Despite a very “holder friendly” summary judgment issued in late June from the Federal  District Court for the District of Delaware in Temple-Inland vs. Cook, the subsequent August 5, 2016 confidential settlement of this case now calls into question whether (or to what extent) we can expect favorable changes to  abandoned/unclaimed property (AUP) enforcement in Delaware and, perhaps, other states.

The case, Temple-Inland vs. Cook originated from a Delaware state audit of Temple-Inland’s AUP initiated in 2008. During the audit covering years 1981 to 2007, Delaware’s third-party auditor uncovered one uncashed payroll check for $147.30 owed to a Delaware resident.  However, because Temple-Inland (as per its own record retention policy) could not produce adequate records prior to 2003, Delaware performed an extrapolation resulting in a final audit assessment of $1.4 million.

Such aggressive estimation techniques and abnormally long look-back periods are commonplace among AUP audits across the nation, particularly when being conducted by private, contingent-fee audit firms hired by the states. Although Delaware has arguably developed the most egregious reputation in this area, it’s also true that few states provide for a true “statute of limitation” on look-back periods or any hesitancy to employ “hired guns” to conduct their audits.

In 2014, Temple-Inland appealed its final unclaimed property assessment and filed a complaint against the Secretary of Finance for the State of Delaware, Thomas Cook, as well as the state’s escheator and audit manager. Temple-Inland alleged that the extrapolation methodology and the extensive look-back period used by the Delaware’s third-party auditor violated the company’s Constitutional rights.

The United States District Court for the District of Delaware issued a summary judgment that sided with Temple-Inland. In addition to determining that Delaware’s unclaimed property audit practices violated the constitution, the Court stated that the audit practices in this case amounted to a “game of ‘gotcha’ that shocks the conscience.”  Not long after this judgment, however, the state negotiated a voluntary settlement agreement with Temple-Inland, thus avoiding trial.

While a great “win” for Temple-Inland, settling the case rather than taking it to trial prevents the fallout and expected authoritative guidance from a trial decision, meaning the impetus for states to adjust their AUP policies will remain uncertain, at best.

Nevertheless, it is expected that Delaware, in particular, will revisit its AUP practices. Indeed, we understand that the state will most likely continue to require companies to estimate AUP liability based on its total AUP obligations in all states, but in return will indemnify the company from any other states’ attempt to use first priority estimation. Furthermore, it also appears likely Delaware will now recognize and favorably account for exemptions offered by other jurisdictions (e.g., business-to-business exemptions) in coming up with error rate estimation ratios.  Finally, given the state’s recently adopted statutory framework (established subsequent to the Temple-Inland audit) regarding look-back periods, it’s not likely there will be any published or official changes in this regard.  However, holder proposals for shorter look-back periods on a case-by-case basis may be entertained in light of Temple-Inland.

We expect further information will be released in the coming months and will keep you up to date as it becomes available. For more information about how Temple-Inland affects your AUP reporting, please contact us.

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