Temple-Inland, Inc. v. Cook, Civ. No. 14-654-GMS

192 F.Supp.3d 527

TEMPLE-INLAND, INC., Plaintiff,

v.Thomas COOK, in his capacity as the Secretary of Finance for the State of Delaware; David M. Gregor, in his capacity as the State Escheator of the State of Delaware; and Michelle M. Whitaker, in her capacity as the Audit Manager for the State of Delaware, Defendants.

Civ. No. 14-654-GMS

United States District Court, D. Delaware.

Signed June 28, 2016

Brian M. Rostocki, Esquire and John C. Cordrey, Esquire of Reed Smith LLP, Wilmington, Delaware. Counsel for Plaintiff. Of Counsel: Diane Green-Kelly, Esquire of Reed Smith LLP, Chicago, Illinois.

David J. Margules, Esquire of Ballard Spahr, Wilmington, Delaware. Counsel for Defendants. Of Counsel: Edward K. Black, Esquire and Caroline Lee Cross, Esquire of Department of Justice, Wilmington, Delaware, Steven S. Rosenthal, Esquire, Marc S. Cohen, Esquire, Tiffany R. Moseley, Esquire, and John D. Taliaferro, Esquire of Loeb & Loeb LLP, Washington, D.C.

MEMORANDUM OPINION

SLEET, District Judge

I. INTRODUCTION

This dispute asks the court to determine the constitutional limits to Delaware's enforcement of its unclaimed property laws. "Unclaimed" or "abandoned" property refers to any property held by a business, where the business is not the owner of the property, and there has been no contact with the owner for the "dormancy period." 12 Del. C. § 1198. Usually, unclaimed property is money in the form of savings accounts, checking accounts, stocks, uncashed dividend or payroll checks, traveler's checks, unredeemed money orders or gift certificates, life insurance policies, etc.

All fifty states, as well as the District of Columbia, have laws addressing how businesses must handle unclaimed property. Under Delaware law, the business is called a "holder." 12 Del. C. at § 1198(7). At the end of each year, holders must report and transfer (or "escheat") to the state any property that has been abandoned as of the end of the prior year. 12 Del. C. § 1199. Ownership of the funds does not transfer to the state. Instead, the state holds the abandoned property in trust in perpetuity until claimed by the owner or the owner's successor in interest. (A742). Until the owner claims the property, a state can use the funds for the general welfare.

The defendants are employees of the state government authorized to enforce Delaware's unclaimed property laws, 12 Del. C. §§ 1101, et seq. (the "UPL"). Plaintiff Temple-Inland Inc. ("plaintiff") is a Delaware corporation that manufactures corrugated packaging. (D.I. 113 at 2). Its principal place of business is in Texas, and its operations are primarily in Texas, Indianapolis, and Indiana. (Id. at 3). In 2008, defendants audited plaintiff for deficiencies in reporting and escheating unclaimed property for the previous 22 year time period.

Plaintiff claims that defendants' audit violates certain provisions of the U.S. Constitution. Presently before the court are the parties' cross-motions for summary judgment on plaintiff's claims for violation of substantive due process, the takings clause, and the ex post facto clause. Defendants have also asked the court to exercise its discretion in favor of abstention. (D.I. 112, 114). For the reasons set forth below, plaintiff's motion for summary judgment is granted-in-part and denied-in-part, and the defendants' motion for summary judgment is denied-in-part and granted-in-part.

II. PROCEDURAL HISTORY

On May 21, 2014, plaintiff filed a complaint alleging violation of federal common law and several provisions of the U.S Constitution. (D.I. 1). On July 22, 2014, plaintiff moved for summary judgment on two of its six claims (violation of federal common law and ex post facto clause). (D.I. 22). At the same time, defendants moved to dismiss the entire complaint for failure to state a claim. (D.I. 24). The court granted defendants' motion to dismiss the federal common law claim, and denied defendants' motion as to the rest of the claims.¹ (D.I. 38, 39). The court also denied plaintiff's motion for summary judgment, finding that issues of fact remained unresolved. (Id. ). On December 3, 2015, plaintiff filed an amended complaint dropping its claims based on the commerce clause and the full faith and credit clause. (D.I. 108). Thus, the only remaining claims in this case are the ones currently before the court on the parties' cross-motions for summary judgment.

III. BACKGROUND

A. Delaware's Dependence on Unclaimed Property Revenue

Three historical factors have made a significant contribution to why the parties find themselves in this dispute: (i) Delaware's dependence on unclaimed property revenue; (ii) the U.S. Supreme Court's priority rules for escheating unclaimed property; and (iii) Delaware's historically lax enforcement of its unclaimed property laws. The court provides this additional background for the purpose of placing this dispute in a broader context.

