State of Delaware, Department of Finance v. AT&T, Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
STATE OF DELAWARE, DEPARTMENT )
OF FINANCE, )
)
Plaintiff, )
)
v. ) C.A. No. 2019-0985-JTL
)
AT&T INC., )
)
Defendant. )
OPINION
Date Submitted: June 3, 2020
Date Decided: July 10, 2020
Melanie K. Sharp, Martin S. Lessner, Mary F. Dugan, Michael Laukaitis, YOUNG
CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Counsel for
Plaintiff.
Brian M. Rostocki, Benjamin P. Chapple, REED SMITH LLP, Wilmington, Delaware;
Sara A. Lima, REED SMITH LLP, Philadelphia, Pennsylvania; R. Gregory Roberts,
REED SMITH LLP, New York, New York; Counsel for Defendant.
LASTER, V.C.
Escheat is a procedure by which “a sovereign may acquire title to abandoned
property if after a number of years no rightful owner appears.” Texas v. New Jersey, 379
U.S. 674, 675 (1965). Title 12, Chapter 11, Subchapter II of the Delaware Code, titled
“Unclaimed Property,” requires that a person holding property that meets certain
requirements file a report identifying the property and escheat it to the State. See 12 Del.
C. §§ 1130–1190. Because the subchapter contemplates escheat, it is frequently called the
“Escheat Law.”
The Escheat Law designates the Secretary of Finance (or the Secretary’s delegate)
as the “State Escheator.”1 The Escheat Law charges the State Escheator with
administering and enforcing the Escheat Law and authorizes the State Escheator to
conduct examinations of companies’ books and records to determine whether they have
complied with the statutory requirements.
Acting on behalf of the State Escheator, the Department of Finance began
examining the books and records of AT&T, Inc. Except for two categories of
information, AT&T agreed to produce the information that the Department sought. On
November 8, 2019, the Department issued an administrative subpoena for the two
1
See 12 Del. C. § 1102 (“There shall be an Escheator of the State, who shall be
the Secretary of Finance or the Secretary’s delegate. The administration and enforcement
of this chapter are vested in the Secretary of Finance or the Secretary’s delegate.”); 30
Del. C. § 363 (“The Secretary of Finance shall act as Escheator of the State under the
provisions of Chapter 11 of Title 12.”); see also 12 Del. C. § 1130(23) (“‘State
Escheator’ means the person responsible for the administration and enforcement of this
chapter, as established by § 1102 of this title and § 363 of Title 30.”).
categories of information. AT&T refused to comply and filed an action against the State
Escheator and two other state officials in the United States District Court for the District
of Delaware (respectively, the “Federal Action” and the “Delaware District Court”).
There, AT&T contends that the officials took actions that violated federal law and the
United States Constitution.
The Department responded by filing this action to enforce the subpoena. AT&T
did not answer the complaint; it responded instead with a motion to stay this action or to
modify or quash the subpoena. In its singular motion, AT&T requested three types of
relief, each of which implicates a different legal framework.
First, AT&T asked to stay this action in favor of the Federal Action. Recent
precedent teaches that the enforceability of the administrative subpoena raises issues of
state law that could moot or otherwise affect the federal and constitutional analysis. As a
matter of judicial efficiency, this action should go first. The request for a stay is denied.
Second, AT&T argued that AT&T’s affiliates are necessary parties who must be
joined if this action is to proceed. AT&T controls its affiliates, and the Escheat Law
authorizes the State Escheator to obtain records from subsidiaries and affiliates. AT&T
has always filed reports and interacted with the State Escheator on behalf of its affiliates.
In this action, AT&T can raise arguments on behalf of its affiliates and protect their
interests. If the subpoena is enforced, then AT&T can cause its affiliates to comply. The
affiliates therefore are not indispensable parties, and the request to join AT&T’s affiliates
is denied.
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Third, AT&T asked that the subpoena be quashed or modified because the
Department exceeded the authority granted to the State Escheator under the Escheat Law.
This motion raises procedural and substantive issues of first impression. This decision
holds that the Escheat Law granted the State Escheator the authority to issue the
subpoena, which the Department exercised. That, however, is not the end of the analysis.
Precedents governing the enforcement of administrative subpoenas in other contexts
recognize that a court may decline to enforce a subpoena that is technically authorized if
doing so would represent an abuse of the court’s process. In this case, AT&T has met its
burden to show that the scope of the subpoena is so expansive that enforcement would
constitute an abuse. Although the court could have permitted the Department to
supplement the record with an additional explanation as to why the subpoena should be
enforced, the Department eschewed that opportunity, insisting that it wanted the court to
issue a final, appealable order.
This court could also modify the subpoena. Only AT&T proposed modifications,
and its limitations tracked its arguments regarding the scope of the State Escheator’s legal
authority, which this decision rejects. The Department should be given the opportunity in
the first instance to frame a narrower subpoena. This decision therefore quashes the
subpoena in its current form.
I. FACTUAL BACKGROUND
The facts are drawn from the parties’ submissions in connection with AT&T’s
motion.
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A. The Examination
AT&T is a Delaware corporation headquartered in Dallas, Texas. Since 1999,
AT&T has filed unclaimed property reports with the State Escheator on a consolidated
basis with thirty-three of its affiliates (the “Affiliates”). For simplicity, except where
necessary to address AT&T’s argument about joining necessary parties under Court of
Chancery Rule 19, this decision refers only to AT&T. See Part II.B., infra.
On January 12, 2012, the Department notified AT&T that it intended to examine
AT&T’s books and records to confirm that it was complying with the Escheat Law.
Compl. Ex. A. The Department designated Kelmar Associates LLC as its agent to
conduct the review. The Department generally uses Kelmar to conduct audits and pursue
escheatable property, and Kelmar receives as compensation a percentage of the escheated
property. See Dkt. 10 at 7. The fact that Kelmar is compensated contingently has obvious
implications, beneficial and otherwise, for its incentives to investigate companies, pursue
escheatable property, and obtain favorable settlements.
On February 10, 2012, Kelmar sent AT&T an initial document request. Compl. ¶
16. Over the next several years, Kelmar sent AT&T additional requests.
The parties refer to one of the requests as the “Rebates Request.” Id. Ex. J Ex. 2;
see id. ¶ 17. It asks AT&T to identify all general ledger accounts used by AT&T since
1992 “to track its rebate accrual and expense activity along with the period of time . . .
each account was utilized to track this activity.” Id. Ex. J Ex. 2 at 2. The Rebates Request
also asks AT&T to identify each third-party administrator that it used to issue rebates to
4
consumers. Id. The Department thus seeks records going back twenty years from the
commencement of the audit.
