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Leading you through the financial and legal risks of unclaimed property law

Hello, Delaware? The Constitution is Calling

by Jennifer C. Borden & Jenna L. Bentley

On December 6, 2019, AT&T filed a complaint in the United States District Court for the District of Delaware alleging violations of its rights under the Fourth and Fourteenth Amendments, and violations of the Ex Post Facto Clause of the U.S. Constitution.  The constitutional issues raised by AT&T are similar to those most recently raised by Univar, Inc. in the complaint it filed last December.  These issues continue to plague holders undergoing unclaimed property audits by the State of Delaware.  Without much needed precedential guidance from the courts as yet, the AT&T complaint highlights the fact that holders are often without meaningful recourse during these “limitless, irrational and arbitrary”[1]audits.

Background

AT&T received an audit notice from the State of Delaware on January 12, 2012.  While AT&T was under audit, Delaware overhauled its Unclaimed and Abandoned Property Law following the decision rendered in Temple-Inland v. Cook.[2]  Pursuant to the revised statute, AT&T elected to enter into Delaware’s expedited audit program.[3]  According to AT&T, this decision was partially motivated by “the belief that the State would be reasonable in the conduct of the audit in light of the two-year timeline”.[4]  Six years into its audit, AT&T was accepted into the expedited audit program on January 16, 2018.  The following day, Kelmar “issued a request demanding that AT&T provide a full database of details related to every check issued on behalf of 34 different AT&T affiliates from 27 accounts”[5] for each quarter beginning in June 1992 and ending with March 2017.[6]

AT&T estimated that this request “seeks approximately 60 million transactions reflecting almost $100 billion of spend.”[7]  Further, AT&T’s compliance with this request, requiring it to research and remediate thousands of disbursements was estimated to take 23.6 years to complete.[8]  AT&T then offered to provide quarterly data for each year from 2008 through 2016.  Even this “compromise proposal included data related to approximately 20 million payments accounting to $30 billion of spend.”[9]  Kelmar rejected this compromise proposal by AT&T on January 28, 2019.  Over the next several months, AT&T continued to provide information while simultaneously attempting to communicate with Kelmar in order to agree on more manageable standards for the conduct of the audit.[10]

On September 19, AT&T received a letter indicating that the State believed it was at risk of being unable to complete the expedited exam within the requisite two-year period.  Hmm, only 60 million transactions were requested, should that be shocking?  On October 21, AT&T reached out to the State to indicate that Kelmar had been non-responsive to its objections to the scope of the document request despite AT&T’s continued good faith attempts to compromise and comply.  On October 28, Kelmar simply reiterated its original request.  No modification was made to the volume or scope of information requested.  Three days later, the State terminated AT&T’s participation in the expedited audit.  

On November 8, Delaware issued a subpoena for AT&T’s records.  On November 15, AT&T sent a letter to the State Escheator requesting a call to discuss the subpoena since it had still not received an explanation as to why such a large volume of data was necessary and why testing had not begun on what had been provided in order to practically refine the original voluminous request.  AT&T received a response on November 21 demanding complete responses to the original request.  On November 27, AT&T sent another letter to the State Escheator to confirm the scope of the information demanded.  On December 3, the State responded with a letter indicating that “Complete records (i.e., not limited to Delaware and unknown address) are required by the State… to construct a statistically valid and reasonable estimation…”[11]

A complaint was subsequently filed in federal court by AT&T on December 6.  At the time of filing, AT&T had “provided quarterly disbursement information for multiple years dating back to 2008 for 5 accounts, amounting to over 10.5 million lines of information, reflecting spend of over $16 billion.”[12]  AT&T did not, however, provide payee names or addresses out of concern for the privacy rights of its customers.

Constitutional Issues

AT&T is seeking a declaration from the court that Delaware impermissibly selected AT&T for an audit based on its perceived profitability; that the use of a self-interested party to conduct the audit is unconstitutional; that the document requests in this instance violate the Fourth Amendment’s right to be free from such unreasonable searches and seizures; that Delaware’s estimation methodology is both unconstitutional and preempted by federal common law; that the retroactive application of the State’s estimation procedure is unconstitutional; that the presumption of the existence of an unclaimed property liability where records are incomplete is unconstitutional; and that Delaware’s election to terminate AT&T’s participation in the expedited audit program violates the Due Process Clause of the Constitution.  In a case of déjà vu all over again, Delaware responded by filing an action in Chancery Court, seeking enforcement of its subpoena.  

