On Saturday, April 1, 2017, the Delaware Department of Finance (DOF) promulgated two regulations that would repeal all existing unclaimed property regulations and replace them with a single DOF regulation containing a revised Reporting and Examination Manual. The Secretary of State (SOS) also promulgated a regulation that outlines the method of estimation to be used for participants in the Voluntary Disclosure Agreement (VDA) Program. These promulgations are in accordance with the General Assembly’s instructions to do so in Senate Bill 13, which was passed in January and enacted by Governor John Carney on February 2, 2017. Any written submission in response to these regulations must be sent to the respective agency by Wednesday, May 3, 2017 at 4:30PM EST. (more…)
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.
Delaware’s Unclaimed Property Audit Program Dealt Blow
The judge in a case challenging Delaware’s use of sampling and extrapolation to determine unclaimed property liability denied the state’s motion to dismiss and in doing so, seriously questioned the State’s approach. Temple-Inland v. Cook, U.S. Dist. Ct. (DE), Civ. No. 14-654-SLR (3/11/2015). Temple-Inland brought a suit against the State following an unclaimed property audit of its accounts payable balances and before the audit of other property types was completed. Delaware found Temple-Inland liable for unclaimed property going back to 1986 based on the use of sampling and extrapolation. On March 11, 2015, Judge Robinson ruled on the Temple-Inland’s summary judgment motion and the State’s motion to dismiss for failure to state a claim. While the State won one issue, Temple-Inland certainly came out ahead overall.
Let’s start with the bad news first: the one dark spot in the opinion for holders is that the judge decided that the U.S. Supreme Court’s priority rule cases (Texas v. Delaware and its progeny) only applied to disputes over custody between states, not between a private holder and a state. This decision seems to conflict with a precedential Third Circuit case, Retail Merchants Ass’n v. Sidamon-Eristoff, 669 F.3d 375 (3rd Cir. 2012). The judge also did not seem to take to heart the role of the U.S. Supreme Court. The judge oddly stated that “finding that the Supreme Court’s holding in Delaware preempts the State’s valid exercise of regulatory power . . . would be contrary to the well-established principle that federal courts may not ordinarily displace state law.” That is exactly what the U.S. Supreme Court is supposed to do (in fact, last week the Court ruled federal courts have just such authority in Direct Marketing Association v. Brohl).
With the bad news out of the way, the good news is that not only does the judge agree to move forward with all of Temple-Inland’s other claims, but expresses significant doubt as to the validity of the State’s position regarding the authority to use estimation prior to a 2010 statutory change. The judge appears to be ready to move forward on hearing factual support for the following claims asserted by the plaintiff: substantive due process, Ex Post Facto Clause, Takings Clause, Commerce Clause and Full Faith and Credit Clause.
The really good news for holders is that the judge seems to have backed the State into a corner. In analyzing the due process and ex post facto claims, the judge noted that “[the] defendants are faced with a dilemma: “If §1155 [the 2010 provision authorizing estimation] is not a penalty provision, it likely violates plaintiff’s rights to substantive due process. If, on the other hand, § 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.” With this opinion, Delaware may finally be feeling the walls closing in and a giant alien cephalopod reaching up [...]