United States: Breaking News: Federal Court Finds Delaware's Unclaimed Property Enforcement "Shocks The Conscience"

On June 28, 2016, the much-anticipated memorandum opinion of the US District Court for the District of Delaware in Temple-Inland, Inc. v. Cook et al., No. 14-654-GMS was released on the parties' cross-motions for summary judgment, finding Delaware's extrapolation methodology and audit techniques collectively violate substantive due process. According to Judge Gregory M. Sleet, "[t]o put the matter gently, [Delaware has] engaged in a game of 'gotcha' that shocks the conscience." The opinion also specifically called third-party auditor Kelmar Associates LLC's formula used for estimation into question, noting that the use of a holder's calendar sales as the denominator in the ratio used to estimate liability raises questions given the lack of connection between abandoned property and the economy. In sum, this opinion is a "must read" for any unclaimed property advisor or holder going through a Delaware audit and is likely to have a drastic impact on both on-going and future unclaimed property audits. Holders should contact their unclaimed property advisors immediately to begin discussing how to proceed based on this groundbreaking development.

Background

Temple-Inland originally filed suit against Delaware in May 2014 following an unclaimed property audit of its accounts payable and payroll balances. After requesting records dating back to 1981, Temple-Inland was only able to provide records back to 2003. This is a frequent occurrence in these types of audits because companies typically have a seven-year record retention policy (tied to federal regulations). After reviewing the balances (or lack thereof), Delaware ultimately found Temple-Inland liable for nearly $1.4 million in unclaimed property liability going back to 1986 based on the use of sampling and extrapolation, after identifying one $147.30 payroll check with a Delaware address subject to escheat during the audit (which Temple-Inland remitted in 2013 upon request).

On March 11, 2015, the court denied Delaware's motion to dismiss (see our prior coverage, available here), permitting Temple-Inland to proceed with their constitutional claims, which include violations of substantive due process, ex post facto clause, takings clause, commerce clause and full faith and credit clause. After conducting discovery and extensively briefing the claims, Temple-Inland filed an amended complaint on December 3, 2015, dropping its claims based on the commerce clause and full faith and credit clause. Oral argument was held on March 16, 2016, addressing the cross-motions for summary judgment on the remaining claims at issue in yesterday's order.

Yesterday's Opinion

Abstention

Prior to addressing the substantive constitutional claims, the opinion first rejected Delaware's argument (not raised until recently) that the court should abstain under Pullman until a state court has the opportunity to interpret 12 Del. C. § 1155 (the statute authorizing Delaware to examine holder's records), which they claim is an ambiguous statute. The court quickly rejected this argument, not that "[b]ecause § 1155 is unambiguous, there is no need for the court to exercise Pullman abstention in this case."

Due Process

In order to violate constitutional substantive due process protections, the executive actions taken by Delaware here must "shock the conscience." While Judge Sleet did not specifically list any of these actions as "shocking the conscience" in isolation, he concluded that "[i]t is sufficient that, in combination, defendants' executive actions shock the conscience." Specifically, Judge Sleet concluded that Delaware:

"(i) waited 22 years to audit plaintiff; (ii) exploited loopholes in the statute of limitations; (iii) never properly notified holders regarding the need to maintain unclaimed property records longer than is standard; (iv) failed to articulate any legitimate state interest in retroactively applying Section 1155 except to raise revenue; (v) employed a method of estimation where characteristics that favored liability were replicated across the whole, but characteristics that reduced liability were ignored; and (viii) subjected plaintiff to multiple liability. To put the matter gently, defendants have engaged in a game of 'gotcha' that shocks the conscience." Mem. Op. p. 33.

In reaching this decision, Judge Sleet deferred a decision on an appropriate remedy until later.

Takings Clause

In denying Temple-Inland's takings clause claim, the court held that a reasonable estimation of a holders' unclaimed property liability is not an unconstitutional taking, but failed to expressly classify Delaware's approach as reasonable. Judge Sleet noted that the parties did not present evidence or argument to whether or not the estimation was reasonable, and because a dispute of material fact remains, the court could not resolve the claim on summary judgment.

Ex Post Facto Clause

The court also denied Temple-Inland's ex post facto clause claim, on the basis that it is limited to criminal punishments and civil measures which are really criminal punishments in disguise. After evaluating the intent of § 1155 and the Mendoza-Martinez factors, the court found that the statute "does not have a criminally punitive purpose or effect."

Practice Note

Yesterday's opinion is a golden ticket for every holder currently under audit (or with an outstanding VDA in process) by Delaware and will have a material impact on negotiations with the state and third-party auditors going forward. There can be no doubt that Delaware will appeal the case and thus any final resolution is likely more than a year in the future. Nevertheless, Holders should carefully consider their options prior to responding to audit document requests, concluding VDAs, and finalizing audits. Holders that have previously settled audits should consider reviewing their closing agreements.

Aside from the significant due process victory for holders, the opinion also sheds light on the estimation techniques used by Kelmar, one of Delaware's third-party contract auditors. In a footnote, Judge Sleet notes that "[t]he court has not been asked to determine if the formula used for estimation is reasonable. But Kelmar's use of 'calendar sales' as the denominator does raise questions, because, as the state acknowledged, 'abandoned property has no pertinent link to the economy.'" Mem. Op. p. 8. Holders and their advocates have long argued that the denominator was not an accurate reflection of the base line against which sampled liability should be extrapolated.

It is also interesting to note that this decision comes in light of Delaware's fight with a number of states over the proper classification of MoneyGram's Official Checks, which Delaware has classified as third-party bank checks and accepted as rightfully theirs under the priority rules. Over 20 other states (and likely more to come) have claimed that the Official Checks are money orders, which would be governed by a federal statute providing for escheat to the state where purchased. See our prior coverage here. Since our last blog, Wisconsin has requested that the US Supreme Court join the two pending cases due to similarity of facts and issues. As part of the Court's review of these two cases, they may have the appetite to review the priority rules established by Texas v. New Jersey, 379 U.S. 674 (1965) and its progeny, as specifically requested by Pennsylvania in its response to Delaware, just a few weeks ago. As noted by Judge Sleet in yesterday's opinion, because so many corporations are formed in Delaware, the state benefits significantly from the second priority rule (which escheats to the holder's state of incorporation when the owner/address is unknown). Practically speaking, this results in unclaimed property being the third largest revenue source for Delaware—with over 90 percent stemming from property with the owner/address unknown. Any such revision or narrowing of the common law priority rules by the court would have an additional detrimental impact on Delaware's ability to fund the state.

Breaking News: Federal Court Finds Delaware's Unclaimed Property Enforcement "Shocks The Conscience"

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions