Federal Court Deals Crippling Blow to Delaware’s Unclaimed Property Audit Regime
July 7, 2016
On June 28, 2016, the U.S. District Court for the District of Delaware granted a substantial victory to a Delaware corporation in its litigation over an unclaimed property audit (Temple-Inland, Inc. v. Cook et al., No. 1:14-cv-00654-GMS (D. Del. June 28, 2016)). The court ruled that the state’s method of estimating unclaimed property liabilities violated the substantive due process requirements of the U.S. Constitution, stating that Delaware “engaged in a game of ‘gotcha’ that shocks the conscience.”
In 2008, Delaware initiated an unclaimed property audit of Temple-Inland Inc., a manufacturer and supplier of corrugated packaging. Temple-Inland was incorporated in Delaware but maintained its commercial domicile outside of the state. Because Temple-Inland was unable to produce records prior to 2003, Delaware, through its contract audit firm Kelmar Associates LLC, estimated a $2 million unclaimed property liability for the audit period, which began in 1986.
In granting Temple-Inland’s motion for summary judgment, the court noted the following factors:
- The 22-year period that Delaware waited to initiate the audit
- Delaware’s attempted exploitation of loopholes in the statute of limitations
- The lack of notification to holders that unclaimed property records should be retained for an extraordinarily long period of time
- No legitimate state interest in retroactively enacting an estimation statute, other than raising revenue
- The use of biased estimation techniques designed to increase estimated liability
- Exposure to claims by multiple states for the same property
The court’s decision will directly affect ongoing Delaware unclaimed property audits and voluntary disclosure agreements that have not been completed. Although Temple-Inland’s victory on constitutional substantive due process grounds is unequivocal, the court deferred its decision on the subject of an appropriate remedy. Accordingly, affected holders should monitor further developments closely.