July 21, 2020
Delaware Chancery Court finds state's unclaimed property information requests too expansive, rejects enforcement of subpoena as abuse of court's process
In Delaware Department of Finance v. AT&T, Inc.,1 the Delaware Court of Chancery (Court) threw out a subpoena issued to AT&T, Inc. (AT&T) by the Delaware Department of Finance (Department) on behalf of a third-party unclaimed property audit firm. While agreeing that the State Escheator was authorized to issue the subpoena, the Court held that enforcing such an expansive subpoena would be an abuse of the Court's process. In reaching its conclusion, the Court found that the subpoena was expansive in terms of both the time it covered (requesting checks and rebates going back to 1992) and its subject matter (seeking information about property the Department cannot escheat).
In quashing the subpoena, the Court expressed concern regarding the subpoena's preparation. The Court found that the Department delegated its unclaimed property investigation to a third-party unclaimed property audit firm retained by the Department on a contingency-fee basis (hereafter, audit firm), and that the audit firm drafted requests and conducted the investigation without the Department's meaningful involvement. The Court further noted that this case fits into a larger controversy about unclaimed property, as several courts have criticized state escheat laws on the grounds that they are being used to raise revenue rather than their purported purpose of finding and safeguarding abandoned property for the owners' benefit.2
On January 12, 2012, the Department notified AT&T that it intended to examine its books and records to confirm it complied with Delaware's escheat law,3 seeking records going back 20 years from the date of the audit's commencement.
Under 2017 Amendments to Delaware's escheat law, AT&T sought and received approval to expedite its unclaimed property audit. During the audit, AT&T responded to the audit firm's Disbursement Request (seeking information about every check AT&T had issued from 27 accounts since June 1992) and Rebates Request, but later objected to the breadth of the audit firm's information requests. The Department sent AT&T several notices of deficiencies and ultimately terminated its participation in the expedited examination process. The Department later issued an administrative subpoena seeking production of documents responsive to the Rebates Request and Disbursements Request. AT&T objected on multiple grounds and filed an action in federal court alleging several violations of the US Constitution. On December 10, 2019, the Department filed this case in the Court seeking an order compelling AT&T to comply with the subpoena. AT&T moved to stay the litigation in favor of the federal action or in the alternative, to quash or modify the subpoena. The Court allowed the action to proceed, subsequently quashing the subpoena.
Administrative subpoena issued under escheat law
Delaware courts previously had not addressed the procedures that should govern an action to enforce a subpoena issued under the escheat law. The Court considered the existing legal framework4 and concluded that Delaware law considers the reasonableness of an administrative subpoena under the escheat law, showing deference to the State Escheator. The Court said the agency must first show that its subpoena is authorized; if it does so, then the respondent must prove that enforcement of the subpoena would be improper under the Powell test.5 In the future, the Court noted that it "hopes" that parties follow the procedures listed in U.S. v. McCarthy6(i.e., step-by-step instructions regarding filing a complaint with an affidavit seeking enforcement, describing the complaint's process, what occurs at the hearing and possible outcomes).
Impermissibly expansive subpoena
The Court said the Department was investigating AT&T's rebates or checks issued for employee compensation, which Delaware law considers abandoned five years after issuance. The State Escheator has broad authority to examine AT&T's records to determine compliance with the escheat law, including the authority, for example, to request records of "all checks issued." Still, the Court said it considers a request's expansive nature in evaluating whether enforcing the subpoena would be an abuse of the Court's process. In this case, the Court noted that AT&T's arguments individually would have fallen short, but together established that the Department had issued an overly broad and unreasonable subpoena.
In so finding, the Court said the Department requested information going back to 1992 but did not specify its rationale for seeking such old information or why one particular statute of limitations applied as opposed to another.7 Similarly, although precedent8 treats records with last-known addresses located outside of Delaware as "almost certainly non-escheatable," the Department requested records from AT&T regardless of last-known address location. To the Court, this indicated that the Department was pursuing information about property that it knew it could not recover without giving a sufficient explanation as to why. Further, the Department requested AT&T's records of all checks, regardless of whether they were marked as cashed, cleared, voided, stopped, reissued or still outstanding. While an agency generally does not need to explain why it is seeking information in a subpoena, it should anticipate being required to provide some justification when making such a broad request, the Court said. Noting that the subpoena would cover "a vast amount of irrelevant data," the Court observed that the Department's audit approach had no limiting principle, in that the Department saw even irrelevant documents as relevant to "the audit" or "the audit process."
