The long-running dispute between states and the business community over the expansive nature of unclaimed property audits has taken a new turn, with a Delaware state court quashing a subpoena served in the course of an audit conducted by a contingency-fee auditor, in State of Delaware, Department of Finance v. AT&T Inc. (Del. Ch. July 10, 2020).1 Although the court acknowledged the state’s power to subpoena records, the court found that the subpoena was so overly broad and unreasonable that enforcing it would constitute “an abuse of the court’s process.” Significantly, the information sought by the state and its auditor, Kelmar Associates, was similar to the standard data request that Kelmar has pursued on the state’s behalf in the normal course of audits of hundreds of large companies.
It was a combination of the following factors that caused the court to find that enforcing the subpoena would be an abuse of process, with no one factor alone being determinative:
- Exceeding the statute of limitations by seeking records back to 1992;
- Exceeding Delaware’s jurisdiction by seeking records of property that would be due, if at all, to other states;
- Requesting overly broad data on records for “all checks,” when paid checks could not possibly be unclaimed property; and
- Allowing a contingency-fee auditor to control the investigation with minimal state oversight.
Audit background
Similar to audits currently being conducted against hundreds of other companies, the Delaware Department of Finance opened an audit of AT&T in 2012 using its primary third-party auditor, Kelmar Associates. Consistent with its standard audit method, Kelmar requested voluminous data from the holder in a range of areas. The holder responded to many of the requests, but resisted providing the full scope of information in selected areas, including the “Disbursements Request” in which Kelmar requested “information concerning every check AT&T had issued from twenty-seven accounts since June 1992,” including checks written to payees in every state, not just to payees in Delaware. Given the size of the company under audit, the number of accounts, the time period, and the geographic scope, the request covered millions of payments made by the holder. When the holder refused to comply in full, the Department converted Kelmar’s information request into a subpoena by merely attaching the Kelmar data request to a form subpoena, with no modifications. Delaware then filed a lawsuit to enforce the subpoena in the Delaware Chancery Court. On a parallel track, the holder sued Delaware in federal court alleging that Delaware’s audit and extrapolation method is unconstitutional.2
Findings of the court
After briefing and a hearing, the Delaware Chancery Court quashed the subpoena, finding that the scope of the subpoena was so expansive that enforcement would constitute an abuse of the court’s process. The court identified multiple problematic aspects of the subpoena, though from the court’s view, the overarching problem seemed to be that the subpoena “will sweep in a vast amount of irrelevant data.”
1. Statute of limitations. First, the court found that the subpoena sought records far beyond the statute of limitations. Specifically, the subpoena sought records back 20 years to 1992, when current Delaware law has a 15-year statute of limitations. More significantly, however, the court rejected Delaware’s argument that the state’s current unclaimed property statute, enacted in 2017, applies retroactively to extend the shorter, 3-year statute of limitations under the prior version of the escheat law to the ongoing audit. Although the court declined to apply a “bright-line” rule barring the Department from...
