Temple-Inland Inc. v. Cook et al
Filing
38
MEMORANDUM OPINION. Signed by Judge Sue L. Robinson on 3/11/2015. (nmfn)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
TEMPLE-INLAND, INC.,
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Plaintiff,
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V.
THOMAS COOK, in his capacity as the
Secretary of Finance for the State of
Delaware; DAVID M. GREGOR, in his
capacity as the State Escheator of the
State of Delaware; and MICHELLE M.
WHITAKER in her capacity as the Audit
Manager for the State of Delaware,
Civ. No. 14-654-SLR
)
)
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Defendants.
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Brian M. Rostocki, Esquire and John C. Cordrey, Esquire of Reed Smith LLP,
Wilmington, Delaware. Counsel for Plaintiff. Of Counsel: Diane Green-Kelley, Esquire
of Reed Smith LLP.
David J. Margules, Esquire, Beth Moskow-Schnoll, Esquire, and Jessica L. Case,
Esquire of Ballard Spahr LLP, Wilmington, Delaware. Counsel for Defendants. Of
Counsel: Edward K. Black, Esquire of the Division of Revenue, and Caroline Lee
Cross, Esquire of the Department of Justice of Ballard Spahr LLP.
MEMORANDUM OPINION
Dated: March 11, 2015
Wilmington, Delaware
R~N
I. INTRODUCTION
On May 21, 2014, plaintiff Temple-Inland Inc. ("plaintiff') filed a complaint against
defendants Thomas Cook ("Mr. Cook"), in his capacity as the Secretary of Finance for
the State of Delaware; David M. Gregor ("Mr. Gregor"), in his capacity as the State
Escheator of the State of Delaware; and Michelle M. Whitaker ("Ms. Whitaker''), in her
capacity as the Audit Manager for the State of Delaware (collectively, "defendants").
Plaintiff seeks equitable, declaratory, injunctive and other relief under 28 U.S.C. §§
2201-2202 and 42. U.S.C. § 1983 for violation of plaintiffs rights under federal law and
the United States Constitution. (D.I. 1) Plaintiff challenged the use of a statistical model
by the Department of Finance of the State of Delaware to estimate plaintiff's obligations
under Delaware's Abandoned and Unclaimed Property Law, 12 Del C. §§ 1110, et seq.
(the "Escheat Act"). Also on May 21, 2014, plaintiff moved for a preliminary injunction to
enjoin defendants from enforcing the assessment of $1,388,573.97 in uncashed
accounts payable and payroll checks during calendar years 1986-2008, and to enjoin
defendants' continued examination of plaintiff's records for potentially abandoned or
unclaimed property. (D.I. 3) On July 2, 2014, the parties jointly stipulated to a standstill
regarding the enforcement of the assessment and examination of records pending entry
of final judgment, and plaintiff withdrew its motion for a preliminary injunction. (D.I. 20)
Presently before the court is plaintiffs motion for summary judgment (D.I. 22),
and defendants' motion to dismiss for lack of jurisdiction over the subject matter and
motion to dismiss for failure to state a claim (D.I. 24). The court has federal question
jurisdiction pursuant to 28 U.S.C. § 1331, as plaintiff asserts five counts for federal
preemption and violations of the United States Constitution. Requests seeking
injunctive relief, such as those asserted by plaintiff, have been held to form the basis for
federal question jurisdiction. See Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96 n.14
(1983) ("A plaintiff who seeks injunctive relief from state regulation, on the ground that
such regulation is pre-empted by a federal statute [over] which, by virtue of the
Supremacy Clause of the Constitution, must prevail, thus presents a federal question
which the federal courts have jurisdiction under 28 U.S.C. § 1331 to resolve.").
II. BACKGROUND
A. The Parties
Plaintiff is a corporation organized under the laws of Delaware, with a principal
place of business in Memphis, Tennessee. Plaintiff is a manufacturer and nationwide
supplier of corrugated packaging.
Mr. Cook is the Delaware Secretary of Finance. Section 1102 of the Delaware
Code vests authority for the administration and enforcement of the Escheat Act "in the
Secretary of Finance or the Secretary's delegate." 12 Del. C. § 1102. Mr. Gregor is the
Secretary's delegate and holds the title of Delaware State Escheator. As State
Escheator, Mr. Gregor "may make such rules and regulations as the Escheator may
deem necessary to enforce [the Escheat Act]." Id. § 1154. Ms. Whitaker is the
Delaware Abandoned Property Audit Manager, acting under the direction of the State
Escheator. As the Audit Manager, Ms. Whitaker may issue a statement of findings and
request for payment from a Delaware corporate citizen who has under-reported
unclaimed property. Id. § 1156(a).
