Tag: estimation

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.

Florida Senate Bill 970 — Will Florida Expand the Use of Estimation?

One of the most controversial issues surrounding unclaimed property audits is estimation — the use by auditors of statistical sampling and extrapolation to calculate a holder’s historical unclaimed property liability in years that there are no researchable records available. Holders and states dispute, among other things, when such estimation is appropriate, how it should be performed, and whether estimation can be used at all when not specifically authorized by statute. Estimation has been a commonly contested issue arising in litigation between holders and states, and is one of the issues hotly contested in connection with the proposed revision of the Uniform Unclaimed Property Act.

While states, auditors, holders, and holder advocates dispute a number of issues with regard to estimation, until now they all agreed on at least one thing: that unclaimed property liabilities for “estimated” years (where actual records were not reviewed) were all payable to the holder’s state of incorporation. As you may recall from our post about unclaimed property jurisdictional rules, unclaimed property generally gets turned over to the state where the owner’s last-known address is located. Where the holder has no owner-address information, unclaimed property gets reported to the holder’s state of incorporation. Using that same logic, estimated liabilities (which, being a simple calculated liability are by definition not associated with owner names) have historically been escheatable only to the holder’s state of incorporation.

Recently introduced legislation in Florida seeks to change all that. Florida House Bill 783 / Senate Bill 970 proposes to amend the audit provisions of the Florida Unclaimed Property Act to provide:

If the records of the holder that are available for the periods subject to this chapter are insufficient to permit the preparation of a report of the unclaimed property due and owing by a holder, or if the holder fails to provide records after being requested to do so, the amount due to the department may be reasonably estimated, regardless of whether the holder is incorporated, formed, or organized in this state.

In other words, the proposed legislation not only expressly authorizes Florida’s auditors to estimate the liabilities of holders incorporated in states other than Florida, but it also provides the auditors with the authority to estimate “the amount due to the department” (i.e., Florida). That runs contrary to most auditors’ current practices, and is likely to cause significant disputes among the states, as most states clearly instruct that all estimated property gets reported and delivered to the holder’s state of incorporation. While holders may be concerned by this development, it is really the private auditing firms that run the risk of being forced to try to reconcile multiple state demands for the same property.

The legislation is currently in committee in both the Florida House and Senate.