Delaware, the Sleeping Giant, steadfast in its historic belief and practice that it has: (i) the authority to audit back to 19811; (ii) the right to utilize estimation techniques that include property with last known addresses in other states; and (iii) the presumption that all estimated property was owner unknown and subject to the state’s jurisdiction, was awakened this week by the long-awaited Temple-Inland decision. The United States District Court’s decision on cross motions for summary judgment held that Delaware’s audit practices violated Temple-Inland’s substantive due process, but deferred its decision on the specific relief to be granted.
In particular, the court found several aspects of the defendant’s (Delaware’s) actions to be troubling including that Delaware:
(i) Waited 22 years to conduct an audit;
(ii) Failed to adhere to its otherwise applicable six-year statute of limitations;
(iii) Required Temple-Inland (and other holders) to retain records beyond the acknowledged standard record retention guidelines, while failing to provide notice such record retention was required;
(v) Failed to articulate a rational reason beyond raising revenue in applying its estimation provisions that was enacted in 2010, to earlier periods;
(vi) Used an estimation methodology that created a misleading result, by applying an approach which estimates a liability where no records exist, for all states, not just Delaware; hence subjecting Temple-Inland to multiple liability.
In addition to its findings on due process, the court denied Temple Inland’s motions for summary judgment on the Takings Clause and the ex post facto laws. With respect to the Takings Clause the count found that “… a reasonable estimate of a holder’s unclaimed property is not an unconstitutional taking2." However, it is important to note that even though the court found that a reasonable estimation of unclaimed property does not represent an unconstitutional taking, the court left open the issue of what is “reasonable” in the utilization of estimations. Further, with respect to the ex post facto laws, the court found that Delaware’s unclaimed property law was not intended to act as a criminal punishment neither did it operate like a criminal punishment, hence no violation of ex post facto laws.
We believe that is very likely that the State of Delaware will appeal the District Court’s decision to the 3rd Circuit Court of Appeals; however, as this case continues to unfold, holders that are either under audit, or in the midst of entering or completing a Voluntary Disclosure Agreement with Delaware or other states should:
(i) Appreciate that the wind appears to be at the back of the holder after challenges to the State’s estimation techniques dating back 15 or more years, but, the tides are not yet settled.
(ii) Be mindful of the rationale found by the court pertaining to record retention, statute of limitations and the use of estimation techniques in their existing audits and voluntary disclosure agreements as there may be room to negotiate previously non-negotiable issues.
(iii) Consider entering into Voluntary Disclosure Agreements with Delaware, and or other states, because in most instances the “look back” period would be less than that which would be imposed if the companies were audited; interest and penalties would be abated; and the holders, not the state, are the primary parties responsible for self-determining the amount ultimately due for prior years.
(iv) Most importantly, we are advising that companies give careful consideration in negotiating the settlement of audits or VDA agreements as there may be latitude in the ultimate determination of what constitutes a “reasonable estimation” methodology, which could modify heretofore standard audit practices.
We will provide updates as additional information becomes available, should you wish to discuss your organizations facts and situation in greater detail please contact Robert Peters, [email protected] (312) 697-4924 or Sonia Walwyn, [email protected] (312) 697-4662.
1 Prior to the July 22, 2015 amendment to its statute that now limits its audits to no more than 22 years
2 See id at 35