Category: lawsuits

Delaware and Temple Inland Settle – Questions to Remain Unanswered

In late June, 2016 a Delaware federal court issued a decision ruling that Delaware’s unclaimed property audit and estimation practices “shock[ed] the conscience” of the court and likely violated the due process rights of Temple Inland (a Delaware company being subjected to an unclaimed property audit on Delaware’s behalf by a private auditing firm).  While the court’s holding was big news in the unclaimed property industry and signaled potentially seismic changes in the way unclaimed property audits are conducted, the real work was left to be done:  the Court expressly left open the issue of how Delaware’s violations were to be remedied.

Even with this important step left to be taken, the holder community was understandably excited that — finally — there would be some answers concerning (a) the interplay between estimation and availability of records; (b) the proper methods for calculating and sourcing historical unclaimed property liabilities; and (c) the retroactivity of Delaware’s estimation authority.

Well, it seems that we will have to wait a little longer.  According to a an Associated Press story in Saturday’s Chicago Tribune, the parties in the Temple Inland case reached a settlement resolving the matter in full.  According to a joint-motion to dismiss the case filed by the parties on Friday, Delaware and Temple Inland have “entered into a voluntary settlement agreement that fully and finally resolves all claims, including all claims that were asserted, or that could have been asserted, in the case and therefore the matters in dispute between Plaintiff and Defendants have been resolved.”

Accordingly, while the Temple Inland case showed that courts are willing ask the hard questions about Delaware’s unclaimed property audit practices, it ultimately left those questions unanswered.

Temple Inland Scores Win in Estimation Suit Against Delaware — How Big Remains to Be Seen

In 2014, Temple Inland filed a lawsuit against the State of Delaware, challenging the results and methodology of an unclaimed property audit performed by that state.  As part of a 2008 audit, the State of Delaware assessed Temple Inland unclaimed property liabilities for a 22 year time period, allegedly because of Temple Inland’s failure to maintain records (notwithstanding the fact that no Delaware law requires a holder to keep such records).  After availing itself of the state’s administrative appeal process, Temple Inland filed a lawsuit in feeral  challenged the state’s use of estimation in the audit context, arguing that the technique (1) was preempted by the Supreme Court’s Texas v. New Jersey decision; (2) violated Temple Inland’s rights under the Due Process Clause of the Constitution; (3) represented an unconstitutional “taking” of Temple Inland’s property; and (4) violated the ex post facto clause of the Constitution.

Initially, both parties moved for a quick knockout — Temple Inland sought a preliminary determination that the use of estimates was completely prohibited by the U.S. Supreme Court’s decision in Texas v. New Jersey, while Delaware asked the court to dismiss the suit in its entirety.  In March 2013, the court denied both those arguments, allowing the case to continue.

Later both parties moved for summary judgment (a ruling providing that there is no need for a trial because one party is right as a matter of law) on the remaining claims that estimation was barred by the Due Process Clause, represented an unconstitutional taking of Temple Inland’s property, or violated the ex post facto clause.  The court ruled on those motions yesterday.

The Court Rules Against Delaware on Due Process Claim, Leaves Remedy Open

The court began its substantive opinion with a section titled “Delaware’s Dependence on Unclaimed Property Revenue.”  While none of the following facts will be particularly startling to unclaimed property professionals, seeing them acknowledged by a federal judge is notable.  In  particular, the court recognized:

  • Unclaimed property represents Delaware’s third largest revenue source;
  • In 2007, Delaware transferred over $350 in unclaimed property to the general fund, but only returned $20 million to owners; and
  • It is estimated that 90% of the property collected by Delaware is owner-unknown property (meaning it will likely never be paid out to its rightful owner).

