Gift Card Alert - Delaware Rewrites Its Unclaimed Property Law

Retail Did You Know?

After a federal court dealt a significant blow to Delaware's unclaimed property law in June 2016, Delaware responded by entirely rewriting its unclaimed property law. This edition of Morgan Lewis Retail Did You Know? describes the requirements of the new law and details some of the significant ways it may impact retailers, particularly with respect to gift card programs.

Background

Various state escheat laws require companies to annually report and pay unclaimed property to states in certain circumstances. This may include customer credits, uncashed payroll checks, and balances on gift certificates or gift cards. Although this money is supposed to be held in trust by the state and returned to its owners, most escheated funds are never returned and become an important source of revenue for states. Because the rules that dictate which state is entitled to the unclaimed property emphasize the company's place of incorporation, Delaware has come to depend heavily on unclaimed property as its third-largest source of revenue. The state has historically pursued aggressive enforcement through third-party audits that involve the use of "estimation" to calculate abandoned property liability going back decades.

Delaware's ability to collect unclaimed funds was dealt a significant blow last year, however, when a federal judge ruled in Temple-Inland, Inc. v. Cook that Delaware's application of its unclaimed property law to estimate companies' abandoned property liability where such records were absent violated due process. Among the problematic features of Delaware's law were

a lack of notice that companies needed to retain unclaimed property records, application of the estimation provision of the statute retroactively, a "look back" liability period that stretched over two decades, and an estimation method that emphasized characteristics favoring liability. The court concluded that Delaware "engaged in a game of 'gotcha' that shocks the conscience." With the Temple-Inland decision, Delaware's ability to obtain significant funds through audits and voluntary disclosure agreements (VDAs) was seriously jeopardized.

The New Delaware Bill

Against that backdrop, the Delaware legislature has now rewritten the Delaware unclaimed property law to try to address the problems identified in Temple-Inland and to bring Delaware more in line with the Uniform Unclaimed Property Audit Act used by other states. In addition, the legislature appears to...