B. The Temple-Inland Ruling
In June 2016, the Delaware District Court issued its ruling in Temple-Inland, Inc.
v. Cook, 192 F. Supp. 3d 527 (D. Del. 2016). In that decision, the Delaware District Court
granted summary judgment in favor of Temple-Inland, Inc., holding that Delaware’s
then-prevailing methods of auditing companies for and collecting unclaimed property
violated the substantive due process clause of the United States Constitution.
Like AT&T, Temple-Inland was a Delaware corporation with its principal place of
business in Texas. In 2008, the State Escheator notified Temple-Inland that it was
commencing an audit to determine whether there were deficiencies in its reporting and
escheating of unclaimed property during the previous twenty-two years—from January
1986 until December 2007. Id. at 531–32. The State Escheator recognized, and the record
in the Temple-Inland case established, that a standard records retention policy is typically
seven years. Id. at 534. As in this case, Kelmar conducted the audit for the State
Escheator and would be compensated on a contingent basis with a percentage of the
escheated property. Id.
The audit focused on Temple-Inland’s issuance of checks for accounts payable
and payroll. Temple-Inland was only able to produce complete records dating back to
2003 for accounts payable and dating back to 2004 for payroll. Id. Temple-Inland
produced all of the unclaimed property reports it had filed in Delaware from 1998 to
5
2008, a couple of reports filed before 1998, and two audit reports filed in Texas covering
1985 until 2005. Id.
When a company lacks sufficient records for a period to determine whether
property was subject to escheat, the State Escheator estimates the amount of abandoned
property that the company should have escheated during that period. For Temple-Inland,
the State Escheator estimated the amount of property subject to escheat for its accounts
payables from 1986 to 2002 and for its payroll from 1986 to 2003. Id. at 535. The
estimates resulted in amounts of abandoned property that were an order of magnitude
higher than what Temple-Inland reported during the period for which records were
available. Id. at 537–38.
Temple-Inland pursued an administrative appeal and secured only minor changes
to the State Escheator’s decision. Temple-Inland then filed suit in the Delaware District
Court, contending the State Escheator’s “audit and assessment of [Temple-Inland’s]
unclaimed property liability” violated federal law, including provisions of the United
States Constitution. Id. at 541.
The Delaware District Court held that Temple-Inland was challenging a form of
executive action that would violate federal substantive due process protections “‘only
when it shocks the conscience.’” Id. (quoting Ecotone Farm LLC v. Ward, 639 Fed.
Appx. 118, 125 (3d Cir. 2016)). The Delaware District Court found that the following
combination of factors, taken together, “shock[ed] the conscience” and resulted in a due
process violation:
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[D]efendants[] (i) waited 22 years to audit plaintiff; (ii) exploited loopholes
in the statute of limitations; (iii) never properly notified holders regarding
the need to maintain unclaimed property records longer than is standard;
(iv) failed to articulate any legitimate state interest in retroactively applying
[the Delaware statute that permitted the use of estimation] except to raise
revenue; (v) employed a method of estimation where characteristics that
favored liability were replicated across the whole, but characteristics that
reduced liability were ignored; and [(vi)] subjected plaintiff to multiple
liability.
Id. at 550.
In response to the Temple-Inland ruling, the General Assembly amended the
Escheat Law. See 81 Del. Laws ch. 1 (2017) (the “2017 Amendments”). Among other
things, the 2017 Amendments authorized the subject of any then-pending examination to
“notify the State Escheator of the person’s intent to expedite the completion of the
pending examination . . . .” 12 Del. C. § 1172(c)(1). If the subject of a then-pending
examination opted to expedite its completion, then the State Escheator only has eighteen
months from the triggering of the expedited examination to serve “[a]ll requests for
records, testimony, and information.” Id. § 1172(c)(3). The 2017 Amendments further
provided that
[i]f the person [triggering the expedited examination] responds within the
time and in the manner established by the State Escheator to all requests for
records, testimony, and information made by the person conducting the
examination, the State Escheator shall complete the examination and
provide an examination report . . . within 2 years from the date of receipt of
the written notification and shall waive interest and penalty . . . .
Id. § 1172(c)(2). The 2017 Amendments gave the State Escheator “complete discretion”
to determine whether the subject of the examination had “responded within the time and
in the manner established.” Id. § 1172(c)(4).
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C. The Expedited Examination
AT&T was subject to a pending examination when the General Assembly enacted
the 2017 Amendments. AT&T was therefore entitled to “notify the State Escheator of
[its] intent to expedite the completion of the pending examination . . . .” Id. § 1172(c)(1).
On December 7, 2017, AT&T gave the requisite notice. See Dkt. 10 Exs. B, C.
On January 25, 2018, the Department acknowledged receipt of the notice and
directed AT&T to work with Kelmar to submit an “agreed-upon detailed work plan” by
February 2, 2018. Id. Ex. C sched. A. On Wednesday, January 31, Kelmar sent AT&T a
proposed work plan. Given the obvious problems in reaching agreement on a work plan
by that Friday, the Department extended the deadline to February 28. Kelmar and AT&T
subsequently reached agreement on a work plan. See id. Ex. E (the “Work Plan”).
The Work Plan divided the parties’ efforts into three phases:
 a 430-day period during which AT&T would respond to Kelmar’s requests and
Kelmar would identify deficiencies,
 a subsequent 180-day period during which Kelmar would issue an interim report
and AT&T would remediate discrepancies, and
 a subsequent 110-day period during which Kelmar would issue a final report and
AT&T would again remediate discrepancies.
In agreeing to the Work Plan, AT&T reserved its rights, “including but not limited to any
rights to challenge the audit process or to request modifications to the plan as the audit
progresses.” Id.
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D. Disputes Over AT&T’s Production Of Records
Meanwhile, on January 17, 2018, Kelmar sent AT&T what the parties refer to as
the “Disbursements Request.” See Compl. Ex. J Ex. 1. It seeks information concerning
every check AT&T had issued from twenty-seven accounts since June 1992. Complying
with the request would require AT&T to identify each check issued, the general ledger
account to which it was recorded, the disposition status, the payee name and address, and
the amount. The Disbursements Request also seeks information concerning checks
marked void, cleared, stopped, or void and reissued.
Over the next several months, AT&T worked with Kelmar to satisfy the
information requests, including the Rebates Request and Disbursements Request. See
Dkt. 10 Ex. F. On August 24, 2018, Kelmar asked AT&T to fulfill the Disbursements
Request for an additional bank account. See Compl. Ex. J Ex. 1. On November 27,
AT&T objected to the breadth of Kelmar’s outstanding requests. Dkt. 10 Ex. G.
