On July 10, 2020, the Delaware Court of Chancery judge in the case State of Delaware, Department of Finance v. AT&T Inc.1 issued an opinion in which the state’s subpoena to enforce the production of records by AT&T was quashed. Delaware’s unclaimed property audits are known to last for many years and involve extensive records requests. The audit of AT&T started in 2012, more than eight years prior to the recent decision and was administered by Kelmar Associates LLC, a private third-party contract auditor.
This decision is highly relevant to companies that are obliged to comply with Delaware’s unclaimed property laws. It reviews several audit-related issues that are central to the enforcement of those laws, namely:
- Can Delaware apply its statute of limitations law (“SoL”) from 2017 retroactively?
- Can Delaware request data on all checks that were issued by a company instead of only requesting data on checks that are more likely to represent unclaimed property, such as still outstanding checks?
- Can Delaware request data for checks, or other property types, that are definitively not escheatable to Delaware because the address of the check payee is in a state other than Delaware?
- Can Delaware request companies subjected to audit create records that are not already in existence?
The Court decided that Delaware cannot apply its SoL law from 2017 retroactively and that requesting data on all checks issued by a company, including checks with payee addresses in states other than Delaware, may constitute an “abuse of the Court’s process.” The Court also determined that companies can be compelled to produce records or reports, such as exporting data from a database and putting the results into a spreadsheet, to satisfy audit requests, even if those records were not in existence before the audit started. In addition to the four issues outlined, AT&T motioned that the arguments raised in this case should be heard in a federal court before the Court of Chancery case was decided and that Delaware’s subpoena did not necessarily cover AT&T’s subsidiaries and affiliates.
Regarding the federal court issue, the judge denied the request, referring to a similar case involving the chemical company Univar Solutions, which was decided on May 21, 2020 in the same Court.2 With respect to whether the subpoena covers only the parent company, AT&T Inc. or also its subsidiaries and affiliates, the Court reasoned that the parent company had been reporting unclaimed property on behalf of its subsidiaries and affiliates for many years and controls the records of those entities. For those reasons, the Court decided that the subsidiaries and affiliates of AT&T Inc. are “necessary parties” to the action and are thus covered by the subpoena.
The issues outlined at the beginning of this article regarding the statute of limitations and the specifics of Delaware’s record request were “issues of first impression” for the Delaware Court of Chancery according to the judge. In other words, these issues needed careful analysis because the Court had not previously dealt with them. The following section covers the Court’s analysis in more detail.
1. Can Delaware apply its statute of limitations law (“SoL”) from 2017 retroactively?
On February 22, 2017, the State of Delaware amended its SoL provisions so that the state escheator may not “commence an action or proceeding to enforce the reporting, payment, or delivery of property more than 10 years after the duty arose.”3
In its subpoena, Delaware claimed that the SoL that became effective in 2017 could be applied retroactively in the audit of AT&T, which started in 2012. Thus, if Delaware applied the new SoL retroactively, records going back to 2002 would be able to be requested, according to the judge. Surprisingly, the State demanded records from AT&T going back all the way to 1992, exceeding the reach of its own law by 10 years, in addition to making the already aggressive argument about the law being retroactive.
The judge reasoned that “[n]othing in the statute or the legislative history indicates that the General Assembly intended for the retroactive application of the New Statute of Limitations.”4 He also concluded that if the SoL has been met for a particular year, it does not mean that Delaware cannot request records for that year. However, if it is “highly unlikely” that any unclaimed property can be identified for such a year, a subpoena to compel production of those records may represent “an abuse of the court’s process.”
2. Can Delaware request data on all checks that were issued by a company instead of only requesting data on checks that are more likely to represent unclaimed property, such as still outstanding checks?
AT&T objected to Delaware’s request of data for all checks, regardless of whether they were “cashed, voided, stopped, voided and reissued, [or] still outstanding” because this request exceeded Delaware’s authority, according to the company. AT&T argued that checks that were marked as cleared or voided should not be presumed abandoned in the context of the audit.