B. Delaware Escheat Law
2
All fifty states, as well as the District of Columbia, have laws that govern the
disposition of unclaimed property, often referred to as "escheat laws." Many states, with
the exception of Delaware and five others, model their escheat laws on the Uniform
Unclaimed Property Act ("UUPA"). Diane Green-Kelly, Unclaimed Property: An Ancient
Concept Creating Modern Liabilities, 32 FRANCHISE L.J. 41, 41 (2012). Escheat laws
require companies holding unclaimed or abandoned property, 1 whether tangible or
intangible, to turn that property over to the State. The stated purpose of Delaware's
Escheat Act is to provide for the "care and custody ... of all abandoned property paid to
the State Escheator" until the property is reclaimed by the true owner. 12 Del. C. §
1144(a). 2
Procedurally, a company must typically first attempt to return the abandoned
property to the owner, using the owner's name and last known address, before turning
the property over to the State. Once the State takes custody, the company is no longer
liable to the property owner, and the State will attempt to reunite the owner with the
property. Id.§ 1144(b). To facilitate the reunion, the State Escheator is mandated to
"maintain a public record of all names and last known addresses of the person or
1
Under Delaware's Escheat Law, the holder of property is defined as "any person
having possession, custody or control of the property of another person," whereas the
owner is "any person ... having the legal or equitable title to property coming within the
purview of this subchapter." 12 Del. C. § 1198(7)-(8).
2
The Delaware state legislature defined "abandoned property" as "property against
which a full period of dormancy has run" where the "period of dormancy" is "the full and
continuous period of 5 years ... during which an owner has ceased, failed or neglected
to exercise dominion or control over property or to assert a right of ownership or
possession or to make presentment and demand for payment and satisfaction or to do
any other act in relation to or concerning such property." 12 Del. C. §§ 1198(1 )-(9)a.
3
persons appearing to be entitled to the abandoned property paid or delivered to the
State Escheator." Id. § 1141. "[T]o the extent necessary for the proper disposition of
property," if "the records of the holder available for the periods subject to this chapter
are insufficient to permit the preparation of a report, the State Escheator may require
the holder to report and pay to the State the amount of abandoned or unclaimed
property that should have been but was not reported[, and] that the State Escheator
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." Id. § 1155.
The Escheat Act was amended in 2010 by Senate Bill No. 272 § 4 to permit the
State Escheator to estimate the liability for unclaimed property "[w]here the records of
the holder available for the periods subject to [examination] are insufficient to permit the
preparation of a report." Id. § 1155. In amending the statute, the Delaware General
Assembly found that "the employment of estimation techniques is an accepted and
routine practice used both by holders of abandoned and unclaimed property and by the
State Escheator in determining holders' liability to report and pay such property to the
State with respect to periods for which inadequate holder records exist." Delaware
Senate Bill No. 272 (May 12, 2010) (hereinafter "SB No. 272").
C. Factual Background
On December 22, 2008, pursuant to his authority under 12 Del. C. § 1155, the
State Escheator initiated an unclaimed property audit of plaintiff. The State Escheator
notified plaintiff that the audit period would begin in 1981, and he asked plaintiff to make
past and present records of unclaimed property "retained under standard retention
4
policies" available for examination. 3 An examination of plaintiff's unclaimed property
reports revealed that plaintiff escheated a cumulative total of $1,338, 116. 70 of
unclaimed accounts payable and payroll checks to various states during the audit
period, including Delaware.
Plaintiff produced disbursement records for payroll starting in the year 2004 and
disbursement records for accounts payable starting in the year 2003. The audit resulted
in no unclaimed property esheatable to Delaware from the payable disbursement
account, and $147.30 in unclaimed moneys from the payroll disbursement account.
The $147.30 was escheated to Delaware on May 22, 2013. Because plaintiff was
unable to produce records prior to 2003, 4 the State Escheator used an estimation
method to extrapolate the amount of unclaimed property due to Delaware. Defendants
reported an underpayment of approximately $2.1 million, and later reduced the amount
to $2.0 million. Following an administrative appeal by plaintiff and appointment of an
independent reviewer, the Secretary of Finance accepted a reduction in the amount
owed to $1,388,573.98, with collection to be enforced by the State Escheator.
Ill. STANDARD OF REVIEW
A. Motion to Dismiss for Failure to State a Claim 5
3
Plaintiff contends that standard retention policies are typically 7 to 10 years, a fact
allegedly admitted by the State Escheator. (D.I. 1 at~ 49)
4
Plaintiff asserts it only retained disbursement records for payroll for the year 2004
and later and for accounts payable for the year 2003 and later. (D.I. 1 at~ 53)
5
Defendants also move to dismiss on the basis of lack of subject-matter jurisdiction
under 12(b)(1 ), but do not present supporting arguments for such in their briefing.
5
A motion filed under Federal Rule of Civil Procedure 12(b)(6) tests the sufficiency
of a complaint's factual allegations. Bell At/. Corp. v. Twombly, 550 U.S. 544, 555
(2007); Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir. 1993). A complaint must contain
"a short and plain statement of the claim showing that the pleader is entitled to relief, in
order to give the defendant fair notice of what the ... claim is and the grounds upon
which it rests." Twombly, 550 U.S. at 545 (internal quotation marks omitted)
(interpreting Fed. R. Civ. P. 8(a)). Consistent with the Supreme Court's rulings in
Twombly and Ashcroft v. Iqbal, 556 U.S. 662 (2009), the Third Circuit requires a twopart analysis when reviewing a Rule 12(b)(6) motion. Edwards v. A.H. Cornell & Son,
Inc., 610 F.3d 217, 219 (3d Cir. 2010); Fowler v. UPMC Shadyside, 578 F.3d 203, 210
(3d Cir. 2009). First, a court should separate the factual and legal elements of a claim,
accepting the facts and disregarding the legal conclusions. Fowler, 578 F.3d. at 21011. Second, a court should determine whether the remaining well-pied facts sufficiently
show that the plaintiff "has a 'plausible claim for relief.'" Id. at 211 (quoting Iqbal, 556
U.S. at 679). As part of the analysis, a court must accept all well-pleaded factual
allegations in the complaint as true, and view them in the light most favorable to the
plaintiff. See Erickson v. Pardus, 551 U.S. 89, 94 (2007); Christopher v. Harbury, 536
U.S. 403, 406 (2002); Phillips v. Cnty. of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008).
