In a decision addressing issues of first impression concerning Delaware’s use of subpoenas to enforce unclaimed property laws, the Delaware Court of Chancery has quashed the state’s subpoena in its entirety, holding that enforcement of the subpoena would constitute an abuse of process.
The decision comes in the case of State of Delaware, Department of Finance v. AT&T Inc., No. 2019-0985-JTL (Del. Ct. Chancery) — an enforcement action related to Delaware’s long-running audit of AT&T, which separately has sparked federal constitutional litigation. While the decision itself is narrow, the case may have significant implications for Delaware-domiciled holders under audit, not only in terms of information that can and cannot be compelled, but also in terms of property that can and cannot be claimed by the state.
Background
In January 2012, the Delaware Department of Finance (“Department”) authorized the contingency-fee audit firm Kelmar Associates LLC to conduct an examination of AT&T and its affiliates. AT&T, which has filed annual reports in Delaware on behalf of itself and 33 affiliates since 1999, produced volumes of records in response to Kelmar’s requests.
While the audit was pending, the U.S. District Court for the District of Delaware decided Temple-Inland v. Cook, 192 F. Supp. 3d 527 (D. Del. 2016) — a watershed case in which certain of Delaware’s unclaimed property enforcement practices were found to shock the conscience and violate due process. In response, Delaware amended its unclaimed property laws in 2017. Among other things, the 2017 amendments authorized holders then under examination to convert to an expedited audit, and articulated a new statute of limitations.
AT&T converted to the expedited audit on Dec. 7, 2017. However, AT&T reserved its rights to challenge the audit process and to request modifications to the parties’ agreed work plan as the audit progressed. Consistent with that reservation of rights, AT&T declined to produce records in response to Kelmar’s rebates request and disbursements request. The rebates request sought an identification of all general ledger accounts used to track rebate accrual and expense activity, the period of time each account was so used and each third-party administrator used to issue such rebates. The disbursements request sought information on every check AT&T had issued from 27 accounts. Both requests sought records back to 1992. Citing AT&T’s failure to produce records in response to the rebates and disbursements requests, the state ultimately terminated AT&T from the expedited examination and issued an administrative subpoena for the requested records.
On Dec. 6, 2019, AT&T filed suit in federal court alleging that the state’s enforcement of unclaimed property laws violated the Fourth Amendment, due process, the ex post facto clause, the takings clause, and equal protection, and was void for vagueness and preempted by federal common law. See AT&T Capital Services, Inc., et al. v. Geisenberger, et al., C.A. No. 19-02238-MN (D. Del. Dec. 6, 2019). Three days later, the Department filed suit in the Delaware Court of Chancery to enforce the subpoena. AT&T responded with a motion to stay in favor of the federal court action, or in the alternative, to quash or modify the subpoena.
Delaware Court of Chancery Decision
As a threshold issue, the Chancery Court denied AT&T’s motion to stay in favor of the federal case. The court looked heavily to Univar, Inc. v. Geisenberger, 409 F. Supp. 3d 273, 281–82 (D....