The Court also found that the breadth of the subpoena suggested that the audit firm was engaging in aggressive enforcement tactics, incentivized by its contingency-fee compensation structure. The audit firm had a financial incentive to serve broad information requests, engage in expansive audits that impose substantial burdens on companies and possibly induce settlements that generate income for it. Because the audit firm worked in other states, such broad requests (i.e., records requests for all checks and rebates regardless of last known address location) could also help it gather records that would be helpful to it in other jurisdictions which, the Court said, was not the purpose of the Delaware escheat law. Moreover, the Department did not appear to be meaningfully involved in the audit because the Rebates Request and Disbursement Request sent to AT&T were on the audit firm's letterhead and it appeared that the audit firm drafted the letters and conducted the investigation. If the Department had a good explanation for these issues, the Court stated, it had not provided them.
The Court quashed the subpoena and offered the Department the opportunity to either appeal the decision or make a new, narrower subpoena request.
In response to the district court ruling in Temple-Inland v. Cook9 raising serious concerns about the administration of unclaimed property laws in Delaware, the Legislature added the subpoena power to Delaware's unclaimed property laws through amendments enacted in 2017. The AT&T opinion is one of the first to examine this aspect of Delaware's unclaimed property enforcement actions. The ruling in AT&T describes the framework for permissible administrative subpoenas under Delaware's escheat law. In other words, while throwing out the subpoena, which is favorable for the holder community, the Court's opinion also outlines for the Department, the audit firm and potentially other state unclaimed property authorities and their audit firms how to successfully issue an appropriately scoped subpoena. The opinion does not specifically address the notion of the Department receiving access to records that are addressable to other states and therefore not escheatable to Delaware, a concern that holders routinely express in these types of expansive unclaimed property audits.
In terms of ongoing or future audits, specifically those including Delaware, the opinion in this case also sets out parameters that holders may consider in determining whether certain unclaimed property authority requests and those of its auditors are so impermissibly expansive that they should seek recourse in court. While a holder can litigate a subpoena or refuse an overreaching audit request, that decision must be weighed against reaching a more expedited settlement by complying with the demands of the authorities and their auditors. Often, this analysis is a balancing act that involves considering historic policies of the Department and its auditors, the availability of records, the commitment by holders of resources to respond to such requests and the overall exposure level.
1 No. 2019-0985-JTL (Del. Chancery Ct. July 10, 2020).
2 Marathon Petroleum Corp. v. Sec'y of Fin., 876 F.3d 481 (3d Cir. 2017) (quoting Plains All Am. Pipeline L.P. v. Cook, 876 F.3d 534, 536 (3d Cir. 2017); Taylor v. Yee, 780 F.3d 928 (9th Cir. 2015) cert. den. 136 S. Ct. 929, 930 (2016) (J. Alito concurring) ("The convoluted history of this case makes it a poor vehicle for reviewing the important question it presents, and therefore I concur in the denial of review. But the constitutionality of current state escheat laws is a question that may merit review in a future case.")
3 Delaware's escheat law requires a person that holds abandoned property and meets certain requirements to file a report identifying the property and to remit payment to Delaware.
4 Del. Code tit. 12, Section 1171(4); Delaware Chancery Court Rules.
5 U.S. v. McCarthy, 514 F.2d 368 (3d Cir. 1975); SEC v. Wheeling-Pittsburgh Steel Corp., 648 F.2d 118 (3d Cir. 1981). (Under United States v. Powell, 379 U.S. 48 (1964), an agency would establish its authority to issue the subpoena by showing "that the investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to the purpose, that the information sought is not already within the [agency's] possession, and that the administrative steps required by the [statute] have been followed … .").
6 U.S. v. McCarthy, 514 F.2d 368 (3d Cir. 1975).
7 Under Delaware's 2017 amendments, the statute of limitations is 10 years. Under the former escheat law, the statute of limitations contemplated three years or six years depending on certain circumstances.
8 Texas v. New Jersey, 379 U.S. 674 (1965); Nellius v. Tampax, Inc., 394 A.2d 233 (Del. Ch. 1978).
9 192 F. Supp. 3d 527 (D. Del. 2016) (Delaware's then-prevailing methods of auditing companies for and collecting unclaimed property violated the US Constitution's substantive due process clause and "shocked the conscience").