U.S. District Court Judge Sue Robinson issued an important Memorandum Opinion (the “Opinion”) on March 11, 2015, allowing the Delaware U.S. District Court (the “Court”) to retain jurisdiction to hear Temple-Inland’s case against the State of Delaware. The Opinion addressed a number of important issues with respect to Plaintiff Temple-Inland’s Motion for Summary Judgment and Defendant State of Delaware’s Motion to Dismiss. By way of background, Plaintiff, after having undergone a Delaware unclaimed property audit conducted by the contract auditor, Kelmar Associates, filed suit in Delaware U.S. District Court, seeking equitable, declaratory, injunctive, and other relief for violation of Plaintiff’s rights associated with the use of estimation and other techniques arising during the course of the audit. The extrapolated liability was originally in excess of $2 million calculated back to 1981. Following an administrative appeal, the assessment was reduced to $1.4 million. On July 2, 2014, the parties jointly stipulated to a standstill regarding the enforcement of the assessment and examination of records pending entry of final judgment, and Plaintiff withdrew its Motion for a Preliminary Injunction. Highlights of the Opinion are summarized below.
- Estimation Not Preempted by Federal Common Law – The Court dismissed Plaintiff’s claim that the use of estimation techniques is preempted by federal law. Judge Robinson ruled that Section 1155 of Delaware’s Escheat Act, which authorizes estimation of unclaimed debts, is not preempted by federal common law established in Texas v. New Jersey and its progeny (referred to in the Opinion as the “Texas Cases”). The Court’s reasoning was that “…the Texas Cases apply to disputes among states, not to disputes between private parties and States.” Accordingly, the Court granted Defendants’ Motion to Dismiss Count I of the Complaint, which alleged Section 1155 was preempted by federal common law. Note: This ruling may be at odds with U.S. Circuit Court rulings by both the Third and Tenth Circuits, in which it was ruled that the Texas Cases did apply to disputes between private parties and states. See New Jersey Retail Merchants Ass’n v. Sidamon Eristoff, 669 F. 3d 375 (3d Cir. 2012), and American Petrofina Co. of Texas v. Nance, 859 F.2d 840 (10th Cir. 1988). Nevertheless, as indicated below, the Court denied the State of Delaware’s Motions to Dismiss with respect to all other alleged violations.
- Estimation May Violate Substantive Due Process – The Court denied Defendants’ motion to dismiss the substantive Due Process claim. Plaintiff alleged that Defendants use of estimation techniques to calculate the debt essentially results in two or more states claiming the same property as expressly prohibited by the Texas Cases. Specifically, it was alleged that the estimation technique used was based on, among other things, “…(i) uncashed checks escheated to other states under the primary rule; (ii) checks that were voided, reissued and cashed by the payees; and (iii) checks payable to payees with addresses in other states, some of which expressly exempt the property from escheat.” The Opinion stated that substantive due process was intended to include among its protections the general protection against “…certain arbitrary, wrongful government actions regardless of the fairness of the procedures used to implement them.” The Opinion noted the U.S. Supreme Court has ruled that the Due Process Clause “…prevents more than one state from escheating a given item of property.” If the allegations claimed are ultimately proven true, the Opinion stated “…the disputed money may indeed violate the Supreme Court’s prohibition against more than one state…escheating a given item of property.” Accordingly, the Court denied Defendants’ Motion to Dismiss Count II of the Complaint, which alleged a violation of substantive due process under the Fourteenth Amendment.
- Whether the 2010 Amendment to Delaware Law Violates the Ex Post Facto Clause – The Court denied Defendants’ motion to dismiss the Plaintiff’s ex post facto claim, which was premised on the fact that the current estimation provision was enacted in 2010. Plaintiff alleged that enactment of Section 1155 in 2010 of the Delaware Escheat Act violates the Ex Post Facto Clause of the U.S. Constitution by imposing a retroactive penalty for lack of recordkeeping. Such legislation apparently was intended to codify prior practices of the state in utilizing estimation techniques. Interestingly, the Opinion concluded that the effect of the 2010 amendment by the Delaware General Assembly “…set the stage for a violation of substantive due process. In other words, Defendants are faced with a dilemma: If Section 1155 is not a penalty provision, it likely violates Plaintiff’s rights to substantive due process. If, on the other hand, Section 1155 is a penalty provision, its retroactive application likely violates the Ex Post Facto Clause. The Court is unprepared, at this juncture, to determine which scenario is most likely.” Thus, the Court ruled that Plaintiff’s pleading withstands Defendants’ Motion to Dismiss Count III of the Complaint, alleging an unlawful Ex Post Facto Law. However, because the Court stated that issues of fact remain regarding whether “…using estimates to calculate liability was a change of practice, or merely codification of a pre-existing practice,” it also declined to grant Plaintiff’s Motion for Summary Judgment that Defendants had violated the constitutional ban on Ex Post Facto Laws by retroactively applying a substantive amendment to the Delaware Escheat Law.
