On June 1, 2021, the Delaware Supreme Court affirmed the Court of Chancery’s decision to quash an administrative subpoena seeking extensive records in an unclaimed property audit of AT&T.1 The Delaware Department of Finance (the Department), through its third-party auditor, Kelmar Associates LLC (Kelmar), sought expansive data on disbursement checks issued by AT&T going back more than twenty years. The new decision affirms the lower court’s finding that the unclaimed property subpoena was so expansive and unreasonable that enforcing it would constitute “an abuse of the court’s process.” Although an agency is entitled to “great deference” in investigations, the decision to quash the subpoena in its entirety was appropriate in this case because the Department had refused to provide answers to the court’s “serious questions” regarding the breadth and scope of the subpoena.
The court also recognized that the procedural and substantive aspects governing the enforcement of administrative subpoenas, including in the context of state escheat laws, were issues of first impression in Delaware. Therefore, the court adopted the same procedural framework to enforce administrative subpoenas used in federal courts and instructed the Department that it may serve a new subpoena on the holder that complies with the new procedures. The subpoena procedure established by the court will govern any future disputes over unclaimed property subpoenas challenged in subsequent cases.
The Department opened an audit of the holder, AT&T, in 2012 using its primary third-party auditor, Kelmar. Consistent with its standard audit method, Kelmar requested voluminous data from the holder in a range of areas. AT&T responded to many of the requests, but resisted providing the full scope of information in selected areas, including the “Disbursements Request” issued in 2018 in which Kelmar requested “information concerning every check AT&T had issued from twenty-seven accounts since June 1992.” The request included checks written to payees in every state, not just to payees in Delaware. When the holder refused to comply in full, the Department converted Kelmar’s information request into a subpoena by merely attaching the Kelmar data request to a form subpoena, with no modifications. In November 2019, Delaware filed a lawsuit to enforce the subpoena in the Delaware Chancery Court.2
Findings of the Delaware Chancery Court
The Delaware Chancery Court quashed the administrative subpoena finding that its scope was so expansive that enforcement would constitute an abuse of the court’s process.3 The lower court identified multiple problematic aspects of the subpoena, which included the following:
- Statute of limitations. First, the lower court found that the subpoena sought records far beyond the statute of limitations. The court rejected Delaware’s argument that the state’s current unclaimed property statute, enacted in 2017, applies retroactively to allow a longer lookback than under prior law; instead, the court held that the shorter, pre-2017 statute governed in years prior to 2017.4 The subpoena sought records back 20 years to 1992, and even the current Delaware law only has a 15-year statute of limitations. Although the court declined to apply a “bright-line” rule barring the Department from seeking information beyond the statute of limitations, the court found that the expansive request made it likely that the subpoena was improper.
- Geographic and status scope. Second, the lower court found it problematic that the subpoena sought records for all checks issued to payees in other states, questioning whether the Department was “pursuing information about property that it knows it cannot recover,” or was in search of records “with last-known addresses outside of Delaware,” for property “almost certainly non-escheatable” which would sweep up “a vast amount of irrelevant data.”
- Records of cashed checks that cannot be unclaimed. Third, the lower court was concerned with the breadth of the requests, which asked for data on every check issued by the holder, regardless of disposition. Most checks had been cashed and therefore could not result in unclaimed property.
- Control by the contingency-fee auditor. Finally, the lower court expressed significant concerns about the scope of authority delegated by the Department to the third-party contingency-fee auditor, Kelmar.
For this combination of reasons, the lower court quashed the subpoena in its entirety. The lower court indicated that it would have preferred to give deference to the Department, and to have enforced a narrowed version of the subpoena, but the Department declined to answer the court’s questions or offer an alternative proposal. The Department appealed the court’s decision to the Delaware Supreme Court.
Decision of the Delaware Supreme Court on appeal
The Delaware Supreme Court upheld the lower court’s decision to quash the unclaimed property subpoena, but allowed the Department to serve a new subpoena on the holder in the future. The court reasoned as follows:
- The Chancery Court has discretion to question the Department’s use of its subpoena power. First, the Supreme Court recognized that if a court doubts the good faith of an agency's use of its subpoena power (as it did in this case), it can go beyond the written submissions and inquire further into whether the Department is using the subpoena for a legitimate purpose related to the administrative investigation. Here, the lower court had “serious questions” regarding the breadth and scope of the unclaimed property subpoena that the Department failed to answer. The Department’s decision not to cooperate placed the lower court “in a box” in that it was asked to either enforce or quash the subpoena, with no option to modify it. Faced with that choice, the lower court did not err in quashing the subpoena in its entirety.
