Litigation Update

Heather Gabell, J.D., Director of Compliance

March 25, 2019

Univar, Inc. v. Geisenberger, et al.

New Unclaimed Property Lawsuit Brings Delaware’s Audit Enforcement Tactics to the Forefront (Again)

On December 3, 2018, Univar, Inc. filed an action in U.S. District Court against the Delaware State Escheator and other officials with the Department Finance for declaratory and injunctive relief, on the grounds that an unclaimed property audit initiated by Kelmar, as the state’s third-party auditor, on December 11, 2015, violated federal common law and was unconstitutional under the Fourth Amendment, Ex Post Facto, Due Process, Equal Protection, and Takings Clauses of the U.S. Constitution.[1]

Issues of particular interest to holders include:

  • The retroactive application of amendments made to Delaware’s unclaimed property law which became effective on February 2, 2017. The state’s subpoena power and the 10-year record retention requirements were not part of Delaware’s law prior to the 2017 amendments;
  • The state’s use of Kelmar, a self-interested party in a multi-state audit (19 participating states) raises issues relating to the confidentiality of records under the public records laws of the participating states; and
  • Delaware’s estimation methodology exposes holders to multiple liabilities for the same unclaimed property.

Univar repeatedly objected to Kelmar’s initial document request for over two years. On October 30, 2018, Delaware issued a subpoena for the records that Kelmar had initially requested in 2015. Delaware has since filed suit in the Chancery Court to enforce the subpoena.

The District Court has a new opportunity to rule on the estimation practices employed by Kelmar. In February 2017, Delaware amended its unclaimed property law to, among other things, adopt a ten-year statute of limitations, a ten-year record retention requirement and authorize the use of a reasonable method of estimation if the holder lacks sufficient records. However, the estimation methodology used by Kelmar has not changed, even in light of the District Court’s opinion in Temple-Inland v. Cook,[2] in which the judge famously stated that the estimation methodology used by the state and Kelmar in unclaimed property audits violated the holder’s due process rights and “shocked the conscience.”[3] The District Court was able to sidestep the issue again in Plains All American Pipeline LLC v. Cook, because the claim was not yet ripe for litigation, as Delaware had not yet made a demand for the holder’s records in the audit.[4] The District Court is once again confronted with many of the same arguments made in the Plains case and the case is in fact ripe under Plains, since Univar filed its lawsuit after receiving the subpoena from Delaware.

Minnesota v. Hall and S. David
Goldberg v. Michael W. Frerichs, Treasurer of Illinois

Owners’ Rights to Interest in Property Held by the State

On March 7, 2018, the Minnesota Supreme Court held in Minnesota v. Hall that the state is required to pay interest on proceeds from an interest-bearing bank account while such proceeds were in the custody of the state, stating that “the right to earn interest was part of the claimant’s unclaimed property and therefore she had the right to receive that interest from the state if she is to be made whole.”[5] The state’s failure to pay interest was therefore a violation of the Takings Clause under the US Constitution. However, the court did not provide such relief to the remaining plaintiffs with non-interest bearing accounts (specifically, payroll checks and insurance proceeds), stating that paying interest in such cases would “reward [the owner’s] inattention and provide an inappropriate windfall.”[6] (Id at 13).

On January 2, 2019, the United States Seventh Circuit Court of Appeals in S. David Goldberg v. Michael W. Frerichs, Treasurer of Illinois found that whether or not a violation of the Takings Clause exists does not hinge upon whether the property was earning interest prior to the state taking custody.[7] In denying the certification of a class of plaintiffs, the appellate court found that the district court had overlooked an earlier opinion by the same court, Kolton v. Frerichs,[8] which held that people are entitled to receive interest on their property while in the state’s custody,[9] less reasonable custodial fees, and finding instead that owners were entitled to compensation for the time value of money “only if the property was earning interest at the moment the state took it into custody.”

Even though Goldberg’s property was in the form of a $100 check, Circuit Judge Easterbrook reiterated Circuit Court’s holding in Kolton: “what the property earns in the state’s hands does not depend on what it had been earning in the owner’s hands.”[10] Judge Easterbrook further stated that “cash has an option value – the option to invest or refrain from investing – that is lost if the state invests without the owner’s consent. That loss has a compensable value.”[11]

Judge Easterbrook also cited the US Supreme Court’s decision in Brown v. Legal Foundation of Washington, which held that the Takings Clause “protects the time value of money just as much as it does money itself.”[12] While taking note that the Court ultimately found no violation of the Takings Clause in Brown because the amounts of principal from small client trust funds were so small that the administrative expenses exceeded returns on the investments, the state could argue on remand that under Brown, interest was not owed on such a small amount.[13]

[1] Univar, Inc. v. Geisenberger et al., No. 1:18-CV-01909 (D. Del. 2018).
[2] Temple-Inland v. Cook, 192 F. Supp. 3d 527 (D. Del. 2016).
[3] Id at. 541.
[4] Plains All Am. Pipeline LLC v. Cook, 866 F. Supp. 3d 534 (3d. Circ. 2017).
[5] Hall v. Minnesota, No. A16-0874, slip op. at 16.
[6] Id at. 13.
[7] S. David Goldberg v. Michael W. Frerichs, Treasurer of Illinois, 2019 WL 76468 (Jan. 2, 2019).
[8] Kolton v. Frerichs, 869 F. 3d 577 (7th Cir. 2017)
[9] FRERICHS DISTRICTCOURTCITATION, 2018 US Dist. Lexis 51062 (N.D. Ill. March 28, 2018).
[10] Kolton at 533.
[11] Goldberg at *2.
[12] Brown v. Legal Foundation of Washington, 538 US 216, 235 (2003).
[13] Id. at 224.

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