Against this backdrop, the court evaluated whether Delaware’s use of estimation was consistent with its obligation to provide Temple Inland with due process of law.  As the court noted, the key protection of the due process clause is to prevent “arbitrary” government action.  Under the relevant caselaw, the court recognized, action by a government agency like the Delaware Department of Finance is deemed to be arbitrary when it “shocks the conscience” of the court.  While noting that no clear precedent existed for the court to determine whether any of Delaware’s individual actions met this threshhold, the court concluded that “in combination, defendants’ executive actions shock the conscience.”

In particular, the court singled out the following actions for criticism:

  • The fact that Delaware attempted to avoid the three or six year statute of limitations (which does not apply where no report has been filed) by not requiring negative reports and by not (apparently) keeping copies of reports filed by holders;
  • That Delaware never gave the holder notice that it must keep records of unclaimed property compliance (Delaware has no unclaimed property records retention statute) then tried to capitalize on the lack of such records to justify its estimation practices;
  • Delaware’s attempt to impose the estimation statute retroactively;
  • The mechanics of the estimation process itself.  In particular, the he court intimated that Delaware may not properly take custody of estimated sums where the underlying liabilities upon which those estimates are based relate to amounts owed in other states.  Specifically, the court explained that “[I]f the property in base years shows an address in another state, then the characteristic of that property has to be extrapolated into the reach back years;” and
  •  The potential for double liability if other states estimate the same period.

While the court ruled that this conduct amounted to a violation of Temple Inland’s due process rights, it did not decide the appropriate remedy.  Instead, it deferred to Delaware for suggestions, explaining that “[i]t is defendants who are best able to know which remedy will be the most palatable in its anticipated efforts to normalize the enforcement of its unclaimed property laws.  Thus, the court will defer its decision on the subject of an appropriate remedy until another day.”

The Court Defers the Takings Clause Claim

The court made no final decision on the “taking” claim.  Pursuant to the Fifth Amendment (made applicable to the states by the Fourteenth Amendment) a state may not take private property for public use without just compensation.  Temple Inland argued that, by demanding estimated property in the context of an unclaimed property audit, the state was impermissibly taking Temple Inland’s property for public use.  The court rejected the absolute nature of this argument.  While the court recognized that an inaccurately performed estimate could result in the taking of a holder’s property, the court held “reasonable” estimation, in and of itself, did not represent an unconstitutional taking of a holder’s property.  Noting that the parties had not yet presented evidence on whether the estimation at issue was “reasonable,” the court deferred a decision on this issue.

The Court Rejects the Ex Post Facto Challenge

The court found in favor of Delaware on the ex post facto cause claim.  The Constitution’s ex post facto clause (Art. I, Sec. 10) prevents states from retroactively punishing an act that was not prohibited at the time of the act.  As the court recognized, however, violations of the ex post facto clause have generally only been found in connection with criminal statutes, or civil statutes that operate as criminal punishments.  Because the court found that the estimation provisions of Delaware’s unclaimed property law were civil, not criminal, in nature it rejected this claim.

The Temple Inland decision is no doubt a big win for the unclaimed property holder community that, for years, has been complaining about Delaware’s overly aggressive and at times seemingly arbitrary estimation practices.  That said, the Court has expressly left open the issue of how Delaware’s violation is to be remedied.  Until the court’s ruling is given some practical effect, it is unclear just how much of a game changer this ruling will be.

Lost + Found: California Lawsuit, Buckeye Bucks, North Carolina Changes

California Files Unclaimed Property Lawsuit — According to an article in LifeHealthPro, the California State Controller’s office has filed a lawsuit against Kemper Corporation – a company operating life insurance subsidiaries – for failing to turn over records and data requested in connection with California’s unclaimed property laws.  The article notes that this is the second such lawsuit filed by California seeking access to unclaimed property compliance information.

Buckeye State Gambler Pennies Add Up — State Hits Jackpot — An article in The Columbus Dispatch demonstrates how the delivery of an aggregate of incredibly small dollar items to the state pursuant to unclaimed property laws results in real money.  The article recounts how slot players and others often fail to redeem credit vouchers worth only a few cents.  After time, those unclaimed credit vouchers get reported and delivered to the state pursuant to the Ohio Unclaimed Property Act — to the tune of over $800,000 thus far.

