Did you get an “invitation” from the Delaware Secretary of State to enter into its Unclaimed Property Voluntary Disclosure (“VDA”) program? Congratulations, you are targeted for an audit. The Delaware Secretary of Finance is required to allow companies the opportunity to participate in the VDA program before commencing an audit. So, the “invitation” really is a warning and a threat. Participate in the Secretary of State program or suffer the consequences.
Make no mistake, though, the Delaware VDA program is not the saving grace the State makes it out to be. And it has changed significantly since its creation. Some might argue that it is merely a company-funded audit of its own records, with no due process rights. While the VDA program does provide interest relief, it also could substantially increase liability, offsetting that benefit. Here are some truths about the VDA program that could weigh against participation:
(1) Myth: You have more control than you would in an audit.
Horror stories abound describing the notorious Delaware-led, multistate, unending, private unclaimed property audits. Pending litigation speaks of audits persisting for over ten years. Thus, the chance to “control the scope” of the review sounds like a reprieve. Indeed, the Department of State regulations regarding the program unambiguously proclaim, “The Holder may determine the scope of the entities and property types included in the Department of State Voluntary Disclosure Agreement program.”1 Its website declares that the company “[d]etermines the entities and property types to be included in the SOS VDA as a result of the Holder’s review.”2
What may not be obvious, however, is that the first “step” of VDA program participation is to provide a list of the “invited” entity and every company affiliated with that entity. Despite Delaware’s corporate prowess, neither “related” or “affiliated” entity is defined, leaving no reasonable or material guidepost. If one entity is “in” the program, all are likely to be, irrespective of whether that entity is in the same line of business or operates under the same record-keeping systems. This list—the “scoping worksheet”— also requires details regarding acquired and predecessor entities, including inactive or non-operating entities and asset purchases. There is a column where the company can indicate whether the particular entity listed will be “included” in the scope of the VDA review, confirming that a company must list entities that it does not intend to be “in scope”.
Moreover, the administrators engaged by the Secretary of State routinely audit the list (by requesting tax returns, consolidating financial statements, trial balances, and organization charts) and by conducting their own research. To the extent that that the list is “missing” an entity, such as, for example, an entity acquired after the program has already commenced, a company filing separately or using separate accounting systems, or a business governed by separate decision-makers, the Secretary of State pressures the company to include it and may threaten to notify the Department of Finance to audit such entities. In other words, by participating in the VDA, a company opens itself up to the same scrutiny of its corporate organization that it would face in an audit. Control over the scope of the review is illusory.
This feature distinguishes the Delaware VDA program from several other states’ voluntary unclaimed property programs in which the company names the specific entities for which it intends to comply.
(2) Myth: The Secretary of State is more open to resolving legal disputes.
The Secretary of State’s website boasts its VDA program creates an “efficient and collaborative settlement process” for determining the Holder’s past due unclaimed property. This is consistent with the intention of the law which grants the Secretary of State full and complete authority to “determine and resolve all such claims” if a holder of unclaimed property voluntarily discloses such property.3 The reality is that there are certain “non-negotiable” issues over which the Secretary of State refuses to settle, irrespective of the facts.
Arguably, the most substantial issue in Delaware’s application of its unclaimed property law is the state’s method of estimating unclaimed property reportable for older years for which records may no longer exist. Under that method, the state estimates Delaware liability for older years by assuming that liability identified as reportable to any states for reviewable periods would all be reportable to Delaware for such earlier years. A federal court called the state’s “fail[ure] to follow the fundamental principle of estimation where the characteristics of the sample set are extrapolated across the whole” as “troubling” and included it as one reason for which the state’s typical method “shocks the conscience” and violates substantive due process protections.4
Notwithstanding its promises to reasonably estimate liabilities and to work with holders to reach agreement upon a quantification methodology, the Secretary of State expects every VDA enrollee with Delaware domicile entities to follow the method of estimation that the federal district court rejected in Temple-Inland. The stance is baffling given the State arguably has the highest litigation risk on its position regarding estimation and its refusal to compromise will leave holders facing substantial exposure on estimation no choice but to bypass the VDA program in favor of retaining their rights to challenge estimation on audit.
(3) Myth: Holder obtains full indemnification at the end of the program.
The Secretary of State may attempt to soothe the sting of the estimation stick by pointing to its indemnification as a carrot—pay all liability for old years and be done with all unclaimed property exposure to any state. The Secretary proclaims on its website,
The SOS VDA program provides certainty for Holders that complete the process. As part of final settlement, the State will release and discharge the Holder from any and all liability related to that property. If another state or person shall make a claim on the property reported in the VDA program, the State will defend the Holder against the claim and indemnify the Holder against any liability on the claim.