In this regard, a court may consider the pleadings, public record, orders, exhibits
attached to the complaint, and documents incorporated into the complaint by reference.
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007); Oshiver v. Levin,
Fishbein, Sedran & Berman, 38 F.3d 1380, 1384-85 n.2 (3d Cir. 1994).
6
The court's determination is not whether the non-moving party "will ultimately
prevail," but whether that party is "entitled to offer evidence to support the claims."
United States ex rel. Wilkins v. United Health Grp., Inc., 659 F.3d 295, 302 (3d Cir.
2011 ). This "does not impose a probability requirement at the pleading stage," but
instead "simply calls for enough facts to raise a reasonable expectation that discovery
will reveal evidence of [the necessary element]." Phillips, 515 F.3d at 234 (quoting
Twombly, 550 U.S. at 556). The court's analysis is a context-specific task requiring the
court "to draw on its judicial experience and common sense." Iqbal, 556 U.S. at 663-64.
B. Summary Judgment
"The court shall grant summary judgment if the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment as a
matter of law." Fed. R. Civ. P. 56(a). The moving party bears the burden of
demonstrating the absence of a genuine issue of material fact. Matsushita Elec. Indus.
Co. v. Zenith Radio Corp., 415 U.S. 574, 586 n.10 (1986). A party asserting that a fact
cannot be-or, alternatively, is-genuinely disputed must be supported either by citing
to "particular parts of materials in the record, including depositions, documents,
electronically stored information, affidavits or declarations, stipulations (including those
made for the purposes of the motions only), admissions, interrogatory answers, or other
materials," or by "showing that the materials cited do not establish the absence or
presence of a genuine dispute, or that an adverse party cannot produce admissible
evidence to support the fact." Fed. R. Civ. P. 56(c)(1 )(A) & (8). If the moving party has
carried its burden, the nonmovant must then "come forward with specific facts showing
that there is a genuine issue for trial." Matsushita, 415 U.S. at 587 (internal quotation
7
marks omitted). The Court will "draw all reasonable inferences in favor of the
nonmoving party, and it may not make credibility determinations or weigh the evidence."
Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000).
To defeat a motion for summary judgment, the non-moving party must "do more
than simply show that there is some metaphysical doubt as to the material facts."
Matsushita, 475 U.S. at 586-87; see also Podohnik v. U.S. Postal Service, 409 F.3d
584, 594 (3d Cir. 2005) (stating party opposing summary judgment "must present more
than just bare assertions, conclusory allegations or suspicions to show the existence of
a genuine issue") (internal quotation marks omitted). Although the "mere existence of
some alleged factual dispute between the parties will not defeat an otherwise properly
supported motion for summary judgment," a factual dispute is genuine where "the
evidence is such that a reasonable jury could return a verdict for the nonmoving party."
Anderson v. Liberty Lobby, Inc., 411 U.S. 242, 247-48 (1986). "If the evidence is
merely colorable, or is not significantly probative, summary judgment may be granted."
Id. at 249-50 (internal citations omitted); see also Celotex Corp. v. Catrett, 411 U.S.
317, 322 ( 1986) (stating entry of summary judgment is mandated "against a party who
fails to make a showing sufficient to establish the existence of an element essential to
that party's case, and on which that party will bear the burden of proof at trial").
IV. DISCUSSION
A. Federal Common Law and Preemption
Plaintiff contends that, to the extent that § 1155 of the Escheat Act authorizes
estimation of unclaimed debts, it violates and is preempted by federal common law
8
established in Texas v. New Jersey, 379 U.S. 674 (1965), and its progeny6 (collectively,
"the Texas Cases"). In the following passage from Delaware v. New York, the most
recent of the Texas Cases, the Supreme Court addressed the escheat of securities held
by brokers for unknown beneficiaries:
We therefore resolve disputes among States over the right to
escheat intangible personal property in the following three
steps. First, we must determine the precise debtor-creditor
relationship as defined by the law that creates the property
at issue. Second, because the property interest in any debt
belongs to the creditor rather than the debtor, the primary
rule gives the first opportunity to escheat to the State of "the
creditor's last known address as shown by the debtor's
books and records." ... Finally, if the primary rule fails
because the debtor's records disclose no address for a
creditor or because the creditor's last known address is in a
State whose laws do not provide for escheat, the secondary
rule awards the right to escheat to the State in which the
debtor is incorporated.
