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Unclaimed Property Focus
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UNCLAIMED PROPERTY FOCUS is a blog written by and for UPPO members, featuring diverse perspectives and insights from unclaimed property practitioners across the U.S. and Canada. We welcome your submissions to Unclaimed Property Focus. Please contact Tim Dressen via tim@uppo.org with any questions about submitting a blog post for consideration and refer to our editorial guidelines when writing your blog post. Disclaimer: Information and/or comments to this blog is not intended as a substitute for legal advice on compliance or reporting requirements.

 

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Litigation Update: Court Denies Motion for Summary Judgment in Card Compliant Whistleblower Case

Posted By Administration, Wednesday, May 16, 2018

Delaware ex rel. French v. Card Compliant LLC et al. is a qui tam case – a suit brought when a whistleblower exposes alleged fraud against the government with the incentive of receiving a portion of the recovery as a reward. The defendants include Card Compliant LLC, a third-party company that some defendants used to issue gift cards and assume certain gift card responsibilities, and numerous other defendants. 

 

Among the various allegations, the plaintiffs claim that some defendants didn’t account for the transfer of liability in the manner its contracts specified. According to the state’s allegations, the liability wasn’t truly transferred and, thus, defendants had the obligation to remit unclaimed property to Delaware but didn’t do so. 

 

On April 30, 2018, Judge Paul Wallace denied defendants’ Motion for Summary Judgment seeking the dismissal of all claims.

 

The defendants argued that the plaintiffs cannot legally establish a Delaware False Claims and Reporting Act fraud claim because “the undisputed facts demonstrate the retailers had no legal obligation to pay the unredeemed balances on gift cards issued by and assigned to the card companies.” 

 

The court, however, said the defendants’ subjective beliefs regarding the validity of the giftco structure remain unresolved, and several disputed issues preclude resolution of whether the defendants knowingly acted in bad faith to avoid monetary obligations to the government. 

 

“The plaintiffs must be given the opportunity to present to a jury evidence of defendants’ actual knowledge, subjective belief, and purported bad faith,” the judge wrote.

 

The defendants also argued that a ruling by a previous judge in the case should be struck down. The ruling held that the relationship between the creditor/customer and the retailers (rather than the relationship between the card company and the retailers) is the relevant relationship for the purposes of escheat. 

 

The defendants suggested that the judge made this ruling without the benefit of reviewing documents and testimonial evidence from Delaware audits and VDAs in which the state took the position that when a gift card is assigned before dormancy, the card company is the relevant debtor for escheat purposes. 

 

Judge Wallace ruled that the defendants failed to establish that the prior ruling was clearly wrong and that extraordinary circumstances exist, thus preventing him from second-guessing the previous judge’s decision. 

 

Finally, the judge pointed to the U.S. Court of Appeals for the Third Circuit’s decision in the Marathon Petroleumcase. In that case, the court stated that the federal priority rules do not prevent the state from examining books and records to determine the unclaimed property holder.

 

The defendants had sought refuge through application of the DFCRA’s Administrative Proceedings Bar and took the position that if Delaware had previously engaged in the type of statutory audits (and VDA procedures) the Third Circuit spoke on to examine their giftco activities and escheat obligations, then the defendants had been subject to administrative proceedings that would preclude the court from exercising jurisdiction over the state’s case. 

 

The judge wrote, “To act as a bar, those prior administrative proceedings must have been ‘substantially based upon allegations or transactions which are subject of a civil suit or an administrative proceeding in which the Government is already a party.’ It would be indeed incongruous if the administrative proceeding meant to discover and enforce a Defendant’s true escheat obligation could cover more ground than a qui tam suit claiming fraud in the same allegations or transactions.”

 

Noteworthy issues that remain to be determined in the case include:

  • When are cards escheatable to Delaware?
  • Who is the true holder of the cards – the retailers or the third party?
  • Can cards that have already been issued be assigned to another affiliate or third party?
  • Was the giftco structure a reasonable effort to comply with the law or did the companies act with fraudulent intent?

This case is scheduled to go to trial in September. UPPO will continue to monitor and report on developments in this case.

Tags:  Card Compliant  Delaware  gift cards  litigation  qui tam  unclaimed property  whistleblower 

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The Four Phases of Delaware’s VDA Program

Posted By Administration, Thursday, April 19, 2018

As part of recent changes to Delaware’s unclaimed property statute, the state must give holders the opportunity to enter into its voluntary disclosure agreement (VDA) program before initiating audits. In addition, holders that were already under examination had the option to convert to a VDA by Dec. 11, 2017. Expectedly, interest in Delaware’s VDA process is high. 

 

To provide UPPO members with insight into Delaware’s VDA process, Delaware Unclaimed Property VDA Administrator Alison Iavarone outlined the program and responded to questions during a recent UPPO webinar. 

 

“The VDA program is not an examination—it’s not an audit—but the holder is expected to conduct a comprehensive and detailed self-review of its books and records to determine whether the holder has past-due abandoned or unclaimed property reportable to Delaware,” she said.

 

Once enrolled, qualified unclaimed property holders accepted into Delaware’s VDA program will proceed through a four-phase process.

 

Phase 1: Scoping

During the initial phase of the VDA, the participating holder analyzes its organizational history, accounting functions and records to determine areas of potential unclaimed property exposure and underreporting. 

 

“The review should be customized to the holder,” Iavarone said. “In order to determine how it’s customized, you need to understand the corporate activity, whether companies were acquired during the VDA review period and how they were rolled into the company for accounting purposes, for example. Another big thing to address during the scoping phase is the compliance history—whether they have been filing and what property types they have been filing. This could help minimize the review you need to do.”

 

The holder determines the entities and property types where unclaimed property exposure exists and submits a Scoping Worksheet and Information Request to the VDA administrator assigned by the secretary of state’s office—either Drinker Biddle or TL2Q. 

 

The administrator reviews the holder’s submission and responds to any questions the holder may have about the process. The Delaware Department of State communicates with the administrator throughout the VDA process and remains available to address holder concerns. 

 

At the conclusion of this phase, the administrator and holder will agree on the scope of the VDA and establish a timeline for completion of the other phases. 

 

Phase 2: Quantification

During the second phase, the holder will review its books and records to quantify past-due unclaimed property reportable to Delaware for the entities and property types established during the scoping phase. The methodology for the quantification of amounts due to Delaware will generally be based on whether an entity is domiciled in Delaware and the records availability for each entity and property type. 

 

The holder and administrator periodically complete status updates to ensure the process is proceeding. The holder provides preliminary quantification schedules or other documentation for the administrator’s review and feedback. 

 

Phase 3: Submission and Validation

During the third phase, the administrator reviews the holder’s work and conclusions with the goal of establishing a settlement agreement, including the amount reportable to Delaware. The holder presents its VDA Submission to the administrator. It should include:

  • Entity or company background information (in narrative form). 
  •  Summary of the work performed (in narrative form). 
  •  Summary of findings (in narrative form). 
  •  Supporting schedules. 
  •  Supporting documents. 
  •  Other applicable documentation (e.g., legal opinions, management representation letters, etc.).

“This is the nuts and bolts of the VDA,” Iavarone said. “It should include is a summary of what was done in narrative form and then quantification schedules summarizing how you came up with the numbers, along with supporting documentation.” 

 

Upon receipt and review, the administrator responds with questions and follow-up items needed to proceed. Depending on the request, the holder may respond with supporting documentation and/or edits and updates to calculation spreadsheets. The holder also provides a management representation letter from its chief financial officer, describing what records are available for property types and for which years. 

 

The administrator presents the VDA Submission to the secretary of state’s office for review and approval. The Department of State reviews the VDA Submission and the administrator’s recommendations.