E. The Notices Of Deficiencies
On July 26, 2018, the Department sent a reminder to AT&T that its failure to
comply with the deadlines in the Work Plan could result in the State Escheator
terminating the expedited examination. Compl. Ex. E. The Department sent virtually
identical letters to AT&T on December 20, 2018, and March 6, 2019, and August 8,
2019. See id. Exs. F–H.
On May 9, 2019, the Department sent AT&T a notice identifying outstanding
requests that had not been fulfilled. The Department warned AT&T that failing to comply
9
could result in termination of the expedited examination. Id. Ex. B. The Department sent
nearly identical notices on September 19 and October 9. See id. Exs. C, D.
On October 31, 2019, the Department notified AT&T that the State Escheator had
terminated the expedited examination. The notice demanded that AT&T produce
documents responsive to the Rebates Request and the Disbursements Request and stated
that failure to do so could lead to the issuance of an administrative subpoena. Compl. ¶
31; id. Ex. I.
On November 8, 2019, the Department issued an administrative subpoena seeking
production of documents responsive to the Rebates Request and the Disbursements
Request by 9:00 a.m. on December 9. See id. Ex. J (the “Subpoena”). On November 27,
AT&T again notified the Department that it objected to the requests on multiple grounds.
Dkt. 10 Ex. H.
F. Litigation
On December 6, 2019, AT&T filed the Federal Action against the State Escheator
and two other Delaware officials—the Secretary of Finance and the Assistant Secretary
of Finance. AT&T contends that by terminating the expedited audit and serving the
Subpoena, the state officials (i) infringed on AT&T’s right under the Fourth Amendment
of the United States Constitution to be free from unreasonable searches and seizures, (ii)
deprived AT&T of procedural due process rights protected by the Fourteenth
Amendment, (iii) deprived AT&T of substantive due process rights protected by the
Fourteenth Amendment, (iv) violated the Ex Post Facto Clause, and (v) violated the
Takings Clause. AT&T further asserted that by focusing on large companies like AT&T,
10
the state officials violated the Equal Protection Clause. And AT&T argued that the
aspects of the Escheat Law were void for vagueness and preempted by federal common
law.
On December 10, 2019, the Department filed this action seeking an order
compelling AT&T to comply with the Subpoena. On January 10, 2020, AT&T moved to
stay the litigation in favor of the Federal Action or in the alternative, to quash or modify
the Subpoena. In its proposed form of order, AT&T asked the court to narrow the
Subpoena as follows:
 “The subpoena applies only to records related to transactions within the statute of
limitations set out in 12 Del. C. § 1158(a) (2016). Therefore, the subpoena may
seek only records for transactions dated eight years prior to the entry of this order,
but in no case prior to 2008.” Dkt. 18.
 “The subpoena applies only to records that reflect amounts outstanding which
have remained unclaimed on the company’s books and records for five years in
accordance with 12 Del. C. § 1133. Therefore, the subpoena may only seek
outstanding checks or checks voided, stopped, or cancelled after five years from
issuance.” Id.
 “The subpoena does not apply to records related to transactions issued to an
apparent owner for which Defendant’s records reflect an address in a state other
than Delaware.” Id.
II. LEGAL ANALYSIS
The Escheat Law authorizes the State Escheator “at reasonable times and on
reasonable notice” to:
(1) Examine the records of a person or the records in the possession of an
agent, representative, subsidiary, or affiliate of the person under
examination in order to determine whether the person complied with [the
Escheat Law].
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(2) Take testimony of a person, including the person’s employee, agent,
representative, subsidiary, or affiliate, to determine whether the person
complied with [the Escheat Law].
(3) Issue an administrative subpoena to require that the records specified in
paragraph (1) of this section be made available for examination and that the
testimony specified in paragraph (2) of this section 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.
12 Del. C. § 1171.
Acting on behalf of the State Escheator, the Department relied on Section 1171(1)
when requesting information from AT&T. The Department relied on Section 1171(3)
when issuing the Subpoena. And the Department relied on Section 1171(4) when filing
this action “seeking enforcement of” the Subpoena.
The Escheat Law charges the court with considering the application “under
procedures that will lead to an expeditious resolution of the action.” This court has not
established a special set of procedures.
The statue contemplates “an action in the Court of Chancery,” and the Department
commenced the action by filing a complaint. AT&T, however, did not respond to the
complaint as a defendant normally would, such as by filing an answer or by moving to
dismiss on grounds set forth in Court of Chancery Rule 12. AT&T instead docketed a
“Motion to Stay, or in the Alternative, Quash or Modify Plaintiff’s Administrative
Subpoena.” Dkt. 10 (the “Motion”). In its opening brief in support of the Motion, AT&T
advanced three requests for relief, styling two as procedural and one as substantive. See
12
id. at 2–4. In the first procedural request, AT&T asked the court to stay this action in
deference to the Federal Action. In the second procedural request, AT&T argued that the
Affiliates are indispensable parties who must be joined before this action can continue. In
its substantive request, AT&T also argued that by issuing the Subpoena, the Department
exceeded the authority granted to the State Escheator under the Escheat Law.
AT&T’s request for a stay presents a question governed by settled precedent that
addresses motions of that type. Recent authority teaches that this action should proceed
before the Federal Action, so the motion to stay is denied. See generally Dept. of Fin. v.
Univar, Inc. (Univar Chancery III), 2020 WL 2569703 (Del. Ch. May 21, 2020).
AT&T’s argument about the Department’s failure to join the Affiliates raises an
issue under Rule 19, which governs the joinder of indispensable parties. Relevant
authority teaches that the Affiliates are not indispensable parties, so AT&T’s request that
this action be dismissed or stayed pending joinder is denied.
AT&T’s request to quash or modify the Subpoena raises procedural and
substantive issues of first impression. In the section of this memorandum opinion
addressing that aspect of AT&T’s motion, this decision explains the framework it applies.
A. The Request For A Stay
AT&T argues that this action should be stayed pending the outcome of the Federal
Action. As the grounds for the stay, AT&T cites this court’s “inherent power to manage
its own docket, including the power to stay litigation on the basis of comity, efficiency, or
simple common sense.” Paolino v. Mace Sec. Int’l, Inc., 985 A.2d 392, 397 (Del. Ch.
2009); see Salzman v. Canaan Capital P’rs, 1996 WL 422341, at *5 (Del. Ch. July 23,
13
1996) (“To enable courts to manage their dockets, courts possess the inherent power to
stay proceedings.”); Phillips Petroleum Co. v. ARCO Alaska, Inc., 1983 WL 20283, at *4
(Del. Ch. Aug. 3, 1983) (granting stay in favor of pending arbitration based on “common
sense”). AT&T contends that it would be inefficient for this action to proceed before the
Federal Action because of the “possibility that the [Delaware District Court] will address
the very claims at issue here.” Dkt. 10 at 19.
