Unclaimed property audit practices now under review

349px-Seal_of_DelawareDOVER — Although Delaware has settled a high-profile lawsuit involving purported abandoned property, major issues likely still remain for the state government.

To that end, Delaware Finance Secretary Tom Cook said the state’s unclaimed auditing practices and procedures are under review.

The issue came to a head after packaging company Temple-Inland sued the state over Delaware’s effort to take more than $1.4 million in uncashed accountants payable and payroll checks.

Temple-Inland argued the state’s method of estimating unclaimed property values was unfair and illegal.

On Friday, Delaware and Temple-Inland reached an agreement.

“In support of this motion, the parties state that they have entered into a voluntary settlement agreement that fully and finally resolves all claims, including all claims that were asserted, or that could have been asserted, in the case and therefore the matters in dispute between plaintiff and defendants have been resolved,” Temple-Inland and Delaware lawyers wrote in a joint filing in federal court.

The terms of the settlement were not disclosed to the public.

But although the lawsuit is resolved, there are issues “that continue to cast a real cloud over the Delaware program,” Mike Houghton, a Wilmington lawyer who regularly handles abandoned property matters and has served on a legislative task force focusing on unclaimed assets, said Monday.

In June, District Court Judge Gregory Sleet issued a ruling castigating the state, one Mr. Houghton characterized as an “indictment” of Delaware’s unclaimed property practices.

In the case of Temple-Inland, Delaware went back 22 years in its audit, failed to inform the company it should retain records for the audit, used a biased method of estimation and took advantage of “loopholes,” the judge said in his ruling.

“To put the matter gently, defendants have engaged in a game of ‘gotcha’ that shocks the conscience,” he wrote.

Regardless of the settlement, the opinion will likely force Delaware to make some adjuswtments to its audit practices, such as shortening the “lookback” period and informing companies they will need to keep detailed property records, Mr. Houghton said.

Mr. Cook said in an email officials are “conducting a thorough review of the state’s escheat statutes, regulations, policies and procedures, with the intention of improving the program going forward. Pending the outcome of that process, the department will continue to conduct audits and resolve pending examinations on a case by case basis and in accordance with the advice of legal counsel.”

But there may be nothing officials can do to prevent the state from losing some proceeds.

“Even if there are changes made by the state to address the opinion, I think a loss of additional revenue is inevitable,” Mr. Houghton said.

Based on Judge Sleet’s ruling, Delaware may also have to consider whether it can only use assets with a First State address. Because more than 1 million companies are incorporated in Delaware due its friendly laws and detailed case law, a large portion of the state’s budget comes from unclaimed property whose owner cannot be found.

In the event the property owner has no known address, the belongings go to the state of incorporation — often Delaware.

The state relies heavily on unclaimed property to fund services and programs: Projections say it will, in the current fiscal year, pull in $525 million, which amounts to 13 percent of its budget.

If the state is limited in what checks, securities and other assets it can liquidate, it would mark an “extraordinary shift,” Mr. Houghton said.

The problem arises as Gov. Jack Markell comes to the end of his term, meaning whomever the state elects as governor in November will be tasked with helping guide the audit process past obstacles confronting it.

Delaware is also facing two separate lawsuits from 23 states over abandoned assets, although Mr. Houghton believes the Temple-Inland settlement will have no effect on this litigation, which he said deals with different issues than the other suit.

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