 

Phase 4: Closing and Documentation

Upon acceptance of the VDA Submission, the holder and secretary of state’s office work together to close the VDA. An officer or authorized representative completes and submits Form VDA-2 – Voluntary Self-Disclosure Agreement, along with several attachments:

  • Exhibit A: List of Entities: This attachment includes a list of entities include in the VDA and their federal identification numbers. Dates and states of incorporation are also requested but not required.
  • Exhibit B.1: Summary of Amounts Due: This attachment includes a table summarizing reportable amounts by property type. 
  • Exhibit B.2: Line Item Owner: This attachment, provided in a printable format should include the name, address, property type and amount that will be included in the NAUPA file that will be uploaded by the holder after receiving the VDA Demand Letter. 
  • Exhibit C: SOS VDA Submission: This attachment may consist of many documents and should include: the narrative summarizing the VDA analysis; a summary and detailed schedules quantifying amounts; copy of VDA-1 and any applicable amendments; management representation/records availability letter; legal opinions/memoranda related to the VDA; and any other relevant documents. 

After the holder and secretary of state have signed Form VDA-2, the Department of State will issue a Demand Letter, requesting payment and providing instructions for uploading the necessary NAUPA file. The holder will have 10 days to make payment of the amount due. 

 

Following completion of the VDA process, the holder is required to file unclaimed property reports electronically to the Department of Finance for the next three years. 

 

For additional information regarding Delaware’s VDA program, including forms, sample documents and answers to frequently asked questions, visit http://vda.delaware.gov.

Tags:  Delaware  VDAs  voluntary disclosure agreements 

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Unclaimed Property Trends Shape Annual Conference Sessions

Posted By Administration, Monday, January 8, 2018

For better or worse, this is not a dull time to be an unclaimed property professional. In recent years, numerous state legislatures have considered (and often approved) updating their unclaimed property statutes. Courts continue to look at state unclaimed property practices, including controversial audit practices. And companies from coast to coast and border to border face the ongoing challenge of minimizing their unclaimed property risk.

 

Throughout 2017, UPPO helped members keep up with the trends affecting unclaimed property professionals. Many of these same trends shape the agenda for the 2018 UPPO Annual Conference, March 4-7, 2018, in Tampa, Florida.

 

Delaware

In February 2017, Delaware Gov. John Carney signed S.B. 13 into law, triggering significant changes to the state’s unclaimed property practices. Since then, the state has adopted new audit rules and encouraged holders currently under audit to convert to the state’s VDA program.

 

As we approach the one-year mark since S.B. 13, its effects continue to unfold. The Delaware Reforms: One Year Later session at the 2018 UPPO Annual Conference will examine the status of changes in Delaware and their ramifications. The Advocacy Efforts in the Age of Reform session will shine a light on UPPO’s work to promote fair unclaimed property requirements not only in Delaware, but in all states.

 

Audits

Fueled by activity in Delaware, controversy continues to swirl around state audit practices. The use of third-party auditors incentivized by contingency fees has been the focus of litigation and advocacy efforts. As states update their unclaimed property statutes, some, such as Michigan, are enacting new audit standards. Some states also help offer a fairer playing field for holders by providing the opportunity to appeal audit assessments. The examination process, particularly that of multi-state audits, often strains holder resources, as it stretches over several years.  

 

The Audit 101, Navigating Your Audit and Mock Trial sessions, along with several of the Industry Focus sessions, at the 2018 UPPO Annual Conference will provide attendees with insight into strategies holders can employ when facing examination.

 

Litigation

The courts have provided several favorable rulings for holders in recent months. Appeals court rulings in cases brought by Plains All American Pipeline, Bed Bath and Beyond, and Marathon Petroleum have yielded positive results. Similar cases, including those brought by Office Depot and the multi-state squabble over MoneyGram official checks, continue to proceed through the courts.

 

Attendees at the 2018 UPPO Annual Conference will learn about these and other relevant litigation trends during the Legislative and Litigation Update session.

 

Operational Practices

In addition to exploring unclaimed property trends, the 2018 UPPO Annual Conference agenda is packed with sessions to provide practical knowledge attendees can apply to be more effective at their jobs. Sessions will examine a wide range of topics, including: state reporting basics, managing due diligence, self-assessments, record retention, exemptions and deductions, fraud, policies and procedures, foreign jurisdictions and much more.

 

View complete details about educational sessions and other 2018 UPPO Annual Conference events. The early-bird registration deadline is Jan. 10, so register today for the best rate.