Both AT&T and the Department rely on a series of decisions in a parallel action
involving Univar, Inc., where both the Delaware District Court and this court considered
whether a similar federal action should take precedence over a comparable state
proceeding. The early rounds in that action supported AT&T’s request for a stay. This
court stayed the Department’s action to enforce an administrative subpoena in favor of
the federal challenge. See Dept. of Fin. v. Univar, Inc., C.A. No. 2018-0884-JRS, at 45
(Del. Ch. Apr. 8, 2019) (TRANSCRIPT). This court declined to certify the ruling for
interlocutory appeal, see Dept. of Fin. v. Univar, Inc., 2019 WL 1995150, at *4 (Del. Ch.
May 6, 2019), and the Delaware Supreme Court agreed that an interlocutory appeal was
not warranted, see Dept. of Fin. v. Univar, Inc., 2019 WL 2513772, at *2 (Del. June 18,
2019) (ORDER).
Four months later, the Delaware District Court dismissed as unripe all but two of
the ten counts in Univar’s federal complaint because this court had not yet determined
whether to enforce the administrative subpoena. Univar, Inc. v. Geisenberger, 409 F.
Supp. 3d 273, 281–82 (D. Del. 2019). The Delaware District Court held that Univar’s
equal protection and procedural due process claims were ripe, but the court stayed those
14
claims pending the outcome of the proceeding to enforce the administrative subpoena. Id.
at 281, 285. The court explained that a stay was “in the interest of justice” and that
the best course of action is to stay this case until such a time that the Court
of Chancery determines whether to enforce the Subpoena against Plaintiff.
If the Chancery Court does not enforce the Subpoena, this action may no
longer be necessary. On the other hand, if the Subpoena is enforced, certain
issues may become ripe and an amended complaint may be appropriate.
The Court recognizes that certain abstention doctrines may come into play,
but believes that as a matter of comity, it would be well if Delaware had the
opportunity to address some of these issues in the first instance. Thus, the
present litigation before this Court is stayed until the enforceability of the
subpoena against Univar has been addressed.
Id. at 284–85 (citation, footnote, and internal quotation marks and alterations omitted).
After the Delaware District Court issued its decision, this court lifted the stay, and
Univar moved to dismiss the Department’s claim as unripe. This court denied the motion
and instructed the parties that “the next step is to present the claim for decision on the
merits promptly.” See Univar Chancery III, 2020 WL 2569703, at *5.
The sequence of rulings in the Univar litigation demonstrates that this action
should proceed. A stay would create inefficiencies and waste judicial resources, because
the issues before the Delaware District Court largely will remain unripe until this court
has ruled on whether to enforce the Subpoena. As to those claims that are ripe, the
Delaware District Court has expressed a preference that this court first decide whether the
Subpoena is enforceable. This approach comports with the general principle that “[w]here
the constitutionality of a state statute . . . is involved, there are sound reasons why any
uncertainty as to its meaning should first be resolved by the state.” Jehovah’s Witnesses
15
v. King Cty. Hosp. Unit No. 1 (Harborview), 278 F. Supp. 488, 505 (W.D. Wash. 1967),
aff’d, 390 U.S. 598 (1968).
AT&T seeks to distinguish the outcome in Univar on the theory that its federal
challenge to the termination of its expedited examination is ripe, regardless of any
challenge to the scope of the Subpoena. The two issues are not separate. The State
Escheator terminated the expedited examination because AT&T failed to comply with the
Department’s requests for information. If this court holds that the Department exceeded
the authority granted to the State Escheator under Delaware law by making those
requests, then that ruling could affect whether the State Escheator had grounds for
terminating the expedited examination.
AT&T also cites three similar challenges to the Escheat Law that are pending in
the Delaware District Court. Dkt. 10 at 18–19 (first citing Eaton Corp. v. Geisenberger,
C.A. No. 1:19-cv-02269-RGA (D. Del. Dec. 12, 2019); then citing Fruit of the Loom,
Inc. v. Geisenberger, C.A. No. 1:19-cv-02273-CFC (D. Del. Dec. 13, 2019); and then
citing Siemens USA Hldgs. Inc. v. Geisenberger, C.A. No. 1:19-cv-02284-MN (D. Del.
Dec. 17, 2019)). AT&T argues that the overlapping issues in those cases should be
decided first, before this court addresses the enforceability of the Subpoena. This is a
variant of the argument that was rejected in the Univar litigation. The Delaware District
Court has already indicated that this court should go first, and this court has agreed.
Alternatively, AT&T contends that the case should be stayed because AT&T made
a so-called “England reservation.” See generally England v. La. State Bd. of Med.
Exam’rs, 375 U.S. 411 (1964). The England reservation preserves AT&T’s ability to
16
litigate federal claims related to this action in federal court. It does not affect whether this
litigation should be stayed. If anything, it counsels in favor of this action going first,
because AT&T has preserved its federal claims.
Staying this action in favor of the Federal Action would be inefficient. This
litigation involves the narrow question of whether the Subpoena is enforceable.
Answering this question will affect the analysis of the constitutional questions at issue in
the Federal Action. The request for a stay is denied.
B. The Failure To Join Necessary Parties
AT&T next argues that the Subpoena should be quashed because the Affiliates are
necessary parties who must be joined as defendants before this court can enforce the
Subpoena. Alternatively, AT&T contends that this court should “order [the Department]
to join in this action all other legal entities from which it seeks documents,” namely the
Affiliates. Dkt. 10 at 22.
AT&T’s request for relief is the equivalent of a motion to join necessary parties
under Rule 19. That rule provides that joinder of a party is necessary if
(1) in the person’s absence complete relief cannot be accorded among those
already parties, or
(2) the person claims an interest relating to the subject of the action and is
so situated that the disposition of the action in the person’s absence may
(i) as a practical matter impair or impede the person’s ability to
protect that interest or
(ii) leave any of the persons already parties subject to a substantial
risk of incurring double, multiple, or otherwise inconsistent obligations by
reason of the claimed interest.
17
Ch. Ct. R. 19(a) (formatting altered).
Invoking the standard set out in Rule 19(a)(1), AT&T contends that this court
cannot grant complete relief unless the Affiliates are joined as necessary parties because
this court cannot order non-parties to comply with the Subpoena. That is not so. This
court can order AT&T to cause the Affiliates to comply with the Subpoena. AT&T
controls the Affiliates, and it can cause them to comply with an order of this court.
The Escheat Law expressly authorizes the enforcement of a subpoena against a
“subsidiary or affiliate” of a person under examination. Section 1171 authorizes the State
Escheator to “[e]xamine the records of a person or the records in the possession of an
agent, representative, subsidiary, or affiliate of the person under examination in order to
determine whether the person complied with [the Escheat Law].” 12 Del. C. § 1171(1).
The statute authorizes the State Escheator to “[i]ssue an administrative subpoena to
require” the production of these records. Id. § 1171(3). The statute also authorizes the
State Escheator to bring an action in this court to enforce the administrative subpoena. Id.
