In Univar, Inc. v. Geisenberg, we see the most significant litigation to date over the new Delaware unclaimed property administrative subpoena.
To make this case even more interesting and complicated is the two separate litigation tracks – one in federal court and one in Delaware’s Court of Chancery.
Univar, incorporated in Delaware with headquarters and principal place of business in Illinois, filed suit against Delaware officials challenging the validity of an unclaimed property audit and a subsequent subpoena for a vast array of Univar documents requested by Kelmar, the third-party contingent fee auditor. Separately, Delaware sought a ruling from the Court of Chancery to enforce its subpoena against the holder for those documents.
The Unclaimed Property Audit Leading to Litigation
The narrative of Univar’s dispute with Delaware is nevertheless familiar to anyone with an interest in unclaimed property law.
On December 11, 2015, Delaware notified Univar that Kelmar, as its third-party auditing firm, would be conducting a far-ranging audit for unclaimed property holdings and obligations. 19 additional states joined the Univar audit to be conducted by Kelmar.
As is customary in its unclaimed property audits, Kelmar issued several requests for documents. Univar raised questions of confidentiality in those records, and declined to turn them over without a written agreement for additional protections to keep the documents and the information in them safe from unauthorized disclosure.
For over two years, the parties grappled over this issue. Then on October 30, 2018, Delaware issued a formal subpoena for those documents that were the subject of the original Kelmar request. The subpoena mandated that Univar deliver the requested documents on or before December 3, 2018.
Univar was concerned that by divulging these records to Kelmar, they were exposing their confidential information and often times, trade secrets, to potential requests by competitors or other actors under various state Freedom of Information Acts (FOIA) requests.
Thus, the challenge to the subpoena under Delaware’s unclaimed property laws.
The Univar Unclaimed Property Litigation Commences
Univar filed a verified complaint against Delaware officials on December 3, 2018, the same date that the subpoena set as a deadline for providing the requested materials.
Four days later, on December 7, 2018, the State filed an action in the Court of Chancery (a Delaware state court) against Univar to seek enforcement of the subpoena. It also filed a motion to dismiss Univar’s complaint in federal court.
Meanwhile, in the state litigation, Univar filed a motion to stay that state court case while the federal District Court considered its claims of constitutional violations. On April 18, 2019 the Chancery Court issued an implementing order that granted Univar’s motion, staying the state court proceedings while the federal constitutional issues were considered by the federal court.
That same day, the state of Delaware filed a request to pursue an interlocutory appeal. This ability to appeal a ruling before the case has been finally decided on the merits is not often granted by a state court, since the judiciary prefers to consider all matters related to a specific case at the same time for efficiency’s sake.
The Court of Chancery did not agree with the state that this case involved a “substantial issue of material importance” sufficient to warrant an appeal before final judgment, and thus denied the state’s motion for the interlocutory appeal. On June 18, 2019, the Supreme Court of Delaware upheld the denial of the interlocutory appeal. Subsequently, Univar filed a motion to dismiss the state court case on the grounds that it was not yet ripe for adjudication.
On September 17, 2019, the District of Delaware court issued its ruling on the state defendants’ motion to dismiss Univar’s complaint.
On May 21, 2020, the Court of Chancery issued its ruling on Univar’s motion to dismiss on the grounds that the state’s claims were not ripe.
With that procedural history now outlined, let’s proceed to examine each of the two major opinions issued in this case—first from the federal court, then from the Court of Chancery.
The Federal Court Action
In the U.S. District Court for the District of Delaware, this case challenged Kelmar’s conduct of an abandoned property audit against Univar on a variety of grounds. The complaint alleged a number of violations of Univar’s constitutional rights, including:
- Unreasonable search and seizure in violation of the Fourth Amendment;
- Substantive due process rights under the Fourteenth Amendment;
- Procedural due process rights under the Fourteenth Amendment;
- Unconstitutional taking of private property for public use without just compensation in violation of the Fifth Amendment;
- Equal protection of the laws under the Fourteenth Amendment; and
- Ex post facto law prohibition under Article 1, Section 10.
The complaint sought a declaratory judgment that the defendants had violated Univar’s rights in these ways.
Additionally, Univar asked the court to declare that Delaware’s method of estimation violated due process rights, as did using Kelmar to conduct a multi-state audit by risking the confidentiality of its proprietary business records.
Finally, Univar asked the court to rule that the contingency fee arrangement the state had with Kelmar violated Univar’s due process rights as a holder, since it led to Kelmar being the real party in interest and thus creating an improper conflict of interest.
In rebuttal, the state defendants argued that Univar’s claims were not yet ripe for adjudication.
Univar’s Claims Not Ripe for Declaratory Relief
Ripeness is part of the “case or controversy” requirement that flows from Article III of the U.S. Constitution. It is separate from standing but related in the sense that both doctrines are designed to ensure the judiciary is asked to evaluate and settle only actual, concrete disputes between adverse parties and not vague claims that aren’t yet ready for a firm, final resolution.