507 U.S. 490, 499-500 (1993).
Plaintiff argues that the Supreme Court's holding in Delaware limited the State's
authority to collect unclaimed property to situations where a "precise debtor-creditor
relationship" is shown. Id. at 499. Plaintiff highlights the fact that the Court declined "to
use a statistical surrogate instead of debtor's records to locate the last known
addresses of creditors." Id. at 509. Defendants' failure to point to specific debtors,
plaintiff argues, runs afoul of the requirement to identify a "precise" relationship. (D.I. 27
at 8-10) Even though Delaware addressed a dispute between two States, plaintiff
argues that the Texas Cases nevertheless apply to disputes between private parties
and States. For support, plaintiff cites a decision from the United States District Court
6
Pennsylvania v. New York, 407 U.S. 206 (1972), and Delaware v. New York, 507
U.S. 490 (1993).
9
for the District of New Jersey which held: "[l]t is true that the Supreme Court's original
jurisdiction [in the Texas Cases] was premised on the dispute between state parties, but
to say that the Court's substantive decision is limited to state parties confuses
jurisdiction with the merits." American Express Travel Related Services, Inc. v.
Sidamon-Eristoff, 755 F.Supp. 2d 556, 608 (D.N.J. 2011 ), aff'd sub nom New Jersey
Retail Merchants Ass'n v. Sidamon-Eristoff, 669 F.3d 375 (3d Cir. 2012).
The court finds that, consistent with the stated purpose of the priority scheme in
Delaware to "resolve disputes among States," the Texas Cases apply to disputes
among States, not to disputes between private parties and States. Although relevant
case law on the topic of escheat law is sparse, such a finding is in accord with a number
of state court opinions addressing the applicability of the Texas Cases. See Riggs Nat'/
Bank of Wash., D.C. v. District of Columbia, 581A.2d1229, 1245 (D.C. Ct. App.1990)
(the Texas Court was "not confronted with, nor did it decide, the relative rights of
abandoned property as between a private holder and a State"); New Jersey v. Chubb
Corp., 570 A.2d 1313 (N.J. Super. 1989) (the Texas guidelines "relate only to conflicts
among states"); O'Connor v. Sperry & Hutchinson Co., 379 A.2d 1378, 1381 (Pa.
Commw. Ct. 1977) ("It is apparent in our view that the Court meant its rule to be binding
only where there were multiple claims to the same property."), aff'd, 412 A.2d 539
(1980). 7 Moreover, finding that the Supreme Court's holding in Delaware preempts the
7
In American Express, the district court applied the Texas Cases to determine
whether the State of New Jersey could escheat assets over which it had neither first nor
second priority under the priority scheme outlined in Delaware. 755 F.Supp at 604-05.
Unlike American Express, the present dispute concerns the propriety of estimates, not
whether the State of Delaware has authority to escheat under the Delaware priority
scheme.
10
State's valid exercise of regulatory power over abandoned property would be contrary to
the well-established principle that federal courts may not ordinarily displace state law.
See Erie Railroad Co. v. Tompkins, 304 U.S. 64, 78 (1938) ("Except in matters
governed by the Federal Constitution or by Acts of Congress, the law to be applied in
any case is the law of the state."). As the court discerns no preemptive federal law, it
need not reach the question of whether Delaware bars the use of estimates to fix a
holder's escheat liability. For the aforementioned reasons, the court grants defendants'
motion to dismiss count I of the complaint alleging violation of and preemption by
federal common law. 8 (D. I. 24)
B. Substantive Due Process
The Fourteenth Amendment to the United States Constitution provides that "[n]o
state shall ... deprive any person of life, liberty, property, without due process of law ..
. ." U.S. Const. amend. XIV,§ 1. A person claiming protection under the Fourteenth
Amendment must first demonstrate that he or she has a protectable interest - of life,
liberty or property. Once a protectable interest has been established, "[t]he Supreme
Court has interpreted [the Fourteenth Amendment] to provide two distinct guarantees:
substantive due process and procedural due process." DeKalb Stone, Inc. v. County of
DeKalb, Georgia, 106 F.3d 956, 959 (11th Cir. 1997). Substantive due process
includes among its protections the general protection against "certain arbitrary, wrongful
government actions regardless of the fairness of the procedures used to implement
them." Id. The Third Circuit has recognized that substantive due process encompasses
8
The court, accordingly, denies plaintiff's motion for summary judgment that federal
common law preempts the State Escheat Act and prohibits estimation of abandoned
property. (D.I. 22)
11
"at least two very different threads." Nicholas v. Pennsylvania State Univ., 227 F.3d
133, 139 (3d Cir. 2000).
The first thread of substantive due process, which is not implicated in this case,
concerns a challenge to the validity of a legislative act. Id. Such a legislative act will
survive a substantive due process challenge as long as the government "identifies a
legitimate state interest that the legislature could rationally conclude was served by the
statute." Alexander v. Whitman, 114 F .3d 1392, 1403 (3d Cir. 1997) (quoting Sammon
v. New Jersey Bd. Of Med. Examiners, 66 F.3d 639, 645 (3d Cir. 1995)).