§ 1171(4). If there were any question about this court’s ability to order AT&T to cause
the Affiliates to comply with the Subpoena, the Escheat Law answers it.
AT&T’s conduct also demonstrates that the Affiliates are not necessary to provide
complete relief. For the past two decades, AT&T has filed consolidated reports on behalf
of itself and the Affiliates. See Dkt. 10 at 9, 26. For the past eight years, AT&T has
participated in the examination on behalf of itself and the Affiliates. In responding to the
requests, AT&T has relied on in-house counsel at one of the Affiliates to act on AT&T’s
behalf. See id. at 13–14; see also id. Exs. G, H. AT&T has never previously objected that
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the Affiliates are technically separate entities or that it lacks the ability to control or
provide information on behalf of the Affiliates. The joinder of the Affiliates as parties is
not necessary for this court to grant complete relief. Only AT&T’s presence is necessary
for this court to grant complete relief.
Separately invoking the language of Rule 19(a)(2), AT&T claims that joining the
Affiliates is necessary to enable the Affiliates to produce information without running
afoul of “any laws or regulations that could prohibit disclosure absent such a court order
directed to the particular entity.” Dkt. 10 at 22. AT&T does not identify what laws or
regulations might apply, making this a hypothetical concern.
In any event, AT&T is the real party in interest. AT&T controls the Affiliates, and
AT&T is fully capable of raising any issues and advocating on their behalf. The joinder
of the Affiliates as parties is not necessary to protect their interests or to avoid duplicative
obligations. See Actrade Fin. Techs. Ltd. v. Aharoni, 2003 WL 22389891, at *7 (Del. Ch.
Oct. 17, 2003) (“There is also little risk that these companies will be unable to protect
their interests or that Aharoni will be subject to duplicative obligations. If, as alleged,
Aharoni controls ICC, Fort and CFI, then Aharoni can adequately defend their
interests.”).
It is not necessary to stay or dismiss this action because the Affiliates are not
parties. AT&T’s request for relief under Rule 19 is denied.
C. The Request To Quash Or Modify The Subpoena
AT&T finally contends that the Subpoena should be quashed or modified because
the Department has not properly exercised the authority granted to the State Escheator
19
under the Escheat Law. AT&T advances six arguments as to why the Subpoena is not a
proper exercise of authority. First, AT&T argues that the Department’s stated reasons for
issuing the Subpoena do not match the language of the statute. Second, AT&T argues that
the Department is seeking information for reporting periods that cannot give rise to any
escheatable property because the statute of limitations has already run. Third, AT&T
argues that the Department is seeking information about transactions where AT&T’s
records show that the property could not possibly be escheatable to Delaware. Fourth,
AT&T argues that the Department is seeking information about voided or cleared checks
that are not yet escheatable. Fifth, AT&T argues that the Subpoena requires AT&T to
create new documents. Finally, AT&T argues that even if the requests might be
technically authorized, the Department’s demands for information are “‘so obviously
pretextual or insatiable’” as to extend “‘beyond a legitimate inquiry.’” Dkt. 10 at 23
(quoting Marathon Petroleum Corp. v. Sec’y of Fin., 876 F.3d 481, 501 (3d Cir. 2017)).
As noted previously, the Delaware courts have not yet addressed the procedures
that should govern an action to enforce a subpoena issued under the Escheat Law. Section
1171(4) authorizes the State Escheator to “[b]ring an action in the Court of Chancery
seeking enforcement of [the Subpoena],” and it instructs the court to consider that request
for relief “under procedures that will lead to an expeditious resolution of the action.” 12
Del. C. § 1171(4).
The statutory reference to an “action in the Court of Chancery” indicates that a
proceeding to enforce a subpoena is governed by the Court of Chancery rules. Like the
Federal Rules of Civil Procedure, the Court of Chancery rules dispense with the prior
20
systems of forms of action, common law writs, and code pleading. There is only “1 form
of action to be known as ‘civil action.’” Ch. Ct. R. 2.
A party confronted with a complaint ordinarily responds by filing an answer or a
motion to dismiss. AT&T filed a singular motion that made pleading-stage arguments
(the request for a stay in deference to the Federal Action and the request for a stay or
dismissal under Rule 19) and also included a motion to quash or modify. Under the Court
of Chancery Rules, a motion to quash or modify is not a motion to dismiss. It is a
discovery motion analogous to a motion for a protective order that is filed in response to
a subpoena issued pursuant to Court of Chancery Rule 45. See Ch. Ct. R. 45(c)(3)(A)
(“On timely motion, the court on behalf of which the subpoena was issued shall quash or
modify the subpoena . . . .”).
A party who moves to quash or modify a subpoena generally takes on the burden
to establish that a subpoena exceeds the scope of proper discovery. 2 Rule 45(c)(3)(A)
identifies possible grounds, including that the subpoena
2
See Tekstrom, Inc. v. Savla, 2007 WL 3231632, at *5 (Del. Com. Pl. Oct. 25,
2007) (“As a rule, the moving party seeking to quash or modify a subpoena bears the
burden in obtaining the desired remedy.”); 9A Charles Allen Wright et al., Federal
Practice and Procedure § 2463.1 (3d ed.), Westlaw (database updated Apr. 2020)
(explaining that under the federal analogue of Court of Chancery Rule 45(c)(3)(A), “the
burden to establish that a subpoena duces tecum imposes an undue burden is on the
person who moves to have it quashed”); cf. Drysdale v. Noble, 2003 WL 21481005, at *2
(Del. Super. June 19, 2003) (“[A] party seeking an order protecting confidential trade
information bears the burden of establishing good cause for the order by showing
specifically that it will be harmed by disclosure.” (internal quotation marks and
alterations omitted)); 23 Am. Jur. 2d Depositions and Discovery § 62 (“The party seeking
a protective order bears the burden of demonstrating the requisite good cause.”).
21
(i) Fails to allow reasonable time for compliance;
(ii) Requires disclosure of privileged or other protected matter and no
exception or waiver applies; or
(iii) Subjects a person to undue burden.
Ch. Ct. R. 45(c)(3)(A); see id. 45(c)(3)(B) (providing additional bases to quash or modify
a subpoena seeking disclosure of trade secrets or expert opinion). A party might seek to
quash or modify an administrative subpoena on similar grounds, and a party seeking to
do so would logically bear the burden to establish a fact-based objection of this type.
By moving affirmatively to quash or modify the Subpoena, AT&T could be seen
as taking on a burden to show that the Subpoena was improper. But in the Motion and its
supporting briefs, AT&T appeared to advance only pleading-stage challenges to the
Department’s authority to issue the Subpoena. At oral argument, the court asked AT&T’s
counsel whether some form of further proceedings would be warranted if those
challenges failed. AT&T’s counsel did not seem to have contemplated further
proceedings, but agreed it was possible. Dkt. 30 at 11–13, 19.
