Delaware U.S. District Court Judge Gregory Sleet issued an important Memorandum Opinion (the “Opinion”) on June 28, 2016. The Opinion ruled that Delaware’s unclaimed property audit of Temple-Inland, Inc. (“Plaintiff”) violated substantive due process, and granted Plaintiff’s Motion for Summary Judgment for its substantive due process claim against Thomas Cook, Delaware Secretary of Finance, David Gregor, Delaware State Escheator, and Michelle Whitaker, Delaware State Audit Manager (collectively referred to hereinafter as “Defendants”). Overall, the Opinion was favorable to the Plaintiff; however, it leaves several key questions unanswered.
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 (the “Court”), seeking equitable, declaratory, injunctive, and other relief for alleged 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. When the matter could not be resolved, Plaintiff filed its lawsuit. Highlights of the Opinion are summarized below.
Violation of Substantive Due Process
Plaintiff’s Motion for Summary Judgment on its substantive due process claims was granted. By granting such Motion, the Court stated in its Opinion that Plaintiff was entitled to judgment as a matter of law. The Opinion noted that several aspects of Defendants’ actions were troubling. It specifically stated that Defendants (i) waited 22 years to conduct the audit, (ii) avoided the otherwise applicable six-year statute of limitations under dubious circumstances, (iii) never gave holders notice that they would need to retain unclaimed property records to defend against what it termed “unmeritorious audits,” (iv) applied the section of the law authorizing estimation for a “…prolonged retroactive period for no obvious purpose other than to raise revenue,” (v) failed to follow fundamental principles of estimation, thus putting Plaintiff at greater risk for liability, and (vi) subjected Plaintiff to multiple liability.
Violation of Ex Post Facto Clause
The Court approved Defendants’ Motion for Summary Judgment on their Ex Post Facto claim.The Opinion concluded that the operative section of Delaware law did not have a criminally punitive purpose or effect.
Violation of Takings Clause
The Court denied both the Plaintiff’s and the Defendants’ respective Motions for Summary Judgment with respect to the Takings Clause. The Court did hold that a reasonable estimation of a holders’ unclaimed property liability is not an unconstitutional taking. However, finding that there were still disputes of material facts as to whether the estimation in this case was reasonable, the Court concluded “…there is a dispute of material fact that cannot be resolved on summary judgment.”
Statute of Limitations
The Opinion noted that the statute of limitations (“S/L”) is a critical issue, stating that “…[i]t explains why Defendants are allowed to assess a liability against Plaintiff for something that happened 22 years ago.” It discussed the three rules under 12 Del. Code Sec. 1158, which essentially provide for (i) a three-year S/L for a suit to enforce a deficiency in payment of unclaimed property, (ii) a six-year S/L for an omission having a value in excess of 25% of the amount of unclaimed property disclosed in a report, and (iii) no S/L if no report is filed, or if a false or fraudulent report is filed with an intent to evade an unclaimed property obligation. In the case at hand, Defendants sought a deficiency payment for each year from 1986 to 2002. The Opinion stated that Defendants did not claim Plaintiff filed false or fraudulent reports. Rather, they assumed that Plaintiff had unclaimed property, but failed to report. The Court found it troubling that Plaintiff was able to produce reports for years 1996, 1998, and 1999, yet Defendants assessed a liability for those years. The Opinion stated: “It is not clear why a liability for those years is not barred by the S/L.” Given that Plaintiff was able to produce three reports from before 2002, as well as a report from every year within its record retention policy, the Opinion found it likely that Plaintiffs filed reports that are now missing. The Opinion further indicated the Court was troubled by the fact that Defendants did not tell holders they need to retain all of their unclaimed property reports, did not retain unclaimed property reports filed with the state, and then attempted an audit to “…put the burden on Plaintiff to show they had in fact filed reports with the states.” Finally, it noted that Defendants did not require negative reports, yet failed to warn holders of the consequences that when no negative report is filed, the S/L never begins to run in Delaware.
Defendants asked the Court to abstain from rendering a decision, which presumably would have meant the matter would revert back to state court. The Court expressed surprise that Defendants would now ask for abstention after almost two years of active litigation, and indicated Defendants could have raised this claim earlier in the case. The Court concluded that abstention was not warranted in this case, and noted that abstention is an “extraordinary and narrow exception” to a court’s duty to adjudicate a controversy properly before it. It is anticipated this is good news for the holder community, as it indicates a willingness by the federal courts to consider abandoned and unclaimed property controversies.
Several key questions remain unanswered. First, and perhaps most important, the Court did not render any decision as to what was the appropriate remedy for Delaware’s violation of Plaintiff’s substantive due process rights. The Court stated in its Opinion that “[i]t is Defendants who are best able to know which remedy will be the most palatable in its anticipated efforts to normalize the enforcement of its unclaimed property laws. Thus, this court will defer its decision on the subject of an appropriate remedy until another day.” Second, the Court did not provide any guidance on what is or might be a permissible type of estimation methodology. Third, as noted above, the Takings Clause issue was not decided. Finally, there is the possibility that the decision may be appealed to the Third Circuit Court of Appeals.
This decision is important for several reasons. First, it highlights that holders who are allegedly aggrieved through unclaimed property audit practices can seek redress in a court of law. Second, it highlights the importance of retaining proper records, and particularly prior unclaimed property reports filed with the states, for a protracted number of years. Third, in assessing all the complex problems encountered by holders in state audits, it highlights the importance of having a competent unclaimed property advisor with experience and knowledge in defending state unclaimed property audits. Holders seeking additional clarification on how these matters relate to their specific factual situations may contact their designated Abandoned and Unclaimed Property (AUP) representative or one of the Ryan contacts below.