Tags:  audits  Delaware  litigation  trends 

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Delaware Makes a Case for Converting Audits to VDAs

Posted By Contribution from Carla McGlynn, 2017/18 UPPO president, Thursday, November 30, 2017

With Delaware’s Dec. 11, 2017, deadline for converting existing audits to state’s Voluntary Disclosure Agreement Program fast approaching, the Secretary of State’s Office recently held a webinar for eligible unclaimed property holders. Alison Iavarone, Delaware’s unclaimed property VDA administrator provided background on the VDA Program and addressed frequently asked questions about the conversion option.

 

The VDA conversion option originates from S.B. 13, legislation intended to shift the state’s unclaimed property compliance efforts away from audits, while promoting voluntary and continued compliance, according to Iavarone. Holders that received an examination notice before July 22, 2015, are eligible. Those that were under audit as Feb. 2, 2017, also have the option to choose a fast-track audit, administered by state’s Department of Finance.

 

Why Convert?

Iavarone suggested several reasons why eligible holders should consider converting their audits to VDAs:

  • The VDA Program is intended to be a more business-friendly method than an audit for holders to come into compliance.
  • The VDA Program is designed to be faster and less expensive than an audit.
  • The holder manages the VDA process and presents its findings to the state for validation. After completion, holders that meet future reporting obligations are protected from audit for historic liabilities for the property types and entities reviewed under the VDA.
  • The state waives interest and penalties for holders participating in the VDA Program.
  • Holders are not expected to begin their internal VDA review from scratch. They can use any review information gathered before converting to the VDA to ensure greater efficiency.
  • Work papers from the audit will not transfer to the Department of State as part of the conversion. The only shared information pertains to the scope of the audit – a summary of entities, property types and audit population periods.

Frequently Asked Questions

Iavarone addressed several key questions related to the state’s VDAs.

 

What is the look-back period?

The look-back period is 10 report years (15 transaction years) from the date the original examination notice was sent to the holder.

 

What is the scope of the VDA from a converted audit?

The scope, for most eligible holders, was determined by the auditor. At a minimum, holders are expected to use the same scope as the audit for the VDA. If they choose, holders may expand the scope.

 

How is the state handling bifurcated audits, covering securities and general ledger items?

Under Delaware law, only the general ledger portion of the audit may be converted to a VDA. Securities are not eligible.

 

What if a holder already settled part of an examination?

If holders have settled and closed portions of the audit before conversion, only the remaining entities and property types will be covered under the VDA.

 

What is the statute of limitations?

S.B. 13 includes a 10-year statute of limitations from when the reporting duty arose. It will not be applied retroactively, as the previous six-year statute of limitations applied before S.B. 13 was effective.

 

How is estimation applied?

The estimation process continues to use second-priority or gross estimation, as it has in the past.

 

What if a settlement cannot be reached?

The audit will refer back to the Department of Finance if a settlement cannot be reached for a particular property type or some other aspect of the VDA.

 

Who is managing the VDA process for Delaware?

Drinker Biddle continues to manage the VDA Program on behalf of the Delaware VDA administrator, who ultimately has final review and approval responsibilities. 

 

Eligible holders must file Form NOI CONV with the Department of State by Dec. 11, 2017, to participate. For more information, visit http://vda.delaware.gov

Tags:  audits  Delaware  VDAs 

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Deadline Approaches for Converting Delaware Audits to VDAs

Posted By Administration, Wednesday, November 22, 2017

Under Delaware Department of Finance regulations that became effective on Oct. 11, 2017, unclaimed property holders that received an examination notice from the department on or before July 22, 2015, have the option to convert the audit to the state’s Voluntary Disclosure Agreement Program. The deadline for submitting the Notice of Intent to Convert Audit to VDA form is Dec. 11, 2017. Holders undergoing a securities examination are not eligible to convert.

 

Converting from an existing audit to a VDA holds several potential benefits for holders.

 

Waived interest and penalties

Delaware officials have stated that waiving the mandatory 25 percent interest charge and other penalties is intended to be a significant incentive for holders to come into compliance via the state’s VDA program.

 

Limited carryover of audit work

“The only aspect of the audit that will have precedential impact on the VDA is the scope of the examination,” said Kendall Houghton, partner with Alston & Bird. “That includes any determination by the Department of Finance and its contract auditors about which entities will come under review, and the applicable property types and years. Other than that, holders that convert to a VDA have the option to incorporate other aspects of work performed during the audit, but are not required to do so.”