The second thread of substantive due process concerns protection against
"certain types of non-legislative state action." Nicholas, 227 F.3d at 140. While
protection against the arbitrary exercise of power by government officials is primarily the
purview of procedural due process, the Third Circuit has held that non-legislative
government deprivation "that comports with procedural due process may still give rise to
a substantive due process claim 'upon allegations that the government deliberately and
arbitrarily abused its power."' Independent Enters. Inc. v. Pittsburgh Water & Sewer
Auth., 103 F.3d 1165, 1179 (3d Cir.1997) (quoting Midnight Sessions, Ltd. v. City of
Philadelphia, 945 F .2d 667, 683 (3d Cir.1991 )); see also Boyanowski v. Capital Area
Intermediate Unit, 215 F.3d 396, 399 (3d Cir.2000) ("The substantive component of the
Due Process Clause limits what governments may do regardless of the fairness of
procedures that it employs, and covers government conduct in both legislative and
executive capacities."). The burden is on the plaintiff to demonstrate it was the victim of
"a governmental action [that] was arbitrary, irrational, or tainted by improper motive,''
Woodwind Estates, Ltd. v. Gretkowski, 205 F.3d 118, 123 (3d Cir.2000) (abrogated on
12
other grounds by United Artists Theatre Circuit, Inc. v. Township of Warrington, 316
F.3d 392, 400-01 (3d Cir. 2003)) (quoting Bello v. Walker, 840 F.2d 1124, 1129 (3d
Cir.1988)), or that the government's conduct was so egregious that it "shocks the
conscience,'' Boyanowski, 215 F.3d 396, 401 (internal quotation marks omitted). The
"shocks the conscience" standard "is no calibrated yardstick," and thus conduct that
"shocks in one environment may not be so patently egregious in another." County of
Sacramento, 532 U.S. at 847, 850.
As a threshold matter, "a plaintiff must establish ... that he has a protected
property interest to which the Fourteenth Amendment's due process protection applies."
Woodwind Estates, 205 F .3d at 123. Not all property interests covered by procedural
due process are protected through substantive due process. Reich v. Beharry, 883
F.2d 239, 243 (3d Cir. 1989). Rather, "a plaintiff must have been deprived of a
particular quality of property interest." DeBlasio v. Zoning Bd. of Adjustment, 53 F.3d
592, 598 (3d Cir.1995) (abrogated on other grounds by United Artists Theatre, 316 F.3d
at 400). Whether a property interest is of a "particular quality" depends on whether the
interest in "fundamental" under the United States Constitution. Nicholas, 227 F.3d at
140. The Third Circuit approaches the topic of qualifying property interests with caution,
finding that real property ownership is "worthy of substantive due process protection,"
DeBlasio, 53 F.3d at 600, but other interests - such as a service contract with the state
- do not qualify, Reich, 883 F.2d at 245. In the context of escheat law, the first of the
Texas Cases held that "a debt which a person is entitled to collect" is a type of
"intangible real property." Texas, 379 U.S. at 677. The Supreme Court further held that
the Due Process Clause "prevents more than one State from escheating a given item of
13
property." Id. at 628; see also Western Union Telegraph Company v. Pennsylvania,
368 U.S. 71, 75 (1961) (a debtor "is deprived of due process of law if he is compelled to
relinquish [the property] without assurance that he will not be held liable again in
another jurisdiction or in a suit brought by a claimant who is not bound by the first
judgment.").
Defendants focus their briefing on the first thread of substantive due process,
arguing that that the Escheat Act does not violate due process because "Delaware's
legitimate interest in safeguarding and using abandoned assets is furthered by [the
Escheat Act's approval of] using estimates where records are inadequate to fix value
specifically." (D.I. 25 at 14) However, rational basis review is not the appropriate
standard here where plaintiff does not challenge the constitutionality of the Escheat Act,
but instead alleges a deprivation of property under the second thread of substantive due
process. Specifically, plaintiff alleges a deprivation of property in the form of the money
claimed by the State under authority of the Escheat Act, arguing that the use of
estimates to calculate the debt results in two or more States claiming the same property
as expressly prohibited by the Texas Cases. Although, as an estimate, the disputed
debt itself cannot be attributed to a particular owner, the unclaimed money on which the
estimate is based may be traced to identifiable creditors. Plaintiff alleges that
defendants' estimate is based on, inter alia: (1) uncashed checks escheated to other
states under the primary rule (D.I. 1 at ml 77(d), 77(g)); (2) checks that were voided,
reissued and cashed by the payees (Id. at ml 77(c), 77(f); and (3) checks payable to
payees with addresses in other States, some of which expressly exempt the property
from escheat (Id.
at~~
77(a), 90). If the allegations as claimed are true, the disputed
14
money may indeed violate the Supreme Court's prohibition against "more than one
State ... escheating a given item of property." Texas, 379 U.S. at 676. Accordingly,
the court denies defendants' motion to dismiss count II of the complaint alleging a
violation of substantive due process under the Fourteenth Amendment. (D.I. 24)
C. Ex Post Facto Clause
Article I, § 10, of the United States Constitution prohibits the States from passing
any "ex post facto Law." The Supreme Court determined that the Ex Post Facto Clause
is aimed at laws that "retroactively alter the definition of crimes or increase the
punishment for criminal acts." Collins v. Youngblood, 497 U.S. 37, 43 (1990); see a/so
Weaver v. Graham, 450 U.S. 24, 29 n.13 (1981) (the Ex Post Facto Clause is
"concerned solely with whether a statute assigns more disadvantageous criminal or
penal consequences to an act than did the law in place when the act occurred."). To
establish a violation of the Ex Post Facto Clause, the challenger must demonstrate "that
the law he challenges operates retroactively (that it applies to conduct completed before
its enactment) and that it raises the penalty from whatever the law provided when he
acted." Johnson v. United States, 529 U.S. 694, 699 (2000).