North Carolina Makes Technical Changes to Unclaimed Property Act — The CCHGroup blog posted a recent article concerning some technical changes to North Carolina’s unclaimed property act that went into effect on July 18.  As the article recounts, among other things the Act has been amended to remove some fees and paperwork burdens placed on holders.

Lost + Found: NC Holder Seminar, WV Lawsuits, Bona Vacantia in the UK

North Carolina to Offer Holder Education Seminar — The North Carolina Treasurer’s Department is offering a “Holder Education and Reporting” seminar on July 17th at the Quorum Center in Raleigh.  A complete copy of the agenda, and registration information, can be found here.  The seminar is free, but according to the website, limited to the first 150 registrants.

West Virginia Sues Insurers  — In October of 2012, West Virginia sued 10 insurers over their attempts (or lack thereof) to notify beneficiaries of payable benefits.  Now, according to an article on LifeHealthPro, West Virginia has brought suit against 69 more insurers alleging violations of that state’s unclaimed property act.  According to the article, insurers were identified by market share.

UK Bona Vacantia Pot Doubles in Past Year — As we’ve mentioned before, modern US unclaimed property laws have their source in the old common law doctrine of bona vacantia (“ownerless goods”).  Historically, the most typical example of such goods are the assets of a person who dies without a will or any known heirs.  In the UK, this common law doctrine is still alive and well.
Indeed, almost too well – according to a recent blog post on the UK edition of the Huffington Post, the mount of funds held on account of estates with no wills or known heirs in the UK has doubled in the past year to about 33.5 million Pounds (appx. $51.2 million). 

Breaking News: Delaware Sued Over VDA/Audit Demand

Philly.com has an article from Randall Chase of the Associated Press with the story of a lawsuit by Select Medical against the State of Delaware arising from a VDA initiated with the Delaware Division of Revenue*.  According to the complaint, which was filed in Delaware federal court on Wednesday, Select Medical entered into a VDA with Delaware in 2006.  As a result of its own review, it attempted to close out the VDA in 2008 with a payment of approximately $20k of Delaware (in addition to some $300k filed in other states).

In response to this payment (again, according to the allegations of the Complaint) Delaware initiated an audit of the company, going back to 1981.  As a result of that audit, Delaware demanded an additional $300k from Select.  The lawsuit raises a number of challenges to the Division of Revenue’s normal audit practices including:

  • the use of estimation prior to the enactment of Delaware’s statute authorizing estimation;
  • the alleged use of “arbitrary and capricious” estimation methods;
  • the inclusion of non-dormant property in Delaware’s estimation procedures; and
  • Delaware’s claimed disregard of the Texas v. New Jersey priority rules.

 The Complaint seeks a preliminary injunction preventing Delaware from demanding the $300k audit assessment, or imposing interest and penalties on that assessment, until such time as the court can review the case.  The case is named Select Medical Corp. v. Cook, et al., Case No. 1:13-cv-00694 in the United States District Court for the District of Delaware.

* Note that the VDA program described in the complaint appears to be the Division of Revenue’s VDA program, not the temporary VDA program currently being offered by the Delware Secretary of State.

Unclaimed Federal Tax Refunds & What Happens When Sovereigns Collide

 According to The Asbury Park Press, the federal government is holding more than $917 million in unclaimed tax refunds from 2009 and the deadline for requesting a refund — April 15 — is fast approaching.  According to the article the number of taxpayers affected is significant:  more than 30,000 in New Jersey, over 86,000 people in Texas, and more than 100,000 in California. 