To the extent that the filing and framing of the Motion muddied the procedural
waters, the Department’s response did not help clarify them. The Department did not
respond to the Motion by cross moving for affirmative relief, such as by filing a motion
for judgment on the pleadings or a motion for summary judgment. The Department only
filed an answering brief. Dkt. 16. At oral argument, the 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
22
make a decision that would result in a “final, appealable order” regarding the
administrative subpoena. Dkt. 30 at 61; see id. at 34–37, 39–42; see also Dkt. 25 at 5.
The Department’s procedural position has little to recommend it. It conflicts with
the Department’s assertion in its answering brief that “this proceeding is analogous to a
summary proceeding seeking examination of a Delaware corporation’s books and records
pursuant to 8 Del. C. § 220.” Dkt. 16 at 7. A Section 220 proceeding does not leap from
the filing of a complaint and the equivalent of a pleading-stage motion to the issuance of
a final, appealable order. Like any other civil action, a Section 220 proceeding starts with
pleadings and culminates in a merits hearing that enables the court to enter final relief,
often after a short trial on a paper record. See, e.g., Lavin v. West Corp., 2017 WL
6728702, at *1 (Del. Ch. Dec. 29, 2017) (rendering post-trial decision on a “‘paper
record’ without depositions or live testimony”). Because the statute calls for the
proceeding to be summary, the court takes steps to streamline the proceeding and
accelerate the merits hearing and motion practice in a Section 220 proceeding is
disfavored.3 But the responding party in a Section 220 proceeding typically files an
3
See La. Mun. Police Empls. Ret. Sys. v. Morgan Stanley & Co., Inc., 2011 WL
773316, at *3 (Del. Ch. Mar. 4, 2011) (“The summary nature of [a Section 220]
proceeding ‘dictate[s] against allowing preliminary motions addressed to the pleadings to
be presented and decided. . . . Such a practice would tend to promote delay, thereby
undercutting the statutory mandate and policy that the proceeding be summary in
character.’” (quoting Coit v. Am. Century Corp., 1987 WL 8458, at *1 (Del. Ch. Mar. 20,
1987))); Lavi v. Wideawake Deathrow Entm’t, LLC, 2011 WL 284986, at *1 (Del. Ch.
Jan. 18, 2011) (“Rarely is dispositive motion practice efficient when the case can be tried
within two months of filing.”); Coit, 1987 WL 8458, at *1 (explaining that pretrial
23
answer, limited discovery is available, and the case follows a standard, albeit accelerated,
procedural track. If a Section 220 proceeding is the proper analogy, then the
Department’s position at oral argument is mistaken.
The Department’s position also conflicts with the implications of Delaware
precedent regarding the enforcement of administrative subpoenas in other settings. In
First Jersey Securities, Inc. v. Bruton, 1980 WL 273543 (Del. Ch. Mar. 6, 1980), the
Delaware Division of Securities issued an administrative subpoena to examine an
employee of First Jersey Securities, Inc. First Jersey filed an action in the Court of
Chancery against Donald Bruton, then Securities Commissioner of the State of Delaware.
First Jersey asked the court to quash the subpoena and sought to have any discovery
governed by the rules of this court. Chancellor Marvel agreed that “once the opposing
contentions of the opposing parties are drawn into the Court of Chancery for decision, it
is clear that the rules of this court must apply . . . .” Id. at *1.
After the Securities Commissioner moved for reargument, Chancellor Marvel
reiterated that “when an administrative proceeding reaches an adjudicatory stage, the full
panoply of judicial procedures must be observed by an administrative agency.” First
Jersey Sec., Inc. v. Bruton, 1980 WL 273547, at *1 (Del. Ch. May 8, 1980). Chancellor
Marvel noted that by statute, “‘[n]othing in this Code, anything therein to the contrary
notwithstanding, shall in any way limit, supersede or repeal any rule heretofore
motions in a Section 220 action “ought not to be presented for decision in advance of the
final hearing on the merits except where necessary to avoid substantial prejudice”).
24
promulgated governing practice or procedure in the Court of Chancery.’” Id. at *1
(quoting 10 Del. C. § 361(d)). As a result, the Court of Chancery Rules prevailed over
any contrary statute for purposes of governing a court proceeding. Chancellor Marvel
also held that the standards set forth in Court of Chancery Rule 26 would govern First
Jersey’s request to quash the subpoena. See id. at *2.
The Department’s argument that the proceedings on AT&T’s motion to quash
must result in a final, appealable order also runs contrary to In re Blue Hen Country
Network, Inc., 314 A.2d 197 (Del. Super. 1973). There, the Attorney General filed an
action to enforce an administrative subpoena as part of an investigation into securities
fraud. The Attorney General petitioned for a rule to show cause as to why the subpoena
should not be enforced, and the responding parties filed motions to quash and for a
protective order. Id. at 199. The trial court largely enforced the subpoena, but found it
unclear whether certain types of documents “would contain information relevant to the
investigation.” Id. at 202. The trial court ordered the Attorney General to “submit
justification for the production of those records.” Id. The trial court thus requested
additional information and conducted further proceedings; it did not immediately issue a
final order.
The Department’s position even departs from how federal decisions describe the
operative procedure for enforcing an administrative subpoena. The United States Court of
Appeals for the Third Circuit recommended the following “generally acceptable
procedure”:
25
1. The Secretary or his delegate would file a complaint accompanied by an
affidavit of the agent who issued the summons, seeking enforcement. The
complaint should separately allege compliance with each of the
requirements of the Powell test of enforceability.4 The affidavit should
support these allegations.
2. Process on the complaint could be in the form of an order served on the
person summoned fixing a deadline for filing any responsive pleading,
albeit an informal pleading, together with an affidavit, and any motions,
and directing that person to show cause at a date and time certain why an
order should not be entered enforcing the administrative summons. The
order should provide that unless the court determines otherwise, any
motions and issues raised by the pleadings will be considered at the return
date of the order to show cause. In addition, the order should state that only
those issues raised in motions or brought into controversy by the responsive
pleading and supported by affidavit will be considered at the return of the
order and that any uncontested allegation in the complaint will be taken as
admitted.
3. At the hearing on the order, the Secretary should be prepared to prove the
allegations of the complaint that the summons complies with the Powell
requirements. He should also be prepared to rebut any proper defenses
asserted by the person summoned.
The person summoned should be prepared to produce any evidence
rebutting the government’s case and also to assume the burden as to
affirmative issues raised by him for the purpose of demonstrating that
enforcement of the summons would constitute an abuse of the court’s
process. After completion of the hearing, the district court in conformity
with [Federal Rule of Civil Procedure] 52(a), should make the requisite
findings of fact and conclusions of law.
4. Although the proceedings are of a summary nature, if the district court
concluded that it could not fairly decide the case on the record before it at
the return of the order, it would be free to direct further proceedings,
including discovery, if requested.
