Chancery Court Answers AT&T’s Call to Quash

The federal District Court for the District of Delaware’s holding in the 2016 Temple-Inland v. Cook[1] decision that Delaware had implemented its audit program in a manner that “shocked the conscience” is well-known to all abandoned property practitioners.  Similarly, Delaware’s responsive law change in 2017, with provisions purportedly addressing the Temple-Inland Court’s constitutional concerns, has now been in effect for almost three (3) years (the “New Statute”)[2].  However, Friday’s decision in State of Delaware, Department of Finance v. AT&T, Inc.[3], is the first opportunity for a trial court at the state level to address the current administration of Delaware’s audit program.  The AT&T decision definitively addresses several issues that have been perplexing holders since the law change and should serve to conclude audits more expeditiously. 

Background

The case arose when Delaware terminated AT&T’s participation in the expedited audit program authorized by the New Statute and issued an administrative subpoena for voluminous records dating back to 1992 (the “Subpoena”).  The Subpoena demanded all records of every check issued by AT&T, whether issued and cleared, voided or outstanding.  The demand was not limited to checks that would be subject to Delaware’s jurisdiction pursuant to the priority scheme established in Texas v. New Jersey[4] and its progeny (“the Texas Trilogy”)[5], or under Delaware’s unclaimed property laws.    

AT&T raised several constitutional issues in federal court.  Delaware responded by commencing this action in the state’s court to enforce the Subpoena.  AT&T moved for a stay, or alternatively to modify or quash the Subpoena.  While the procedural discussion is fascinating, for the abandoned property practitioner, the result is simple:  Delaware had the authority to issue the Subpoena and a stay was neither appropriate nor efficient.  However, despite repeatedly noting the deference being afforded to the agency and the need for wide latitude in administrative investigations, Vice Chancellor Laster “was forced to conclude that enforcing the Subpoena as written would be an abuse of the court’s process.”[6]  As such, the Subpoena was quashed in its entirety, providing an enormous victory for AT&T and clearing the path for the federal court to consider AT&T’s many constitutional challenges to Delaware’s audit procedures.  Relevant portions of the decision are discussed below.      

Statute of Limitations Applicable to Holders Under Audit Prior to Effective Date of New Statute

Delaware commenced its audit of AT&T in 2012.  The lookback period in effect at that time was no more than six (6) years after a report should have been filed, as contained in § 1158 (“the Old Statute”).[7]  The New Statute requires the retention of records for ten (10) years.[8]  Delaware did not provide any public guidance as to which lookback would apply to holders under audit at the time of the law change.  Most advocates assumed that the Old Statute would apply, as “to give an act a retrospective operation would be contrary to well settled principles of law applicable to the construction of statutes unless it be plainly and unmistakably so provided by the statute.”[9]  Perhaps not surprisingly, with a position that was “devoid of authority or argument” Delaware opined that the longer period contained in the New Statute was applicable.[10]  Vice Chancellor Laster did not agree and pointed out that even if the New Statute was applicable, the Subpoena demanded information from periods beyond what either statute provided.  Holders who were under audit prior to the effective date[11] of the New Statute can reasonably rely on AT&T to support the shorter lookback provided for under the Old Statute.

The Need to Produce Records that Are Not Subject to Escheat to Delaware

The holding recognizes that “under Texas v. New Jersey, the State Escheator can only seek to escheat property where (i) the last known address is in Delaware or (ii) the company is domiciled in Delaware and (a) there is no last known address or (b) the last known address is in a jurisdiction that does not escheat the property.  The Escheat Law memorializes these rules.”[12] However, the Subpoena required the production of all of AT&T’s records, regardless of whether the property was potentially due to Delaware.  This did not sit well with the Vice Chancellor.  “Because the State Escheator can never reach property that does not fall into one of the escheatable categories, the State Escheator acts at the outer limit of its auditing authority when it requests records involving that type of property.”[13]  Holders who are under audit where the State is demanding records relating to owners with addresses in states other than the audit state(s) would be well-advised to consider this decision before turning over property that cannot be escheated under the priority rules established by the Supreme Court in the Texas Trilogy.[14] 

The Need to Produce Records of Cleared, Stopped and Cancelled Checks

AT&T objected to the requirement to produce “all records of checks issued, whether they were ‘cashed, voided, stopped, voided and reissued, [or] still outstanding.’”[15]  The alleged basis for the demand is that the audit protocol presumes that all checks which are not cleared or voided within thirty (30) days of issuance constitute unclaimed property, unless AT&T could prove that the original liabilities represented by the checks had been satisfied.  AT&T protested that this audit practice, “shifts the burden of proof to AT&T to show that all checks issued were not abandoned.’”[16]  Once again, the Vice Chancellor rejected such a practice, holding, “[t]o 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.”[17]  Holders who have struggled to prove that a check voided thirty-one (31) days after issuance did not represent unclaimed property will likely rejoice at this clarification of the standard that Delaware must meet upon audit before including such checks in their audit demands or error ratios. 

Enforcement of the Subpoena Would Constitute an Abuse of the Court’s Process

If taken individually, each of the three issues discussed might have been insufficient to warrant quashing the Subpoena.  However, the Court held that “a combination of factors supports a finding that to enforce the Subpoena would be an abuse of this court’s process.”[18]  The Court noted that a subpoena can be abusive if its demands for information are “’so obviously pretextual or insatiable’ as to extend ‘beyond a legitimate inquiry.’”[19]  Another factor that suggests abuse is “if the agency appears to be ‘pursuing a claim it knows it cannot win’ on the merits.’”[20]    As such, requesting data from years that exceeded the statutory lookback, and not limiting the data to checks that actually could be escheatable to Delaware, proved fatal for the State. 

Vice Chancellor Laster did not limit his concerns to just the subpoena itself, noting that the case is part of a larger picture: “‘[I]n recent years, state escheat laws have come under assault for being exploited to raise revenue rather than to safeguard abandoned property for the benefit of its owners … even as they more aggressively go about classifying property as abandoned.”[21]     He continued, “the preparation of the Subpoena in this case provides cause for concern.  The Department delegated its investigation to Kelmar … There is no indication that the Department had any meaningful involvement in the investigation.  The Department appears to have lent the State Escheator’s investigatory authority to Kelmar to use as it sees fit.

“Kelmar is compensated contingently … It potentially creates a pernicious incentive for Kelmar to serve broad information requests and engage in expansive audits that impose substantial burdens on companies, thereby inducing settlements that generate income for Kelmar.  The breadth of the Subpoena in this case is suggestive of such tactics.

“The breadth of the Subpoena also suggests that Kelmar may be furthering its own interests in other ways … The fact that Kelmar works for multiple states supplies a potential motivation for Kelmar’s insistence on obtaining records for all checks and rebates, regardless of whether or not the last-known address on AT&T’s records indicates that the property would be escheatable to Delaware.  Those records would be helpful to Kelmar in recovering property for other states, but helping other states recover property is not a purpose of the Escheat Law.”[22]            

Conclusion
While it is uncertain whether Delaware will appeal the decision, reissue the Subpoena within the confines described the Court, or come to an agreement with AT&T on an a more reasonable production of records, there are a few key take-aways.  Holders should absolutely consider whether or not to provide records related to owners with addresses in jurisdictions that are not participating in the audit.  Holders should reject a state’s demand to prove that a check is not escheatable, since it is the state’s burden instead to prove that the check is escheatable.  The correct lookback period must be determined, based on the law in effect when the audit commenced.  Finally, although there may be some efficiencies in one firm conducting a multi-state audit, the time has come to evaluate once and for all whether the inherent conflicts of this approach outweigh any potential benefits.  

[1] 192 F.Supp. 3d 527, 550 (D. Del. 2016).

[2] Del. Code. Ann. tit. 12, § 1130 et seq. (2017).

[3] No. 2019-0985-JTL (Del. Ch. July 10, 2020).

[4] 379 U.S. 674 (1965).

[5] Pennsylvania v. New York, 407 U.S. 206 (1972); Delaware v. New York, 507 U.S. 490 (1993).

[6] State of Delaware, Dep’t of Fin. v. AT&T, Inc., No. 2019-0985-JTL at *60 (Del. Ch. July 10, 2020).

[7] Del. Code Ann. tit. 12, § 1130 et seq. (2012).

[8] Del. Code. Ann. tit. 12, § 1145 (2017).

[9] State of Delaware, Dep’t of Fin. v. AT&T, Inc. at *44.

[10] Id.

[11] The New Statute was signed into law on February 2, 2017.

[12] State of Delaware, Dep’t of Fin. v. AT&T, Inc. at *50.

[13] Id.

[14] Supra at n. 4 and n. 5.

[15] State of Delaware, Dep’t of Fin. v. AT&T, Inc. at *51.

[16] Id. at *53.

[17] Id. (emphasis added).

[18] Id. at *57.

[19] State of Delaware, Dep’t of Fin. v. AT&T, Inc. at *56.

[20] Id.

[21] Id. at *58-*59.

[22] Id.