This begs the question:  what happens to these tax refunds if they remain unclaimed, do they get turned over to the states as unclaimed property?  Consider the following:

Unclaimed property practitioners are familiar with the seemingly continued and unrelenting expansion of state unclaimed property laws.  Where, historically, those laws were used to provided rules for the disposition of the estates of those who died without heirs, they now touch upon nearly every party of modern economic life:  bank accounts, brokerage accounts, checks, gift cards, benefits, rebates, insurance proceeds . . . . the list is nearly endless.  However, as state governments become increasingly reliant upon using unclaimed funds to balance state budgets and provide a source for state revenue, pressure increases on state legislatures and/or unclaimed property administrators to expand the laws even further, or to audit even more aggressively, to continue to be able to feed the beast.  As states recognize that they can only squeeze so much revenue from corporations and financial institutions, they will start to look elsewhere.  One such place that they may look is to federal government programs.  

After all (the argument would go), one of the rationales for state unclaimed property laws is that the state “steps into the shoes” of the rightful owner and takes custody of the property in that owner’s name.  See Great Iowa Treasure Hunt FAQs (explaining that “The courts have long maintained the states’ rights are derivative of the missing owner. In other words, the state stands in the shoes of the missing owner.”)  Under this theory, there would seem to be no reason why property held by the federal government is any different.

The “steps into the shoes” theory, however, is not the only policy supporting unclaimed property laws.  Another is the “common benefit” theory, which generally provides that when property is abandoned or unclaimed, the property is better used for the benefit of all citizens (i.e., by escheating the money to the state) rather than having the holder (who, in most cases, has no entitlement to the funds) receive a windfall because of the owner’s failure to take the property.  Under this theory, the property arguably should remain with the federal government, where it can be used for the common benefit of all citizens.  Similarly (the argument would go) there is no reason why the state should be deemed a better custodian of unclaimed funds than the federal government.  Indeed, the federal government has its own site providing links to searchable databases of unclaimed funds relating to government programs.

So, what happens when sovereigns collide?  A relatively recent case out of New Jersey suggests one possible answer.  Last year, the states of New Jersey, Montana, Oklahoma, Missouri, Pennsylvania, Kentucky and North Carolina filed an action in federal court seeking to require the federal treasury to turn over unclaimed savings bonds that the states alleged had become abandoned pursuant to their state unclaimed property laws.  The amounts at issue were significant.  The states sought turnover of some $1.6 billion in matured bonds and some estimate that the amount of matured but unredeemed bonds held by the Treasury Department is about $16 billion. 

Ultimately, the federal district court dismissed the case, raising the doctrines of federal preemption (i.e., that federal law is superior to, and cannot be trumped by, a conflicting state law) and intergovernmental immunity (i.e., that one government cannot threaten civil or criminal penalties to another government for acts carried out in an official capacity).  This decision was affirmed by the United States Court of Appeals  in Philadelphia, which held that “federal statutes and regulations pertaining to United States savings bonds preempt the States’ unclaimed property acts insofar as the State seek to apply their acts to take custody of the proceeds of the matured but unredeemed savings bonds.”  The Court also agreed with the district court that the states’ claim was barred by the doctrine of intergovermental immunity, reasoning that allowing application of state unclaimed property laws to the federal government “would result in a direct regulation of the Federal Government [by a state] in contravention of the Supremacy Clause.”

Apparently reluctant to give up on this pot of funds, the objecting states filed a Petition for Certiorari with the Supreme Court of the United States, asking the high court to review and reverse the appellate court’s decision.  That petition is currently under review.

Unless and until the Supreme Court reverses the decision of the Court of Appeals in the savings bond case, it is unlikely that the states will see be able to take custody of property held by the federal government under state unclaimed property laws.  However, with both the state and federal governments scrambling to raise revenue, cut expenses, and balance budgets, these inter-government fights over other people’s money are sure to continue.

Unclaimed Life Insurance Updates

A few items of note concerning the long running regulatory investigation into the unclaimed property practices of life insurers, and their use of the Death Master File to determine whether policies are eligible to be paid.  Earlier this week, NBC’s The Today Show posted an article estimating the value of unclaimed insurance policies at over $1 billion.  The story provides a good summary of the issues, and the history of the investigations to date.