As noted above, the majority of these constitutional issues have been raised by other holders in the past but remain unresolved for various reasons including that the State settled with other holders; the issues were previously deemed not ripe; and litigation on similar issues is still pending at both the state and federal level.  The AT&T complaint is, however, notably distinct from those previously filed because of the decision made by the Secretary of Finance to terminate AT&T’s participation in the expedited audit program.  As such, there can be no question regarding the ripeness of the dispute.[13]  The Due Process Clause of the Fourteenth Amendment of the federal Constitution provides that no state shall “deprive any person of life, liberty, or property without due process of law.”[14]  The demands of procedural due process require “that a deprivation of life, liberty, or property be preceded by notice and opportunity for hearing appropriate to the nature of the case.”[15]  This right to be heard was denied AT&T because the company was not provided an opportunity to state its objections prior to receipt of the October 31 letter terminating its participation in the program.  Pursuant to the statute, the decision to terminate a holder from the program is subject only to review by the Secretary of Finance and there is no subsequent process or ability to challenge the termination decision.

The termination of AT&T’s participation in the expedited audit is also problematic because it deprives the company of its statutorily-created right to a waiver of interest for completing the examination.  Delaware’s actions also appear retaliatory since AT&T objected to the scope of the document request from the outset of the audit in 2012 and is now being penalized for the consistent assertion of its constitutional rights.  

Conclusion  

While AT&T looks forward to relief for the circumstance-specific procedural due process issue that it is facing, holders in general will benefit greatly from conclusive direction by the federal court with respect to the other constitutional issues raised.  Until then, holders are faced with the excessive and burdensome document requests routinely issued by Delaware through its contingent fee auditors; concerns regarding confidentiality and data privacy issues; juggling competing state laws on multi-state audits; an estimation procedure that has already been determined to yield seriously misleading results; and confusion over which, if any, provisions of the 2017 law apply retroactively.  When viewed in conjunction with recent filings in the Univar matter, it is very clear that numerous questions remain regarding the execution of Delaware’s audit program.  Here’s hoping that these cases will finally provide the answers.      


[1] Complaint, AT&T Capital Services, Inc. et al, v. Geisenberger et al., No. 1:19-cv-02238-MN at *37 (D. Del. Dec. 6, 2019).

[2] Civ. No. 14-654-GMS (D. Del. June 28, 2016). The court here effectively noted the flaws in the prior statutory scheme and the audit methodology utilized.  Further litigation, however, has revealed that the Third Circuit believes that although the revision of the statute resulted in “some meaningful changes… the basic framework of the law remains unchanged…” Plains All American Pipeline, L.P. v. Cook, 866 F.3d 534 (3d Cir. 2017).

[3] Del. Code Ann. tit. 12, § 1172 (2019).

[4] Complaint, AT&T Capital Services v. Geisenberger at *15.

[5] Id. at *16.

[6] This request was not confined to Delaware-addressed property and required the production of data for checks with addresses in all states.

[7] Complaint, AT&T Capital Services v. Geisenberger at *17.

[8] Id.

[9] Id.

[10] Incidentally, Kelmar allegedly completed its review of accounts receivable on behalf of Delaware and found no underreported amounts.  AT&T or its affiliates have filed unclaimed property reports in Delaware since at least 1999.  In the last 15 years alone, AT&T has remitted over $400 million in unclaimed customer refunds, vendor checks, payroll, rebates and credit balances to various states throughout the country, including millions of dollars to Delaware. Complaint, AT&T Capital Services v. Geisenberger at *13.

[11] Complaint, AT&T Capital Services v. Geisenberger at *21.

[12] Id. at *17. AT&T rightfully maintains that “such records should be sufficient for Kelmar to test AT&T’s data.” AT&T also offered to revisit the State’s request in the event that material gaps in compliance were identified. Id. at *18.

[13] Whether or not a due process violation claim is ripe for decision depends on (1) the adversity of the parties’ interest; (2) the conclusiveness of the judgment; and (3) the utility of the judgment. See e.g., Plains All American Pipeline, L.P. v. Cook, 866 F.3d 534 (3d Cir. 2017).

[14] U.S. Const. amend. XIV, § 1.

[15] Complaint, AT&T Capital Services v. Geisenberger at *34 (citing Biliski v. Red Clay Consol. Sch. Bd. Of Educ., 574 F.3d 214, 220 (3d Cir. 2009).

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