By Randall Chase, Associated Press
DOVER (AP) — The state Senate on Thursday unanimously passed a bill reforming Delaware’s abandoned-property laws following a federal judge’s ruling excoriating the state for its aggressive collection procedures.
The legislation passed the Senate with no debate and now goes to the House.
Abandoned property is a critical revenue source for state government, amounting to about half a billion dollars annually and representing the state’s third-largest revenue category.
It’s also been the subject of several lawsuits by companies challenging the way Delaware has gone after abandoned property, which can include unclaimed stocks and bonds, insurance policies, uncashed checks, unclaimed wages, dividends, even unredeemed rebates and gift certificates.
The bill adopts certain recommendations from a state task force and is aimed at bringing more predictability, efficiency, and fairness to unclaimed-property reporting and compliance rules.
“The court’s ruling in 2016 really threw a wrench into the program and this helps to clear that up,” said chief bill sponsor Sen. Bryan Townsend, D-Newark.
Among other things, the legislation reduces the “lookback” period for audits to 10 years, and creates a 10-year statute of limitations for the state to seek payment of unclaimed property. The bill also establishes record-retention requirements for businesses, which should make it easier for them to comply with annual reporting mandates.
“Moving forward, I don’t think courts are going to have an issue with this,” Townsend said.
The legislation also offers any company under audit prior to July 22, 2015, the opportunity to convert the audit into a voluntary disclosure agreement with the state by September.
The legislation comes after a June ruling in which a federal judge in Wilmington blastedDelaware’s abandoned-property, or escheat, practices, saying they violate due process and amount to a game of “gotcha” that “shocks the conscience.”
The ruling came in a lawsuit in which packaging company Temple-Inland Inc., a subsidiary of Memphis-based International Paper, challenged Delaware’s claim to almost $1.4 million in purported uncashed accounts payable and payroll checks. Among other things, the company argued that Delaware’s practice of estimating unclaimed property liability for years in which actual records were not available amounted to an unlawful taking of property and violated constitutional provisions regarding due process.
State officials began an unclaimed property audit of Temple-Inland in 2008, telling the company that the audit period would begin in 1981. But because the company was unable to produce records before 2003, officials used an estimation method to extrapolate what the state was owed.
The Temple-Inland lawsuit, which state officials later settled, is one of several challenging Delaware’s abandoned-property system, which has become a source of tension between the business world and a state that is the legal or corporate home to more than 1 million business entities, including more than 60 percent of Fortune 500 companies.
Under federal law, a state can seize abandoned property if it remains unclaimed for a certain number of years and the true owner can’t be found.
Under U.S. Supreme Court rulings, states follow a two-tier scheme. Under the primary priority rule, unclaimed property is reported to the state of the owner’s last known address appearing on a company’s records. But if the owner’s address is unknown or incomplete, the unclaimed property is reported to the company’s state of incorporation. Because so many corporations are formed in Delaware, the state benefits significantly from the second-priority rule.