- Whether Delaware’s Use of Estimation Violates the Takings Clause – The Court denied Defendants’ motion to dismiss the Takings Clause claim. Plaintiff alleged that Defendants’ use of estimation gives rise to an unconstitutional taking of its property without just compensation. Defendants argued that Plaintiff cannot have a legitimate property interest in unclaimed funds. The Opinion noted that Plaintiff has pled sufficient facts to support the position that it has a legitimate property interest in the estimated debt, given that the estimate may not be traceable to bona fide creditors. If Delaware does not have authority to escheat the property, the Opinion expressed, it follows that “…the seizure of the property without just compensation would be a violation of the Takings Clause.” Thus, the Court denied Defendants’ Motion to Dismiss Count IV of the Complaint, which alleged that the estimation was an unlawful taking without just compensation.
- Whether Delaware’s Use of Estimation Violates the Commerce Clause and Full Faith and Credit Clause – The Court denied Defendants’ motion to dismiss the Commerce Clause and Full Faith and Credit Clause claims, but instead chose to defer its decision. The Opinion noted that under the Full Faith and Credit Clause, federal common law imposes on Delaware a duty to give another state’s federal judgment the same force and effect as it would be entitled to in that state’s federal or state courts. Because the estimation used includes property exempted by other states under a business-to-business exemption, the Plaintiff alleged it interfered with commerce in those states and also violated the Full Faith and Credit Clause of the U.S. Constitution. In turn, Defendants cited language in Texas v. New Jersey to the effect that a debtor’s state of incorporation may escheat if the “…laws of the creditor’s state do not provide for escheat.” The Court stated that, given the brevity of the parties’ briefing on this issue, it is unprepared at this stage to “…determine whether the Supreme Court intended secondary priority to attach if the laws of the creditor’s State or silent on the question of escheat, or if, as Defendants allege, secondary priority attaches if the laws of the creditor’s State actively exempt certain property from escheat.” However, it stated that the Court is inclined to agree with the sentiment expressed by the U.S. District Court for the District of New Jersey that “…inherent in the State’s sovereignty is its choice not to exercise custodial escheat over the disputed property. American Express, 755 F. Supp. At 607.” Accordingly, the Court denied Defendants’ Motion to Dismiss Count V of the Complaint, which alleged violation of the Commerce Clause and the Full Faith and Credit Clause.
- Opinion is Procedural – Notwithstanding the preliminary developments and some holder-friendly legal dicta in this Opinion, we caution that this Opinion was issued in the context of whether certain procedural Motions, such as Motions to Dismiss, Motions for Summary Judgment, etc. were or were not going to be decided. This sentiment was echoed in an open email dated March 12, 2015 from Jeffrey Bullock, Delaware’s Secretary of State, sent to participants and firms representing them in Delaware’s Secretary of State Voluntary Disclosure Program. The email stated, “The Court’s opinion in what was a preliminary stage of this litigation has absolutely no impact on Delaware law and how the law has been applied historically or will be applied going forward as it relates to estimation or any other aspect of the Delaware escheat law.” But rather, “…the Court simply opined that it would not dismiss the case outright and wished to have more evidence to decide the rest of the various claims asserted by the plaintiff.”
Depending on the ultimate disposition of this case, it could potentially result in more holder-friendly law, policies, and practices, as well as set precedents on several ongoing differing points of interpretation between states and holders. Because this Opinion may have potential implications on a company’s particular facts and circumstances, it is recommended for each company to have the Opinion carefully reviewed by their legal counsel for advice as to possible application of the Opinion to each company’s own factual situation. Ryan’s Abandoned and Unclaimed Property (AUP) practice is not a law firm and, therefore, does not render legal services or advice. The information in this Alert is not intended to substitute for legal advice, which can only be rendered by an attorney. Ryan AUP professionals will monitor this area and keep you updated on any future developments. If you have any questions, please reach out to the technical contacts below.