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 supporting documents related to such reports.” The scope of the concept of “supporting documents” is not clear.

Practice Note: Companies, particularly those domiciled in Delaware, not filing Delaware unclaimed property reports or filing reports showing no liability, should review their policies and procedures related to unclaimed property, including how voided checks and unidentified remittances are handled. Furthermore, recent audits have included an expanded Automated Clearing House (ACH) payment review request, so a company should also review its treatment of failed ACH payments. Such a review should take place in an environment that will protect the attorney-client privilege – so, including internal counsel and/or external counsel is critical. Such an internal review should: (a) verify that the holder is in compliance with its policies and procedures; and (b) provide any necessary policy or operational changes. Conducting such a review and maintaining attorney-client privilege for appropriate elements of the review is especially important given recent false claims act developments in the unclaimed property space.

On Saturday, April 1, 2017, the Delaware Department of Finance (DOF) promulgated two regulations that would repeal all existing unclaimed property regulations and replace them with a single DOF regulation containing a revised Reporting and Examination Manual. The Secretary of State (SOS) also promulgated a regulation that outlines the method of estimation to be used for participants in the Voluntary Disclosure Agreement (VDA) Program. These promulgations are in accordance with the General Assembly’s instructions to do so in Senate Bill 13, which was passed in January and enacted by Governor John Carney on February 2, 2017. Any written submission in response to these regulations must be sent to the respective agency by Wednesday, May 3, 2017 at 4:30PM EST. Continue Reading Delaware Proposes Unclaimed Property Regulations – No April Fools

On January 26, 2017, the Delaware House approved comprehensive unclaimed property rewrite legislation (SB 13) that was passed by the Senate (with committee amendments) last week.  Our summary of many of the key provisions of the bill (as introduced) is available here.  Because the amended version of SB 13 has now passed both chambers of the General Assembly, it will be sent to Governor John C. Carney Jr. for signature, and will become effective immediately upon his approval.  Rumors are circling that follow-up legislation is likely, and may be considered this session. Senate Amendment The Senate Amendment adopted by both chambers made relatively minor changes to the introduced legislation. First, it struck all references to and the definition of “net card value” that was used to determine the amount presumed abandoned in the stored-value and gift card context.  As passed today, “the amount unclaimed is amount representing the maximum cost to the issuer of the merchandise, goods, or services represented by the card.”  The 5 year dormancy period tied to “the later of the date of purchase, the addition of funds to the stored-value card or gift card, a verification of the balance by the owner, or the last indication of interest in the property” was not changed. Second, the amendment struck all references to and the definition of “virtual currency.”  This is significant because the introduced version of the legislation expressly included an expansive definition of virtual currency in the definition of “property” subject to escheat.  While the inclusion of virtual currency in the definition of “property” is consistent with the approach taken in the Revised Uniform Unclaimed Property Act (RUUPA) adopted by the Uniform Law Commission (ULC) last year, the introduced Delaware legislation definition of “virtual currency” omitted two exclusions (the software or protocols governing the transfer of the digital representation of value and game-related digital content) contained in the RUUPA definition that were included after careful consideration to limit the potentially vast scope.  By removing virtual currency entirely from the Delaware legislation, it will not be presumed to be property subject to escheat. Third, the Senate Amendment changes the timeframe that holders currently under audit have to submit a written application to participate in the Secretary of State VDA program or expedited audit process.  As introduced, the Delaware legislation would have required these decisions to be made by July 1, 2017.  As amended (and passed), this period would be extended to within 60 days from the date of the adoption of regulations pertaining to the methods of estimation used. Practice Note With the passage of this legislation, there is a lot for holders to consider.  In particular, holders with an on-going audit will need to make the decision whether to: (1) make an election to join the Secretary of State VDA program; (2) expedite the audit; or (3) continue as-is.  With new penalties and mandatory interest enacted as part of the legislation, securing waiver of penalties and interest should be a top priority and could result in significant savings.  This must be balanced with the holder’s ability to timely comply with document request (required by expedited audit) and desire to appeal the final determination (prohibited for VDA program participants).  Holders under audit should begin these important discussions now, as Delaware is expected to act quickly in preparing the estimation regulations that are tied to the holders decision deadline.

The Delaware General Assembly has introduced legislation that would significantly rewrite the Delaware unclaimed property statute by repealing the three current subchapters and replacing them with a single unclaimed property subchapter. This article highlights key proposed changes in the bill.

Read the full article.

