In a new opinion released by the Delaware District Court hearing Temple-Inland, Inc. v. Cook, several challenges to current Delaware unclaimed property audit methodologies have survived motion by the State for dismissal, giving a boost to holders and holder advocates who believe current estimation and other audit methodologies run afoul of constitutional protections.
Although the court also denied Temple-Inland’s motion for summary judgment in the same opinion, the decision ultimately gives further traction to claims that Delaware’s current enforcement methods of its unclaimed property law deprives holders of due process and infringes on other constitutional limitations.
The Delaware District Court Decision
This most recent decision follows a motion by Temple-Inland for summary judgment and a motion by Delaware to dismiss Temple-Inland’s action for failure to state a claim and lack of jurisdiction. The court did uphold its jurisdiction over the case based on the fact that Temple-Inland is raising five federal preemption and U.S. Constitutional violations in its complaint, each of which is discussed in detail below:
In its Motion for Summary Judgment, Temple-Inland asserted that the Supreme Court’s holding in Delaware v. New York (507 U.S. 490 (1993)) restricts a state’s ability to collect unclaimed property to only those instances where a “precise debtor-creditor” relationship exists and recloses the ability to estimate an unclaimed property liability.
The Delaware District Court declined to extend that aspect of the Delaware holding to this case, highlighting that Delaware v. New York addressed disputes between two states, not a dispute between a state and private party, such as Temple-Inland. As such, Delaware’s motion to dismiss count I of Temple-Inland’s complaint was granted.
Substantive Due Process Violations
Temple-Inland raises a substantive due process violation based on Delaware estimation methodology. A substantive due process claim arises when a state act denies a person of, in this case, property without due process of law. Of the two types of substantive due process claims, Temple-Inland asserted that their right to due process was deprived as a result of non-legislative state action.
Specifically, Temple-Inland claims that because due process requires a holder to be liable in only one jurisdiction for an unclaimed property liability, the reliance of Delaware’s estimation methodology on uncashed checks escheated to other states, checks that were voided, reissued, and cashed by the payees, and checks payable to payees with addresses in other states, creates a situation where two or more states are laying claim to the same property.
While the Court acknowledged that the money claimed by Delaware has no identifiable owners, it pointed out that the money on which the estimate is based is traceable to identified amounts. Accordingly, the motion to dismiss count II was denied and the substantive due process claim survived.
Retroactive Law Application
The U.S. Constitution bans passage of laws which retroactively alter the definition of a crime or increase the punishment for a criminal act (ex post facto laws). The ex post facto prohibition applies to civil legislation, such as Delaware’s unclaimed property law, if the intent of the legislature in passing the provision was to impose a punishment or be punitive in nature.
At issue in this claim is Section 1115 of the Delaware Escheat Act which provides for an estimation of liability based on available records if the records of a holder are insufficient to permit the preparation of a report. Delaware asserts that the 2010 amendment was simply codification of a long standing practice in Delaware. Temple-Inland rebuts that claim saying that statistical sampling prior to 2010 was not generally accepted, more frequently occurred outside of Delaware, and was a penalty for inadequate record keeping.
While the court found “unpersuasive” Delaware’s claims that Section 1115 does not operate as a penalty (based in large part on commentary found in the Uniform Unclaimed Property Act), the court refused to grant Delaware’s motion to dismiss count III (and Temple Inland’s claim for summary judgment) as questions of fact remain about whether its adoption codified preexisting practices.
Temple-Inland has also alleged that the estimation employed by Delaware amounts to a taking without just compensation, a violation of the Fifth Amendment of the U.S. Constitution (as applied through the Fourteenth Amendment). In the escheat context, the U.S. Supreme Court has previously held that because it is a lack of action by the property owner and not the act of a state that causes property to be remitted, takings claims do not generally arise in application of unclaimed property laws.
Delaware asserted in its Motion to Dismiss that Temple-Inland lacked a property interest in the money claimed by Delaware, therefore no takings claim could stand. However, the Court has found that there are sufficient facts to claim that Temple-Inland had a property interest in some of the estimated liability as it may not be traceable to bona fide creditors. As the court observed, “if Delaware does not have the authority to escheat the property in question, then the seizure of such property without just compensation would be a violation of the Takings Clause.” Thus, Delaware’s motion to dismiss count IV was also denied.
Commerce Clause and Full Faith and Credit Clause Claims
Lastly, the Delaware Court addressed Commerce and Full Faith and Credit Clause claims raised by Temple-Inland. Temple-Inland’s Commerce Clause claim is based on an assertion that the estimation methodology affects interstate commerce in other states outside of Delaware (under the so-called “dormant” commerce clause doctrine).
Similarly, Temple-Inland’s Full Faith and Credit claim is based on Delaware’s assessment of property owned by owners in jurisdictions that expressly exempt the property from escheatment. Thus, according to Temple-Inland, by requiring payment to Delaware for property that other states exempt, Delaware is interfering with commerce in those states.
Delaware responded to these claims by citing U.S. Supreme Court precedent that allows a state of incorporation to escheat property if a state of last known address “does not provide for escheat” and arguing that because the assessment is made against the holder and not the state, no interference with interstate commerce arises. The Court denied Delaware’s motion to dismiss the “potentially meritorious” Commerce Clause and Full Faith and Credit Clause claims, saying they needed to be more fully explored later in the litigation.
Although Temple-Inland did not emerge from the opinion with a clear victory on its Motion for Summary Judgment, the judge has acknowledged that several legitimate questions exist as to the constitutionality of Delaware’s estimation methodologies. All eyes will be on what happens next, and whether Delaware will make attempts to moot Temple-Inland’s claims to spare further questioning of its audit program.