Of course, wherever there is a giant pot of money reported, people seeking a share of it will not be far behind.  According to a report by Arthur Postal on LifeHealthPro, at least one plaintiffs’ lawyer has commenced a class action against insurer John Hancock seeking damages for delayed notification of life insurance benefits.  For its part, John Hancock has already been investigated — and reached a settlement — with a variety of states concerning this particular issue.  Thus, it appears that the insurers’ fears of having the state investigations being used to fuel private class action lawsuits is coming to pass.  It is doubtful that this will be the last such case.

West Virginia Treasurer Sues 10 Insurance Companies Over Unclaimed Property Compliance

When we last left the “Death Master File” controversy intersecting life insurance policies and the unclaimed property laws, it looked like things were winding down.  A variety of companies announced settlements, Congress got involved, and state insurance regulators were issuing revised standards for compliance.

Despite those settlements, West Virginia Treasurer John Purdue has now filed suit against many of the same insurance companies alleging that they failed to deliver unclaimed insurance policies to that state in accordance with the West Virginia Unclaimed Property Act.  

In most situations, either an heir or the administrator of the deceased’s estate will notify the insurer that the policy has become triggered, and often there is no issue.  These lawsuits center upon what, if anything, the insurance companies are required to do to determine whether or not an insured has died in the absence of such notification.  According to the Charleston Gazette, the lawsuits allege that “a reasonable exercise in good faith and fair dealing statutorily imposed upon defendant includes an annual examination of life insurance policy holders to determine if they are deceased or three years past the applicable limiting age.”  Again, because this topic may come up in our professional capacity, we are not going to analyze this question in any great detail except to say that the unclaimed property laws are generally silent as to how (or whether) the insurer has such an obligation. 

In any event, it seems the story isn’t quite over.

No "Easy Button" for Delaware VDAs: Pricetag of Staples Settlement Disclosed — $8.9 Million

In 2010, office supplies company Staples, Inc. got into a public dispute with the Delaware State Escheator, over the latter’s attempts to collect unclaimed property allegedly due from Staples.  As recounted here by Business Week, the controversy started when Staples approached Delaware in connection with a “Voluntary Disclosure Agreement” or VDA.  Pursuant to the VDA program, a holder that is not under audit can voluntarily approach the state and disclose past liability.  The state, in turn, generally agrees to waive interest and penalties that might otherwise be assessed on the property.  Here, Staples ultimately admitted owing approximately $150,000 in past due liability.

As many in this industry know, however, doing a VDA with Delaware is not as simple as it seems.  Here, Delaware refused to accept the results of Staples’ VDA, and commenced its own audit.  Ultimately, according to Business Week, the state presented Staples with an assessment of $3.9 million.  The litigation moved along for about two years in Delaware state court.

Earlier this summer, the parties jointly announced the settlement of the matter, and noted that the terms were “confidential.”  Apparently, that did not sit well with the Associated Press, which challenged the parties’ assertion of confidentiality.  The AP ultimately prevailed:  according to CBS News, among other sources, we now know the full pricetag:  $8.9 Million.  To put that number in context, here are some things you can buy with $8.9 million:

Breaking News: Costco Sues Washington State Over Unclaimed Rebates

According to an article by Vanessa Ho in Tuesday’s Seattle Post-Intelligencer, Costco – the famous big box grocer/wholesaler – has just sued the State of Washington over $3 million in unclaimed rebates.  According to the article, Costco alleges that it should not have to turn over the amounts requested by the state because it has engaged 3rd party rebate fulfillment houses to manage its rebate programs and that it does not retain the amounts at issue.

As those in the unclaimed property field know, this is far from the first lawsuit between holders and states regarding unclaimed rebates.  In 2006, some thirty-six states, led by Iowa, sued Young America Corporation – a rebate fulfillment house – over the failure to turn unclaimed property over to the states.  That lawsuit eventually resulted in a number of settlements between the states and Young America’s customers.  We will continue to follow the developments in Washington.