Civil legislation violates the Ex Post Fact Clause "[i]f the intention of the
legislature was to impose punishment." Smith v. Doe, 538 U.S. 84, 92 (2003).
However, if "the intention was to enact a regulatory scheme that is civil and nonpunitive,
[the court] must further examine whether the statutory scheme is 'so punitive either in
purpose or effect as to negate [the State's] intention to deem it civil.'" Id. (quoting
Kansas v. Hendricks, 521 U.S. 346, 361 (1997)). Determining whether a statutory
scheme is civil or criminal "is first of all a question of statutory construction." Kansas,
15
521 U.S. at 361. Ordinarily, the court must "defer to the legislature's stated intent," such
as the placement of the act in the probate rather than the criminal code. Id.
Accordingly, "only the clearest proof will suffice to override legislative intent and
transform what has been denominated a civil remedy into a criminal penalty." Hudson
v. U.S., 522 U.S. 93 at 100 (internal quotation marks omitted).
Here, plaintiff alleges that§ 1115 of the Escheat Act violates the Ex Post Facto
Clause by imposing a retroactive penalty for lack of record-keeping. Section 1115 of
the Escheat Act provides, in part:
Where the records of the holder available for the periods
subject to this chapter are insufficient to permit the
preparation of a report, the State Escheator may require the
holder to report and pay to the State the amount of
abandoned or unclaimed property that should have been but
was not reported that the State Escheator 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 current version of§ 1155 was adopted in June 2010 to "clarify
that, in accordance with established accounting and industry practice, the State may
employ estimation techniques in certain circumstances in order to determine a holder's
liability for abandoned or unclaimed property." Synopsis, S.B. No. 272. The Delaware
General Assembly explained that,
the employment of estimation techniques is an accepted and
routine practice used both by holders of abandoned and
unclaimed property and by the State Escheator in
determining holders' liability to report and pay such property
to the State with respect to periods for which inadequate
holder records exist, and desires to ratify and affirm that the
State Escheator has inherent authority to estimate
abandoned and unclaimed property liability when adequate
records do not exist.
16
Id. at§ 3.
Defendants allege that § 1155 is not "retroactive" because the use of estimates
to evaluate debt is a longstanding practice in Delaware. See Stanford Stevenson,
Unclaimed Property: Basics and New Developments, 30-FALL DEL. LAW. 14, 16 (2012)
("Unclaimed liability to Delaware has been calculated by extrapolation and estimation
for years, both by the state's auditors and by holders themselves despite there being no
specific authority providing for this technique."); see also Greene-Kelly, 32 FRANCHISE
L.J. at 41 ("The State of Delaware regularly audits entities domesticated in the state for
compliance with unclaimed property laws for audit periods as far as [sic] back as
1981."). Plaintiff challenges the general acceptance of statistical sampling methods
prior to the 2010 amendment to the Escheat Act, arguing that any use of estimates
occurred outside of Delaware and, in those States, estimation was a penalty for
inadequate record-keeping. Additionally, plaintiff alleges that the State Escheator
admitted that "standard retention policies" are 7 to 10 years. (D.I. 1 at W 47, 49)
As for whether§ 1155 is "punitive," defendants compare § 1155 with the UUPA,
which imposes a 10-year record retention requirement, the violation of which allows the
administrator to "reasonably estimateD" the amount due "on the basis of any available
records of the holder or by any other reasonable method of estimation." Uniform
Unclaimed Property Act§§ 20(f)-21 (a). In the comments section, the drafters of the
UUPA clarified that§ 20(f) should be "viewed as a penalty for failure to maintain records
of names and last known address." Id. § 20(f) cmt. The drafters opined that§ 20,
therefore, is consistent with Texas v. New Jersey which "is intended to prevent multiple
liability of holders." Id. Defendants urge that§ 1155, unlike§ 20 of the UUPA, is
17
characterized as a non-penal confirmation of existing evidentiary practice. Defendants
add that because § 1155 mandates that the estimate be "reasonable," it cannot be
viewed as a penalty.
The Supreme Court defines a retroactive law as one that applies to "conduct
completed before its enactment." Johnson, 529 U.S. at 699. Here,§ 1155 of the
Escheat Act was enacted in 2010, but it authorized the use of estimates for conduct
(namely, inadequate record-keeping) stretching back as far back as 1981. Although
Senate Bill No. 270 §13(c) states that "[s]ections 3 through 13 [including the
amendment to § 1155] of this Act shall become effective upon their enactment into law,"
the Delaware General Assembly specifically omitted the UUPA's suggested language,
"[i]f, after the effective date of this [Act]," from the introduction to §1155, thereby
indicating that the General Assembly intended estimates to be applied retroactively to
conduct occurring before the enactment of § 1155. The First Circuit has held that where
a statutory amendment "simply codified pre-existing practice ... , retroactive application
of the amendment raises no ex post facto concerns." U.S. v. Pelkey, 57 F.3d 1061 (1st
Cir. 1995). Although § 1155 was retroactively applied in accordance with the intent of
the General Assembly, questions of fact remain as to whether the legislation merely
codified a pre-existing practice and, as a consequence, fails to trigger Ex Post Facto
review.
