Delaware Overreach? Chancery Criticizes Delaware’s Unclaimed Property Audit Program, Limits Information Holders Must Produce and Places Burden on the State to Show Voided Checks Are Unclaimed Property

Earlier this month, the Delaware Court of Chancery issued an opinion in Department of Finance v. AT&T, Inc., C.A. No. 2019-0985-JTL (Del. Ch., July 10, 2020). The opinion itself is narrow in scope but its result, and several of its findings regarding Delaware’s administration of its unclaimed property program, should be assessed carefully by holders and their advocates.

Synopsis of the Case

The case involved what the Court viewed as a procedural quagmire arising from various motions in response to Delaware’s effort to enforce an administrative subpoena to produce a substantial number of checks issued by AT&T over a significant number of years in an audit that began in 2012.

The Court determined that the state had the right to issue and the power to enforce the subpoena seeking what were claimed to be millions of electronic records. Likewise, the Court held that AT&T’s parallel pending Federal action attempting to stop the audit could not be used as a vehicle to stop state law enforcement of an administrative subpoena. Nevertheless, Vice Chancellor Laster determined that the Court could take into account the fact that the state did not provide an explanation or justification for obtaining the documents it sought which was warranted in light of its “wide ranging” request. Consequently, the Court quashed the entire subpoena but not without first stating its views as to how the request could be narrowed and what might be legitimately requested by the state in unclaimed property audits.

The Court’s comments as to what is likely “in” and what is likely “out” of bounds offer useful guidance to both sides in an unclaimed property audit. For example, a request for “all records of checks” that are outstanding or have been voided or stopped is permissible. The Court also indicated that requiring a holder to conduct inquiries of databases and extract or export information and populate a spreadsheet is permissible.

On the other hand, the Court noted that checks that have been voided and reissued or cleared or cashed do not have to be produced, and that while the state can request and obtain checks that have just been voided, the state bears the burden of showing that a voided check is unclaimed property:

AT&T contends that permitting the State Escheator to investigate the voided checks “shifts the burden of proof to AT&T to show that all checks issued were not abandoned.” Dkt. 18 at 12; accord Dkt. 10 at 39. To the contrary, AT&T only has the burden to produce records. The State Escheator has the burden to show that a check was improperly voided because it was unclaimed. Only by doing so can the State Escheator carry its “burden of proof as to the existence and amount of the [unclaimed] property and its abandonment . . . by showing evidence of the unpaid debt or undischarged obligation and passage of the requisite period of abandonment.” 12 Del. C. § 1175(a).

Id. at 54.

The Vice Chancellor also stated that Delaware’s request for records with last known addresses outside of Delaware “seems to be pursuing information about property that it knows it cannot recover” since “records with last-known addresses outside of Delaware are almost certainly non-escheatable. Once again, the Department seems to be pursuing information about property that it knows it cannot recover and it failed to support those requests with any creditable explanation.” Id. at 59.

In quashing the subpoena, the Court quoted language from United States v. Powell, noting that a subpoena can be “abusive” if it is “issued for an improper purpose, such as to harass the taxpayer or to put pressure on him to settle a collateral dispute...”, or if it requests information “beyond a legitimate inquiry”, or (citing Wheeling-Pittsburgh) is in pursuit of “a claim it knows it cannot win”. Id. at 57-58.

The Court noted that this case is “part of a larger picture.” It discussed the criticism leveled against state unclaimed property programs by various courts as mechanisms to raise revenue rather than safeguard abandoned property for the benefit of owners. The Vice Chancellor referenced U.S. Supreme Court Justices Alito and Thomas who leveled such criticisms in the 2016 case of Taylor v. Yee, and a number of other federal cases calling out Delaware specifically for its reliance on unclaimed property which has become the third largest revenue source of the state. The Court also criticized the state’s continued reliance on contract auditors - specifically Kelmar Associates - stating that Kelmar appears to run audits with little oversight from the state. Because Kelmar represents many other states in the same audits in which Delaware participates, the Court noted it may be using Delaware process and courts to attempt to collect information about property due to other states. The Court observed “helping other states recover property is not a purpose of the Escheat Law”. Id. at 61.

Noting that the state may have good explanations as to why, for instance, it is seeking non-Delaware addressed property and other information, the Vice Chancellor invited the state to issue a narrower subpoena or provide a better explanation of the need for information going forward.

Implications and Issues to Follow

Holders and their advocates should follow the aftermath of this ruling closely. The opinion may impact pending or new audits in two important ways:

• Based on this ruling, there is a serious question as to whether a Delaware audit holder can be compelled to produce information requested related to purported owners of property with addresses outside the state.
• Because, under this ruling, the state bears the burden of showing that a check is, in fact, unclaimed property, holders may be able to resist auditor demands that holders prove, by exhaustive research or burdensome outreach to putative owners of checks that are frequently many years old, that an item is not unclaimed property.

Until the landscape is clearer, pushing for limits on requests in Delaware audits is appropriate. This is especially true in light of the criticism of the Delaware program, State’s use of and reliance on contract auditors, and a growing sense that the Delaware unclaimed property regime may be viewed with disfavor by the courts.

If you have any questions regarding this Alert or Delaware’s unclaimed property program in general, please contact one of the members of the Morris Nichols Unclaimed Property Counseling Group.

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