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Court of Chancery Holds Delaware Has the Power to Compel Holders to Produce Information Sought in Unclaimed Property Audits

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On May 21, 2020, the Delaware Court of Chancery issued an opinion denying a holder’s ripeness challenge to an administrative subpoena for documents issued by the Delaware Department of Finance pursuant to the amended provisions of the State’s abandoned and unclaimed property law.  In State of Delaware Department of Finance v. Univar, Inc., the Delaware Department of Finance filed a summary proceeding seeking to enforce an administrative subpoena issued pursuant to 12 Del. C. § 1171, compelling Univar to produce certain corporate books and records in connection with the State’s unclaimed property examination of the company.  Univar moved to dismiss the action on ripeness grounds, arguing that the State had failed to satisfy the statutory prerequisites for enforcing the subpoena because the State failed to (1) demonstrate compliance with the confidentiality provisions for multistate unclaimed property audits; and (2) promulgate regulations to ensure fairness in the management of the audit process.  Univar also argued that it had preserved all of the arguments raised in its prior filed action pending in the United States District Court for the District of Delaware challenging the constitutionality of the Delaware unclaimed property statute, and that the Chancery Court did not need to address any of these constitutional issues in deciding the enforceability of the subpoena.  In denying Univar’s motion to dismiss, the Court held that the confidentiality provisions contained within the revised statute, and the State’s promulgation of regulations pursuant thereto were sufficient to satisfy the statutory prerequisites to the issuance of the subpoena.  The Court also held that, since it was not deciding any constitutional issues in ruling on Univar’s ripeness challenge, whether those arguments were preserved, and how, and if, they would be adjudicated, should be left to the District Court.

Synopsis of the Case

In October 2018, Delaware issued an administrative subpoena to Univar as a result of Univar’s failure to provide information responsive to requests for documents from Delaware’s contract auditor, Kelmar Associates.  In response thereto, on December 3, 2018, Univar filed an action in the United States District Court for the District of Delaware challenging the constitutionality of Delaware’s unclaimed property statute.  On December 7, 2018, the State responded by filing a complaint in the Delaware Court of Chancery seeking a summary order enforcing the administrative subpoena and, thereafter, moving to dismiss Univar’s complaint in the federal court on jurisdictional grounds and for failure to state claims on which relief could be granted.

While the motion to dismiss was pending in the District Court, the Chancery Court stayed Delaware’s suit to enforce the subpoena, finding that the District Court should decide the threshold constitutional issues, before the Court of Chancery determined whether to enforce the subpoena against Univar.  On September 17, 2019, the District Court issued an opinion granting, in part, and denying, in part, the State’s motion to dismiss, and staying the action pending the Chancery Court’s decision as to the enforceability of the subpoena.

Following the District Court’s ruling, on October 23, 2019, Univar moved to dismiss the State’s Chancery Court complaint, arguing that the State’s claim was not ripe because the State had failed to comply with the statutory prerequisites for issuing an administrative subpoena.  Specifically, Univar argued that the State had failed to demonstrate compliance with the revised statute’s confidentiality provisions for the conduct of multistate audits, because the public records laws of the other participating states materially conflicted with the confidentiality requirements of the Delaware statute.  In addition, Univar argued that the State had failed to promulgate regulations to ensure fairness in the management of the audit process as required by the Delaware statute.

Turning first to Univar’s challenge to the State’s compliance with the confidentiality requirements for multistate audits, the Court found that Univar had failed to establish that the State was conducting a multistate audit as a matter of law.  Nevertheless, the Court held that even if the State was conducting a multistate audit, its third-party audit firm was prohibited by law from sharing Univar’s confidential information with persons who are not current officers or employees of the State of Delaware and that the Court could fashion an appropriate order to ensure the confidential treatment of any records produced in response to the subpoena as required by Delaware law.  As to Univar’s attack on the State’s alleged failure to promulgate regulations to ensure that the audit process was managed fairly, the Court noted that the State had, in fact, promulgated regulations under the revised statute, and that any gaps in the regulations could easily be filled by the well-developed common law standards for enforcement of subpoenas.  As a result, the Court directed the parties to submit a proposed schedule for a prompt hearing on the merits of the claim, but left Univar’s constitutional challenges to Delaware’s unclaimed property statute – including its due process and equal protection claims – to be decided by the District Court.

While Univar will most certainly challenge the State’s enforcement action on the merits, having determined that the State can state a justiciable claim for the enforcement of an administrative subpoena, the Court has removed what promised to be a significant procedural barrier to the State’s use of that process to enforce the State’s unclaimed property statute and force recalcitrant holders who resist voluntary production of information in an audit, and who consequently shut down audits – often for years – to produce information requested by agents of the State.

Given the pendency of a host of cases in the District Court raising constitutional challenges to Delaware’s unclaimed property law, whether and how this may change the Delaware audit landscape remains to be seen.  If companies under audit are inclined to attempt to avoid the time, expense and possible resultant liability to Delaware by asserting constitutional claims in federal court, and consequently forestall or avoid liability, that strategy may proliferate until the District Court provides much needed guidance to both the State and the holder community.  In all events, with this enforcement action, Delaware has shown it is not afraid to use the administrative subpoena process to compel compliance with the unclaimed property law, and it is, therefore, unlikely that holders will continue to be able to avoid producing documents through the simple expedient of refusing to comply with the State’s information requests.

If you have any questions regarding this Alert, the pending lawsuits, or Delaware’s unclaimed property program in general, please contact one of the members of the Morris Nichols’ Unclaimed Property Counseling Group.

Copyright © Morris, Nichols, Arsht & Tunnell LLP. These materials have been prepared solely for informational and educational purposes, do not create an attorney-client relationship with the author(s) or Morris, Nichols, Arsht & Tunnell LLP, and should not be used as a substitute for legal counseling in specific situations. These materials reflect only the personal views of the author(s) and are not necessarily the views of Morris, Nichols, Arsht & Tunnell LLP or its clients.

 

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