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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: Univar Takes on Delaware

Posted By Administration, Thursday, January 24, 2019

Univar Inc. v. Geisenberger, et al.

 

On Dec. 3, 2018, Univar Inc. filed a lawsuit against Delaware Department of Finance officials, alleging that several aspects of an unclaimed property audit initiated by third-party auditor Kelmar in 2015 on Delaware’s behalf are unconstitutional. Among the issues at play in the Univar case are:

  • Delaware’s retroactive application of amendments to the Delaware Abandoned and Unclaimed Property Law (DUPL), amended on Feb. 2, 2017. 
  • The state’s estimation methodology.
  • The state’s use of a third-party auditor that simultaneously represents other states in a multi-state audit.
  • The state’s contingent-fee arrangement with its third-party auditor.

 

On Dec. 11, 2015, Delaware notified Univar it would be subject to an unclaimed property examination, conducted by Kelmar. Upon receiving document requests from Kelmar, Univar objected, citing confidentiality concerns, Kelmar’s self-interest, the estimation process and other aspects of the audit. According to Univar’s complaint, Delaware rejected or ignored the objections and continued to do so for more than two years. On Oct. 30, 2018, the state issued a subpoena for the records Kelmar had previously requested. 

 

The Univar case includes several issues that have been part of other recent cases, including Temple-Inland v. CookPlains All American v. Cook and Marathon Petroleum v. Cook. However, unlike those lawsuits, the Univarcase was filed after the February 2017 DUPL amendments and, thus, questions the state’s ability to retroactively apply those amendments to audits that were initiated earlier.  

 

“The subpoena power that Delaware is relying on to force production of records from Univar was not effective until February 2017,” said Jameel Turner, one of the attorneys with Bailey Cavalieri who is representing Univar in this case. “The February 2017 amendments also created a 10-year record retention requirement for unclaimed property records. Prior to that time there was no record retention requirement. Delaware is using estimation for holders that did not comply with a record retention requirement that did not exist until February of 2017. So, they are using estimation when holders do not have records for periods when the law did not require records to be kept. It simply does not make sense.”

 

Univar also picks up the challenge to Delaware’s estimation methodology where Temple-Inland left off. The Temple-Inland court ruled that the state’s estimation methodology was unconstitutional. Univar argues that Delaware merely added a 10-year look-back period but otherwise continues to rely on estimation practices already declared invalid.

 

Delaware and Kelmar also allegedly responded to Temple-Inland by rescinding its requests to holders for prior unclaimed property filings for all states because the court took issue with the practice. However, after the case was settled, these requests were reinstated and the state incorporated the right to request such prior filings into the 2017 DUPL amendments. 

 

“Delaware and Kelmar use prior unclaimed property filings for states not participating in the audit to increase the potential liability due and payable to Delaware,” Turner said. “Univar is asking a judge to confirm that the way they are using those prior filings is unconstitutional and that prior filings in nonparticipating states are not relevant to whether a holder has liability due and payable to any participating state.”

 

One of the issues in the Univar case that was also a factor in other recent litigation is the concept of ripeness. The Plains All American case also questioned Delaware’s use of estimation. The court said Plains may have valid complaints, but because the state had not yet formally taken steps to request records or force Plains to comply with the audit, the case was not yet ripe. 

 

“One of the reasons the Plains All American case was dismissed was because Delaware had not made a formal demand for compliance with the audit request,” Turner said. “Univar has been served with a subpoena, so Delaware has taken steps to formally compel Univar to provide records. That’s a significant factor that distinguishes Univar’s situation from that of Plains All American.”

 

Ultimately, a decision in the Univar case may provide clarity for unclaimed property holders regarding the state’s audit and estimation practices. 

 

UPPO will continue to monitor and report on the progress of the Univarcase as noteworthy developments occur.  