 

This limited carryover of audit work has two noteworthy advantages to holders:

  1. They don’t have to start over, redoing every aspect of the audit. Holders that qualify for the VDA conversion have been under examination for at least two years and have likely dedicated significant resources to the process. They can choose to use completed work as they prepare their VDA analysis, submission and quantification of liability.
  2. They are not required to use the audit firm’s work papers and determinations made during the examination.

Closing and release agreement

Upon completing the VDA program, holders have the opportunity to secure a closing and release agreement from the secretary of state. That can be quite valuable, as it protects holders from liability for the period covered under the VDA, as long as there was no willful misrepresentation or fraud, and they meet future reporting requirements.

 

Flexibility

Holders that elect to convert their examinations to VDAs are not required to complete the VDA program. If they are unable to reach acceptable terms or anticipate that the results of an unclaimed property lawsuit may deem Delaware’s estimation practices unconstitutional, for example, holders may choose to withdraw from the VDA program. This gives them the option to challenge their liability or litigate it later, which would not be an option once the VDA closing and release agreement is finalized.

 

Control

Undergoing a self-directed review under the VDA process gives holders greater control of the process than completing an audit. The self-directed review is typically more targeted, freeing holders from overly broad information requests from the auditor. They also have the ability to set their own timelines.

 

“If you’re engaged in yearend closing and need to put the VDA process aside for a few weeks, you can do that without the constant tension of having to fulfill the auditor’s record requests,” Houghton said.

 

Relaxed review standards

The VDA’s review standards are generally less stringent than those imposed during an audit. For example, under an audit, checks voided after 30 days need to be researched and remediated. Under the VDA process, the standard increases to 90 days for voided checks. This standard is more in line with common business practices and is likely to generate a lower error rate for liability estimation.

 

“The remediation standards employed in the VDA program are more appropriate because the holder knows its policies and procedure, and is in the best position to assess whether an item on the books has been proven not to be unclaimed property,” said Houghton. “There is effectively a presumption in the audit process that anything on the books is unclaimed property, and the level of documentation required to rebut that presumption is more rigid.”

 

Greater cooperation

The VDA program is designed to give holders the opportunity to complete the self-directed examination, secure a release and move forward with proactive compliance. As such, even when issues between holders and the VDA administrators are contested, they are generally able to discuss, vet and settle the differences. Everyone involved typically approaches challenges with the common goal of collaborating on a solution.

 

Potential downsides

Despite the advantages available to holders through the audit-to-VDA conversion, opting to convert is not a clear-cut decision for everyone. As mentioned previously, upon execution of a closing and release agreement, holders forfeit the right to challenge the liability or later litigate it. In the event of a significant lawsuit that changes the unclaimed property audit landscape, holders that completed the VDA would not have the right to file a refund claim or dispute the estimated liability they paid.

 

For some holders that have substantially completed the audit process, the VDA process may represent an additional burden. Although not starting from scratch because they can use material from the examination period when preparing their VDA analysis, the self-directed review process still requires dedication of resources. A holder may decide that completing the audit process is more prudent than dedicating additional consultant, outside counsel and staff resources to the VDA program.

 

Finally, if the holder is subject to a multi-state audit, converting to a VDA in Delaware would not affect the audit from the other states. So, entering into the VDA could effectively shift the holder from a single process to multiple processes, posing potential resource issues.

 

The third option

In addition to completing the examination or converting to a VDA, holders may instead elect to convert to an expedited audit. Much like the VDA, this option includes a waiver of interest and penalties. However, very little information regarding the expedited audit process has been published, and the waiver is subject to the escheator’s determination that a holder cooperated with the auditor.

 

“The VDA and audit processes have been around a long time, but the expedited audit process is new and has a lot of unknowns,” said Houghton. “The administrative comments and guidelines don’t exist yet. That creates a lot of questions that aren’t yet answerable.”

 

For more information about Delaware’s VDA conversion initiative, refer to Delaware’s Convert Audit to a VDA web page.

Tags:  audits  Delaware  VDAs 

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