Tracking the myriad of changes in abandoned and unclaimed property

Abandoned and Unclaimed Property Quarterly /Issue 10 /October 2014
Delaware unclaimed property legislative changes and events p2/ Multistate
developments p4
Tracking the myriad of
changes in abandoned and
unclaimed property
Dear Clients and Alumni,
Abandoned and Unclaimed Property (AUP) continues to be a hot topic among businesses and
organizations. As this edition of our quarterly discusses, the AUP landscape appears to be changing as
Delaware is the subject of more scrutiny and responds with favorable law changes and in-depth
reviews of its current policies and procedures related to enforcement of AUP compliance. PwC will
continue to monitor on-going changes and noteworthy events and keep you updated.
Please send us your comments on the newsletter - your feedback is invaluable. We hope you enjoy
reading this edition of our newsletter, and look forward to hearing from you.
Regards,
Janet Gagliano
National Leader - Abandoned and Unclaimed Property
www.pwc.com
Delaware unclaimed property legislative changes
and events
In brief
Abandoned and unclaimed property laws, which were originally designed to protect
the rights of individuals, are now being enforced against all types of organizations,
and may have a significant impact on various areas of a company’s operations. These
laws generally require that any holder of unclaimed funds (including, but not limited
to outstanding payroll, customer credit refunds, accounts payable, accounts
receivable credit balances and vendor checks) report and remit the unclaimed
property to the appropriate state after a specified time period has expired. The laws
are complex and can vary significantly from state to state. However, a company must
fully understand its unclaimed property reporting requirements in each applicable
state to comply with the laws.
During the last year, much attention has been paid to Delaware’s unclaimed property
policies, with specific focus on how it could improve its unclaimed property processes.
Consequently, Delaware has enacted significant changes to unclaimed property law in
recent months specifically to address the interest and penalty provisions in its law.
Additionally, a number of Delaware court cases have recently addressed the question
of the fairness of Delaware’s unclaimed property estimation techniques. Companies
should monitor Delaware legislative and judicial developments to comply with state
unclaimed property requirements.
In detail
Abandoned and unclaimed property is a significant revenue source for Delaware. To
illustrate, in October 2013 the Council on State Taxation (COST) released a scorecard
that graded each state’s unclaimed property laws. In its scorecard, COST gave
Delaware a score of ‘D-’, stating, “revenue from unclaimed property is the state’s third
largest revenue source, generating 16 percent of the general revenue fund in fiscal
year 2013.” Many unclaimed property holders incorporated in Delaware that have
been subject to Delaware’s third party contingent fee audits, which may examine
records dating back to 1981(or the date of incorporation if after 1981), may not be
surprised by Delaware’s score in the report.
On October 1, 2014, COST released additional survey information regarding fourteen
companies' experiences with Delaware unclaimed property audits to share with the
Delaware Unclaimed Property Task Force. The majority of respondents cited
concerns about the extensive length of audits, unreasonable reporting demands, and
costs to complete the audits. Respondents also stated that the third party auditor,
Kelmar, requests vast amounts of data that are unobtainable, requires unreasonable
time periods for holders to compile the data requested, and "fails to understand basic
tax and recordkeeping principles applicable to larger companies." These detailed
responses paint a very negative picture of the Delaware unclaimed property audit
process.
Recently, there has been an increase in scrutiny of Delaware’s unclaimed property
laws and administrative policies, as well as a negative perception by some and
litigation due, in part, to its increased revenue generated from unclaimed property in
the past few years, increased audit activity, and its use of contingent fee auditors.
Overview of recent legislative changes in Delaware
After the COST scorecard was published in 2013, Delaware enacted legislation to
amend its interest and penalty provisions, making them less severe. On June 30,
2014, Delaware Governor Jack Markell signed Senate Bill 228 to change the penalty
for failing to file an unclaimed property report from 5% per month to the lesser of 5%
per month or $100 per day. The maximum penalty for failing to file the report
changed from 50% of the amount required to be shown on the report to $5,000. Even
more significant, the legislation also eliminated the assessment of interest on unpaid
amounts.
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Additionally, Senate Bill 228 extended the enrollment period for the Voluntary
Disclosure Agreement (VDA) program administered through the Secretary of State.
The time period to submit a letter of intent to the Secretary of State was extended to
September 30, 2014 and the time period to enter a VDA agreement and make
payment in full or enter into a payment plan was extended to July 1, 2016 to provide
sufficient time for holders to complete the process and submit payment to the state.
As a result of the enacted legislation, Delaware-incorporated entities not under audit
by the State could have enrolled in a VDA to limit the look back period back to 1993
and subsequent years through September 30, 2014. If the Delaware incorporated
entity chose not to participate in the VDA program and is selected for audit after
September 30, 2014, the look back period would extend back as far as 1981 if the
company was incorporated in Delaware on or before that year.
Overview of recent litigation in Delaware
In addition to Delaware’s legislation to amend its unclaimed property statutes, the
Delaware courts have recently examined unclaimed property laws. In 2014, there
have been two cases involving unclaimed property holders that filed suit against
Delaware regarding unfair estimation techniques.
On April 17, 2013, Select Medical Corporation filed suit against Delaware in US
District Court, alleging that an unclaimed property assessment of approximately
$300,000 for accounts payable was improper and sought a preliminary injunction
against the state’s collection of the property, penalties and interest. Select Medical
made a payment of more than $17,000 to Delaware under a Voluntary Disclosure
Agreement (VDA). Select Medical claimed that Delaware cashed its check and then
notified the company that it would perform an unclaimed property audit of Select
Medical.
Select Medical argued that Delaware’s policies were improper based on the following:

Delaware’s three year statute of limitations bars the assessment.

Delaware Section 1155 does not provide authority for retroactive estimation
techniques during the time period in question.

Texas v. New Jersey, 379 US 674 does not give common law authority for
estimation techniques since records were available during the time period in
question.

The estimation methodology was unconstitutional, violating the Commerce
Clause, Full Faith Clause, Credit Clause and the Takings and Substantive Due
Process Clause because it does not recognize exemptions, and was arbitrary and
capricious.
Delaware filed a response opposing the motion, citing a lack of federal jurisdiction in
the case and claiming Select Medical did not meet requirements for a preliminary
injunction since the audit was not complete. Delaware also claimed that during the
audit, Select Medical maintained that complete records were not available, and
therefore Delaware was required to use estimation techniques. Finally, Delaware
argued that Select Medical attempted to move the decision from the Court of
Chancery to federal court by raising baseless constitutional arguments.
On January 21, 2014, the parties filed for a dismissal of the case with prejudice,
stating each party would bear its own costs, expenses and attorneys’ fees. The District
Court Judge approved the settlement on January 23, 2014, with no other details
regarding the terms of the settlement made public by the parties. This outcome leaves
holders with unanswered questions concerning the Court’s reasoning regarding
Select Medical’s allegations of unfair estimation techniques (Select Medical
Corporation v. Cook, et al. U.S. District Court, District of Delaware No. 1:13-cv00694, 1/21/2014).
Similarly, Temple Inland Inc. filed an administrative appeal of Delaware’s estimation
techniques regarding the escheatment of accounts payable and payroll accounts.
Temple Inland asserted that it owed Delaware $147.30 for unclaimed property.
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Delaware used a third party audit firm to estimate that Temple Inland owed over $2
million for the accounts. On April 3, 2014, the complaint was confirmed in part and
reversed in part. An Independent Reviewer reduced the amount owed to $1.3 million
(Temple Inland Inc. v. Michelle Whitaker, Audit Manager, Delaware Department of
Finance, 4/3/2014).
On May 21, 2014, Temple Inland filed a complaint in US District Court for the District
of Delaware contending that the estimation of liability by Delaware violates federal
common law. The Court has not made a decision in the case. Holders that are
currently under audit by Delaware should continue to follow this case very closely,
especially if they plan to act on similar concerns as argued in Temple Inland (Temple
Inland v. Cook et al, No. 1:2014-cv-00654, 5/21/2014).
Delaware’s internal evaluation of unclaimed property law
Delaware is also performing an internal evaluation of its unclaimed property policies.
For instance, on June 11, 2014, the Delaware Senate passed Senate Concurrent
Resolution 59 that would establish a legislative task force to analyze and make
recommendations to improve fairness and compliance with Delaware’s unclaimed
property laws. Some unclaimed property holders question whether the proposal to
evaluate Delaware’s unclaimed property laws was prompted by the two most recent
cases litigated in Delaware.
Additionally, the Senate Banking Committee is evaluating Senate Bill 215, which
would forbid the State Escheator from paying third party auditors by commission.
This legislation would also require re-bidding of auditing contracts at least every three
years. Delaware unclaimed property statutes, Title 12 Chapter 11, provide that “no
person who has served as a state employee, state officer or honorary state official shall
represent or otherwise assist any private enterprise on any matter involving the State,
for a period of two years after termination of employment or appointed status with
the State, if the person gave an opinion, conducted an investigation or otherwise was
directly and materially responsible for such matter in the course of official duties as a
state employee, officer or official. Nor shall any former state employee, state officer or
honorary state official disclose confidential information gained by reason of public
position nor shall the person otherwise use such information for personal gain or
benefit.” The Senate Banking Committee will need to address whether the current
contingent fee auditing policy should be amended.
A final report of recommendations for legislative or executive action is planned to be
submitted to the President of the Senate and the Speaker of the House no later than
November 1, 2014. This report and the proposed legislative task force may address
various concerns regarding the fairness of the Delaware law and future audit
practices.
The takeaway
Companies need to be aware of and monitor unclaimed property developments in
Delaware in order to comply with state requirements. The final decisions made in
recently litigated court cases should provide guidance regarding Delaware’s audits
and the use of contingent fee auditors. Companies should evaluate the decisions and
whether Delaware will continue to amend unclaimed property laws accordingly.
Multistate developments
While not fully inclusive of all developments in state AUP, the following provides
highlights of some notable items.
Delaware
Delaware ex rel. French v. Card Compliant LLC et al.; C.A. No. 14-CV-688-GMS,
July 31, 2014
Delaware recently unsealed a qui tam civil action claiming that several large
corporations failed to escheat the value of unredeemed gift cards by engaging in
improper practices to avoid being classified as holders of unclaimed gift card
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liabilities. In response to the civil action filed with the Delaware Superior Court which
alleged violations of two provisions of the Delaware False Claims and Reporting Act
(DFCRA), defendants moved to dismiss the complaint with prejudice. Defendants
noted that a valid claim requires plaintiffs to plea that Delaware has the right to
escheat under federal common law, that defendants have violated the Delaware
Escheats Law, and that the defendants have violated the DFCRA. Defendants contend
the complaint does not contain these pleas, along with other arguments.
North Carolina
NC H 27, signed by Governor August 1, 2014
This bill provides that unclaimed US savings bonds escheat to the state as directed by
the treasurer, and creates an escheat savings bond trust fund.
Pennsylvania
PA H 278, signed by Governor July 10, 2014
This bill revises the definition of 'holder' and 'owner' in unclaimed property law.
Additionally, the bill reduces the holding period from five to three years for:

any demand, saving or matured time deposit in a financial institution, or any
funds paid toward the purchase of shares or other interest in a savings
association, savings and loan or building and loan association, excluding any
charges that may lawfully be withheld

any sum payable on checks or on written instruments including, but not limited
to, drafts, money orders and travelers checks, on which a financial institution is
directly liable

any funds or other personal property, tangible or intangible, removed from a
safe deposit box or any other safekeeping repository in Pennsylvania on which
the lease or rental period has expired due to nonpayment of rental charges or
other reason, or any surplus amounts arising from the sale thereof pursuant to
law

any moneys held or owing by an insurer as established by its records under any
contract of annuity or policy of life insurance including premiums returnable or
dividends payable

any moneys held or owing by an insurer as established by its records under any
contract of insurance other than annuity or life insurance, including premiums
or deposits returnable or dividends payable to policy or contract holders or
other persons entitled thereto

any customer advance, toll, deposit or collateral security or any other property
held by any utility if under the terms of an agreement the advance, toll, deposit,
collateral security or other property is due to or demandable by the owner

gift certificates or gift cards (from the date of issuance if no redemption period
is specified)

any certificate of stock or participating right in a business association, for which
a certificate has been issued or is issuable but has not been delivered

any sum due as a dividend, profit, distribution, payment or distributive share of
principal held or owing by a business association

any sum due as principal or interest on a business association's bonds or
debentures, or coupons attached thereto, whenever the owner has not claimed
or indicated an interest in such sum

any sum or certificate or participating right due by a cooperative to a
participating patron, whenever the owner has not claimed or indicated an
interest in such property

all property held in a fiduciary capacity for the benefit of another person
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
all property, not otherwise mentioned, that is admitted in writing by the holder
and adjudicated to be due, and is held or owing in the ordinary course of the
holder's business, except for wages and other compensation.
The bill also provides that abandoned and unclaimed property now includes
retirement account plans for self-employed individuals or a similar account or plan
created pursuant to Federal internal revenue law or to the law of this Commonwealth
and that is not subject to a mandatory distribution requirement, three years after the
owner has: (i) attained seventy and one half (70.5) years of age; or (ii) indicated an
interest in the account or plan or in other property of the owner in the possession,
custody or control of the holder.
In addition, the bill amends provisions regarding the examination of records, and
creates penalties for noncompliance of $1,000 per day for not reporting and up to
$5,000 for offenses.
Texas
Highland Homes Ltd. v. Texas, Texas Supreme Court, No. 12-0604 August 29, 2014
The Texas Supreme Court examined whether damages and settlement proceeds
claimed by class representatives on behalf of absent members should be considered
unclaimed property, presumed abandoned, and subject to unclaimed property laws.
The Court stated, "Whether settlement payments are mailed to class members or
must be applied for, the Act is inapplicable for the same reason: absent class members
have asserted claims and exercised ownership through their class representatives. In
both situations, there is no holder of abandoned property. “Therefore, the Court held
that Texas unclaimed property law does not apply.
Let’s talk
For more information, please do not hesitate to contact:
Janet Gagliano
Partner, National Practice Leader Abandoned and Unclaimed Property
Atlanta
+1 (678) 419-1068
[email protected]
Heela Popal
Director
Atlanta
+1 (678) 419-1462
[email protected]
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