Tags:  audits  Delaware  estimation  litigation  Plains All American  Temple Inland  Univar 

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S.B. 13 makes sweeping changes to Delaware’s unclaimed property statutes

Posted By Administration, Thursday, February 16, 2017

On Feb. 2, 2017, Gov. John Carney signed Delaware S.B. 13 into law, significantly updating the state’s unclaimed property statutes. Many of the changes mirror the 2016 Revised Uniform Unclaimed Property Act (RUUPA), and others appear to respond to issues raised by the Temple-Inland case. The new law is intended to “bring greater predictability, efficiency and fairness to the state’s unclaimed property reporting process and compliance initiatives.” Following is a summary of several of the law’s most noteworthy provisions.

 

Lookback, Record Retention and Statute of Limitations

S.B. 13 reduces the lookback period for both audits and voluntary disclosure agreements (VDAs) to 10 years plus dormancy. It also defines an express record retention period of 10 years from the date a holder submits a report. The statute of limitations is now 10 years from the date the duty arose, whether or not the holder reported the property. The previous statute of limitations, although shorter, began to run from the time the holder reported the property.

 

Estimation Methodology

The new law mandates that the secretaries of finance and state develop estimation regulations by July 1, 2017. They must include permissible base periods; items to be excluded from estimation calculation; aging criteria for outstanding and voided checks; and a definition of what constitutes “complete and researchable records.”

 

Audit Conversion

Under the new law, all holders currently under audit may convert to a two-year accelerated audit. Holders under audit as of July 22, 2015, may convert to a VDA program. Holders have until 60 days after the promulgation of the new estimation regulations to decide whether to convert to an accelerated audit or VDA program. Interest and penalties will be waived if conversion is made. Holders remaining in the audit will be subject to mandatory interest that is waivable only up to 50 percent.

 

Subpoena Authority

Provisions of the new law give the state escheator the power to issue an administrative subpoena and the ability to seek enforcement of an administrative subpoena in the Court of Chancery. These provisions appear to address issues raised by Delaware Department of Finance v. Blackhawk Engagement Solutions.

 

Judicial Review

Among the new provisions adopted in Delaware is a process for appeal by holders to the Delaware Court of Chancery, replacing the previous multi-step administrative review process. Under the new appeal process, holders have the ability to challenge the state escheator’s determination of liability. The court’s standard of review is deferential to the state escheator regarding factual determinations, but errors of law will be reviewed de novo. The judicial review provision also expressly gives the Court of Chancery the authority to review questions of state or constitutional law related to the examination. This provision appears to be a response to the Temple-Inland case.

 

Indications of Owner Interest

S.B. 13 adds a specific list of owner activities that prevent running of the dormancy period. Indications of the owner’s interest in property includes:

  • A written or oral communication by the owner to the holder or agent of the holder concerning the property or the account in which the property is held.
  • Presentment of a check or other instrument of payment of a dividend, interest payment or other distribution.
  • Accessing the account or information concerning the account, or a direction by the owner to increase, decrease or otherwise change the amount or type of property held in the account.
  • Payment of an insurance policy premium with some exceptions.

The new law also specifies that if an owner has more than one investment or account with a holder, an indication of interest in one investment or account is an indication of interest in all of those accounts.

 

Knowledge of Death

The new law adopts the “knowledge of death” concept as a dormancy trigger for life insurance proceeds. “Knowledge of death” may be identified through any source, such as declaration of death, a death certificate or the comparison of the holder’s records against the Social Security Administration’s Death Master File.

 

Priority Rules

For the first time, the Delaware unclaimed property law includes a codification of the U.S. Supreme Court’s priority rules. It expressly prohibits Delaware as the state of domicile under the second priority rule from taking property into custody that is exempted in the first priority rule state. It also allows the state of domicile to claim foreign-address property but excludes property claimed under foreign law.

 

Owner Address

S.B. 13 adopts portions of RUUPA’s definition of an owner’s “last-known address.” The last-known address of an owner is defined as “a description, code or other indication of the location of the owner on the holder’s books and records that identifies the state of the last known address of the owner.”

