State of Delaware Dept of Finance v. AT&T Inc. ( 2021 )

IN THE SUPREME COURT OF THE STATE OF DELAWARE
STATE OF DELAWARE, §
DEPARTMENT OF FINANCE, § No. 303, 2020
§
Plaintiff Below, §
Appellant, § Court Below: Court of Chancery
§ of the State of Delaware
v. §
§ C.A. No. 2019-0985
AT&T INC., §
§
Defendant Below, §
Appellee. §
Submitted: March 17, 2021
Decided: June 1, 2021
Before SEITZ, Chief Justice; VALIHURA and TRAYNOR, Justices.
Upon appeal from the Court of Chancery: AFFIRMED AND REMANDED.
Melanie K. Sharp, Esquire, Martin S. Lessner, Esquire (argued), Mary F. Dugan,
Esquire, and Michael A. Laukaitis II, Esquire, YOUNG CONAWAY STARGATT
& TAYLOR, LLP, Wilmington, Delaware; Attorneys for Plaintiff-Appellant State
of Delaware, Department of Finance.
Brian M. Rostocki, Esquire and Benjamin P. Chapple, Esquire, REED SMITH LLP,
Wilmington, Delaware; Sara A. Lima, Esquire (argued), REED SMITH LLP,
Philadelphia, Pennsylvania; Attorneys for Defendant-Appellee, AT&T Inc.
SEITZ, Chief Justice:
The Delaware Department of Finance served an administrative subpoena on
AT&T Inc. to produce records relating to a financial audit. AT&T refused to
produce all of the requested records. The Department responded by filing a
complaint in the Court of Chancery to enforce the subpoena. AT&T defended by
claiming, among other things, that the subpoena exceeded the Department’s
authority and was overbroad. The Court of Chancery held that, although the
Department validly issued the subpoena, AT&T “met its burden to show that the
scope of the subpoena is so expansive that enforcement would constitute an abuse”
of the court’s process. 1 The court noted that it had offered the Department the
opportunity to supplement the record to explain why the subpoena should be
enforced as written, but the Department declined the invitation. And, according to
the court, it could have modified the subpoena, or permitted the Department to serve
a narrower subpoena, but the Department declined these alternatives. The court
therefore quashed the subpoena in its entirety. The Department has appealed the
court’s decision.
For the reasons explained below, we affirm the Court of Chancery’s judgment.
We recognize, however, as the Court of Chancery did, that the procedural and
substantive aspects of administrative subpoena enforcement are issues of first
impression in Delaware. We adopt the procedures and substance followed by the
1
State of Del., Dep’t of Fin. v. AT&T Inc., 239 A.3d 541, 547 (Del. Ch. 2020).
2
federal courts in administrative subpoena enforcement proceedings. When the
Department files a complaint to enforce an administrative subpoena, it must support
the complaint with an affidavit or verification that shows it has a legitimate purpose
for its investigation, the information sought may be relevant to the purpose and is
not already in the Department’s possession, and the Department has complied with
any administrative requirements. The respondent then files a response, where it can
contest the Department’s assertions. If the respondent goes a step further and claims
that the subpoena has been issued for an improper purpose such that enforcement
would be an abuse of the court’s process, then the burden is on the respondent to
make a particularized showing in its response that the Department issued the
subpoena in bad faith, such as for harassment or to pressure the respondent to settle
a collateral dispute. After the respondent files a response, and the parties make any
further submissions called for by the court, the Court of Chancery should then
convene a prompt hearing and address in summary fashion the enforcement issues.
An evidentiary hearing should take place only in those cases when the court, after
according great deference to the Department’s administrative judgments, believes
that the disputed issues can only be resolved after hearing from witnesses.
Because we have announced new procedural and substantive standards
governing administrative subpoenas, we will allow the Department to serve a new
subpoena on AT&T that complies with the guidance in this opinion. If the dispute
3
cannot be resolved, the Department should file an amended complaint to enforce the
new subpoena, which should be addressed by the Court of Chancery consistent with
the procedures and substantive review announced in this opinion.
I.
Delaware’s unclaimed property law, also known as escheat, allows the State
to claim abandoned property if, after the statutory dormancy period, no rightful
owner appears (the “Escheat Law” or “Escheat Statute”).2 Unclaimed property laws
are rooted in the principle that abandoned property should be collected by the State
to benefit the citizenry rather than confer a potential windfall on the holder.3
2
12 Del. C. §§ 1130-1190. Escheat means the State assumes title to or custody of unclaimed
property. Note, Origins and Development of Modern Escheat, 61 COLUM. L. REV. 1319 (1961).
Escheat originated in the English feudal system where all land was considered derived from the
Crown. Id. at 1320. If a tenant died without heirs, “the land escheated, or fell back[,]” and reverted
up the feudal chain of possession. Id. Similarly, the common law concept of bona vacantia gave
the Crown the power to claim title to abandoned personal property. Id. at 1326 (noting that bona
vacantia differs from escheat in that bona vacantia “was predicated on the absence of any other
owner rather than on [the Crown’s] status as ultimate owner”). In the United States, escheat and
bona vacantia merged under the umbrella of escheat. See Delaware v. New York, 507 U.S. 490,
497 n.9 (1993) (explaining that the contemporary concept of escheat bears a closer resemblance to
bona vacantia and encompasses both real and personal property). States, as sovereigns, may
escheat real or personal property located in that state after the owner has “abandoned” the property
as defined under the State’s escheat statute. Texas v. New Jersey, 379 U.S. 674, 677 (1965),
supplemented by, 380 U.S. 518 (1965). Modern escheat statutes also cover abandoned or
unclaimed intangible personal property such as corporate dividends, bank accounts, and insurance
policies. See, e.g., 12 Del. C. § 1130(18) (defining “property” as both tangible and intangible
under Delaware’s escheat laws).
3
The State may use the funds obtained through the unclaimed property statute in its operating
budget until the property is claimed. See State of Del., Dep’t of Fin. v. Univar, Inc., 2020 WL
2569703, at *1 (Del. Ch. May 21, 2020).
