True Alert: Delaware’s Unclaimed Property Audit Estimation Practices Ruled Unconstitutional

 
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Delaware Loses Due Process Challenge
On June 28, 2016, the Delaware federal district court in Temple-Inland, Inc. v. Cook et. al, Civ. No. 14-654-GMS, (D. Del. June 28, 2016) granted Temple-Inland’s motion for summary judgement on its substantive due process claim challenging Delaware’s estimation practices during unclaimed property audits.  The district court agreed with Temple-Inland that Delaware’s historic estimation methods and practices were unconstitutional.

Citing a lack of clear precedent, the district court stated that an executive action by a state violates substantive due process protections “only when it shocks the conscience”.  After reviewing the facts, the district court stated that it found Delaware’s actions troubling, and concluded that Delaware’s estimation practices violated Temple-Inland’s substantive due process rights, because the State:

  • Waited 22 years to conduct an audit;
  • Exploited loopholes in the statute of limitations, avoiding the otherwise 6 year statute of limitations “under dubious circumstances”;
  • Never properly notified holders regarding the need to maintain unclaimed property records longer than the standard record retention period;
  • Applied 12 Del. C. §1155 (the statute authorizing estimation) for a prolonged retroactive period for “no obvious purpose other than to raise revenue”;
  • Employed a method of estimation where characteristics that favored liability were replicated across the whole, but characteristics that reduced liability were ignored; and
  • Subjected the plaintiff to multiple liabilities.

The district court concluded that, “[t]o put the matter gently, defendants have engaged in a game of ‘gotcha’ that shocks the conscience.”

Estimation Still Allowed
Despite its condemnation of Delaware’s existing estimation practices, the district court did not go so far as to state that Delaware’s use of estimation for determining a potential unclaimed property liability was, in itself, unconstitutional.  Rather, the district court stated that estimation can be appropriately used when “ it balances the competing interests between an unlawful taking by the state and improper windfall for holders,” ultimately concluding that “the proper use of estimation can satisfy defendant’s burden that property is unclaimed.”  The district court held that Delaware failed to make that showing.

Notwithstanding its holding that Delaware violated due process, the court believed that the state was in the best position to suggest a palatable remedy.  So the district court deferred “its decision on the subject of an appropriate remedy until another day.”

Ex Post Facto, Takings Clause
While the decision by the district court represents a significant win for Temple-Inland in its ongoing litigation against Delaware, the court also granted Delaware’s motion for summary judgment on Temple-Inland’s ex post facto claim.  In doing so, the district court stated that a law violates the ex post facto clause if it "imposes a punishment for an act which was not punishable at the time it was committed; or imposes additional punishment to that then prescribed."  In applying it to the facts to 12 Del. C. §1155, the statute allowing Delaware’s use of estimation, the district court held that the “Delaware General Assembly did not intend 12 Del. C. §1155, to act as a criminal punishment, and the statute does not operate like a criminal punishment.”  Finally, the district court declined to grant summary judgment in favor of Temple-Inland or Delaware with respect to the Takings Clause claim, holding that the “parties have not presented evidence or argument to the court as to whether or not the estimation was reasonable, although the court is aware that expert reports have been prepared on this issue. Thus, there is a dispute of material fact that cannot be resolved on summary judgment.”

What This Means To Holders
While it is too early to predict the full impact of the district court’s decision in Temple-Inland, it is clear that it is likely to have significant impact on how Delaware and other states manage their unclaimed property programs.  Whatever the impact of the decision is on the states, any company that is currently under an unclaimed property audit by Delaware, as well as companies that have undergone, or are facing, the use of estimation to determine its potential unclaimed property liability, including voluntary disclosure programs, should take this decision into consideration as  it moves forward.  Future plaintiffs should also be aware that the district court indicated that holders may be able to  persuasively argue that the doctrine of laches might bar a state from assessing a liability against holders “for something that happened 22 years ago.”

In Closing
As the states continue to rely on unclaimed property as a potential source of revenue, more disputes like the ones filed this year are likely to arise.  True Partners will continue to monitor this and other litigation as it arises, and will release relevant updates as the cases progress.

About Unclaimed Property…
Unclaimed property is any intangible property that is owed by a company and has gone unclaimed for a specific period of time by the rightful owner.  Every company is likely to generate unclaimed property and has a legal responsibility to report and remit that property to the appropriate jurisdiction.  Generally, there is no statute of limitations on a Holder’s unclaimed property liability, and a holder’s state of incorporation can estimate a holder’s potential liability for periods where actual records are not available.  Companies not in full compliance with the state’s unclaimed property laws often have many concerns about getting into compliance, including the likelihood of triggering interest and penalty assessments or being selected for an examination.  However, once aware of the various rules and processes, every holder should consider taking advantage of the various opportunities available to get into compliance for any past-due property.

Our Expertise
True Partners Consulting’s Unclaimed Property Management Solutions Team is comprised of a national group of professionals with diverse backgrounds, including industry and government.  Our team can offer your company the best combination of experience, expertise, and resources to assist your company, regardless of your company’s industry.  We encourage you to contact one of our professionals to discuss any questions or concerns that you may have regarding unclaimed property.

Download this Alert (PDF)

Contact:

Cathleen A. Bucholtz
Managing Director
(213) 417-2501
Cathleen.Bucholtz@TPCtax.com

Jim Sadik
Managing Director
(508) 667-3408
Jim.Sadik@TPCtax.com

Robert M. Tucci
Managing Director
(214) 438-3766
Robert.Tucci@TPCtax.com

 

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