In addition to being applied retroactively, legislation that violates the Ex Post
Facto Clause must also be punitive in nature. Smith, 538 U.S. at 92. Regardless of
whether§ 1155 of the Delaware Escheat Act was in fact based on § 20 of the UUPA,
both sections call for payment of the amount the administrator "reasonably estimates ..
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. on the basis of any available records of the holder or by any other reasonable method
of estimation." Because§ 20 of the UUPA was intended to be a penalty provision, yet
still requires the method of estimation to be "reasonable," defendants' argument that §
1155 is not a penalty because it calls for reasonable estimates is unpersuasive.
Moreover, § 1155 and § 20 are structurally and linguistically similar, and neither labels
the estimate provision as a "penalty" on its face. The drafters of the UUPA anticipated a
potential conflict with the Texas Cases for dual-liability by authorizing the use of
estimates, and they forestalled any such conflict by explaining that § 20 was to be
viewed as a penalty. See Uniform Unclaimed Property Act § 20(f) cmt. The Delaware
General Assembly, on the other hand, eliminated the document retention requirement
and avoided characterizing § 1155 as a penalty. In so doing, the General Assembly set
the stage for a violation of substantive due process. In other words, defendants are
faced with a dilemma: If§ 1155 is not a penalty provision, it likely violates plaintiff's
rights to substantive due process. If, on the other hand, § 1155 is a penalty provision,
its retroactive application likely violates the Ex Post Facto Clause. The court is
unprepared, at this juncture, to determine which scenario is most likely.
For the aforementioned reasons, the court finds that plaintiff's pleading
withstands defendants' motion to dismiss count Ill of the complaint alleging an unlawful
Ex Post Fact Law. (D.I. 24) The court, however, does not grant plaintiff's motion for
summary judgment that defendants violate the constitutional ban on Ex Post Facto
Laws by retroactively applying a substantive amendment to the Delaware Escheat Law.
(D.I. 22) At a minimum, issues of fact remain regarding whether using estimates to
19
calculate liability was a change of practice, or merely codification of a pre-existing
practice.
D. Takings Clause
Claims for a taking without just compensation are pursued under the Fifth
Amendment through the Fourteenth Amendment. The Fifth Amendment states that
"private property [shall not] be taken for public use, without just compensation." U.S.
Const. amend. V. While the Fifth Amendment does not prohibit the taking of private
property by the State, it "places a condition on the exercise of that power." First English
Evangelical Lutheran Church v. County of Los Angeles, 482 U.S. 304, 314 (1987). The
Fifth Amendment "is designed not to limit the governmental interference with property
right per se, but rather to secure compensation in the event of otherwise proper
interference amounting to a taking." Id. at 315. The Third Circuit has set forth three
factors to consider when conducting a takings analysis: "first, whether the government's
action entails a physical invasion of the plaintiff's property; second, the extent to which it
results in a diminution in the value of plaintiff's property; and third, the degree to which it
interferes with plaintiff's reasonable, distinct, investment-backed expectations."
Keystone Bituminous Coal Assn. v. Duncan, 771 F.2d 707, 715 (3d Cir. 1985) aff'd sub
nom. Keystone Bituminous Coal Ass'n v. DeBenedictis, 480 U.S. 470, 107 S. Ct. 1232,
94 L. Ed. 2d 472 (1987). The Supreme Court has held that a "'taking' may more readily
be found when the interference with property can be characterized as a physical
invasion by government." Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104,
124 (1978).
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Courts equate the public use requirement as "coterminous with the scope of a
sovereign's police powers." Carole Media LLC v. New Jersey Transit Corp., 550 F.3d
302, 307 (3d Cir. 2008) (internal quotation marks omitted). Even if one of the
legislature's motives is to raise revenue, this does not render a taking unconstitutional.
Id. at 310. In the escheat context, the Supreme Court has rationalized that "[i]t is the
owner's failure to make any use of the property - and not the action of the State - that
causes the lapse of the property right; there is no 'taking' that requires compensation."
Texaco Inc. v. Short, 454 U.S. 516, 529 (1982). Based on this logic, the Third Circuit
has found no Takings Clause violation when unclaimed property statutes allow States to
retain interest earned on abandoned property while in state custody. Simon v.
Weissman, 301 F. App'x. 107, 113 (3d Cir. 2008).
The parties focus their dispute on whether plaintiff has a legitimate property
interest in the assets, with defendants arguing that plaintiff is merely holding the
property for the legitimate owner and plaintiff arguing that defendants have failed to
identify any property legitimately subject to escheat. As previously explained, the court
finds that plaintiff has pied sufficient facts to support the position that it has a legitimate
property interest in the estimated debt given that the estimate may not be traceable to
bona fide creditors. It follows that, 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. Accordingly, the court denies defendants'
motion to dismiss count IV of the complaint alleging an unlawful taking without just
compensation. (D.I. 24)
E. Commerce Clause and Full Faith and Credit Clause
21
The Commerce Clause of the United States Constitution provides that "Congress
shall have Power ... [t]o regulate Commerce ... among the several States." U.S. Const.
art. I, § 8, cl. 3. Although it is phrased as an affirmative grant of power to Congress, the
Commerce Clause has long been understood to have a "negative" or "dormant" aspect
that prohibits the States from unjustifiably discriminating against or burdening interstate
commerce. See Oregon Waste Sys., Inc. v. Department of Environmental Quality, 511
U.S. 93, 98 (1994). Consequently, a state law or regulation is unconstitutional and
invalid if it discriminates against interstate commerce-that is, if it results in "differential
treatment of in-state and out-of-state economic interests that benefits the former and
burdens the latter." Id. at 99. A finding that a state law or regulation creates such
"economic protectionism" may be made on the basis of discriminatory purpose or
discriminatory effect. See Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 270 (1984).
