State v. At&T Inc.
| Decision Date | 10 July 2020 |
| Docket Number | C.A. No. 2019-0985-JTL |
| Citation | 239 A.3d 541 |
| Parties | State of Delaware, DEPARTMENT OF FINANCE, Plaintiff, v. AT&T INC., Defendant. |
| Court | Court of Chancery of Delaware |
Melanie K. Sharp, Martin S. Lessner, Mary F. Dugan, Michael Laukaitis, YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Counsel for Plaintiff.
Brian M. Rostocki, Benjamin P. Chapple, REED SMITH LLP, Wilmington, Delaware; Sara A. Lima, REED SMITH LLP, Philadelphia, Pennsylvania; R. Gregory Roberts, REED SMITH LLP, New York, New York; Counsel for Defendant.
LASTER, V.C.
Escheat is a procedure by which "a sovereign may acquire title to abandoned property if after a number of years no rightful owner appears." Texas v. New Jersey , 379 U.S. 674, 675, 85 S.Ct. 626, 13 L.Ed.2d 596 (1965). Title 12, Chapter 11, Subchapter II of the Delaware Code, titled "Unclaimed Property," requires that a person holding property that meets certain requirements file a report identifying the property and escheat it to the State. See 12 Del. C. §§ 1130 – 1190. Because the subchapter contemplates escheat, it is frequently called the "Escheat Law."
The Escheat Law designates the Secretary of Finance (or the Secretary's delegate) as the "State Escheator."1 The Escheat Law charges the State Escheator with administering and enforcing the Escheat Law and authorizes the State Escheator to conduct examinations of companies’ books and records to determine whether they have complied with the statutory requirements.
Acting on behalf of the State Escheator, the Department of Finance began examining the books and records of AT&T, Inc. Except for two categories of information, AT&T agreed to produce the information that the Department sought. On November 8, 2019, the Department issued an administrative subpoena for the two categories of information. AT&T refused to comply and filed an action against the State Escheator and two other state officials in the United States District Court for the District of Delaware (respectively, the "Federal Action" and the "Delaware District Court"). There, AT&T contends that the officials took actions that violated federal law and the United States Constitution.
The Department responded by filing this action to enforce the subpoena. AT&T did not answer the complaint; it responded instead with a motion to stay this action or to modify or quash the subpoena. In its singular motion, AT&T requested three types of relief, each of which implicates a different legal framework.
First, AT&T asked to stay this action in favor of the Federal Action. Recent precedent teaches that the enforceability of the administrative subpoena raises issues of state law that could moot or otherwise affect the federal and constitutional analysis. As a matter of judicial efficiency, this action should go first. The request for a stay is denied.
Second, AT&T argued that AT&T's affiliates are necessary parties who must be joined if this action is to proceed. AT&T controls its affiliates, and the Escheat Law authorizes the State Escheator to obtain records from subsidiaries and affiliates. AT&T has always filed reports and interacted with the State Escheator on behalf of its affiliates. In this action, AT&T can raise arguments on behalf of its affiliates and protect their interests. If the subpoena is enforced, then AT&T can cause its affiliates to comply. The affiliates therefore are not indispensable parties, and the request to join AT&T's affiliates is denied.
Third, AT&T asked that the subpoena be quashed or modified because the Department exceeded the authority granted to the State Escheator under the Escheat Law. This motion raises procedural and substantive issues of first impression. This decision holds that the Escheat Law granted the State Escheator the authority to issue the subpoena, which the Department exercised. That, however, is not the end of the analysis. Precedents governing the enforcement of administrative subpoenas in other contexts recognize that a court may decline to enforce a subpoena that is technically authorized if doing so would represent an abuse of the court's process. In this case, AT&T has met its burden to show that the scope of the subpoena is so expansive that enforcement would constitute an abuse. Although the court could have permitted the Department to supplement the record with an additional explanation as to why the subpoena should be enforced, the Department eschewed that opportunity, insisting that it wanted the court to issue a final, appealable order.
This court could also modify the subpoena. Only AT&T proposed modifications, and its limitations tracked its arguments regarding the scope of the State Escheator's legal authority, which this decision rejects. The Department should be given the opportunity in the first instance to frame a narrower subpoena. This decision therefore quashes the subpoena in its current form.
The facts are drawn from the parties’ submissions in connection with AT&T's motion.
