Federal judge blasts Delaware government in abandoned property suit, sparking budget woes

By Randall Chase, AP

DOVER, Delaware — A U.S. federal judge on Tuesday blasted Delaware’s practice of collecting abandoned property, issuing a ruling that could have dire budget consequences for the state. U.S. District Court Judge Gregory Sleet said Delaware’s abandoned property, or escheat, practices violate due process and amount to a game of “gotcha” that “shocks the conscience.” The ruling came in a lawsuit in which packaging company Temple-Inland Inc., a subsidiary of Memphis-based International Paper, challenged Delaware’s claim to almost US$1.4 million in purported uncashed accounts payable and payroll checks. Abandoned property is a critical source of funding for Delaware, amounting to about half a billion dollars annually and representing the state’s third-largest revenue category.

State Finance Secretary Tom Cook said his agency was reviewing the decision with attorneys and had no immediate comment.

Governor Jack Markell said he had not reviewed the decision and referred to questions to his chief of staff, Michael Barlow, who declined to comment on the potential impact of the ruling.

“There hasn’t been an opportunity to review the decision,” said Barlow, who is an attorney. Diane Green-Kelly, an attorney for Temple-Inland, said the company was pleased. “We are still in the process of digesting the opinion,” she said. Temple-Inland argued among other things that Delaware’s practice of estimating unclaimed property liability for years in which actual records are not available amounted to an unlawful taking of property and violated constitutional provisions regarding due process.

Audit State officials began an unclaimed property audit of Temple-Inland in 2008, telling the company that the audit period would begin in 1981. But because the company was unable to produce records before 2003, officials used an estimation method to extrapolate that the state was owed US$2.1 million. The figure was subsequently reduced to the amount that nevertheless remained in dispute.

The Temple-Inland lawsuit is one of several challenging Delaware’s abandoned property system, which has become a source of tension between the business world and a state that is the legal or corporate home to more than 1 million business entities, including more than 60 percent of Fortune 500 companies. It also has led other states to challenge Delaware in court over abandoned property.

Abandoned property can include unclaimed stocks and bonds, insurance policies, uncashed checks, unclaimed wages, dividends, even unredeemed rebates and gift certificates. Under federal law, a state can take such property if it remains unclaimed for a certain number of years and the true owner can’t be found. Under U.S. Supreme Court rulings, states follow a two-tier scheme for reporting and claiming abandoned property. Under the primary priority rule, unclaimed property is reported to the state of the owner’s last known address appearing on a company’s records. But if the owner’s address is unknown or incomplete, the unclaimed property is reported to the company’s state of incorporation.