As soon as we start to think that Delaware’s unclaimed property practices and administration couldn’t possibly get any more egregious, another lawsuit like JLI Invest S.A. et al. v. Cook et al., Case No. 11274 surfaces. The facts alleged in the complaint highlight the fundamental issue of just how much “protection” state unclaimed property laws provide to owners. In this case, Delaware apparently protected two scientists out of $12,024,148.25. Yay Delaware. The scientists are not happy (we would be crying on the floor with either (a) a vat of Graeter’s ice cream or (b) a barrel of Sancerre) and have sued Delaware for their lost value.

Facts

Dr. Gilles Gosselin and Dr. Jean Louis Imbach are the two Belgian scientists who headed the research team responsible for creating a Hepatitis B drug. Idenix Pharmaceuticals, Inc. was established to commercially develop this drug. As the creators of the drug, Dr. Gosselin and Dr. Imbach were given an ownership interest amounting to approximately 10 percent of the Idenix shares. These shares were held by JLI Invest S.A. and LIN Invest S.A. (the plaintiffs), two Belgian companies established for this purpose.

Despite the facts that (a) both Idenix and Computershare (their transfer agent) had record of the mailing address of each plaintiff and no mail was ever returned undeliverable—as required by Delaware law at the time for property to be deemed abandoned— and (b) that scientists both continued to perform professional services for Idenix, Computershare reported the Idenix shares to Delaware in November 2008 and delivered all of the shares to Delaware on January 2, 2009.  Three days later, Delaware sold the shares for a total of $1,695,851.75 (approximately $3.03 per share). At the time, Idenix had approximately 50 shareholders, and the market for the shares was illiquid.

After making an inquiry concerning the stock to Computershare three years later in 2012, the plaintiffs learned that their shares had been escheated to Delaware. Upon contacting the Delaware Office of Unclaimed Property to claim their property, the plaintiffs were forced to provide substantial documentation verifying their status as the rightful owner, which they did in October and December 2012. After over a year of “pending” status, the plaintiffs were directed to complete a “Request Form” in May 2013, at which time it was noted that a response could take another 12 weeks.

On June 9, 2014, Merck and Idenix announced that Merck would acquire Idenix via a cash tender offer for $24.50 per share. Because the plaintiffs’ shares had been escheated to (and immediately sold by) Delaware in 2009, they were not able to participate in the tender offer despite their desire to. Had they been able to participate, the plaintiffs would have been entitled to receive a total of $13,720,000 for their shares. Meanwhile, Delaware had still not responded regarding the status of their claim. Notably, it was not until October 2014 (over two years after their initial request) that the Delaware Office of Unclaimed Property confirmed that the plaintiffs Idenix shares were sold (and for how much). The plaintiffs subsequently completed a claim for the market value of their shares (i.e., $13.72 million based on the Merck tender offer). Delaware immediately responded that they could only refund $1,695,851.75, and could do so without any additional documentation—which had previously delayed the process. Without agreeing to the lower amount, Delaware took the initiative to send the plaintiffs a check for the lesser amount.  The plaintiffs accepted the check in June, after agreeing that the acceptance would not affect their rights to seek recovery of the remaining amount of their claim. In July, they filed this complaint.

Alleged Claims

The plaintiffs are requesting damages in the amount of $12,024,148.25, which represents the amount that would have been received via the Merck tender offer, minus the amount actually received from Delaware. The named defendants include the State of Delaware, plus two current and three former Department of Finance (Department) officials. The plaintiffs highlight the fact that contrary to the primary purpose of the Escheat Law, Delaware never attempted to locate or contact the plaintiffs regarding the unclaimed shares, even though they had the ability and resources to do so. The eleven counts alleged against the defendants include:

  • Violations of Delaware Escheat Law ( Code tit. 12, §§ 1101 et seq.)
  • Violation of the Friendship, Establishment and Navigation Treaty Between the United States and Belgium
  • Violation of the United States and Delaware Takings Clauses
  • Violation of the United States and Delaware Due Process Clauses
  • Violation of the Foreign Commerce Clause
  • Violation of Federal Common Law (Texas v. New Jersey)
  • Gross Negligence
  • Conversion
  • Civil Rights Violations under 42 U.S.C. § 1983
  • Injunctive Relief
  • Declaratory Judgment

Practice Note

It is important to remember that the holder in this case had a last known address for the owner, only it was in a foreign country. Delaware, without any statutory authority, takes the position that foreign addressed property escheats to the state of the holder’s incorporation. This case challenges this position directly, and holders should seriously consider the risks of escheating foreign address property while this case is pending.

