Delaware State Court Enforces Unclaimed Property Subpoena - Case Headed Back to Federal Court
The story started nearly five years ago, in December 2015, when Univar received notice that it was to be the subject of an unclaimed property audit conducted by Kelmar Associates. After some procedural wrangling back and forth among the state, the holder, and Kelmar, an initial document request was issued in September 2016 seeking four categories of documents: (1) tax returns and related information; (2) apportionment schedules; (3) information relating to certain shared-service and disbursement activity; and (4) information concerning prior unclaimed property audits and voluntary disclosure proceedings.
In October 2018, after the holder failed to produce the requested information, Delaware issued an administrative subpoena seeking to compel production. (As those who follow unclaimed property closely may know, in 2017, Delaware enacted a revised unclaimed property law (the “New Law”) which expressly allowed the issuance of such subpoenas. See 12 Del. Code 1171(3)). In response to the subpoena, Univar filed an action in federal court in December 2018 challenging the audit on various constitutional grounds. Delaware, for its part, filed its own action in Delaware state court seeking to enforce the subpoena.
Thus, as of the beginning of 2019, there were two separate litigation tracks concerning the audit; one in federal court, one in state court. Those courts thereafter each issued decisions — primarily on procedural and non-merits matters — seeking to unwind the knot of litigation. In September 2019, the federal court considering the constitutional challenges to the audit held that Univar could proceed with its claims challenging the audit on due process and equal protection grounds, but that the majority of Univar’s claims were not “ripe” for adjudication unless and until the state court entered an order enforcing the subpoena. The federal court thus decided to stay the action until further proceedings took place in Delaware state court.
Those state court proceedings have now been completed. On October 29, the Delaware Court of Chancery issued a Memorandum Opinion enforcing the subpoena and directing Univar to comply. In doing so, the Chancery Court considered, and ultimately rejected, three separate challenges to the subpoena.
First, Univar argued that the Delaware Department of Finance did not have authority to issue the subpoena because the 2017 legislation explicitly authorizing the issuance of subpoenas was enacted after the commencement of the Univar audit. The Court rebuffed that contention, noting that the Delaware legislature appeared to contemplate that such subpoenas could be issued in audits that predated the 2017 law, and that the subpoena itself was issued after the law was enacted. More to the point, the Court concluded that it was “indisputable that the State had the power to issue administrative subpoenas before the New Law went into effect . . . .”
Next, the Court held that Univar’s concerns about confidentiality, though well founded, did not excuse its compliance with the subpoena (though the door was left open for similar challenges in the future). Here, Univar’s argument focused not on Delaware’s audit power, but rather who was exercising that power: a contingent fee auditing firm (Kelmar Associates) working on behalf of Delaware and several other states. While acknowledging that Delaware’s New Law contained statutory privacy protections (see e.g., 12 Del. Code Sec. 1189) Univar argued that these protections would not prevent Kelmar from sharing the information with other states that provided no such protection. In order to avoid this fight, and “[a]pparently recognizing the Court was inclined to impose confidentiality conditions whether the State agreed or not,” Delaware instructed Kelmar to have a separate audit team perform the Univar audit on behalf of Delaware, and to refrain from sharing information with others. The Court concluded that this procedure alleviated Univar’s concerns about confidentiality.
Finally, the Court analyzed Univar’s main substantive argument: that the information requested in the subpoena was “unreasonably broad or burdensome” under Delaware law. The Court began its analysis by setting forth the test used to determine whether the subpoena is enforceable, taken from the U.S. Supreme Court decision in United States v. Powell. Under the Powell test, an administrative agency’s subpoena will be enforced where:
(1) the investigation will be conducted pursuant to a legitimate purpose; (2) the inquiry may be relevant to the purpose; (3) the information is not already within the [agency’s] possession; and (4) the administrative steps have been followed.
Delaware v. Univar, C.A. No. 2018-0884-JRS (Oct. 29, 2020) (quoting United States v. Powell, 379 U.S. 48, 57-58 (1964)).
The Court then applied the Powell test the the specific information sought by the subpoena: tax returns, apportionment schedules, shared service information, and information relating to prior unclaimed property audits. The Court found that all of these requests passed the Powell test, giving particular deference to the state in light of the “early stage” of the audit.
Though the Court ultimately ordered that the subpoena could be enforced, it indicated that it would stay (i.e., delay enforcement of) the order until such time as Univar had its constitutional objections to the subpoena and the audit adjudicated by the federal court.