However, the statement falls apart in the fine print. First, Delaware has no authority to “settle” unclaimed property exposure on behalf of other states. Second, Delaware attempts to avoid indemnity for the largest portion of remitted amounts—estimated liability for which a claimant may appear in the future. As part of the VDA closing process, holders participating in the program are required to execute Form VDA-2 – Voluntary Self-Disclosure Agreement (“VDA-2”). That form tries to carve out indemnity for any estimated amounts, as follows:
…Upon payment of the Payable Property, the STATE agrees to indemnify the HOLDER pursuant to the terms of § 1153 of the Abandoned or Unclaimed Property Law. Notwithstanding the foregoing provisions of this paragraph 6, for Payable Property for which complete names and addresses do exist, the HOLDER assumes the applicable reporting responsibilities and any such amounts due or paid to any state other than the STATE are not subject to the release and indemnification provisions contained in this paragraph 6.
The language suggests that Delaware may keep the estimated amount remitted, even if an owner later appears. That is, Delaware will not remit property for those years unless another state or individual can establish a claim WITHOUT identifying who the owner or what the address is. This carve-out becomes especially concerning where a holder informs the state that some partial records with names and addresses exist, and Delaware deems those records to be insufficiently “complete and researchable” to avoid estimation. In other words, the Secretary of State may require that companies disregard partial records, remit estimated amounts that do not account for those records, and then bear the burden of future claims for such amounts. The carve-out reflects that the State itself may be concerned about its risk in its estimation position. If you participate in the VDA, you waive your right to challenge it.
(4) Myth: The VDA program is faster and less expensive than an examination.
Holders should consider that to date, participants in the VDA program have been subjected to a formulaic and forensic review and several rounds of requests for support and clarification on what may seem like petty or irrelevant details. The VDA program “work plan” includes three pages of various tasks broken into four phases. Like an audit, the VDA requires holders to review quarterly bank reconciliations, outstanding and voided checks, and accounts-receivable aging reports. The third-party administrators that the Secretary has engaged expect detailed schedules similar to those prepared by an auditor. Those administrators review full trial balances, and identify long lists of accounts for which the holder must perform account tracing and testing of individual journal entries. The Secretary of State has promulgated specific rules concerning the use of statistical sampling. Lately, such administrators have been demanding all documentary evidence that amounts were reissued, refunded, or otherwise resolved appropriately, amassing large swaths of data that may include names, addresses, and other personal data of vendors, consumers, or employees.
Of note, the VDA “work plan” is substantially similar to the “work plan” provided to holders participating in Delaware’s expedited audit program. That program reduces interest to 1% where the holder remits the audit findings (12 Del. C. 1172(c)(1)). However, unlike the VDA, holders retain their appeal rights to the extent they dispute such findings.
Conclusion:
As we indicate in prior alerts, there are benefits to participating in the VDA program. Most notable is the ability to withdraw from the program at any time to the extent the company objects to the demands of the administrator. However, the Secretary of State has quietly unwound some of the original benefits of the program. In particular, since our prior publications, specific benefits—like the ability to control the companies included in the review, the ability to provide limited data (only select remediation examples), and the expectation that the administrators would take a more pragmatic approach to compromising legal grey areas—no longer apply.
The VDA program does still excuse checks voided within 90 days of issuance from a detailed review, whereas auditors routinely schedule checks voided 30 days or more after issuance and try to shift the burden of proof to the holder to establish that such amounts were voided for cause. Further, the VDA program carries a full interest waiver on all amounts reported and remitted. However, election to participate in the “expedited audit” program carries a reduction of interest to only 1% of undisputed amounts. For findings in dispute, holders retain the ability to negotiate the findings or exercise their appeal rights. By contrast, holders retain very little ability to negotiate any material issues with the Secretary of State’s office—especially concerning estimation, which may carry the largest exposure and the weakest legal justification.
In short, as counterintuitive as it may sound, audit may be the best option for many holders, especially those with limited years of accessible transaction-level records. The Secretary of State has the authority to make the VDA program more palatable to holders and beneficial to the State. However, that does not seem to be the trajectory it is choosing at this time.
- 12 Del. Admin. Code 301, 2.2.1.
- Steps to VDA
- 12 Del. C. § 1173(a)(2).
- See Temple-Inland, Inc. v. Cook, 192 F. Supp. 3d 527, 535 (D. Del. 2016).
Client Alert 2025-141