 

Disposal of Securities

The new law specifies that the state escheator shall sell or dispose of securities on any established stock exchange or by such other means as soon as the escheator deems it feasible after the delivery. The escheator may not sell a security listed on an established stock exchange for less than the price prevailing on the exchange at the time of sale. The escheator may sell a security not listed on an established exchange by any commercially reasonable method.

 

S.B. 13 provides for indemnification of security owners for 18 months. The escheator will provide either a replacement security or the market value of the security at the time the claim is filed if the owner comes forward with that 18-month period.

 

Gift Cards

For the first time, Delaware’s statute defines “gift cards,” “stored value cards” and “loyalty cards.” Gift cards and stored value cards remain escheatable after five years of inactivity. The state retained its unique profit retention provision defining the amount unclaimed as “the amount representing the maximum cost to the issuer of the merchandise, goods, or services represented by the card.” S.B. 13 adds “Goods” and “Services” into the mix, as old statute only provided exemption for “maximum cost to issuer of merchandise represented by the card.” Loyalty cards are expressly exempt.

 

Holders are prohibited from transferring their unclaimed property liability or obligation, except to a parent, subsidiary or affiliate. This provision affects third-party, unrelated companies that issue gift cards on behalf of a business and appears to address some of the uncertainty resulting from the Card Compliant qui tam litigation.

 

Compliance Review

Another new provision in the law permits the state escheator to conduct a “compliance review” if the escheator believes a filed report was inaccurate, incomplete or false. The compliance review is limited to contents of report and all supporting documentation. The escheator is required to adopt rules governing the procedures and standards for compliance reviews, but no timeline was included in the statute.

 

Application of the New Law

S.B. 13 represents a major change in Delaware’s unclaimed property practices with many positive developments for holders. They include reduced lookback, clear record retention period, estimation regulations, statute of limitations regardless of prior reporting compliance, direct appeal to Court of Chancery, new definitions and new exemptions.

 

As with any new law, it remains to be seen how provisions will be interpreted and applied. Holders await the regulations still in development regarding audit conversions to fast-track audits and VDAs, and the new compliance review provision. Clarification from Delaware will help holders make informative judgments about whether to convert current audits into VDA or fast track audits, and whether other changes to their unclaimed property practices are warranted.

 

Tags:  audits  Delaware  estimation  gift cards  RUUPA  unclaimed property 

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Litigation update: Plains All American appeal keeps estimation case alive

Posted By Administration, Thursday, January 12, 2017

One of the more interesting recent unclaimed property cases in recent years is Plains All American Pipeline L.P. v. Thomas Cook et al. In August 2016, the case was dismissed, but Plains has appealed the decision, sending the case to the Third Circuit Court of Appeals.

 

Background

A limited partnership incorporated in Delaware, Plains All American Pipeline, received notification in 2014 that Kelmar would be conducting an audit of the company on behalf of Delaware. Plains objected to the initial information request, claiming, in part, that the company was being audited not because of any suspicion of wrongdoing, but rather because of its profitability. When Delaware dismissed the company’s objections, Plains filed suit.

 

Among the complaint’s allegations, Plains argues that Kelmar’s request for information about subsidiaries organized outside of Delaware constitutes illegal search and seizure under the Fourth Amendment. The company argued that the state and its agent have no right to that information and, if they did, they would need to have reasonable grounds to search for it. The complaint also directly challenged Delaware’s right to use estimation.

 

Decision

On Aug. 16, 2016, the U.S. District Court for the District of Delaware granted the defendants’ motion to dismiss. In part, the court said the plaintiffs brought their suit based on potential threats and not actual threats. For example, Plains challenged the state’s right to use estimation before it had done so, as the lawsuit was brought immediately following Kelmar’s initial information request. Regarding the Fourth Amendment claim, the court said the state’s decision to examine businesses based on their profitability was legitimate, as those companies are logically more likely than others to hold large amounts of unclaimed property.

 

Plains was worried about going through this long audit and then getting an estimated liability,” says Diane Green-Kelly, partner with Reed Smith LLP. “They didn’t think estimation was appropriate. The way the court read the complaint was that Plains was unhappy about how the audit might unfold and what the assessment might be. The court said you can’t complain about something that might happen. You have to wait until you’ve suffered an injury. The court didn’t consider the case ‘ripe.’”

 

Status

As with any case a court dismisses with prejudice, parties involved in the case may appeal the decision. Plains All American did just that on Sept. 16, 2016, sending the case to the Third Circuit Court of Appeals.

 

Outlook

The appealed Plains case is developing at a time when Delaware’s unclaimed property practices face several significant challenges. These challenges may affect how the appeals court views the case.

 

“It’s hard to know what the Third Circuit will do, especially in light of other things,” Green-Kelly says. “You can’t look at the Plains case in a vacuum. The court will see that 21 states are suing Delaware for overreaching its unclaimed property authority. Temple-Inland won because of overreaching and ignoring federal law. Marathon and Office Depot sued Delaware. Everyone is suing Delaware. The Third Circuit will see this case in the context of a lot of things happening out there challenging Delaware’s conduct. So, the court could decide this case actually was ripe in light of the context in which it was filed.”

 

Another case, Delaware Department of Finance v. Blackhawk Engagement Solutions, could also influence the outcome of Plains. In 2015, Delaware’s escheator issued a subpoena to Blackhawk requesting documents related to an audit that had been in progress for several years. Blackhawk refused. Delaware filed an action in court to enforce the subpoena, and Blackhawk resisted, claiming the escheator was not authorized to take these actions, among other things. The state filed a motion for judgment on the pleading, at which point Plains All American and Marathon filed a joint amicus brief.

 

The brief cites several areas of the Delaware Code where state agencies are authorized to conduct examinations to determine with a set of laws and expressly authorized to issue a summons for testimony and a subpoena for documents. The unclaimed property statute authorizes the escheator to issue a summons for testimony, but not a subpoena for documents. The amicus brief points out that the code actually included such authorization until it was repealed and revised in 1990.

 

“If the Blackhawk court says the escheator has the authority to issue a subpoena and enforce it, Plains sort of goes away,” says Green-Kelly. “If the escheator actually has subpoena power and can enforce it in court, the resisting company can claim it doesn’t have authority to so and let the court decide. It happens during the audit, so the court can stop it while it’s happening. Because the statute lacks the authority to issue a subpoena, right now there’s no way to stop it other than to file the type of lawsuit Plains filed.”

 

Impact on Holders

In light of the important issues at play in Plains and other current cases, Green-Kelly offers some advice for holders undergoing an audit or considering entering into a voluntary disclosure agreement (VDA).

 

“If you’re a company already under audit and close to the end, you shouldn’t just accept a result that is not supported by documents or anything that is close to an estimate like Temple-Inland,” she says. “If you’re not under audit and are thinking about a VDA, don’t do anything. See what happens with these cases. Under the new audit program, it might be better to be audited than to go through a VDA. Wait and see what the audit program is going to be. I can’t imagine telling any company to go into the VDA program right now unless they get the letter and have to make a decision.”

 

 

Tags:  Blackhawk  Delaware  estimation  litigation  Plains All American  unclaimed property 

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Temple-Inland decision and settlement open the door to changes in Delaware

Posted By Administration, Thursday, August 18, 2016

Delaware’s use of and methodology for estimation in audits has come under the spotlight as a result of the Temple-Inland Inc. v. Cook court case, filed in May 2014. Recent developments in June and August 2016 provided clarity about the legality of Delaware’s practices and subsequently ended the case.

 

Background

The plaintiff, Temple-Inland, alleged violations of several federal laws based on the estimation methods used by Delaware’s third-party agent, Kelmar, which resulted in a $2 million estimated liability (later reduced to $1.3 million) based on a single payroll check for $147.30 that the company failed to escheat to the state.

