On June 29, 2017, the Delaware Governor signed a technical correction bill (“SB 79”) to the State’s unclaimed property overhaul legislation (“SB 13”), after SB 79 unanimously passed the Delaware House of Representatives and the Delaware Senate. To briefly recap, Delaware enacted SB 13 on February 2, 2017 in an effort to reform its widely-criticized unclaimed property laws. Some of the more beneficial changes in SB 13 included a reduced audit look-back period of 10 report years, and the ability for certain holders currently under audit to elect to convert the existing audit into a voluntary disclosure agreement or to elect an expedited audit option — both of which would result in the waiver of penalties and interest.
While undoubtedly a step in the right direction, SB 13 still included an automatic mandatory interest provision eliminating any reasonable cause exception to the imposition of interest for late-filed property remitted after July 1, 2017. Furthermore, SB 13 deferred to the Secretary of Finance, in consultation with the Secretary of State, to promulgate regulations to establish instructions and guidelines for the administration of the new unclaimed property laws and to develop rules regarding the State’s historically-controversial estimation methodology.
On April 1, 2017, Delaware released its much anticipated proposed regulations; however, the regulations fell far short of making any meaningful improvements to the State’s estimation methodology — in fact, the proposed regulations did nothing to address Delaware’s historic (and arguably unconstitutional) practice of extrapolating unclaimed property liability to Delaware based on all unclaimed property reported in the base period, including property that was escheatable to other states. This estimation technique directly conflicts with Temple-Inland Inc. v. Cook, 1:14cv00654 (D. Del. June 28, 2016), where a federal court determined that Delaware’s method of estimation “created significantly misleading results” and was “contrary to the fundamental principle of estimation.” See Delaware Issues New Abandoned and Unclaimed Property Regulations, April 21, 2017, for our prior coverage.
The technical correction to SB 13 does not correct Delaware’s infamous estimation practices, but it does include two noteworthy developments:
- Allowing the Delaware State Escheator to waive interest in whole or in part “for good cause shown” that otherwise would be assessed on holders for late / non-reporting; and
- Pushing back the deadline for the Delaware Secretary of Finance to adopt regulations regarding the method of estimation from July 1, 2017 to December 1, 2017.
The benefits of the first development above are obvious — holders submitting late unclaimed property reports may be able to request a waiver of interest for good cause shown.
The benefits of the second development are less clear. Under the original SB 13, holders were required to notify the Delaware Secretary of State of their intent to convert from an audit to a voluntary disclosure agreement (“VDA”) or expedited audit within 60 days of promulgation of the estimation regulations. On one hand, many holders are already positioned to convert their audit to a VDA or expedited audit and may want to wait to review the Secretary of Finance’s finalized estimation regulations before taking further action. On the other hand, the extended deadline allows holders more time to prepare their records and consider their options before moving forward under the new law. The delayed release date may (or may not) mean Delaware is taking a second look at improving its proposed estimation regulations. As indicated by the extensive commentary and criticism of Delaware for not making any significant changes to its historic extrapolation practices, additional litigation addressing the constitutional concerns raised in Temple-Inland likely will result if further changes are not made to the proposed estimation regulations. We will learn in the coming months if Delaware is finally addressing these concerns in earnest before finalizing its estimation regulations.
Contact the author: Drew Hemmings