The state government has admitted that providing consumer protection is not its only goal in administering unclaimed property. (A593). Unclaimed property is Delaware's third largest revenue source, making it a "vital element" in the state's operating budget. (DE00001111).² The difference between the amount collected by the state and the amount returned to owners shows that a large percentage of unclaimed property revenue remains with the state. For example, in 2007, approximately $364.9 million in unclaimed property went to the state's general fund.

(A588). But, around that same time, no more than $20 million was returned to owners.³ (A723).

The state government has also admitted that "[t]o the extent that future budget needs and growth are dependent on [unclaimed property revenue], it, too, must grow." (DE00001111). Delaware's approach to growing its unclaimed property revenue is significantly influenced by the priority rules set forth by the U.S. Supreme Court. (A593). Since states can use unclaimed funds for the general welfare, several states may make competing claims for the same property. But the U.S. Supreme Court has held that the same unclaimed property "cannot constitutionally be escheated by more than one State." Texas v. New Jersey , 379 U.S. 674, 678–79, 85 S.Ct. 626, 13 L.Ed.2d 596 (1965). To resolve which state had priority, the U.S. Supreme Court established a set of rules under Texas v. New Jersey , 379 U.S. 674, 85 S.Ct. 626, 13 L.Ed.2d 596 (1965) and its progeny, referred to as the " Texas cases." The "primary rule" gives the first opportunity to escheat to the state of the owner's last known address as shown by the holder's books and records. Delaware v. New York , 507 U.S. 490, 499–500, 113 S.Ct. 1550, 123 L.Ed.2d 211 (1993). If the primary rule fails because the holders' records disclose no address for an owner, the "secondary rule" awards the right to escheat to the state in which the owner is incorporated. Id.

As defendants are aware, Delaware is legal home to a large share of the nation's corporations. (See A593 (recognizing Delaware's "unique circumstances")). As a result, Delaware "receives a large share of all owner/address unknown abandoned property" generated in the United States. (A587). In fact, an estimated 90% of the unclaimed property collected by Delaware is owner/address unknown property. (A595). Thus, it benefits Delaware if the holders' records do not have an address for the owner. The state government has recognized that "improved record keeping systems could reduce the level of owner unknown property," and, if that happened, "Delaware could see its revenues reduced." (DE00001115).

Despite the state's dependence on unclaimed property revenue, it has historically been lax in enforcing its unclaimed property laws. Delaware, like most states, has voluntary compliance percentages in the single digits. (A645). Historically, Delaware has never received more than 14,000 unclaimed property reports a year, yet over 680,000 entities are incorporated in the state. (A589, A692). Delaware has long known that holders' low level of compliance is not due to "willful noncompliance," but a lack of awareness of reporting obligations.⁴ (A595 n. 3).

As a result, a "significant portion" of Delaware's unclaimed property revenue comes from its enforcement activities.

(A596, A646). But even this has not been particularly robust. Delaware lacked a formal audit program for unclaimed property until 2001 and, as of 2008, that program was still in its "infancy." (A588, A642). Delaware has a small staff dedicated specifically to unclaimed property and depends primarily on contractors to conduct its audits. (A640-41, A646). Because Delaware has limited resources for its enforcement activities, it targets for auditing "large companies" where "there is a greater chance of escheatable property being collected." (A655).

B. The Audit

On December 22, 2008, plaintiff received notice that the defendants would be conducting an audit to determine its compliance with the UPL. In the notice, the state's Audit Manager said, "I'm sure all records are being retained under standard retention policies," which defendants later admitted is typically 7 years. (A129, A275, A455). The notice also stated that unclaimed property is to be reported to Delaware in accordance with the priority rules set forth in the Texas cases. (A455). That same instruction is provided in every Delaware audit notice letter and every Delaware Escheat Handbook. (D.I. 113 at 4)

On behalf of defendants, a contract auditor named Kelmar Associates, LLC ("Kelmar") audited two bank accounts from which plaintiff issued checks for accounts payable and payroll. (A465). The audit covered a 22 year time period—January 1986 to December 2007. (A459). But plaintiff was only able to produce complete records back to 2003 for accounts payable and 2004 for payroll. (D.I. 113 at 4). Plaintiff had disposed of older records in compliance with its retention policy. (A260-63). Plaintiff also produced all unclaimed property reports it filed in Delaware from 1998 to 2008, a couple of...