 

June decision

On June 28, 2016, the U.S. District Court for the District of Delaware issued an opinion, granting Temple-Inland’s request for summary judgment. The court said it “finds several aspects of defendants’ actions troubling,” specifically:

  • Waiting 22 years to conduct an audit.
  • Avoiding the otherwise applicable six-year statute of limitations under dubious circumstances.
  • Giving holders no notice that they would need to retain unclaimed property records to defend against unmeritorious audits.
  • Applying Section 1155 for a prolonged retroactive period for no obvious purpose other than to raise revenue.
  • Failing to follow the fundamental principle of estimation where the characteristics of the sample set are extrapolated across the whole, which also puts the plaintiff at risk of multiple liability.

August settlement

On Aug. 5, 2016, Temple-Inland and the defendants filed a joint motion to dismiss the case, signaling a settlement and ending the dispute. Although details of the settlement were not made public, several published reports indicate that Delaware withdrew the full assessment and agreed to pay all of Temple-Inland’s attorney fees and additional case-related costs.

 

Long-term effects

How the Temple-Inland decision and settlement will affect Delaware’s practices, the litigation landscape, the state’s voluntary disclosure program, and other states’ use of estimation remain to be seen, but some of the results may play out quickly.

 

Delaware’s budget depends on revenue from unclaimed property, the third largest source of state revenue. As such, officials won’t have the luxury of time on their side when retooling unclaimed property systems, processes and practices. Finance Secretary Tom Cook told The News Journal that officials are already “conducting a thorough review of the state’s escheat statutes, regulations, policies and procedures, with the intention of improving the program going forward.”

 

If Delaware finds itself facing a budget crisis as a result of lost unclaimed property funds, it may have to turn to alternative sources, namely a state sales tax. Currently, Delaware is one of just five states that doesn’t charge sales tax, and residents would not be happy to see one implemented.

 

“When you’re getting unclaimed property based on estimation going into Delaware’s general fund, it’s coming from outside sources so Delaware’s not tapping its own citizens for that revenue,” says Kevin Spiegel, senior manager at Crowe Horwath LLP. “Now Delaware may have to tap its own citizens for that revenue the state has come to expect.”

 

Holders facing substantial liability in Delaware as a result of the state’s estimation practices are likely to follow Temple-Inland’s lead, so lawsuits against the state may surge as a result of the case’s outcome.

 

“Holders are lining up to litigate,” says Chris Hopkins, partner at Crowe Horwath LLP. “It would be in Delaware’s best interest to settle these cases before they even hit the administrative appeals level, when they may become public record.”

 

Temple-Inland will also affect the state’s voluntary disclosure program. The results of the case will undoubtedly factor into negotiations for holders with voluntary disclosure agreements already in place and going through the process.

 

While the court’s decision is, in many ways, a victory for holders, it isn’t entirely positive.

 

“The decision was good for Delaware-incorporated and domiciled businesses,” Hopkins says. “However, it may not be such good news for holders in general. The court implicitly sanctioned reasonable estimation by states that aren’t necessarily the states of domicile of holders.”

 

It will take weeks, months and perhaps even years to fully know how Temple-Inland changes the unclaimed property landscape. In the immediate future, it highlights the importance of ongoing compliance.

 

“Not only is there some precedential value here, but there’s also an important takeaway for holders, and that is to be in compliance,” Spiegel says. “One of the important elements Temple-Inland had going for it is that it had filed reports in the past.”

 

Spiegel and Hopkins will provide additional insight into the Temple-Inland case during an upcoming UPPO Lunch ’n Learn event in Chicago. The case will also be part of the Lunch 'n Learn - Boston discussion. Both events will be held on Sept. 21, 2016. Register today.

 

Tags:  audits  compliance  Delaware  estimation  Temple-Inland  unclaimed property  VDAs 

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