October 28, 2010
Escheat of Unclaimed Intangible Property
In general, states may take custody of or assume title to abandoned or unclaimed property through a process commonly referred to as escheat. With respect to tangible property, it has always been the accepted rule that only the state in which such tangible property is physically located may claim such property pursuant to escheat. However, in the case of the escheat of abandoned or unclaimed intangible personal property, several U.S. Supreme Court cases were necessary to establish the priorities of the states over such property. In Texas v. New Jersey, 379 U.S. 674 (1965), the U.S. Supreme Court decided that: (1) the state of the last known address of the owner of the property as it appears on the holder’s records is entitled to escheat the intangible personal property (the “Primary Rule”); and (2) if there is no last known address of the owner appearing on the holder’s records or if that address is located in a state that does not provide for the escheat of intangible property, then the state of the holder’s incorporation may take custody of the intangible property unless and until another state comes forward with a claim pursuant to the Primary Rule (the “Secondary Rule”).
In Delaware v. New York, 507 U.S. 490 (1993), the U.S. Supreme Court declined to alter the Secondary Rule to provide for escheat to the state where the holder’s principal executive offices are located, and instead affirmed that in the case where there is no last known address of the rightful owner of property, such unclaimed property escheats to the state of incorporation of the holder of such property. Because many corporations are incorporated in Delaware and in many cases the holder of abandoned property has no record of the last known address of the rightful owner of the property, the administration of its unclaimed property program is an issue of importance for the State of Delaware by reason of the Secondary Rule.
Enacted in July 2010, 77 Del. Laws, c. 417 (the “Act”) represents a significant development in the area of unclaimed property administration in Delaware. The Act has three main components: (1) changes to the procedures related to the manner in which unclaimed property assessments are prosecuted; (2) a declaration that “uninvoiced payables” will not be considered escheatable property; and (3) provisions related to the State Escheator’s power to use estimation techniques to determine unclaimed property liability.
Establishment of Administrative Procedures for Delaware Unclaimed Property
In Delaware, the unclaimed property program is administered by the Department of Finance. The Act establishes an elective administrative review procedure. Previously, in general, the only recourse that a holder of unclaimed property subject to Delaware’s unclaimed property laws had to challenge an attempted unclaimed property assessment was to file a petition in the Court of Chancery of the State of Delaware. Pursuant to the Act, such a holder may file a written protest with the Delaware Abandoned Property Audit Manager (the “Audit Manager”) seeking a review of an issued Statement of Findings and Request for Payment. Upon the determination of the Audit Manager, the holder may further appeal such determination to the Delaware Secretary of Finance, who will appoint an independent reviewer to consider the appeal of the Audit Manager’s findings. The Secretary of Finance may adopt or reject the independent reviewer’s determination in whole or in part. Upon the determination by the Secretary of Finance, the holder may appeal such determination to the Court of Chancery. However, the standard of review of such determination shall be limited to whether the Secretary’s determination was supported by substantial evidence on the record.
Uninvoiced Payables Are Not Escheatable Property
In addition to the creation of the administrative review procedures, the Act established new 12 Del. C. § 1211, which provides that “uninvoiced payables” are not considered escheatable property for Delaware unclaimed property purposes. Pursuant to that section, “uninvoiced payables” include: (i) amounts due between merchants from a holder who is a buyer to a creditor who is the seller of goods ordered by the holder in the ordinary course of business when the goods were received and accepted by the holder, but which for any reason were never invoiced by the seller; (ii) the value of goods received by a holder from a seller where the holder’s purchase order for goods and the amount of goods received by the holder do not match; and (iii) the value of unsolicited merchandise delivered to a holder for whom it is intended. However, “uninvoiced payables” do not include accounts payable, accounts receivable or any other type of credit or amount due to the creditor relating to inventory, goods or services. In addition, the new section expressly provides that such new section should not be construed to create a general business-to-business exemption for Delaware unclaimed property purposes.
Provisions Related to the Estimation of Unclaimed Property Liability
Another significant aspect of the Act relates to the use of estimation techniques in calculating a holder’s Delaware unclaimed property. As it is often the case that a company will lack adequate records in order to calculate accurately its unclaimed property liability, it is common to use estimation techniques, sampling and extrapolation in order to calculate such liability. In the Act, the Delaware General Assembly expressly declared that the State Escheator has inherent authority to estimate abandoned and unclaimed property liability when adequate records do not exist to calculate such liability. Furthermore, the Act amended 12 Del. C. § 1155 to provide that where the records of a holder available for the periods under review are insufficient to prepare an unclaimed property report, the State Escheator may require a holder to report and pay to the State of Delaware the amount of unclaimed property that should have been reported that the State Escheator reasonably estimates to be due and owing on the basis of any available records or by any other reasonable method of estimation.
The provisions relating to the new administrative procedures became effective upon enactment on July 23, 2010, with respect to examinations initiated after that date. The provisions related to “uninvoiced payables” became effective upon enactment on July 23, 2010, and for all uncompleted examinations then being conducted and with respect to all then pending litigation pertaining to such subject matter. The provisions related to estimation techniques became effective upon enactment on July 23, 2010.