our initial review and the potential impact on Washington holders. Scope of Property Subject to Act The legislation would define “property” consistent with the RUUPA definition. Based on the existing Washington unclaimed property law, the enactment of...

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Litigation Alert | Third Circuit Reaffirms Scope of Federal Priority Rules

On December 4, 2017, the US Court of Appeals for the Third Circuit issued its much-anticipated precedential opinion in Marathon Petroleum Corp. et al., v. Secretary of Finance et al., No. 16-4011. The opinion affirms the Third Circuit’s existing view (described in its 2012 New Jersey Retailers Association decision) that US Supreme Court precedent permits a private cause of action to enforce the federal priority rules, overruling the federal district court’s conclusion (in this case and Temple-Inland) that the priority rules only apply to disputes between states. The plaintiffs in this case ultimately lost (i.e., Delaware’s motion to dismiss was upheld) on ripeness grounds because the state had not yet taken formal steps to compel cooperation with the third-party auditor’s document request (i.e., Delaware had not yet issued a subpoena, but had only threatened it). The Third Circuit also rejected to the plaintiff’s argument that Delaware is barred from auditing...

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Get Ready for the Countdown: Final Delaware Unclaimed Property Regulations Published

On October 1, 2017, the Delaware Department of Finance published final regulations in the Register of Regulations repealing its former unclaimed property regulations and promulgating a new reporting and examination manual.  See 21 DE Reg 336 (Oct. 1, 2017).  The final reporting and examination regulation contains no substantive changes from the revised version that was re-proposed on August 1, 2017.  As published, the regulations are set to be adopted and take effect on October 11, 2017. This development is significant for holders that are currently under audit and considering enrolling in the Secretary of State’s Voluntary Disclosure Agreement Program (VDA Program) or converting the audit to an “expedited audit” because October 11 marks the start of the 60-day period allotted for holders to notify the Secretary of State and/or State Escheator of their intention.  See 12 Del. Code § 1172(b)-(c).  At the conclusion of this 60-day period, any holder that has...

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Holders Beware: Delaware Department of State Notices to be Mailed in Two Weeks!

In two weeks, the Delaware Secretary of State (SOS) will begin mailing notices to holders who have been identified as likely being out of compliance with Delaware unclaimed property law. Holders that do not enroll in the SOS Voluntary Disclosure Agreement Program (VDA Program) within 60 days of the mailing of this notice will be referred to the State Escheator for examination. Once an audit notice is issued, the SOS will have no legal ability to accept a holder into its VDA Program. The VDA Program was put in place to respond to concerns about Delaware’s audit program and allow holders to come into compliance through a “self-audit” that is administered by the holder, as opposed to the State Escheator. The audit is overseen by a third-party provider that must approve the steps taken by the holder, but allows more flexibility in terms of the details and deadlines than a traditional audit. Delaware law requires that every company be provided with an opportunity...

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Delaware (Re)Proposes Unclaimed Property Reporting and Examination Manual Regulation

On August 1, the Delaware Department of Finance (DOF) published a revised version of its proposed reporting and examination manual regulation addressing audit procedures and method of estimation.  See 21 DE Reg 123 (Aug. 1, 2017). The revised proposed regulation is substantially similar to the first draft proposed earlier this year, but contains a dozen or so notable differences (described in more detail below). Because the former draft of the regulation was never finalized, the 60-day time period for eligible holders to convert to the Voluntary Disclosure Agreement (VDA) Program (administered by the Secretary of State) or an expedited audit has not started to run, and will not commence until the final DOF regulation is published in the monthly Register of Regulations. Based on the fact that the DOF is accepted comments through August 31, 2017 (and likely needs at least a month to take them into consideration), the final regulation is not expected to be...

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Resistance is not Always Futile: New Decision in Ongoing Delaware Unclaimed Property Audit Litigation

On August 9, 2017, the US Court of Appeals for the Third Circuit (Third Circuit), overruling the US District Court for the District of Delaware (District Court), allowed a claim by a holder seeking to prevent an unclaimed property audit by Delaware on due process grounds to proceed. See Plains All American Pipeline L.P. v. Cook et al., No. 16-3631 (3d Cir. Aug. 9, 2017).  The procedural due process claim challenges Delaware’s use of auditors that have a stake in the assessment. Consistent with the District Court decision, the Third Circuit held that challenges to Delaware’s estimation methodology were ruled not ripe. The case has been remanded to the District Court for further proceedings. Background The holder, Plains All American Pipeline L.P. (Plains) brought a lawsuit against Delaware officials including the Secretary of Finance, the State Escheator, the State unclaimed property Audit Manager and third party auditor, Kelmar Associates, LLC (Kelmar)....

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Illinois Unclaimed Property Law Substantially Revised As Part of Revenue Package Supporting Illinois Budget

Yesterday the Illinois House of Representatives voted to override Governor Bruce Rauner’s veto of Senate Bill (SB) 9, the revenue bill supporting the State’s Fiscal Year (FY) 2017-2018 Budget. Just days before the vote, SB 9 was amended to include a revised version of the Illinois Unclaimed Property Bill (House Bill (HB) 2603) on which we’ve previously reported. The new law (part of Public Act 100-0022) is known as the Revised Uniform Unclaimed Property Act (RUUPA). The RUUPA becomes effective January 1, 2018. Below is a brief summary of a few of the highlights of which holders should be aware. Gift Cards, Loyalty Cards and Game-Related Digital Content Exempt Unlike HB 2603, the Illinois RUUPA expressly excludes “gift cards” from the definition of “property” subject to escheat. Pulling (in-part) from the Uniform Law Commission (ULC) definition, “gift card” is defined in the Illinois RUUPA as “a stored-value card: (i) issued on a prepaid basis in a specified...

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Substitute Alert ‒ Delaware Technical Corrections Bill

Last Friday, the Delaware Senate released a substituted version of the bill (Senate Bill 79) introduced last month as a technical corrections bill to Senate Bill 13—the unclaimed property rewrite legislation enacted earlier this year. The Senate substitute differs from the introduced version of Senate Bill 79 as follows: It does not strike § 1147(a)—the provision that limits the ability of a holder to assign or otherwise transfer its obligation to pay or deliver property or to comply with the unclaimed property law to others (aside from a parent, subsidiary or affiliate of the holder). It would delay the timeline that Delaware must promulgate regulations to December 1, 2017. It would make changes to the State Escheator’s authority to grant waivers of interest and penalties under § 1185 as follows: Removes the language in the introduced bill that made the discretionary waiver of penalties only applicable to late filed property remitted while under examination....

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