- Statute of Limitations was appropriately applied. Second, the Supreme Court agreed with the lower court’s decision (i) to decline to apply a “bright-line” rule barring the Department from seeking information beyond the statute of limitations, but also (ii) finding that the expansive requests made it likely that the subpoena was improper in relation to the investigatory purpose of the subpoena. The Supreme Court did not make a specific ruling on the appropriate statute of limitations in the underlying audit (that issue was not before the Court on appeal), but held that the lower court had not erred in considering the reasonableness of the subpoena based on the statute of limitations.5
- Adoption of the federal framework to enforce administrative subpoenas. Finally, in recognizing that the procedural and substantive aspects governing enforcement of administrative subpoenas were issues of first impression in Delaware, the Supreme Court adopted the framework used in federal courts to enforce administrative subpoenas as set forth in United States v. Powell,6 and allowed the Department to serve a new subpoena on AT&T that complied with the new procedures. The appropriate standard of judicial review to enforce an administrative subpoena is as follows:
- The Department must show that (i) the investigation/audit is conducted for a legitimate purpose, (ii) the information sought is relevant to the purpose and not already in the Department's possession, and (iii) the Department has complied with any statutory and administrative requirements.
- If the Department meets this preliminary showing, the burden shifts to the respondent to disprove the Department’s assertions7 and/or to demonstrate that enforcement would constitute “an abuse of the court’s process.” If improper purpose or abuse of process is alleged, the respondent has the heavy burden of rebutting the presumption that the agency acted in good faith by making a particularized showing that the subpoena was issued in bad faith (i.e., harassment or reasons unrelated to the investigation).
- Finally, the court should hold a hearing to address the issues with the parties, and schedule an evidentiary hearing if it believes that the disputed issues can be resolved after hearing from witnesses.
Delaware Senate Bill 104
Delaware has reacted to the decision, in part, by introducing legislation that could impact some of the issues raised in the case. Senate Bill 104, introduced in April 2021 and likely to pass in some form, includes new provisions regarding the scope of information the State may request from a holder in the course of an unclaimed property audit. According to the legislative synopsis, the legislation is meant to “address recent court decisions that, to determine a holder’s compliance, the State Escheator may request and review records to verify the completeness and accuracy of the holder’s records, even if such records may not identify property reportable to the State, and that the State may initiate an examination to determine compliance for any reason and is under no obligation to provide a detailed or specific reason or justification.”8
There is no doubt that the reference in the legislative synopsis to “recent court decisions” includes Delaware v. AT&T, where one reason the Delaware Chancery Court quashed the subpoena was because the requested records related to transactions with last-known addresses outside of the state of Delaware and therefore not reportable to Delaware. Senate Bill 104 appears to broaden the scope of permissible data requests, although presumably “completeness and accuracy” of records could be shown in a manner that does not require producing otherwise non-relevant data for an unclaimed property audit limited to Delaware. Nevertheless, Delaware can be expected to argue that this new provision gives the state even broader authority to request records. If the new provisions are enacted, this will likely be fodder for future disputes over data requests in unclaimed property audits, and in litigation over unclaimed property subpoenas.
1 State of Delaware, Dep't of Fin. v. AT&T Inc., No. 303, 2020, 2021 WL 2200973 (Del. June 1, 2021)
2 The holder is also challenging the audit methodology in a related federal court action.
3 State of Delaware, Dep't of Fin. v. AT&T Inc. (Del. Ch. July 10, 2020)
4 The pre-2017 statute of limitations was generally eight years for holders who had filed reports.
5 In a detailed analysis, the lower court held that Delaware’s 2017 unclaimed property statute did not retroactively lengthen the statute of limitations that was in effect from 2002 to 2016.
6 United States v. Powell, 379 US 48, 85 S. Ct. 248, 13 L. Ed. 2d 112 (1964)
7 The Supreme Court noted that “[u]ltimately, the question comes down to one of reasonableness.”