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Jamie C. Yesnowitz
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On June 1, 2021, the Delaware Supreme Court affirmed a judgment by the Delaware Court of Chancery (Chancery Court) to quash an administrative subpoena to produce extensive records relating to an unclaimed property audit of AT&T, Inc. (AT&T).1
While the Supreme Court agreed with the lower court that the subpoena should be quashed in its entirety, the Court also adopted federal procedural and substantive standards governing administrative subpoena enforcement proceedings and allowed the Delaware Department of Finance an opportunity to serve a new subpoena in compliance with the new procedures. Within a month of the ruling, the Delaware General Assembly enacted legislation broadening the scope of permissible data requests made by the Department under audit, essentially authorizing the Department to request records identifying property beyond that which is reportable to the state.2
Delaware’s escheat law requires holders of unclaimed property to report such property over to the state if the rightful owner of property cannot be found after the applicable statutory dormancy period.3
In 2017, Delaware enacted significant changes to its escheat law, pertaining specifically to the state’s unclaimed property audit procedures. First, the law change authorized the state to issue administrative subpoenas to require the production of records under audit.4
The law change also extended the statute of limitations for most unclaimed property audits from three to ten years.5
Finally, holders subject to audit may request an expedited audit examination, requiring the Department to make all records requests no more than 18 months from the request submission date.6
In 2012, the Department began an unclaimed property audit examination of AT&T, designating Kelmar Associates LLC (Kelmar) as its agent for the audit. During the audit, AT&T complied with voluminous document requests from Kelmar, except for two requests, a “rebates request” and “disbursements request.” For the rebates request, first sent in 2014, Kelmar asked AT&T to provide transaction details for all general ledger accounts used to track customer rebate accrual and expense activity. The disbursements request, sent in 2018, sought information on all AT&T checks issued from 27 general ledger accounts dating back to June 1992. The request related to checks written to payees in all states, instead of being limited to only payees located in Delaware.
After AT&T objected to the information requests and refused to provide the requested records, the Department sent several deficiency notices, and then terminated the expedited examination of AT&T in October 2019 when AT&T did not respond. In November 2019, the Department issued an administrative subpoena demanding the production of documents related to the rebates and disbursements requests. The Department then filed a lawsuit in the Chancery Court in order to enforce the subpoena.
Chancery Court decision
Finding the scope of the administrative subpoena to be so expansive in both time period and subject matter that enforcement would constitute an abuse of the court’s process, the Chancery Court quashed the subpoena in its entirety.7
Finding that the 2017 law change implementing the ten-year statute of limitations did not apply retroactively, the court used the pre-2017 three-year statute of limitations period as a “measuring stick” to assess the reasonableness of the Department’s information requests, and found that the Department seemed to be pursuing information about property that it knew it could not recover, which could include irrelevant data. Also finding that the Department might have been in search of records “with last-known addresses outside of Delaware,” the lower court was troubled by the scope of authority delegated by the Department to Kelmar, noting that the breadth of the subpoena along with Kelmar’s contingent fee structure suggested that the auditor might have been furthering its own interests to support its business in other states.
The court determined that quashing the subpoena was the only alternative because the parties did not provide the court with a sufficient basis to narrow the subpoena. While the court would have preferred to defer to the Department in narrowing the subpoena, it could not do so because the Department declined to propose any modifications. The Department appealed the lower court’s decision to the Delaware Supreme Court.
Supreme Court decision
The Court addressed three principal issues on appeal: the appropriate framework for enforcing administrative subpoenas, whether the Chancery Court could question the Department’s good faith in light of the breadth of the subpoena and of Kelmar’s incentives, and whether Delaware’s statute of limitations period was appropriately applied.
First, the Court followed the framework used by federal courts to enforce administrative subpoenas as set forth in United States v. Powell
Following the Powell
framework, the Court established that the Department must show that the investigation will be conducted for a legitimate purpose, the information sought may be relevant to that purpose and is not already in the Department’s possession, and that the Department has complied with any statutory requirements. If the Department can meet these factors, the subpoena recipient then has the burden to show that the Department is not acting in good faith, such that enforcement would be an abuse of the court’s process.
Regarding the discretion of the lower court, the Court observed that while a court’s role is constrained when deciding whether the enforcement of an administrative subpoena would be an abuse of process, the Chancery Court was within its discretion to inquire further into whether the Department was using the subpoena for a legitimate purpose related to the investigation. Noting that the lower court had “serious questions” about the breadth and scope of the subpoena, the Court stated that the Department “put the court in a box” when it refused to provide the requested information or narrow the scope of the subpoena. Acknowledging that the Chancery Court was left with no choice but to enforce the subpoena as written, the Court concluded that the lower court did not err in quashing the subpoena.
The Court found that while courts cannot apply a bright-line test barring an agency from seeking information beyond the applicable statute of limitations, the Chancery Court did not apply a bright-line test. Rather, the Chancery Court acknowledged the Department’s ability to make information requests outside of the limitations period and did not err in considering the three-year timeframe of the pre-2017 statute of limitations in determining the reasonableness of the Department’s subpoena.
Finally, the Court acknowledged that it announced new procedures and law governing enforcement of administrative subpoenas. The Court therefore allowed the Department the opportunity to conform to the new procedures and serve a new subpoena on AT&T consistent with the decision.
While discussing federal case law and procedural issues at length, the AT&T
decision highlights many of the issues that are central to Delaware’s notoriously aggressive enforcement of the state’s escheat laws, which include lengthy audit examinations, extensive information requests, a very expansive limitations period, and potentially large assessments. This process often ensnares companies that may have acquired businesses that did not preserve the records needed to successfully respond to audit requests.
Ultimately, the Delaware Supreme Court agreed with the Chancery Court that the administrative subpoena served on AT&T was so expansive in terms of both time period and subject matter that it could not be enforced as written, especially when the Department refused to narrow the subpoena’s scope or clarify the questions sought by the Chancery Court. However, because administrative subpoena enforcement procedures were an issue of first impression in Delaware, the Court adopted the framework followed by federal courts and allowed the Department to serve a new subpoena on AT&T.
Perhaps in direct response to the AT&T
decision, Delaware recently enacted legislation that broadens the scope of permissible data requests made by the Department under audit.9
In particular, the Department is authorized to request and review records to verify the completeness and accuracy of the holder’s records, even if such records may not identify property reportable to the State.10
Further, the legislation clarifies that the Department may initiate an audit examination to determine unclaimed property compliance for any reason, and is under no obligation to provide a detailed or specific reason or justification for doing so.11
The expanded unclaimed property audit authority granted to the Department is likely to bring further disputes and litigation over the scope of information requests and administrative subpoenas going forward.
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