4
The “Powell test” is a reference to United States v. Powell, 379 U.S. 48 (1964),
discussed below.
26
United States v. McCarthy, 514 F.2d 368, 372–73 (3d Cir. 1975) (Seitz, C.J.) (footnote
added) (footnote from original omitted); accord United States v. Genser, 582 F.2d 292,
302 (3d Cir. 1978) (endorsing McCarthy; noting that “[o]ther courts have established
similar procedures”). The McCarthy court clarified that although its procedure
contemplated an evidentiary hearing, “implicit in our design is the realization that not
every summons enforcement proceeding will require an evidentiary hearing.” 514 F.2d at
373. The court observed that “if the person summoned neither puts in issue allegations of
the complaint nor raises proper affirmative defenses, no evidentiary hearing will be
required; the matter can be decided on the pleadings.” Id.
In a somewhat more recent decision, the United States Court of Appeals for the
Third Circuit described the process for enforcing an administrative subpoena in similar
terms:
 “The agency seeking enforcement must first file a complaint alleging compliance
with the [requirements for issuing an administrative subpoena under Powell] and
an affidavit of the agent who issued the subpoena verifying those allegations.”
SEC v. Wheeling-Pittsburgh Steel Corp., 648 F.2d 118, 128 (3d Cir. 1981).
 “The person subpoenaed is then served, and finally a hearing is held during which
the government must prove its compliance with the [requirements for issuing an
administrative subpoena under Powell].” Id.
 “If the government makes this preliminary showing, the burden then shifts to the
respondent to prove that enforcement of the subpoena would be improper . . . .” Id.
 “After these proceedings, the district court must make findings of fact and
conclusions of law in conformity with [Federal Rule of Civil Procedure] 52(a), but
if the record as then constituted is inadequate to dispose of the action, the trial
judge may, in his discretion and on request, direct further proceedings including
discovery.” Id.
27
 “The trial judge must evaluate the assertions of the recipient of the subpoena and
any evidence introduced by both parties before allowing substantial discovery.
This procedure requires the respondent to bear the initial burden of convincing the
trial judge that the claimed abuse of process is not frivolous.” Id. (citations
omitted).
See also United States v. Gertner, 65 F.3d 963, 966–68 (1st Cir. 1995) (describing similar
framework); cf. United States v. Morton Salt Co., 338 U.S. 632, 637 (1950) (noting that
after the United States filed actions to enforce information requests issued by the Federal
Trade Commission, the responding parties answered, the parties filed cross motions for
summary judgment, and the court ruled on the cross motions because there was no
dispute as to the material facts). The Department’s description of how enforcement
proceedings unfold only contemplates the filing of a complaint, followed by a motion to
quash and briefing on the motion to quash, then culminating in a hearing on those papers
without the taking of any evidence, and the immediate issuance of a final, appealable
order. That is inconsistent with the federal scheme.
In the abstract, the McCarthy and Wheeling-Pittsburgh decisions describe a
method of proceeding that fits well with the Court of Chancery Rules, albeit one that the
parties did not follow here. The immediately pressing question is how to proceed in this
case.
During oral argument, AT&T cited Blue Hen and referenced the possibility that if
the court had concerns about the scope of the Subpoena, then the Department might wish
to provide additional justification. Dkt. 30 at 30–33. The Department rejected that route,
insisting that it wanted a final, appealable order. Id. at 34–37, 39–42, 61. In a similar
situation where a government agency not only did not seek an evidentiary hearing but
28
affirmatively opposed it, the United States Court of Appeals for the First Circuit held that
a district court had acted within its discretion by not holding an evidentiary hearing and
deciding the case based on the agency’s complaint and supporting submissions. See
Gertner, 65 F.3d at 969–70.
Given the Department’s position, this decision evaluates the Department’s
application to enforce the Subpoena based solely on the allegations of the complaint. If
those allegations do not support the requested relief, then the relief will be denied.
Similarly, because of AT&T’s decision to file a motion to quash or modify, this
decision will not give AT&T an opportunity to raise further arguments in opposition to
the Subpoena. As the responding party, AT&T was in a position to know whether
compliance would be unduly burdensome or implicate other fact-based complications.
When it filed the Motion, AT&T could have raised fact-based objections in addition to its
legal arguments. AT&T did not need any discovery to do so; it could have submitted
affidavits and supporting documents with the Motion. Although the McCarthy procedures
contemplate a different procedural means by which the responding party would raise
issues, the parties have not followed that framework.
Giving AT&T a second bite at the apple would be inconsistent with “an
expeditious resolution of the action.” 12 Del. C. § 1171(4). AT&T is therefore limited to
the legal arguments it raised in the Motion. This ruling is not prejudicial to AT&T,
because requiring a party opposing a subpoena to come forward with all of its objections
at once comports with how courts approach motions to quash or modify under Rule 45 or
29
in miscellaneous actions to enforce out-of-state subpoenas. As noted, AT&T does not
appear to have contemplated making further fact-based arguments.
1. The Legal Framework
This court has not previously articulated the legal framework that governs an
action to enforce an administrative subpoena under the Escheat Law. As Vice Chancellor
Slights recently suggested, the proper course is to look to the “well-developed common
law standards in Delaware for enforcing subpoenas,” including the “abundant authority
with respect to the parameters for enforcement of administrative subpoenas generally.”
Univar Chancery III, 2020 WL 2569703, at *4 & n.47.
When the legislature gives an administrative agency the power to subpoena, it has
given the agency “a power of inquisition” that is “analogous to the 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.” Morton Salt, 338 U.S. at 642–43; accord In re Hawkins, 123 A.2d 113, 115
(Del. 1956) (holding that after enacting of statute conferring power to issue subpoenas
and other writs on Attorney General, “it is clear that the general investigatory powers of
the grand jury are now shared, at least to a substantial extent, by the Attorney General”
and that like the grand jury, the Attorney General “may institute an investigation of
suspected violations of law, and in pursuing the investigation may compel the appearance
of witnesses and the production of documents”). The resulting power to investigate
possible wrongdoing is “‘necessarily broad.’” Blue Hen, 314 A.2d at 200 (quoting
Branzburg v. Hayes, 408 U.S. 665, 688 (1972)). “For these reasons, judicial review of
30
administrative subpoenas is ‘strictly limited.’” Univ. of Med. & Dentistry of N.J. v.
Corrigan, 347 F.3d 57, 64 (3d Cir. 2003) (quoting FTC v. Texaco, Inc., 555 F.2d 862,
872 (D.C. Cir. 1977) (en banc)).
