Delaware Legislative Hall; photo by Wikimedia Commons user Adavyd
Delaware’s unclaimed property bounty hunters are not out of a job – yet. But ongoing legislation and attention from the courts suggest that, with any luck, their days are numbered.
Delaware has spent years employing contracted examiners to audit businesses with an eye toward identifying unclaimed property that can escheat to the state. Since Delaware pays auditors with contingent fees, rather than at a flat rate, examiners have every incentive to define “unclaimed property” as broadly as they can. In 2010 unclaimed property was the state’s third-largest revenue source. That is still true today. As the legal domicile of more than 1 million business entities, including more than two-thirds of Fortune 500 companies, Delaware has found it lucrative to claim a business’s property is abandoned and scoop it into the state coffers.
Businesses have pushed back, as have other jurisdictions with competing claims to the supposedly unclaimed property. In 2016, 21 states (subsequently joined by others) banded together to ask the U.S. Supreme Court to hear their complaints about Delaware’s “finders-keepers” approach to property it says is unclaimed. Only a few months later, a pair of federal court rulings related to the practice put Delaware on the defensive.
In response to judicial skepticism of the state’s tactics, Delaware lawmakers have attempted to reform unclaimed property reporting and compliance rules. The new law, enacted last year, reduced the look-back audit period to 10 years, instituted new record retention requirements for businesses, and created a 10-year statute of limitations for the state to seek unclaimed property payments. The idea was to make the processes fairer, more predictable and more efficient – and to fend off future litigation.
A 10-year statute of limitations is certainly an improvement over the unrestricted bounty hunting in which the state and its hired guns previously engaged. That statute of limitations is down from a 22-year limit instituted in 2015, and from no limit at all prior to that. Clearer record-keeping requirements also mean fewer instances where auditors have room for creative maneuvering. But fewer isn’t none. The estimation procedures used in the absence of records and the auditors’ aggressive definition of what constitutes so-called unclaimed property are still egregious. “Property” that has no determinable owner isn’t unclaimed. It either is owned by the holder, or represents a bookkeeping error and doesn’t exist in the first place. The state’s determination to grab such property is a form of taxation without due process.
In a column for Bloomberg Tax, Sara Lima and Michael Lurie of Reed Smith LLP suggest a sensible proposal for a legislative fix that would untangle at least some of the interstate battles over unclaimed property. (Disclosure: I know Sara via a connection on LinkedIn.) In cases where more than one state can make a claim on unclaimed intangible property like an abandoned bank account, disputes historically have gone to the U.S. Supreme Court. However, because the court has limited room in its docket, only the most important cases are heard. And only states can ask the court to hear such cases; businesses and other stakeholders can’t initiate them. Through a procedural mechanism called “unclaimed property interpleader,” however, federal district courts could resolve unclaimed property disputes instead. Letting federal courts determine at the outset which state is entitled to hold unclaimed property, and letting the business or other holder go to federal court rather than relying on a state to bring the issue directly to the Supreme Court, would provide clarity to companies that are trying to do the right thing.
The Supreme Court is the wrong place to litigate these cases anyway. Witness the Supreme Court case brought by those 21 original jurisdictions, which has been pending there since 2016. The states’ complaint hinges on Delaware’s treatment of official checks handled by MoneyGram (which has corporate domicile there). Most cases docketed by the U.S. Supreme Court are decided in the same term. But this time, the court doesn’t have benefit of a lower court’s finding of facts, since the states appealed to the high court directly. Instead, it has appointed Pierre N. Laval, a senior (retired) judge of the 2nd U.S. Circuit Court of Appeals, as special master to make findings of fact. The case has been creeping along under his administration since 2017. This pace does not surprise me. As a journalist, decades ago, I covered a major trial in Laval’s court when he was still a district judge. He was not a jurist who moved things along at a brisk pace back then. Now in his 80s, he does not seem to have gotten any faster in the intervening years.
In the meantime, some businesses are still trying their luck in federal court. Univar, a chemical supplier based in Illinois, has claimed that Delaware’s contracted auditor has infringed the company’s right to be free from unreasonable searches and seizures, violated its rights to due process and equal protection, and taken private property for public use without just compensation. Delaware’s Department of Finance in turn attempted to force Univar to comply with the audit by filing a separate lawsuit, prompting a Delaware Chancery Court judge to intervene.
Other companies, hoping to avoid audits and legal fights entirely, have entered into voluntary disclosure agreements. Delaware sends businesses an “invitation” to participate if they are at risk for an audit. These businesses have 60 days to respond before the Department of Finance can begin the audit process. The volume of these VDA invitations illustrates that even with its new legislation, Delaware continues to hunt unclaimed property with zeal. MarketSphere, a consulting firm with an arm that specializes in unclaimed property cases, said in January that it understood the state would mail hundreds of VDA invitations in each quarter of 2019. The state can still audit a business even after voluntary disclosure.
It would be useful for Congress to weigh in with clear legislation addressing the circumstances in which a state can lay claim to “unclaimed” property that may have crossed state lines. Mere domicile of a company within that state should not be enough, especially if the company does not maintain a place of business in Delaware beyond having its charter issued there. Delaware should run its government by taxing its own citizens and the businesses to which it actually provides services. The state’s bounty hunting is an extreme effort to lay off the cost of Delaware’s government on the rest of the United States economy.
Delaware has run into trouble because it is behaving swinishly. Last year’s legislation amounts to some nice lipstick on that pig.