4
Under Delaware’s Escheat Law, there is an Escheator of the State, who is the
Secretary of Finance or the Secretary’s delegate.4 The State Escheator can, subject
to limitations, “contract with a person to conduct compliance reviews and
examinations” of the State’s unclaimed property laws.5 It can examine records, take
testimony, and issue subpoenas to assess compliance with the State’s unclaimed
property laws.6 Specific to subpoenas, the statute provides that the State Escheator
or its agent can:
(3) Issue an administrative subpoena to require that [] records . . . be
made available for examination and that [] testimony . . . be provided.
(4) Bring an action in the Court of Chancery seeking enforcement of an
administrative subpoena issued under paragraph (3) of this section,
which the Court shall consider under procedures that will lead to an
expeditious resolution of the action.7
4
12 Del. C. § 1102.
5
Id. at § 1178.
6
Id. at § 1171. The State Escheator can also coordinate an audit with other states to verify
compliance with the State’s Escheat Law. Id. at § 1181. If the State Escheator works with other
states, it can only exchange information or examine records “if the other state has confidentiality
and security requirements substantially equivalent to those in the [Delaware Escheat Statute] or
agrees in a record to be bound by this State’s confidentiality and security requirements.” Id. at
§ 1181(b). The State Escheator can also “retain a private attorney in this State or another state or
foreign country to commence an action to recover property on behalf of the State Escheator and
may agree to pay attorneys’ fees based in whole or in part on a fixed fee, hourly fee, or a percentage
of the amount or value of property recovered in the action.” Id. at § 1182(e). The Escheat Statute
also has general confidentiality requirements that must be followed when conducting an audit. Id.
at § 1189.
7
Id. at § 1171. The Court of Chancery plays a role beyond hearing requests to enforce
administrative subpoenas. In an appellate capacity, the court adjudicates underreporting disputes
between the State Escheator and respondents over escheated property (12 Del. C. § 1179) and can
“enforce the determination and secure payment or delivery of past due, unpaid, or undelivered
property.” Id. at §§ 1179-80.
5
A.
On January 12, 2012, the Department sent AT&T—a Delaware corporation—
a notice of unclaimed property examination. 8 The Department designated third-
party auditor Kelmar Associates LLC (“Kelmar”) as its agent for the examination.
Over the next several years, Kelmar requested from AT&T documents related to the
audit. AT&T apparently satisfied all the requests except the two that are the subject
of this appeal. The parties refer to these requests as the “Rebates Request” and the
“Disbursements Request.” On October 30, 2014, Kelmar sent the Rebates Request.
It asked AT&T to identify and provide transaction details for all general ledger
accounts used to track customer rebate accrual and expense activity during a
particular period.9 The Rebates Request also asked AT&T to name all third-party
administrators it had used to issue rebates and the duration of the vendors’
relationships with AT&T.10
On January 17, 2018, Kelmar notified AT&T of the Disbursements Request.
The Disbursements Request sought information on all checks issued from twenty-
seven accounts since June 1992.11 Kelmar asked AT&T to identify which business
unit each check was issued on behalf of, the general ledger account where it was
8
Since 1999, AT&T filed consolidated unclaimed property reports on behalf of itself and its
affiliates with the State Escheator. App. to Opening Br. at A0103; 12 Del. C. § 1142(a).
9
App. to Opening Br. at A0154-56.
10
Id. at A0156.
11
Id. at A0144-47.
6
recorded, the payee’s name and address, and whether the check was cashed, voided,
stopped, still outstanding, or voided and reissued.12 Seven months later, Kelmar
notified AT&T of an additional bank account it had added to the Disbursement
Request.13
While the examination of AT&T’s records was ongoing, the General
Assembly amended Delaware’s unclaimed property laws (the “2017
Amendments”). 14 Three aspects of the 2017 Amendments are relevant to this
appeal. First, the amendments authorized the State to issue administrative subpoenas
to require production of records related to an unclaimed property examination. 15
Second, the amendments extended the statute of limitations for most unclaimed
property audits from three years to ten years.16 This decision will refer to the statute
of limitations in place prior to the 2017 Amendments as the “Old Statute of
Limitations” and the statute of limitations as amended in 2017 as the “New Statute
of Limitations.” Finally, under the 2017 Amendments, the subject of a pending
examination may “notify the [Department] of the person’s intent to expedite the
completion of the pending examination . . . .”17 Doing so requires the Department
12
Id. at A0144-45.
13
Id. at A0148-52.
14
See 81 Del. Laws ch. 1 (2017).
15
12 Del. C. § 1171(3).
16
12 Del. C. §§ 1156(b), 1172(h).
17
Id. at § 1172(c)(1).
7
to serve “[a]ll requests for records, testimony, and information” no more than
eighteen months from the date the expedited examination request was submitted.18
AT&T was the subject of a pending examination when the General Assembly
enacted the 2017 Amendments. Thus, AT&T was entitled to an expedited
examination under the revised law. AT&T submitted the required notice to the
Department on December 11, 2017. Two months later, AT&T and Kelmar finalized
a work plan for the expedited examination.19
The parties disagree on what happened next. The Department argues that,
after the parties executed the work plan, AT&T “refused to produce documents”
relating to the Rebates and Disbursements Requests thereby “violating its own work
plan with the State.”20 According to AT&T, “the records produced to date, which
include[d] years of AT&T’s unclaimed property reports to Delaware, [were]
sufficient to proceed with its audit to determine AT&T’s unclaimed property
compliance.”21 Specifically, AT&T argues that it responded to the Disbursement
Request with “payment data for every quarter-end month (four months per year) for
approximately eight years[,]” which “amounted to over 10.5 million lines of
information and reflected spend of over $16 billion.”22 AT&T further claims that it
18
Id. at § 1172(c)(3).
19
App. to Opening Br. at A0164-65.
20
Opening Br. at 9.
21
Answering Br. at 9.
22
Id. (citing App. to Opening Br. at A0106-07).
8
“provided schedules of data and detailed in writing how it maintain[ed] information
that may be responsive to the [Rebates] [R]equest.”23
In response to AT&T’s objections to the outstanding requests, the Department
sent AT&T seven notices of deficiencies between July 2018 and October 2019. The
Department cautioned that failure to comply with the work plan could result in
termination of the expedited examination. On October 31, 2019, the Department
terminated the expedited examination. The termination notice included a warning
that the Department might issue an administrative subpoena for the records if AT&T
did not produce the outstanding documents. AT&T did not respond. On November
8, 2019, the Department issued an administrative subpoena demanding the
production of documents responsive to the Rebates Request and the Disbursement
Request.
B.
On December 6, 2019, AT&T filed an action in the United States District
Court for the District of Delaware against three Delaware Department of Finance
officials challenging the constitutionality of the Delaware Escheat Law. This action
followed four days later. In the district court case, AT&T moved to stay the Court
of Chancery litigation pending resolution of the federal action, and also moved to
23
Id. (citing App. to Opening Br. at A0107).
9
dismiss the case, or to quash or modify the subpoena. The district court stayed the
federal case pending the outcome of the Court of Chancery action and this appeal.24
On July 10, 2020, the Court of Chancery quashed the subpoena in its entirety.
First, the Court of Chancery denied AT&T’s request to stay the action in favor of
the federal action. It also denied AT&T’s motion to dismiss for failure to join
indispensable parties. Those issues have not been raised on appeal. Next, the court
concluded that the Department was authorized to issue the subpoena, and the
subpoena satisfied the framework for enforcing administrative subpoenas set forth
in the United States Supreme Court’s decision United States v. Powell.25 But as the
court interpreted Powell, the court should not enforce an “unreasonable” subpoena
if it would be an abuse of the court’s process.26 The court ultimately held that AT&T
had established that the subpoena was so “expansive, both as to the time period it
cover[ed] and the subject matter it embrace[d][,]”27 that “the Department issued an
24
AT&T Cap. Servs., Inc. et al. v. Geisenberger et al., C.A. No. 1:19-cv-02238-MN, D.I. 22 (filed
July 28, 2020); Geisenberger et al., D.I. 26 (filed Jan. 12, 2021).
25
379 U.S. 48, 57-58 (1964); AT&T Inc., 239 A.3d at 547 (“This decision holds that the Escheat
Law granted the State Escheator the authority to issue the subpoena, which the Department
exercised.”).
26
AT&T Inc., 239 A.3d at 547. The Court of Chancery observed that “[d]ecisions considering the
enforcement of administrative subpoenas also evaluate the dimension of reasonableness.” Id. at
562 (citing Okla. Press Publ’g Co. v. Walling, 327 U.S. 186, 209 (1946)).
27
Id. at 575. The court found that a combination of factors supported its abuse of the court’s
process conclusion: (1) the Department’s failure to provide a rationale for records requests that
covered periods “sixteen years beyond the point at which the Old Statute of Limitations would
[have] prevent[ed] the State Escheator from recovering unclaimed property,” (2) the Department’s
requests for records where the last-known address may have been outside Delaware, in potential
violation of the statute, and (3) the Department’s requests for records of all checks, regardless of
the check’s disposition. Id.
10
overly broad and unreasonable subpoena such that to enforce it would abuse the
court’s process.”28
The Court of Chancery also found Kelmar’s involvement in the investigation
troublesome. Relying on federal cases that have questioned Kelmar’s auditing
practices in other states, the court noted that the breadth of the subpoena, coupled
with the fact that Kelmar was compensated contingently and “works for other states
in similar arrangements,” suggested that Kelmar might be furthering its own interests
to support its business in other states.29 The court also found that “[t]he Department
appear[ed] to have lent the State[]’s investigatory authority to Kelmar to use as it
sees fit.”30 Thus, taken together, the court held that enforcing the subpoena would
be an abuse of the court’s process.
The Court of Chancery decided to quash, rather than modify, the subpoena.
According to the court, quashing the subpoena was the only alternative because the
parties did not provide the court with a sufficient basis to narrow the subpoena. The
court rejected AT&T’s proposed limitations after finding that it would confine the
Department’s authority beyond what is already permissible under the Escheat
Statute. The court noted that it would have preferred to give “significant deference”
28
Id. at 563.
29
Id. at 576 (citing Fidelity & Guar. Life Ins. Co. v. Frerichs, 2017 WL 4863318, at *4 (C.D. Ill.
Sept. 5, 2017); Fidelity & Guar. Life Ins. Co. v. Chiang, 2014 WL 6090559, at *1-2 (E.D. Cal.
Nov. 13, 2014)).
30
Id.11
to the Department in narrowing the subpoena, but the Department declined to
propose any modifications.31
The Department sought reargument on the grounds that the court “exceeded
the appropriate scope of review for an abuse of the court’s process, misapprehended
the factual record relating to [Kelmar’s] compensation, and incorrectly created a
presumption that Kelmar . . . would improperly seek documents to use in
examinations for other [s]tates.”32 The Court of Chancery denied the Department’s
motion for reargument and dismissed the case without giving the Department leave
to amend its complaint.
C.
On appeal, the Department argues that the Court of Chancery erred in several
respects. First, the Department contends that, once the court found that the
Department met the elements of the Powell test, it should not have quashed the
subpoena using the “abuse of the court’s process” standard. In other words, the court
should have presumed good faith on the Department’s part and not jumped to the
abuse of the court’s process review. Second, the Department argues that the Court
of Chancery should not have singled out Kelmar’s involvement in the audit and its
disputed contingency fee arrangement to find an abuse of the court’s process. Even
31
Id. at 577.
32
Opening Br. at 1.
12
if the State compensated Kelmar by contingency, according to the Department, the
contingency arrangement was unrelated to the validity of the subpoena. Third, the
Department contends that the court erred in applying the Old Statute of Limitations
to assess the reasonableness of the subpoena. As they argue, the New Statute of
Limitations in the 2017 version of the unclaimed property law should have been
applied retroactively. And even if the Old Statute of Limitations applied, the
Department claims, the Department’s information requests were not restricted to the
statute of limitations period. Next, the Department argues that the Court of Chancery
erred when it refused to accept the Department’s representation that it had narrowed
the temporal scope of the subpoena with AT&T. And finally, the Department argues
the court erred by entering a final judgment after granting AT&T’s motion to quash
instead of allowing the Department to amend its complaint as a matter of right under
Court of Chancery Rule 15(a).
AT&T responds that the Court of Chancery’s factual findings—the
overbreadth of the subpoena and Kelmar’s financial incentives—could be
considered by the court when deciding whether the court’s process would be abused
by enforcing the subpoena. What constitutes an abuse of the court’s process,
according to AT&T, is within the court’s discretion. And regardless, AT&T argues,
the court had the power to inquire further into the Department’s information requests
but could not because the Department refused to cooperate. AT&T further asserts
13
that the court correctly applied the Old Statute of Limitations. The court was
required to presume that the New Statute of Limitations had prospective effect only,
and finding to the contrary would impact AT&T’s vested rights. And finally, AT&T
argues that it had not agreed with the Department to narrow the subpoena and the
court was not obligated to grant the Department’s request for further proceedings
when the Department could simply issue a new subpoena.
On appeal we defer to the Court of Chancery’s factual findings and will not
set aside those findings “unless they are clearly erroneous or not the product of a
logical and orderly deductive reasoning process”.33 Questions of law are subject to
de novo review.34
II.
In United States v. Morton Salt,35 the United States Supreme Court held that
a government agency charged with examining suspected wrongdoing has “a power
of inquisition” akin to that of a grand jury “which does not depend on a case or
controversy for power to get evidence but can investigate merely on suspicion that
the law is being violated, or even just because it wants assurance that it is not.”36 An
administrative subpoena is not an “actual search or seizure” subject to the Fourth
33
Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1114 (Del. 1994).
34
Klaassen v. Allegro Dev. Corp., 106 A.3d 1035, 1043 (Del. 2014).
35
338 U.S. 632 (1950).
36
Id. at 643-44.
14
Amendment’s probable cause requirement. 37 Rather, “[t]he gist of the [Fourth
Amendment] protection [against administrative subpoenas] is in the requirement . .
. that the disclosure sought shall not be unreasonable.” 38 Agency investigatory
powers are afforded great deference by the judiciary.39 When the legislature has
given the agency the power to issue administrative subpoenas, judicial review of a
complaint for enforcement is “strictly limited.”40
In Morton Salt the Court held that a subpoena is enforceable if “the inquiry is
within the authority of the agency, the demand is not too indefinite, and the
37
Powell, 379 U.S. at 57; see also Okla. Press, 327 U.S. at 195, 216 (stating that investigative
subpoenas need not be “limited . . . by forecasts of the probable result of the investigation”)
(internal quotation marks omitted) (quoting Blair v. United States, 250 U.S. 273, 282 (1919)).
38
Okla. Press, 327 U.S. at 208.
39
338 U.S. at 642 (“Because judicial power is reluctant if not unable to summon evidence until it
is shown to be relevant to issues in litigation, it does not follow that an administrative agency
charged with seeing that the laws are enforced may not have and exercise powers of original
inquiry.”). Without deference to administrative agencies, “[j]udicial supervision of agency
decisions to investigate might hopelessly entangle the courts in areas that would prove to be
unmanageable and would certainly throw great amounts of sand into the gears of the administrative
process.” SEC v. Wheeling-Pittsburgh Steel Corp., 648 F.2d 118, 127 n.12 (3d Cir. 1981) (internal
quotation marks omitted) (quoting Dresser Indus., Inc. v. United States, 596 F.2d 1231, 1235 n.1
(5th Cir. 1979)).
40
FTC v. Texaco, Inc., 555 F.2d 862, 871-72 (D.C. Cir. 1977) (en banc). The D.C. Circuit
explained that “while the court’s function is ‘neither minor nor ministerial,’ the scope of issues
which may be litigated in an enforcement proceeding must be narrow, because of the important
governmental interest in the expeditious investigation of possible unlawful activity.” Texaco, Inc.,
555 F.2d at 872 (internal citation omitted) (quoting Okla. Press, 327 U.S. at 217 n.57); accord
Univ. of Med. & Dentistry of N.J. v. Corrigan, 347 F.3d 57, 64 (3d Cir. 2003) (“[J]udicial review
of administrative subpoenas is ‘strictly limited.’”) (quoting Texaco, Inc., 555 F.2d at 871-72); In
re McVane, 44 F.3d 1127, 1135 (2d Cir. 1995) (“The courts’ role in a proceeding to enforce an
administrative subpoena is ‘extremely limited.’”) (quoting NLRB v. C.C.C. Assoc., Inc., 306 F.2d
534, 538 (2d Cir. 1962)); E.E.O.C. v. Kloster Cruise Ltd., 939 F.2d 920, 922 (11th Cir. 1991) (“It
is well-settled that the role of a district court in a proceeding to enforce an administrative subpoena
is sharply limited . . . .”).
15
information sought is reasonably relevant” to the authorized inquiry.41 An agency’s
“determination of relevance should be accepted if not ‘obviously wrong.’”42
In United States v. Powell, the United States Supreme Court refined the
inquiry when courts are asked to enforce administrative subpoenas. There, a
corporate taxpayer refused to comply with an IRS administrative summons. The
company’s president argued that a three-year statute of limitations barred the IRS
from seeking further assessments unless the agency could “indicate some grounds
for its belief a fraud had been committed.”43 The district court granted the petition
for enforcement. The Third Circuit reversed and found that the Internal Revenue
Code barred the IRS from re-examining the taxpayer’s records unless it could make
a showing of probable cause.
The United States Supreme Court reversed the Third Circuit decision. The
Court held that “the Commissioner need not meet any standard of probable cause to
obtain enforcement of his summons, either before or after the three-year statute of
limitations on ordinary tax liabilities has expired.” 44 To hold otherwise “might
seriously hamper the Commissioner in carrying out investigations he thinks
41
Morton Salt, 338 U.S. at 652.
42
F.T.C. v. Carter, 636 F.2d 781, 788 (D.C. Cir. 1980) (quoting Texaco, Inc., 555 F.2d at 877
n.32).
43
Powell, 379 U.S. at 49.
44
Id. at 57.
16
warranted, forcing him to litigate and prosecute appeals on the very subject which
he desires to investigate . . . .”45
Summarizing the appropriate standard of judicial review, the Supreme Court
in Powell held that an administrative subpoena is enforceable when the agency
shows that (1) the investigation will be conducted for a legitimate purpose, (2) the
inquiry may be relevant to the purpose, (3) the information sought is not already
within the agency’s possession, and (4) the administrative steps required by the
statute have been followed.46 If the government has met this preliminary showing,
the burden shifts to the subpoena recipient to disprove one of the Powell factors or
to demonstrate that enforcement would constitute an “abuse of the court’s
process.”47
After Powell, a subpoena issued within an agency’s statutory authority is
“presumed to be reasonable.”48 “[T]he burden of demonstrating that [the] subpoena
45
Id. at 54.
46
Id. at 57-58.
47
Id. at 58 (“The burden of showing an abuse of the court’s process is on the [party objecting to
the subpoena] . . . .”); see also United States v. LaSalle Nat’l Bank, 437 U.S. 298, 316 (1978)
(“[T]hose opposing enforcement of a summons do bear the burden to disprove the actual existence
of a valid . . . purpose [for the investigation] by the [agency].”).
48
U.S. v. R. Enters., Inc., 498 U.S. 292, 300-01 (1991) (explaining that “the law presumes . . . that
a grand jury acts within the legitimate scope of its authority[,]” and therefore, “a grand jury
subpoena issued through normal channels is presumed to be reasonable”). This principle applies
with equal force to administrative subpoenas. See Morton Salt, 338 U.S. at 642-43 (analogizing
the subpoena power to that of grand juries).
17
is unreasonable falls on the individual to whom it is directed.”49 When a subpoena
is challenged as overbroad, its permissible scope is addressed by the second Powell
factor. “[W]hether [the] evidence sought is relevant requires the [] court to evaluate
the relationship between the particular materials sought and the particular matter
under investigation—an analysis ‘variable in relation to the nature, purposes and
scope of the inquiry.’”50 It must be “adequate, but not excessive, for the purposes of
49
In re McVane, 44 F.3d at 1135 (citing FTC v. Rockefeller, 549 F.2d 182, 190 (2d Cir. 1979));
Texaco, Inc., 555 F.2d at 882 (“The burden of showing that the request is unreasonable is on the
subpoenaed party.”) (citing Powell, 379 U.S. at 58; FTC v. Standard Am., Inc., 306 F.2d 231, 235
(3d Cir. 1962)).
50
McLane Co., Inc. v. E.E.O.C., 137 S. Ct. 1159, 1167-68 (2017) (quoting Okla. Press, 327 U.S.
at 209). Several Federal Courts of Appeals have applied this framework when reviewing
subpoenas challenged as overbroad. See Doe v. United States, 253 F.3d 256, 266-71 (6th Cir.
2001) (considering the scope of the materials requested and whether production of those materials
would be an undue burden on the subpoena recipient under “the second element of [the court’s]
test for determining the enforceability of an administrative subpoena [which] focuses on the
relevance of the documents to the agency’s investigation” ); In re McVane, 44 F.3d at 1135 (noting
that “[t]he relevance of the sought-after information is measured against the general purposes of
the agency’s investigation, ‘which necessarily presupposes an inquiry into the possible range of
investigation under the statute’”) (quoting Linde Thomson Langworthy Kohn & Van Dyke, P.C. v.
Resolution Trust Corp., 5 F.3d 1508, 1516 (D.C. Cir. 1993)); United States v. Westinghouse Elec.
Corp., 788 F.2d 164, 169-71 (3d Cir. 1986) (evaluating a subpoena challenged as overly broad
under a “relevancy standard”); United States v. Goldman, 637 F.2d 664, 666 (9th Cir. 1980)
(affirming the district court’s denial of enforcement after finding that “the government had not met
its light burden in establishing that the records [from two years prior to the agent’s examination]
were relevant”); United States v. Freedom Church, 613 F.2d 316, 321-22 (1st Cir. 1979)
(reviewing the summonee’s challenge to the scope of the IRS summons in terms of its relevancy
to the investigation); SEC v. Arthur Young & Co., 584 F.2d 1018, 1031 (D.C. Cir. 1978) (“The
breadth of an investigation is for the investigators to determine. The breadth of a subpoena or of
a search made in records may be excessive, but the test is relevance to the specific purpose, and
the purpose is determined by the investigators.”) (quoting 1 Davis, Administrative Law Treatise
§ 3.06, at 188-89 (1958)).
18
51
the relevant inquiry.” Ultimately, the question comes down to one of
reasonableness.52
Under Powell, the court can also consider whether enforcing the subpoena
would constitute an abuse of the court’s process. This factor is different than the
other Powell factors. It addresses whether the court is being asked to join the agency
in an act of bad faith:
It is the court’s process which is invoked to enforce the administrative
summons and a court may not permit its process to be abused. Such an
abuse would take place if the summons had been issued for an improper
purpose, such as to harass the [target of the investigation] or to put
pressure on him to settle a collateral dispute, or for any other purpose
reflecting on the good faith of the particular investigation.53
If an agency satisfies the four Powell factors, however, it is strong evidence
of an administrative agency’s good faith.54 The party opposing the subpoena then
51
See Okla. Press, 327 U.S. at 208-09 (articulating this reasonableness standard, the United States
Supreme Court stated that the subpoena must be “authorized by [the legislature],” “relevant to the
inquiry[,]” and shall be “adequate, but not excessive, for the purposes of the relevant inquiry”).
52
See Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 323 (1985) (observing that the court
has never held “that the IRS must conduct its investigations in the least intrusive way possible[,]
[i]nstead, the standard is one of relevance”); SEC v. Arthur Young & Co., 584 F.2d at 1028-31(holding that information subpoenaed may be obtained if reasonably relevant to an investigation
within the authority of the agency); see also See v. City of Seattle, 387 U.S. 541, 544 (1967)
(“[W]hen an administrative agency subpoenas corporate books or records, the Fourth Amendment
requires that the subpoena be sufficiently limited in scope, relevant in purpose, and specific in
directive so that compliance will not be unreasonably burdensome.”); Morton Salt, 338 U.S. at
652-53 (finding that a government agency has not exceeded its investigatory power where “the
inquiry is within the authority of the agency, the demand is not too indefinite and the information
sought is reasonably relevant”).
53
Powell, 379 U.S. at 58 (internal citation omitted).
54
United States v. Stuart, 489 U.S. 353, 360 (1989) (referring to the Powell factors as “the
requirements of [agency] good faith”); LaSalle Nat’l Bank, 437 U.S. at 313, 318 (listing the Powell
factors as the “elements of a good-faith exercise” and later referring to the factors as “the Powell
standards of good faith”).
19
bears the burden of rebutting the presumption of good faith.55 “This burden is a
heavy one.”56 To carry it, a respondent must point to “specific facts or circumstances
plausibly raising an inference of bad faith.”57
Federal courts applying Powell’s abuse of process standard have avoided rigid
definitions of “bad faith.” Instead, they have restricted bad faith to those cases when
an agency acts for reasons unrelated to the merits of the investigation. Some
examples include, when an agency serves a subpoena in support of a claim the
agency “knows it cannot win,”58 “fraud or deceit on the part of the government,”59
55
Stuart, 489 U.S. at 360 (finding that affidavits submitted by the IRS “plainly satisfied the
requirements of good faith [that the court] set forth in Powell and ha[s] repeatedly reaffirmed”)
(citing Tiffany Fine Arts, Inc., 469 U.S. at 321); United States v. Arthur Young & Co., 465 U.S.
805, 813 n.10 (1984)); see also United States v. McCarthy, 514 F.2d 368, 372 (3d Cir. 1975).
56
LaSalle Nat’l Bank, 437 U.S. at 316; see also United States v. Markwood, 48 F.3d 969, 978 (6th
Cir. 1995) (“LaSalle held that the party asserting the agency acted in bad faith bears a heavy burden
of proof.”); United States v. Balanced Fin. Mgmt., Inc., 769 F.2d 1440, 1444 (10th Cir. 1985)
(“The burden then shifts to the taxpayers. The burden is a heavy one.”); SEC v. Knopfler, 658
F.2d 25, 26 (2d Cir. 1981) (“When the Commission has met the normal statutory prerequisites for
enforcement, the opponent of a subpoena has a heavy burden if he seeks denial of enforcement on
the ground that the subpoena is sought for an invalid purpose.”); N.L.R.B. v. Interstate Dress
Carriers, Inc., 610 F.2d 99, 112 (3d Cir. 1979) (“[T]he burden on the party to whom the subpoena
is addressed is not a meager one.”).
57
United States v. Clarke, 573 U.S. 248, 254 (2014) (holding that a taxpayer opposing an IRS
summons on the grounds that it was issued for an improper purpose is entitled to examine IRS
officials only if he alleges specific facts giving rise to an inference of agency bad faith); SEC v.
Marin, 982 F.3d 1341, 1357 (11th Cir. 2020) (applying Clarke’s holding to other Powell criteria);
see also United States v. Garden State Nat’l Bank, 607 F.2d 61, 71 (3d Cir. 1979) (“Allegations
supporting a ‘bad faith’ defense are . . . insufficient if conclusionary.”).
58
Wheeling-Pittsburg Steel Corp., 648 F.2d at 127 (internal quotation marks omitted).
59
Groder v. United States, 816 F.2d 139, 144 (4th Cir. 1987) (quoting United States v. Kaatz, 705
F.2d 1237, 1243 (10th Cir. 1983)).
20
or where an administrative agency uses its civil investigatory powers solely for
criminal investigations (where it is not already authorized to do so).60
III.
We turn to three of the Department’s related arguments on appeal—whether
the Court of Chancery erred when it found that enforcing the subpoena would be an
abuse of the court’s process, even though the Department satisfied the Powell
factors; whether Kelmar’s contingent fee arrangement was relevant to the subpoena
enforcement issue; and whether the court should have accepted representations that
the subpoena’s scope had been narrowed by the parties.
We agree with the Department on several points when it comes to the court’s
inquiry into an abuse of the court’s process. First, it is correct that the proper scope
of the subpoena and the reasonableness of the requested information is addressed
under the second Powell factor—whether the information requested is relevant to
the purpose of the investigation being conducted by the Department. We also agree
with the Department that once the Court of Chancery found that the Department had
satisfied the Powell factors, AT&T bore a heavy burden to rebut the presumption
that the Department was acting in good faith in pursuing its investigation. 61 Further,
we agree with the Department that there is nothing inherently wrong with the State’s
60
LaSalle Nat’l Bank, 437 U.S. at 318-19.
61
Id. at 316; Garden State Nat’l Bank, 607 F.2d at 68.
21
designated representative, Kelmar, operating under a contingency fee arrangement
and, when permitted, collaborating with other states on audits.62 And finally, the
Department is correct that parties should be able to narrow the breadth of a subpoena
by representations made to the court without having to serve an amended subpoena.
We part company with the Department, however, when it comes to the court’s
authority to have the Department address its questions about the breadth of the
subpoena and Kelmar’s incentives. As recognized earlier, the Department enjoys a
strong presumption of good faith. That strong presumption comes from satisfying
the Powell factors. Yet even though the court’s role is extremely constrained when
deciding whether enforcing and administrative subpoena would be an abuse of the
court’s process, it still exists. When the court has questions about the
appropriateness of a subpoena, it is within the court’s discretion to inquire further,
or to hold an evidentiary hearing to clear up disputed facts, before enforcing the
subpoena.63
62
A contingency fee arrangement with the auditor benefits the State because the State need not
pay for audit services unless funds are uncovered that should be returned to the State. The State
also does not have the expense of a large staff of state employee auditors to conduct compliance
audits. The Department is also permitted by statute to enter into a contingency fee arrangement
with designees (12 Del. C. § 1182(e)), who can coordinate its audits with other states. Id.
63
Garden State Nat’l Bank, 607 F.2d at 71 (holding that when the government’s “allegations are
factually refuted by the [person opposing the subpoena], thus presenting a disputed factual issue,
or where proper affirmative defenses, such as those alleging ‘bad faith’ . . . are factually
supported[,] . . . the [person opposing the subpoena] is entitled to an evidentiary hearing”) (citing
McCarthy, 514 F.2d at 368); United States v. Salter, 432 F.2d 697, 700-01 (1st Cir. 1970) (setting
a similar procedure for evidentiary hearings where the respondent has challenged enforcement of
an administrative summons as an abuse of the court’s process); see also United States v. Church
22
Here, the Department put the court in a box. It took the position that after the
pleadings closed and briefing completed, the court had to decide the matter on the
record submitted and issue a final appealable order either enforcing or quashing the
subpoena.64 In other words, the court’s only options were to enforce the subpoena
as is, or not at all. Either way, enter a final order. That is not what the Powell test
contemplates. Instead, in a case when the court has doubts about the good faith of
an agency’s use of its subpoena power, the court can go beyond the written
submissions and inquire further into whether the Department is using the
administrative subpoena for purposes unrelated to the administrative investigation—
for instance, to harass the respondent or further some other unrelated interest.
The Court of Chancery found the subpoena was “expansive, both as to the
time period it covers and the subject matter it embraces.”65 According to the court,
“[t]he Department seems to be pursuing information about property that it knows it
cannot recover” or was in search of records “with last-known addresses outside of
Delaware” for property “almost certainly non-escheatable” which would sweep up
“a vast amount of irrelevant data.”66 The court was also concerned that Kelmar
of Scientology of Cal., 520 F.2d 818, 824-25 (9th Cir. 1975) (citing with approval the procedure
set forth in McCarthy and Salter and applying it to the case at hand).
64
AT&T Inc., 239 A.3d at 557 (“[T]he Department maintained that in an action to enforce an
administrative subpoena, the only pleading is a complaint, the standard response is a motion to
quash, and that based on that record, this court must make a decision that would result in a ‘final
appealable order’ regarding the administrative subpoena.”).
65
Id. at 575.
66
Id.
23
might be straying from its Delaware-based work into information that might help
Kelmar recover unclaimed property for other states.67
Boxed in by the Department’s black or white stance, the court was left in the
unsatisfying position of having questions that the Department would not answer. As
the court held:
The Department might have good explanations on these points, but it
eschewed the opportunity to provide them. The court is therefore left
with the bare allegations of the complaint. Based on those allegations,
the court is forced to conclude that enforcing the Subpoena as written
would be an abuse of the court’s process.68
In most cases the subpoena recipient will have a difficult time convincing the
court to inquire further into an agency’s good faith once the agency satisfies the
Powell test. But under the circumstances of this case, where the court had serious
questions but the Department refused to provide answers, the Court of Chancery did
not err in quashing the subpoena in its entirety.
IV.
We now address the Department’s argument that the Court of Chancery erred
when it decided that the New Statute of Limitations did not apply retroactively and
thus the Old Statute of Limitations applied to the Department’s 2019 subpoena. The
67
Id. at 576 (“The fact that Kelmar works for multiple states supplies a potential motivation for
Kelmar’s insistence on obtaining records for all checks and rebates, regardless of whether or not
the last-known address on AT&T’s records indicates that the property would have been
escheatable to Delaware.”).
68
Id.
24
Court of Chancery used its statute of limitations analysis to review the
reasonableness of the Department’s document requests. Finding that the Old Statute
of Limitations applied, the court used its shorter time frame as a measuring stick to
assess the reasonableness of the Department’s information demands.
Before the 2017 Amendments, the last update to the statute of limitations was
2002.69 Under that version of the Escheat Law, the statute of limitations was tied to
the holder’s filing of an annual unclaimed property report. The State could not
recover property until after it had issued a notice of deficiency for an annual report.70
Generally, the State had three years from the holder’s annual report filing to issue a
notice of deficiency, and six years if the omission exceeded 25% of the amount
disclosed in the report.71 But if “no report [was] filed, or if a false or fraudulent
report [was] filed with the intent to evade the obligation to pay over abandoned
property,” then the State could issue a notice of deficiency at any time.72 Absent
fraud, failure to issue a notice of deficiency within the statutory time period barred
the State from suing to recover the unclaimed property.73
69
73 Del. Laws ch. 417 (2002).
70
Id. (“The State Escheator, as soon as practicable after receipt of any report required by this
chapter, shall examine it to determine if it is correct.”) (emphasis added).
71
Id.
72
Id.
73
Id. (“No suit to enforce the payment of a deficiency in payment of abandoned or unclaimed
property shall be brought . . . against a holder unless the notice of deficiency in payment is mailed
to the holder within the three (3) year period provided in this subsection.”).
25
After the 2017 Amendments adopting the New Statute of Limitations, the
State extended the limitations period to enforce unclaimed property laws to ten years
after the duty arose to report the unclaimed property. 74 It also provided that the
limitations period was tolled by delivery of a notice of examination or if the State
Escheator “reasonably concludes that the holder has filed a report containing a
fraudulent or willful misrepresentation.”75
In its review of the reasonableness of the subpoena, the court noted first that
“the statute of limitations [] does not operate as a bright-line rule that leads to a
finding that a subpoena is unauthorized if the agency seeks records that are outside
the limitations period.”76 Instead, when “an information request goes beyond the
statute of limitations[,] [it] becomes part of the inquiry into whether it would
represent an abuse of the court’s process to enforce a subpoena . . . .”77 The court
found that neither the statute nor the legislative history showed that the General
Assembly intended to apply the New Statute of Limitations retroactively. 78 Using
74
81 Del. Laws ch. 1 (2017); 12 Del. C. § 1156(b). Under the 2017 Amendments, the State is
prohibited from “commenc[ing] an action or proceeding to enforce [the Escheat Statute] with
respect to the reporting, payment, or delivery of property more than 10 years after the duty arose.”
Id.
75
Id.
76
AT&T Inc., 239 F.3d at 569.
77
Id. at 570. We note that the overbreadth of an administrative subpoena should not reflexively
be treated as a trigger to inquire into whether the court’s process is being abused. Overbreadth as
part of a review for abuse of the court’s process should be reserved for those rare cases when the
scope of the administrative subpoena as a whole is so overbroad that it strongly supports an
argument of bad faith by the agency.
78
Id. at 568-69 (citing Del. S.B. 13 syn., 149th Gen. Assm. (2017)).
26
the Old Statute of Limitations, the court concluded that the Department’s subpoena
requests appeared unreasonable because they far exceeded the scope of what was
permissible under the version of the Escheat Law in effect at that time.
On appeal, the Department advances three reasons why the Court of Chancery
erred in applying the Old Statute of Limitations: (1) the New Statute of Limitations
should be applied retroactively; (2) even if the Old Statute of Limitations applied, it
should not be used to bar the State’s review of records outside the limitations period,
and (3) AT&T elected to be bound by the New Statute of Limitations when it entered
the expedited examination program.79
For the first argument, the Department did not raise it before the Court of
Chancery. In another case, the distinction might require serious consideration. In
this appeal, however, it is waived.80 For the second argument, we agree with the
Department that Powell rejected a “bright line bar on the State’s authority to conduct
an investigation based on the running of the statute of limitations.”81 But the Court
of Chancery recognized this point. As the court held when addressing AT&T’s
argument that the statute of limitations precluded the Department from requesting
information outside the statute: “[f]ramed in this bright-line fashion, this argument
79
Opening Br. at 28.
80
Del. Supr. Ct. R. 8. AT&T raised the waiver issue in its answering brief. Answering Br. at 29.
The Department did not respond to the argument in its reply brief.
81
Opening Br. at 30 (citing AT&T Inc., 239 F.3d at 569; Powell, 379 U.S. at 49; EEOC v. Del.
State Police, 618 F. Supp. 451 (D. Del. 1985)).
27
does not provide grounds for quashing or modifying the Subpoena” and “AT&T’s
bright-line argument that the statute of limitations bars the Department from
investigating those years runs contrary to precedent.”82 The court concluded that
“[t]he statute of limitations ... thus does not operate as a bright-line rule that leads to
a finding that a subpoena is unauthorized if the agency seeks records that are outside
the limitations period.”83 The court did not apply a “bright-line” rule. Instead, it
acknowledged the Department’s ability to make information requests outside the
limitations period, but assessed the reasonableness of the requests in relation to the
ultimate investigatory purpose of the subpoena.
Finally, the Department contends that the New Statute of Limitations applies
because AT&T elected to be bound by the 2017 Amendments based on its decision
to participate in the expedited examination. Stated differently, AT&T should not
benefit from the expedited examination program authorized by the 2017
Amendments without also being bound by the New Statute of Limitations, enacted
under the same amendments.84 The Department’s position, however, is inconsistent
with the position it took when the 2002 amendments to the Escheat Statute were
adopted. As the Court of Chancery held:
82
AT&T Inc., 239 F.3d at 566, 569.
83
Id. at 569.
84
Opening Br. at 31 (citing Harper v. United States., 2019 WL 4229755, *1 (S.D. Cal. Aug. 2,
2019); Hampton v. Univ. of Md. at Baltimore, 674 A.2d 145, 150 (Md. Spec. App. 1996)).
28
Then, the State Escheator agreed that “no statute of limitations applie[d]
for periods for which reports were filed prior to July 22, 2002,” and that
the new statute of limitations applied for reports filed after the effective
date.85
The Court of Chancery did not err when it considered the reasonableness of the
subpoena in light of what it found to be the applicable statute of limitations.
V.
We affirm the Court of Chancery’s judgment. We recognize, however, that
the Court has announced new procedures and law governing enforcement of
administrative subpoenas. Thus, although we affirm, the Department should have
the opportunity to conform to the new procedures.86 The Department should serve
a new subpoena on AT&T consistent with this opinion. If the parties are unable to
agree on production of the information called for in the amended subpoena, the
85
AT&T Inc., 239 A.3d at 569 (citing Ethan D. Millar et al., Unclaimed Property, Tax Portfolio
Series (BNA) no. 1600-3d § 1600.05(J)(1), Bloomberg Law (database updated June 2020)).
86
See United States v. Cortese, 614 F.2d 914, 918-19 (3d Cir. 1980) (remanding the case for further
development of the record following the Third Circuit’s articulation of the proper standard for
showing bad faith); White v. Panic, 783 A2.d 543, 555 & n.45 (Del. 2001) (“We have implicitly
recognized a narrow exception to this policy where the Court affirms the judgment of the Court of
Chancery but announces a new rule of law or clarifies pleading standards that apply to the
plaintiff’s cause of action. In the interest of fairness, the Court directs the Court of Chancery in
such cases to grant the plaintiff leave to amend the complaint in accordance with the newly
announced rule or clarification.”); Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135, 147
(Del. 1997) (“Because of the unique circumstances of this case, where we have been called upon
to explicate pleading standards and the limited principles applicable to damages in a disclosure
case, we remand for the sole purpose of allowing the plaintiff a reasonable opportunity to replead
in a manner consistent with this opinion.”).
29
Department should file an amended complaint and seek review by the Court of
Chancery generally following the procedure set forth in United States v. McCarthy:87
1. The Department files a complaint to enforce an administrative subpoena
(in this case an amended complaint). It must support the complaint with
an affidavit or verification that shows it has a legitimate purpose for its
investigation, the information sought may be relevant to the purpose and
is not already in the Department’s possession, and the Department has
complied with any administrative requirements. The respondent then files
a response and affidavits, where it supports any affirmative defenses and
can contest the Department’s assertions.
2. If the respondent goes a step further and claims that the subpoena has been
issued for an improper purpose such that enforcement would be an abuse
of the court’s process, the burden is on the respondent to make a
particularized showing in its response and by affidavit that the Department
issued the subpoena in bad faith, meaning for reasons unrelated to the
merits of the investigation.
3. After the respondent files a response and affidavits, the Court of Chancery
can request further submissions to distill the issues for consideration. The
court should convene a prompt hearing to address the enforcement issues
87
514 F.2d 368, 372-73 (3d Cir. 1975).
30
in summary fashion. An evidentiary hearing should take place only in
those cases when the court, after according the great deference to the
Department’s administrative judgments, believes that the disputed issues
can only be resolved after hearing from witnesses.
31