AT&T is a Delaware corporation headquartered in Dallas, Texas. Since 1999, AT&T has filed unclaimed property reports with the State Escheator on a consolidated basis with thirty-three of its affiliates (the "Affiliates"). For simplicity, except where necessary to address AT&T's argument about joining necessary parties under Court of Chancery Rule 19, this decision refers only to AT&T. See Part II.B., infra .
On January 12, 2012, the Department notified AT&T that it intended to examine AT&T's books and records to confirm that it was complying with the Escheat Law. Compl. Ex. A. The Department designated Kelmar Associates LLC as its agent to conduct the review. The Department generally uses Kelmar to conduct audits and pursue escheatable property, and Kelmar receives as compensation a percentage of the escheated property. See Dkt. 10 at 7. The fact that Kelmar is compensated contingently has obvious implications, beneficial and otherwise, for its incentives to investigate companies, pursue escheatable property, and obtain favorable settlements.
On February 10, 2012, Kelmar sent AT&T an initial document request. Compl. ¶ 16. Over the next several years, Kelmar sent AT&T additional requests.
The parties refer to one of the requests as the "Rebates Request." Id. Ex. J Ex. 2; see id. ¶ 17. It asks AT&T to identify all general ledger accounts used by AT&T since 1992 "to track its rebate accrual and expense activity along with the period of time ... each account was utilized to track this activity." Id. Ex. J Ex. 2 at 2. The Rebates Request also asks AT&T to identify each third-party administrator that it used to issue rebates to consumers. Id. The Department thus seeks records going back twenty years from the commencement of the audit.
In June 2016, the Delaware District Court issued its ruling in Temple-Inland, Inc. v. Cook , 192 F. Supp. 3d 527 (D. Del. 2016). In that decision, the Delaware District Court granted summary judgment in favor of Temple-Inland, Inc., holding that Delaware's then-prevailing methods of auditing companies for and collecting unclaimed property violated the substantive due process clause of the United States Constitution.
Like AT&T, Temple-Inland was a Delaware corporation with its principal place of business in Texas. In 2008, the State Escheator notified Temple-Inland that it was commencing an audit to determine whether there were deficiencies in its reporting and escheating of unclaimed property during the previous twenty-two years—from January 1986 until December 2007. Id. at 531–32. The State Escheator recognized, and the record in the Temple-Inland case established, that a standard records retention policy is typically seven years. Id. at 534. As in this case, Kelmar conducted the audit for the State Escheator and would be compensated on a contingent basis with a percentage of the escheated property. Id.
The audit focused on Temple-Inland's issuance of checks for accounts payable and payroll. Temple-Inland was only able to produce complete records dating back to 2003 for accounts payable and dating back to 2004 for payroll. Id. Temple-Inland produced all of the unclaimed property reports it had filed in Delaware from 1998 to 2008, a couple of reports filed before 1998, and two audit reports filed in Texas covering 1985 until 2005. Id.
When a company lacks sufficient records for a period to determine whether property was subject to escheat, the State Escheator estimates the amount of abandoned property that the company should have escheated during that period. For Temple-Inland, the State Escheator estimated the amount of property subject to escheat for its accounts payables from 1986 to 2002 and for its payroll from 1986 to 2003. Id. at 535. The estimates resulted in amounts of abandoned property that were an order of magnitude higher than what Temple-Inland reported during the period for which records were available. Id. at 537–38.
Temple-Inland pursued an administrative appeal and secured only minor changes to the State Escheator's decision. Temple-Inland then filed suit in the Delaware District Court, contending the State Escheator's "audit and assessment of [Temple-Inland's] unclaimed property liability" violated federal law, including provisions of the United States Constitution. Id. at 541.
The Delaware District Court held that Temple-Inland was challenging a form of executive action that would violate federal substantive due process protections " ‘only when it shocks the conscience.’ " Id. (quoting Ecotone Farm LLC v. Ward , 639 Fed. Appx. 118, 125 (3d Cir. 2016) ). The Delaware District Court found that the following combination of factors, taken together, "shock[ed] the conscience" and resulted in a due process violation:
[D]efendants[ ] (i) waited 22 years to audit plaintiff; (ii) exploited loopholes in the statute of limitations; (iii) never properly notified holders regarding the need to maintain...
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State v. AT&T Inc.
...judgments, believes that the disputed issues can only be resolved after hearing from witnesses.1 State of Del., Dep't of Fin. v. AT&T Inc. , 239 A.3d 541, 547 (Del. Ch. 2020).2 12 Del. C. §§ 1130 -1190. Escheat means the State assumes title to or custody of unclaimed property. Note, Origins......