This case is yet another example of a state being much less concerned about returning property to its rightful owner (as it should be) and more concerned with using the unclaimed property laws as a revenue raising tool. It has many similarities to the case in which a federal court shut down California’s unclaimed property system for insufficient notice requirements. Taylor v. Westly, 488 F.3d 1197 (9th Cir. 2007). Here, based on the allegations in the complaint, the Department does not seem to have acted in good faith to return the wrongfully abandoned shares to the plaintiffs; in fact, it never even attempted to. It failed to publish the names and addresses of the plaintiffs in any newspaper or the State Escheator’s website, as it was required to do by law.  Finally, once they received the shares, the Department never attempted to notify the plaintiffs that their shares had escheated—and instead decided to sell them after a mere three days. Prior to the tender offer when the plaintiffs contacted the Department to redeem their shares, they forced the plaintiffs to jump through a series of administrative hurdles for over two years—all the while concealing the fact that the shares had been sold.

The defendants answer to the complaint is still pending and in late July the Department issued a Request for Proposals for Special Litigation Counsel to represent them in defending against this complaint. In this request, the Department stated that they anticipated requesting an extension of time to file a responsive pleading in order to engage Special Litigation Counsel.

On June 18, 2015, a bill (S.B. 141) was unanimously approved by the Delaware Senate that would place limits on the look-back period and permanently extend the Voluntary Disclosure Agreement (VDA) program. This represents the second bill this year that seeks to implement the recommended changes contained in the Unclaimed Property Task Force’s (Task Force) December 2014 final report (the first, S.B. 11, was signed by Governor Jack Markell on January 29, 2015). If passed by the House, the legislation would offer several additional protections to holders; however, it also contains a number of traps for the unwary that should not be overlooked.

Look-back Period Shortened

First, and most significantly, the bill would limit the examination look-back period in Delaware to 22 years, starting in 2017. For periods before 2017, the bill would limit the look-back period to 1986 (if currently under examination) or 1991 (for any examinations initiated after enactment).  While this proposed look-back period decrease would be a significant improvement from the status quo (which allows Delaware to look-back to any period after 1980), it would still represent one of the longer look-back periods in the country. Notably, the proposed 22-year look-back period would remain over twice as long as most state unclaimed property look-back periods (which are usually 10 years or less).

Permanent VDA Program

Second, the VDA program is amended to authorize the Secretary of State to request that any potential holder enter into an unclaimed property VDA. If the potential holder does not agree to the VDA within 60 days, they will be referred to the State Escheator for examination. The bill provides for a 19-year (reduced) look-back period for any holder than enters the VDA program on or after January 1, 2017, and allows two years to complete the VDA process. Additionally, S.B. 141 would strike the sunset provision for the VDA program, which is currently scheduled to expire July 1, 2016. Certain holders are not permitted to participate in the VDA program, including those that: (1) formally withdrew from the voluntary disclosure agreement program, or (2) were removed from the VDA program for failure to work in good faith to complete the VDA program as soon as practicable.

Interest

The bill would also amend the governing statute to allow interest of 0.5 percent per month (up to 25 percent of the amount due) to accrue from the due date for any late-filed unclaimed property reported and remitted on or after March 1, 2016. The current unclaimed property statute in Delaware does not have a provision permitting the accrual of interest (former interest provisions were repealed in June 2014 with the enactment of S.B. 228). Even before their repeal, the interest provisions were largely unenforced. Because the look-back period would remain over 20 years in Delaware, the added costs associated with the proposed interest increase (and actual enforcement) will likely be more than the amounts no longer owed due to the proposed look-back period reduction.

Mandatory Holder Contact

One procedural change included in the bill is a requirement that holders designate an employee (as opposed to outside counsel) to serve as the primary contact for all correspondence with the state when filing their annual report. Delaware appears to be attempting to forbid holders from outsourcing contact with the state to outside advisors, yet ironically Delaware has outsourced their unclaimed property audit and policy functions. It is not clear what the policy behind such a change is, other than to create an additional burden on holders, who often hire an advisor because they do not have the infrastructure in place to manage an audit on a daily basis.

Practice Note

The bill was introduced in the House last Friday (June 19, 2015) and referred to the Economic Development/Banking/Insurance/Commerce Committee. While the legislation takes several steps in the right direction, it subsequently takes several steps back. Notably, the proposed VDA program is far from voluntary (i.e., participate or be audited), especially when paired with the new threat of interest and only a slightly reduced look-back period (that was egregious in the first place). It remains to be seen whether additional legislation implementing the Task Force recommendations is still to come. Regardless of whether S.B. 141 passes, Delaware will continue to be one of the most aggressive enforcers of unclaimed property and holder remittance should be carefully evaluated and managed.