The Third Circuit has articulated three standards of review: ( 1) state actions that
purposefully or arbitrarily discriminate against interstate commerce or undermine
uniformity in areas of particular federal importance are given heightened scrutiny; (2)
legislation in areas of peculiarly strong state interest is subject to very deferential
review; and (3) the remaining cases are governed by a balancing rule, under which
state law is invalid only if the incidental burden on interstate commerce is clearly
excessive in relation to the putative local benefits. See Old Bridge Chemicals, Inc. v.
New Jersey Dept. of Environmental Protection, 965 F.2d 1287, 1291 (3d Cir. 1992)
(citations omitted). A discriminatory restriction of commerce is subject to the "strictest
scrutiny" and must be struck down unless the State can prove that it "advances a
legitimate local purpose that cannot be adequately served by reasonable
22
nondiscriminatory alternatives." Oregon Waste, 511 U.S. at 100-101 (citation omitted).
That is, the statute will not be upheld if "the burden imposed on such commerce is
clearly excessive in relation to the putative local benefits." Pike v. Bruce Church Inc.,
397 U.S. 137, 142 (1970).
As for the Full Faith and Credit Clause, federal common law imposes on the
State of Delaware a full-faith-and-credit requirement to give another State's federal
judgment the same force and effect as it would be entitled to in that State's federal or
state courts. Delaware law "requires our courts to afford the same respect to federal
court judgments that the Full Faith and Credit Clause requires them to afford to
judgments from other states." See Pyott v. La. Mun. Police Emps.' Ref. Sys., 74 A.3d
612, 616-17 (Del. 2013) (applying California collateral estoppel law to determine
preclusive effect of prior California federal court demand futility dismissal). The
Supreme Court has held that "[t]he Full Faith and Credit Clause bars ... double
escheat" where the "debts or demands ... [were] taken from the appellant company by
a valid judgment" of another State. W. U. Tel. Co. v. Com. of Pa., by Gottlieb, 368 U.S.
71, 75-76 (1961).
Plaintiff alleges that defendants' estimation methodology affects economic
production, and by extension, interstate commerce in other states outside of Delaware.
(D.I. 1 at~ 147) Plaintiff also alleges a violation of the Full Faith and Credit Clause in
that defendants assess plaintiff for property owned by creditors in States that expressly
exempt the property from escheat under a "business-to-business" exemption. (Id.
at~
148) Plaintiff complains that, in requiring plaintiff to pay Delaware for property that other
States exempt, defendants interfere with commerce in those States. (Id.
23
at~
149)
Defendants respond that the Commerce and Full Faith and Credit Clauses are
not implicated because plaintiff's claims rest on the faulty assumption that a holder's
state of incorporation may not escheat assets due to another State, citing the Supreme
Court's holding that a debtor's state of incorporation may escheat if the "laws of the
creditor's State do not provide for escheat." Delaware, 507 U.S. at 504. Defendants
also argue that plaintiff fails to explain how defendants interfere with interstate
commerce given that the assessment is levied on the debtor entity, not the State.
Defendants also take issue with the lack of evidence regarding how much of the
challenged assessment is attributable to allegedly excluded "business-to-business"
debts.
Given the brevity of the parties' briefing, the court is unprepared, at this stage, to
determine whether the Supreme Court intended secondary priority to attach if the laws
of the creditor's State are silent on the question of escheat or if, as defendants allege,
secondary priority attaches if the laws of the creditor's State actively exempt certain
property from escheat. 9 Whether or not it is appropriate for the State where the debtor
is incorporated to base estimates on property that was exempted by the creditor's State,
plaintiff also alleges that estimates were based on cashed checks as well as property
actually escheated to other States. (D.I. 1 at 1J 77(c)-(g)) These latter examples, if true,
are in tension with the Supreme Court's prohibition against double escheat as a
violation of the Full Faith and Credit Clause. Western Union, 368 U.S. at 76. As pied,
9
Although taken somewhat out of context, the court is inclined to agree with the
sentiment expressed by the United States District Court for the District of New Jersey
that "inherent in the State's sovereignty is its choice not to exercise custodial escheat
over [the disputed property]." American Express, 755 F.Supp at 607.
24
the Full Faith and Credit Clause violation is inexorably intertwined with the alleged
violation of the Commerce Clause. The court is unwilling to dispense with a potentially
meritorious Commerce Clause claim at this stage of the litigation, as a more complete
factual record would aid the court in making a determination. Accordingly the court
denies defendants' motion to dismiss count V of the complaint alleging a violation of the
Commerce Clause the Full Faith and Credit Clause. (D.I. 24)
IV. CONCLUSION
For the foregoing reasons, defendants' motion to dismiss (D.I. 24) is granted in
part and denied in part, and plaintiff's motion for summary judgment (D. I. 22) is denied.
An appropriate order shall issue.
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