Unclaimed Property Archives

Unclaimed Property

Meaningful Statute of Limitations for Unclaimed Property Audits and Enforcement Actions? Michigan Court of Appeals Says Yes!

by Eric D. Carstens, Stephen P. Kranz and Diann Smith | Mar 10, 2023 | Audits, Michigan, Nationwide Importance, Procedure, Unclaimed Property

On January 19, 2023, the Michigan Court of Appeals affirmed two 2022 trial court orders, holding that initiating an unclaimed property audit does not toll (or freeze) the running of the statute of limitations (time-bar) for the Michigan State Treasurer to commence “an action or proceeding” with respect to a duty of a holder.[1] As most holders are well aware, unclaimed property audits are extremely invasive and burdensome and, unlike other types of audits conducted by states, often drag on for a decade or more before the state will issue a formal notice and demand—covering multiple years and looking back from the date of the original audit notice (often 10 or 15 years). This dynamic has created an audit framework that sets holders up for failure (really, who has complete books and records that far back?) and results in millions of unclaimed property being reported to states because of record limitations alone and third-party audit firms being handsomely paid for their time spent.

The Michigan Court of Appeals’ decision calls this entire model (some would say scheme) into question and could drastically change how holder audits look, feel and proceed in the unclaimed property world going forward. Even more importantly for holders currently under audit, these decisions could drastically narrow the scope of the open periods covered by the audit for Michigan and other states with similar unclaimed property statute of limitations.

Practice Note: While the common sense holding in this case is well established in the tax realm, it has long been the position of unclaimed property administrators and their third-party audit firms that the commencement of an audit alone freezes the statute of limitations and allows them to enforce the duties of holders looking back from that date. This (now precedential) Michigan Court of Appeals decision flies in the face of that long-standing view and calls into question whether peer states with similar unclaimed property statute of limitations are barred from enforcing transaction years being reviewed under pending audits. Because the Michigan unclaimed property statute of limitations is modeled off a provision contained in the 1981 Uniform Unclaimed Property Act (which has been adopted by many states and incorporated in the Revised Uniform Unclaimed Property Act approved in 2016), this is not a Michigan-specific victory and one that should be explored further for holders under audit by other states as well. Showing the nationwide importance of these Michigan cases, the National Association of State Treasurers filed an amicus brief through its affiliate, the National Association of Unclaimed Property Administrators, with the Michigan Court of Appeals in July 2022; however, their arguments were not enough to convince the Court to modify the trial court decision interpreting the plain language of the statute of limitations and uphold the trial court ruling in favor of the holders.

The State Treasurer filed an application for leave to appeal the Michigan Court of Appeals opinion to the Michigan Supreme Court (the state court of last resort, which has [...]

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Victory? Delaware Suggests an End to Contingency Compensation for Unclaimed Property Contract Auditors

by Diann Smith and Stephen P. Kranz | Jan 17, 2020 | Audits, Delaware, Unclaimed Property

For years, Delaware has used contract audit firms to enforce their unclaimed property laws and paid them based, at least partially, on the amount recovered. Motivated by this financial reward and empowered as an agent of the state, the contract-auditing firms with the State’s complicity harass holders, inflate liabilities by deploying aggressive estimation techniques and engage in other questionable practices to maximize their bounty.

Maybe not anymore. In a federal court filing on January 10, Delaware’s brief appended as an exhibit its most recent contract signed December 31, 2019, with Kelmar, one of the more notorious unclaimed property contract audit firms. The new contract states that Kelmar will be paid at set hourly rates for general ledger work, instead of their prior compensation, which was largely seen to be contingent upon recovery. (Securities-related work remains contingency-based.)

It will be welcome news if this heralds an end to the madness of contingency compensation for contract auditors. Holders have voiced complaints for decades, often forced to litigate to prove Kelmar’s method incorrect. The US Chamber has detailed the flaws of using contract auditors and urged a ban to the practice, and judges have tried to rein in their behavior. The National Conference of State Legislatures adopted a resolution disapproving of the practice. After all of these years and horror stories, the message might have finally gotten through.

Delaware Starts Unclaimed Property “Compliance Reviews” (Different from Audits)

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | Jan 16, 2019 | Delaware, Unclaimed Property

If the Delaware Office of Unclaimed Property believes that a person may have filed an “inaccurate, incomplete, or false report,” the State Escheator may authorize a “compliance review” under Del. Code Ann. tit. 12, § 1170(b). This is not a standard audit and as a result, the target is not entitled to the option of entering the state’s voluntary disclosure program rather than being subject to the audit. Nevertheless, the compliance review can result in a finding of liability.

