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Unclaimed accounts payable or payroll?

A very interesting unclaimed property memorandum opinion was recently issued by the U.S. District Court for the District of Delaware in Temple-Inland, Inc. v. Cook, et al. After the State of Delaware conducted an audit going back 22 years and assessed Temple-Inland a liability of $2,128,834.13, which was comprised of unclaimed accounts payable and payroll, Temple-Inland filed a complaint challenging that the State’s actions violate federal common law and several constitutional provisions, including substantive due process, the takings clause, and the ex post facto clause. The District Court considered the constitutional limits to Delaware’s enforcement of its unclaimed property laws. Upon review, the District Court concluded, in part, “[t]o put the matter gently, [the State] ha[s] engaged in a game of ‘gotcha’ that shocks the conscience.”

Unclaimed or abandoned property generally includes any property held by a business where the business is not the owner of the property and there has been no contact with the owner for the period of dormancy; certain types of property are exempt. Unclaimed property can include money in a savings or checking account, stocks, uncashed dividend, payroll or traveler’s checks, unredeemed money orders or gift certificates, life insurance policies, safety deposit box contents, etc. All fifty states, as well as the District of Columbia, have unclaimed property laws; which state may make a claim is governed by the U.S. Supreme Court’s established set of rules under Texas v. New Jersey and its progeny, referred to as the “Texas cases.” As a result, all companies should pay attention to what sorts of unclaimed property they may have and to understand their responsibilities to report and remit such property to one or more states to avoid what could be stiff civil penalties. Those in the construction industry, for example, may be holders of unclaimed accounts payable and payroll.

Temple-Inland is a Delaware corporation that manufactures corrugated packaging with its principal place of business and primary operations located in Texas, Indianapolis and Indiana. In 2008, the State of Delaware audited Temple-Inland for compliance with Delaware’s unclaimed property law. In the State’s notice to Temple-Inland that it would be conducting an unclaimed property audit, the State confirmed that “I’m sure all records are being retained under standard retention policies,” which is typically 7 years. The audit ultimately covered from January 1986 to December 2007. Temple-Inland was only able to produce complete records back to 2003 for accounts payable and 2004 for payroll, and unclaimed property reports it filed in Delaware from 1998 to 2008, a couple of reports filed before 1998, and two audit reports by Texas, covering 1985 to 2005. For the several years in which Temple-Inland did not have complete records, the State estimated the amount of unclaimed property; Legislation enacted in 2010, permits the State to require the holder of the property to report and pay “reasonably estimates to be due and owing on the basis of any available records of the holder or by any other reasonable method of estimation” (12 Del. C. § 1155).

The District Court provided a summary of its conclusions on Temple-Inland’s substantive due process  challenge:

“[The State] (i) waited 22 years to audit [Temple-Inland]; (ii) exploited loopholes in the statute of limitations; (iii) never properly notified holders regarding the need to maintain unclaimed property records longer than is standard; (iv) failed to articulate any legitimate state interest in retroactively applying Section 1155 except to raise revenue; (v) employed a method of estimation where characteristics that favored liability were replicated across the whole, but characteristics that reduced liability were ignored; and (viii) subjected [Temple-Inland] to multiple liability. To put the matter gently, [the State] ha[s] engaged in a game of ‘gotcha’ that shocks the conscience.”

With respect to the applicable statute of limitations, the District Court noted that the State was seeking a deficiency payment from Temple-Inland for each year from 1986 to 2002 — more than 6 years past the date a report was or should have been filed. In order to do so, the District Court confirmed that the State “must show they fit within the ‘at any time’ exception of Section 1158.” It noted that the State did not claim that Temple-Inland filed false or fraudulent reports. Rather, the State assumed that Temple-Inland had unclaimed property but filed no report, ignoring that Temple-Inland may have had no unclaimed property or filed a report but it cannot be proven because the copies were lost or destroyed.

The District Court thereafter concluded that “a reasonable estimation of a holders’ unclaimed property liability is not an unconstitutional taking,” and that “a balancing of the Mendoza-Martinez factors weighs overwhelmingly in favor of the conclusion that Section 1155 does not have a criminally punitive purpose or effect” and, “as a matter of law, [Temple-Inland] has not stated a claim that [the State’s] application of Section 1155 violates the ex post facto clause.”

Interesting facts noted by the District Court include:

  • “Unclaimed property is Delaware’s third largest revenue source, making it a ‘vital element’ in the state’s operating budget.”
  • “The difference between the amount collected by the state and the amount returned to owners shows that a large percentage of unclaimed property revenue remains with the state.”
  • “[I]n 2007, approximately $364.9 million in unclaimed property went to the state’s general fund… [A]round that same time, no more than $20 million was returned to owners.”
  • “In 2014, that number jumped to around $100 million, because Delaware’s Department of Finance ‘started doing a better job processing claims.'”
  • “[A]n estimated 90% of the unclaimed property collected by Delaware is owner/address unknown property.”
  • “Historically, Delaware has never received more than 14,000 unclaimed property reports a year, yet over 680,000 entities are incorporated in the state.”
  • “Delaware has long known that holders’ low level of compliance is not due to ‘willful noncompliance,’ but a lack of awareness of reporting obligations.”
  • “[A] ‘significant portion’ of Delaware’s unclaimed property revenue comes from its enforcement activities.”

It remains to be seen whether the State will appeal this decision. Nonetheless, this decisions serves as an important reminder that all companies should carefully considered whether they are holding property that belongs to another and, if they are, whether they are required to report and remit the property to one or more states to avoid running afoul of the states’ unclaimed property law.