In layman’s terms, a case is ripe for judicial action when there is an actual conflict to decide.
There are three factors in determining whether a declaratory judgment action is ripe and may be adjudicated:
- “The adversity of the parties’ interests”
- “The probable conclusiveness of a judgment”
- “The practical utility to the parties of rendering a judgment”
In this case, the court notes that the facts are “largely the same” as those found in another Delaware unclaimed property case, Plains All American Pipeline, L.P. v. Thomas Cook, 201 F. Supp. 3d 547 (D. Del. 2016).
In Plains All American, the Third Circuit found that the plaintiff’s unreasonable search and seizure, substantive due process, takings, ex post facto and other claims similar to Univar’s were unripe. This could have been decisive, as courts generally stick to precedence as a controlling factor in adjudication of disputes.
However, Univar claimed its case differed substantially on the underlying facts, and thus its claims were ripe.
Specifically, Univar claimed that the defendants had “taken affirmative steps to enforce their unconstitutional audit demands” when they served the administrative subpoena on the holder. Additionally, Univar argued, the state had used an estimation methodology that was unconstitutional but which was “now formally recognized” under state law. Consequently, Univar argued that the defendants would be required to use that same method against it, while Univar’s standard document retention policies did not cover the period of time the defendants were auditing (back to 2000).
Univar also pointed out that the state was applying parts of the law that had been codified into statutory law in 2017, two years after the audit had begun. Univar claimed this amounted to “changing the rules at halftime.”
The court pointed out that this was not sufficient to confer ripeness on Univar’s claims for one simple reason: no one knew what rules would be applied to Univar’s audit, because they hadn’t progressed to that point yet.
In short, Univar couldn’t prove the ripeness of its claims because it had not yet been “compelled to participate in the audit.” That hadn’t happened yet.
Univar would have to refuse to comply with the administrative subpoena, then wait for the state’s enforcement action in state court to be resolved.
Until these future events actually occurred, Univar’s claims were not ripe.
Equal Protection and Procedural Due Process Claims
The court excepted Univar’s claims as to a violation of the equal protection clause and its procedural due process rights. As in the Plains case, the court found that these claims were ripe and could proceed.
As to the equal protection claim, the claim became adverse simply by “initiating the process.” If the defendants took any future actions against Univar, the equal protection claim would be unaffected because they’d already targeted Univar by notifying it that the state intended to audit the company under the Escheat Law.
The same was found to be true of Univar’s procedural due process claims.
Given the state’s “widespread” reliance on private auditors such as Kelmar, a ruling on this claim would be helpful to both the parties and any other potential holder corporations in the future. The harm that served as the basis of the procedural due process claim was the appointment of Kelmar as the auditor. That event had already occurred, establishing the requisite level of adversity for a ripe claim.
Failure to State a Claim
The defendants also alleged that Univar had failed to sufficiently state claims on which the court could grant relief.
The Court evaluated both the procedural due process and equal protection claims (the only two remaining at this point) on this point.
Kelmar Has Significant Control Over Delaware Audits
To survive the defendants’ motion to dismiss for failure to state a procedural due process claim, Univar had to show it was forced to “submit a dispute to a self-interested party.” Univar argued it had done so, given Kelmar’s contingency fee arrangement in adjudicating and administering the unclaimed property audit.
Delaware argued that Kelmar wasn’t a decision-maker and thus there was no violation of the plaintiff’s right to a neutral decision-maker. It argued that Kelmar was really more like an investigator or prosecutor, who collected evidence and then made a preliminary recommendation. It was the State Escheator who made any final determinations of amounts owed, and that official could reject Kelmar’s conclusions entirely and make an entirely different decision.
Finally, the defendants pointed out that the Escheat Statute itself mandated the State Escheator to conduct an independent review before instituting any collection action, with holders free to file challenges to that action in the Court of Chancery.
The court noted that the presence of the factual disputes between the parties established a stated claim.
Further, the Escheator’s review and the access to some limited judicial appeal didn’t adequately meet the procedural due process requirements of a “de novo review of all factual and legal issues.”
Kelmar’s involvement created the appearance of a self-interested party with “significant control” over the entire process, and thus the court held Univar had adequately stated a procedural due process claim in this regard.
Delaware Targets Large Companies in Audit Program
The Fourteenth Amendment prohibits states from denying to people (and corporate entities) the equal protection of its laws. The essence of equal protection is fair and uniform treatment of all those who are similarly situated.
To pass muster, economic legislation such as the Delaware Escheat Statute and unclaimed property program must be rationally related to a legitimate state interest. This is a fairly low bar to meet, but Univar alleged that both Kelmar and Delaware unfairly targeted large, well-capitalized companies in an effort to raise revenues for the state’s coffers.
However, Univar argued, the “size, wealth and fame of the holder” has no rational relationship to the statute’s purpose of reuniting owners with their previously unclaimed property.