The judge concluded that requesting data for still outstanding and voided or stopped checks was clearly within the authority of the State to request. The judge also concluded that requesting data for cashed and voided and replaced checks is within the State’s authority, but that “the expansive nature of [such a] request will be taken into account when evaluating whether enforcing the Subpoena would be an abuse of this court’s process.”
3. Can Delaware request data for checks, or other property types, that are definitively not escheatable to Delaware because the address of the check payee is in a state other than Delaware?
Delaware had demanded data from AT&T for checks and rebate properties with payee addresses in all states, not just Delaware. According to Supreme Court rules,5 a state is allowed to escheat an item of property if the payee’s address is in that state. A state is also allowed to escheat items that have no address available if the company that wrote the check is incorporated in the state in question.
The case Nellius v. Tampax6 (a case involving whether certain unclaimed shares and dividends should escheat to Massachusetts or Delaware) is the proper case to analyze whether Delaware’s demand for this data was allowed. The Court said: “[A] broad request for information concerning property that does not fall into any escheatable category makes it more likely that enforcing a subpoena would be an abuse of this court’s process.”
An “escheatable category” is an item with a Delaware address or an unknown address issued by a Delaware-incorporated entity, in line with the Supreme Court definition outlined above. Because every audit conducted by Kelmar Associates on behalf of Delaware contains requests for data on properties with payee/owner addresses in all states, this would seem to represent a major change in the allowed procedures of Delaware unclaimed property audits. Because the population of Delaware is roughly 0.003% of the U.S. population, it goes without saying that the vast majority of the items in every Delaware audit is comprised of non-Delaware addressed items.
4. Can Delaware request companies subjected to audit create records that are not already in existence?
A common argument that companies under a Delaware unclaimed property audit make is that the audit should be limited to records that are in existence as part of the ordinary course of business and that new records do not have to be created. This theory was established in, among other cases, a case involving Google, Inc. in 2006.7
Delaware had requested that certain rebate information be extracted from a database and included on a spreadsheet. The judge concluded the following:
Querying a database and extracting or exporting information does not constitute the creation of a new document. It is how a party accesses an electronic records-keeping system in the ordinary course of business. . . . A request that asked a party to populate an Excel spreadsheet manually with millions of transactions would be abusive. In this case, a reasonable interpretation of the Rebates Request is that AT&T can export the information into an accessible format.
With this language, the judge delineates for the first time in the Delaware Court of Chancery, if only in a small way, the type of effort that a company under audit may have to go through to create new records.
In conclusion, because Delaware’s subpoena was unable to compel the production of records with non-Delaware addresses appears to be a significant issue for companies under audit by that state. Most items in Delaware audits have non-Delaware addresses, so future audit requests may need to be modified significantly. Because the 2017 SoL law could not be applied retroactively will most likely also have an effect on current and future audits as it appears to limit Delaware’s ability to maximize the audit period.
1 State of Delaware, Department of Finance v. AT&T Inc., Delaware Court of Chancery Case Number C.A. No. 2019-0985-JTL.
2 Department of Finance v. Univar, Inc. (Univar Chancery III), 2020 WL 2569703.
3 12 Del. C. § 1156(b).
4 Del. S.B. 13 syn., 149th Gen. Assem. (2017).
5 Texas v. New Jersey, 379 U.S. 674 (1965).
6 Court of Chancery of Delaware, October 24, 1978, 394 A.2d 233 (Del. Ch. 1978).
7 Gonzalez v. Google, Inc., 234 F.R.D. 674, 683 (N.D. Cal. 2006).
Written by Jacob Oennerfors, Senior Manager, Abandoned and Unclaimed Property, Ryan, email@example.com, 212.847.0126
TECHNICAL INFORMATION CONTACTS:
Mark A. Paolillo
The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at firstname.lastname@example.org.