Correspondence between the Unclaimed Property Professionals Organization and the Delaware State Escheator’s Office acknowledges that several holders have been selected for this review. According to the Escheator’s Office, if a holder has no report or a negative report, the state will typically request a copy of the holder’s unclaimed property policies and procedures that would support the lack of property due to the state. By statute, the state may review the filed reports and “all supporting documents related to such reports.” The scope of the concept of “supporting documents” is not clear.

Practice Note: Companies, particularly those domiciled in Delaware, not filing Delaware unclaimed property reports or filing reports showing no liability, should review their policies and procedures related to unclaimed property, including how voided checks and unidentified remittances are handled. Furthermore, recent audits have included an expanded Automated Clearing House (ACH) payment review request, so a company should also review its treatment of failed ACH payments. Such a review should take place in an environment that will protect the attorney-client privilege – so, including internal counsel and/or external counsel is critical. Such an internal review should: (a) verify that the holder is in compliance with its policies and procedures; and (b) provide any necessary policy or operational changes. Conducting such a review and maintaining attorney-client privilege for appropriate elements of the review is especially important given recent false claims act developments in the unclaimed property space.

Washington Legislature Introduces Revised Uniform Unclaimed Property Act

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | Jan 18, 2018 | Nationwide Importance, Unclaimed Property, Washington

On January 10, 2018, a bill was introduced in the Washington State Legislature that would substantially enact the Revised Uniform Unclaimed Property Act (RUUPA) finalized by the Uniform Law Commission (ULC) in late 2016. The bill, House Bill (HB) 2486, is sponsored by Representative Paul Graves at the request of the ULC and would be effective beginning January 1, 2019. The House Committee on Finance conducted a public hearing on the bill on January 16, 2018, but only the sponsor testified and the bill was held for further consideration. While similar (or identical) to RUUPA in most respects, the bill contains a number of significant deviations. Below is a brief summary of several provisions that we flagged in our initial review and the potential impact on Washington holders. (more…)

Litigation Alert | Third Circuit Reaffirms Scope of Federal Priority Rules

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | Dec 7, 2017 | Audits, Delaware, Procedure, Unclaimed Property

On December 4, 2017, the US Court of Appeals for the Third Circuit issued its much-anticipated precedential opinion in Marathon Petroleum Corp. et al., v. Secretary of Finance et al., No. 16-4011. The opinion affirms the Third Circuit’s existing view (described in its 2012 New Jersey Retailers Association decision) that US Supreme Court precedent permits a private cause of action to enforce the federal priority rules, overruling the federal district court’s conclusion (in this case and Temple-Inland) that the priority rules only apply to disputes between states. (more…)

Get Ready for the Countdown: Final Delaware Unclaimed Property Regulations Published

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | Oct 5, 2017 | Audits, Delaware, Unclaimed Property

On October 1, 2017, the Delaware Department of Finance published final regulations in the Register of Regulations repealing its former unclaimed property regulations and promulgating a new reporting and examination manual. See 21 DE Reg 336 (Oct. 1, 2017). The final reporting and examination regulation contains no substantive changes from the revised version that was re-proposed on August 1, 2017. As published, the regulations are set to be adopted and take effect on October 11, 2017. (more…)

Holders Beware: Delaware Department of State Notices to be Mailed in Two Weeks!

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | Sep 29, 2017 | Audits, Delaware, Unclaimed Property

In two weeks, the Delaware Secretary of State (SOS) will begin mailing notices to holders who have been identified as likely being out of compliance with Delaware unclaimed property law. Holders that do not enroll in the SOS Voluntary Disclosure Agreement Program (VDA Program) within 60 days of the mailing of this notice will be referred to the State Escheator for examination. Once an audit notice is issued, the SOS will have no legal ability to accept a holder into its VDA Program.

The VDA Program was put in place to respond to concerns about Delaware’s audit program and allow holders to come into compliance through a “self-audit” that is administered by the holder, as opposed to the State Escheator. The audit is overseen by a third-party provider that must approve the steps taken by the holder, but allows more flexibility in terms of the details and deadlines than a traditional audit. Delaware law requires that every company be provided with an opportunity to voluntarily comply prior to being issued an audit notice. For holders that receive a notice from the SOS in a little over two weeks, this letter will be their one opportunity to voluntarily come forward and enroll in the VDA Program and requires prompt decision making and evaluation, given the 60 days deadline and potentially significant implications.