The defendants countered that under prior case law, having a “revenue-raising” purpose was fine as long as it wasn’t the only purpose of the unclaimed property program. Yet the court noted that the state didn’t point to any other reason why it would target large, wealthy corporations.
Given the substantial amounts raised by escheat, and the fact that it was the third-largest revenue source for the state, the court agreed that Univar had adequately stated an equal protection claim.
But the Subpoena
Given the contentiousness of the proceedings, and the additional proceedings in state court flowing from the same factual dispute, the Court decided to stay the federal court proceedings until the state court decided whether the subpoena the state served on Univar was enforceable.
Delaware State Court Proceedings on the Unclaimed Property Subpoena
Recall that in this related state court case, Delaware sought to compel Univar to comply with the subpoena issued on its behalf.
Univar filed a motion to dismiss this case, claiming that the State hadn’t yet met the legal prerequisites for enforcing the subpoena. Consequently, Univar argued, the state’s claim was not yet ripe and thus Univar was entitled to dismissal.
On May 21, 2020, the Chancery Court issued its ruling on the holder’s motion to dismiss, holding that Univar didn’t meet its burden with respect to ripeness, and denied its motion to dismiss.
Ripeness of State’s Claim in Court of Chancery
In 2017, the Delaware legislature amended the unclaimed property program after Temple-Inland, Inc. struck down large portions of the escheat law. Part of the new statutory scheme included authorization for the issuance of administrative subpoenas forcing corporate holders to turn over its books and records. In its motion to dismiss, Univar challenged whether the state had complied with statutory requirements that were necessary prior to issuing a subpoena.
When is an Audit a Multi-State Audit?
Univar claimed the State hadn’t complied with statutory confidentiality provisions, nor had it issued regulations to fairly manage multi-state audits.
Despite 20 states signing on to the Kelmar audit, the Court rejected Univar’s claim that the audit is definitively a multi-state audit, as the state insisted it was conducting only an audit under the law of and for Delaware.
The court said that even assuming this was a multi-state audit, Kelmar would still be bound to keep Univar’s confidential information produced under the subpoena away from anyone who is not a Delaware official or employee.
Additionally, the Court of Chancery had the authority to subject the documents sought to a confidentiality order complying with Delaware law and possibly prohibiting Kelmar employees from sharing any of the information sought under the subpoena with anyone else, even other Kelmar auditors.
The Court likewise rejected the claim that the State hadn’t promulgated sufficient regulations to manage multi-state audits, saying that “Univar may not like the number or content of regulations that have been promulgated” but that this didn’t necessarily create a fatal gap in regulatory coverage.
There was no specific requirement in the new law for the size, number, or scope of specific regulations. The court also observed that standards developed under Delaware common law could also fill any regulatory gaps that might exist.
How can Delaware officials claim with any sense of sincerity that this is not a multi-state audit? Delaware may be acting in its own right, but its auditor Kelmar does not treat each state as an independent audit. When documents are sent to Kelmar, it is done for all the states at once, regardless of what Delaware says it is doing. How can documents not be disclosed by Kelmar to the other states?
Did Univar Waive Facial Challenges to the Subpoena?
Also at issue before the Court of Chancery was the state’s argument that Univar should be compelled to press the “facial challenges” it made to the new 2017 laws and that since it didn’t do so in its Motion to Dismiss, the Court should deem all of those challenges waived.
Univar denied it had raised any facial challenges to the new statute before the Court of Chancery, pointing out that it raised its constitutional claims to the federal District Court.
The court ultimately concluded that it wasn’t the state court’s job to decide whether these constitutional claims had been preserved or waived. Thus, it dodged these claims and left them for the District Court to decide.
Following the court’s denial of Univar’s motion to dismiss, the Court of Chancery will next consider the State’s case for the enforcement of the subpoena on its merits.
Once the Court of Chancery determines the enforceability of the subpoena, then the Federal Court will need to rule on the remaining claims for equal protection and procedural due process.
What This Means for Unclaimed Property Holders
Still outstanding is the issue of whether Delaware can enforce a subpoena against a recalcitrant holder. So if you are in a multi-state unclaimed property audit, what are you to do?
Holders should analyze the risk of potential disclosure through the participating states’ unclaimed property and FOIA laws. Not all states are created equally in this analysis, so depending on the participating states, you may determine that the risk is sufficiently low and proceed. Others may determine that the risk is too high and that other protective actions are required.
Some of the solutions may include, but are not limited to:
- Confidentiality and non-disclosure agreements with the third-party auditor.
- Bi-bifurcating the audit between states that have favorable disclosure rules and those that do not.
- Seeking protective orders from state courts to protect the disclosure of data under audit.
And of course, waiting on the determination of the Univar case in both the Court of Chancery and the Federal Court is also an option.
As is common in unclaimed property cases, the law is not a settled issue and is continually changing as these issues are litigated and the State Escheator and legislature reacts.
For help navigating the continuing changes for your unclaimed property audit or compliance program, please contact Kimberly DeCarrera.
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