It is still expected that the final Department of Finance (DOF) regulation required by SB 13 will be included in the October 1, 2017 Register of Regulations. If this holds true, companies currently under a Delaware audit authorized by the State Escheator on or before July 22, 2015, will have 60 days from October 1 (i.e., until November 30, 2017) to convert to the SOS VDA Program. Again, the same analysis and implications are at stake.

Practice Note

There is a lot for holders to consider in a very short period of time. Holders should be aware that there are may be more than the single, historic third-party provider in charge of administering the SOS VDA Program. Adding new providers creates uncertainty in the process and it is not clear how holders will be assigned to each provider.

Holders in need of advice on whether to enroll in the SOS VDA Program should reach out to the authors to discuss their options. Stay tuned for our analysis of the final DOF regulation, which will be posted shortly after publication.

Delaware (Re)Proposes Unclaimed Property Reporting and Examination Manual Regulation

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | Aug 16, 2017 | Audits, Delaware, Interest and Penalties, Unclaimed Property

On August 1, the Delaware Department of Finance (DOF) published a revised version of its proposed reporting and examination manual regulation addressing audit procedures and method of estimation. See 21 DE Reg 123 (Aug. 1, 2017). The revised proposed regulation is substantially similar to the first draft proposed earlier this year, but contains a dozen or so notable differences (described in more detail below). Because the former draft of the regulation was never finalized, the 60-day time period for eligible holders to convert to the Voluntary Disclosure Agreement (VDA) Program (administered by the Secretary of State) or an expedited audit has not started to run, and will not commence until the final DOF regulation is published in the monthly Register of Regulations. Based on the fact that the DOF is accepted comments through August 31, 2017 (and likely needs at least a month to take them into consideration), the final regulation is not expected to be published before October 1, 2017, giving eligible holders at least three more months before the looming conversion deadline.

Our summary of the initial regulations proposed by the DOF and Secretary of State (SOS) on April 1, 2017 is available here. The final SOS VDA estimation regulation was published on July 1, 2017, without substantive amendments. See 21 DE Reg 50 (July 1, 2017). Below is a brief summary of the key differences between the old and new proposed DOF reporting and examination manual that holder’s should be aware of.

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Resistance is not Always Futile: New Decision in Ongoing Delaware Unclaimed Property Audit Litigation

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | Aug 14, 2017 | Audits, Constitutional Issues, Delaware, New Jersey, Pennsylvania, Unclaimed Property

On August 9, 2017, the US Court of Appeals for the Third Circuit (Third Circuit), overruling the US District Court for the District of Delaware (District Court), allowed a claim by a holder seeking to prevent an unclaimed property audit by Delaware on due process grounds to proceed. See Plains All American Pipeline L.P. v. Cook et al., No. 16-3631 (3d Cir. Aug. 9, 2017). The procedural due process claim challenges Delaware’s use of auditors that have a stake in the assessment. Consistent with the District Court decision, the Third Circuit held that challenges to Delaware’s estimation methodology were ruled not ripe. The case has been remanded to the District Court for further proceedings.

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Illinois Unclaimed Property Law Substantially Revised As Part of Revenue Package Supporting Illinois Budget

by Diann Smith and Eric D. Carstens | Jul 7, 2017 | Illinois, Unclaimed Property

Yesterday the Illinois House of Representatives voted to override Governor Bruce Rauner’s veto of Senate Bill (SB) 9, the revenue bill supporting the State’s Fiscal Year (FY) 2017-2018 Budget. Just days before the vote, SB 9 was amended to include a revised version of the Illinois Unclaimed Property Bill (House Bill (HB) 2603) on which we’ve previously reported. The new law (part of Public Act 100-0022) is known as the Revised Uniform Unclaimed Property Act (RUUPA). The RUUPA becomes effective January 1, 2018. Below is a brief summary of a few of the highlights of which holders should be aware.

Gift Cards, Loyalty Cards and Game-Related Digital Content Exempt

Unlike HB 2603, the Illinois RUUPA expressly excludes “gift cards” from the definition of “property” subject to escheat. Pulling (in-part) from the Uniform Law Commission (ULC) definition, “gift card” is defined in the Illinois RUUPA as “a stored-value card: (i) issued on a prepaid basis in a specified amount; (ii) the value of which does not expire; (iii) that is not subject to a dormancy, inactivity, or service fee; (iv) that may be decreased in value only by redemption for merchandise, goods, or services upon presentation at a single merchant or an affiliated group of merchants; and (v) that, unless required by law, may not be redeemed for or converted into money or otherwise monetized by the issuer.” (more…)

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