An agency has authority to issue an administrative subpoena “if the inquiry is
within the authority of the agency, the demand is not too indefinite and the information
sought is reasonably relevant.” Morton Salt, 338 U.S. at 652. Reframed in slightly
different words, the agency can establish its authority to issue the subpoena by showing
“that the investigation will be conducted pursuant to a legitimate purpose, that the inquiry
may be relevant to the purpose, that the information sought is not already within the
[agency’s] possession, and that the administrative steps required by the [statute] have
been followed . . . .” Powell, 379 U.S. at 57–58; see State v. Salasky, 2013 WL 5487363,
at *15 (Del. Super. Sept. 26, 2013) (finding that under statute conferring subpoena power
on Attorney General, “as long as the Attorney General is conducting an investigation of
alleged criminal activity, they are acting within the statutory authority provided to them
by the General Assembly”). It is nevertheless possible that an agency may issue a
subpoena that is not sufficiently grounded in its statutory authority. See In re McGowen,
303 A.2d 645, 647 (Del. 1973) (quashing subpoena issued by Attorney General as
beyond statutory authority). It is also possible that “a governmental investigation . . . may
be of such sweeping nature and so unrelated to the matter properly under inquiry as to
exceed the investigatory power.” Morton Salt, 338 U.S. at 652.
If the court finds that the agency had authority to issue the subpoena, the scope of
judicial review remains limited, but it is not over.
31
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 [subject 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. The burden of
showing an abuse of the court’s process is on the [party objecting to the
subpoena] . . . .
Powell, 379 U.S. at 58 (footnote omitted). These examples of abuse “were not intended
as an exclusive statement about the meaning of good faith.” United States v. LaSalle
Nat’l Bank, 437 U.S. 298, 317 n.19 (1978). “Future cases may well reveal the need to
prevent other forms of agency abuse of congressional authority and judicial process.” Id.
at 318 n.20.
Decisions considering the enforcement of administrative subpoenas also evaluate
the dimension of reasonableness. This requirement is often grounded in the protections
supplied by the Fourth Amendment of the United States Constitution, but it flows more
generally from the “real problem of balancing the public interest against private
security.” Okla. Press Pub. Co. v. Walling, 327 U.S. 186, 203 (1946). For purposes of an
administrative subpoena,
the requirement of reasonableness . . . comes down to specification of the
documents to be produced adequate, but not excessive, for the purposes of
the relevant inquiry. Necessarily, as has been said, this cannot be reduced to
formula; for relevance or adequacy or excess in the breadth of the subpoena
are matters variable in relation to the nature, purposes and scope of the
inquiry.5
5
Id. at 209; see id. at 216 (explaining that analysis of scope of administrative
subpoena is “essentially the same as . . . the court’s in issuing other pretrial orders for the
32
Put differently, (i) the subpoena must “specify the materials to be produced with
reasonable particularity,” (ii) the subpoena must “require the production only of materials
that are relevant to the investigation,” and (iii) the request “must not cover an
unreasonable amount of time” or otherwise be overly burdensome. Blue Hen, 314 A.2d at
201.
When evaluating reasonableness, courts show deference to the needs of the
agency, even though “such investigations can be expensive and time consuming” for the
responding party. EEOC v. Am. Express Centurion Bank, 758 F. Supp. 217, 221 (D. Del.
1991) (citing Okla. Press, 327 U.S. at 213). “Premature interruption of investigation
‘would render substantially impossible [the agency’s] effective discharge of the duties of
investigation and enforcement’” that have been assigned to it. Id. at 221 (quoting Okla.
Press, 327 U.S. at 213).
Because the reasonableness analysis has traditionally been grounded in the Fourth
Amendment, and because AT&T has sought to reserve its right to litigate issues under
federal law and the United States Constitution in the Federal Action, this court could
conclude that reasonableness is solely a federal law issue and decline to consider it on
that basis. Under Powell, however, this court must evaluate whether the enforcement of
discovery of evidence”); id. at 217 n.57 (noting that a court has the power to address
whether the agency has “authority[]to conduct the investigation, relevancy of the
materials sought, and breadth of the demand”); id. at 217 (reiterating that “[p]ersons from
whom [an agency] seeks relevant information are not required to submit to [the agency’s]
demand, if in any respect it is unreasonable or overreaches the authority [the legislature]
has given”).
33
the subpoena would be “an abuse of the court’s process,” 379 U.S. at 58, and the
enforcement of an unreasonable subpoena would be abusive. In addition, the Escheat
Law appears to contemplate an inquiry into reasonableness by stating that a subpoena
may be issued “at reasonable times and on reasonable notice,” 12 Del. C. § 1171, and a
leading authority on the Escheat Law observes that “[h]olders expect both the conduct
and the review methodology employed by unclaimed property auditors to be reasonable .
. . .” Ethan D. Millar et al., Unclaimed Property, Tax Portfolio Series (BNA) no. 1600-3d
§ 1600.09(F), Bloomberg Law (database updated June 2020). This decision therefore
concludes that Delaware law contemplates an inquiry into the reasonableness of an
administrative subpoena under the Escheat Law, albeit one that is deferential to the State
Escheator.
The resulting legal framework for enforcing an administrative subpoena involves a
shifting burden of proof. The agency has the initial burden of showing that its subpoena is
authorized. “If the [agency] makes this preliminary showing, the burden then shifts to the
respondent to prove that enforcement of the subpoena would be improper under the test
enunciated in Powell.” Wheeling-Pittsburgh, 648 F.2d at 128. This decision has already
discussed the McCarthy procedures, which parties ideally would use in these settings.
At bottom, AT&T maintains that the Subpoena exceeds the authority granted to
the State Escheator. The Department bears the initial burden to show that it possesses the
authority to issue the Subpoena. See Powell, 379 U.S. at 57–58. The allocation of the
burden is not significant in this case, because the question of authority raises issues of
law. The one exception is the question of whether the Subpoena is so broad,
34
unreasonable, or otherwise infirm that it would constitute an abuse of the court’s process
to enforce it. As to this issue, AT&T bears the burden. See LaSalle, 437 U.S. at 316.
2. Whether The Department Properly Exercised Authority Granted To
The State Escheator.
For an administrative subpoena to be valid, the agency must show “that the
investigation will be conducted pursuant to a legitimate purpose . . . .” Powell, 379 U.S.
at 57. Framed in slightly different terms, “the inquiry must be within the authority of the
agency . . . .” United States v. Westinghouse Elec. Corp., 638 F.2d 570, 574 (3d Cir.
1980).
AT&T advances different theories as to why the Subpoena falls outside the
authority granted to the State Escheator. Individually, the theories fall short. Evaluated
collectively, however, AT&T has established that the Department issued an overly broad
and unreasonable subpoena such that to enforce it would abuse the court’s process.
a. Linguistic Divergence Between Section 1171 And The Complaint
AT&T first focuses on the linguistic divergence between the language of Section
1171 and how the complaint frames the purpose of the Subpoena. This argument does not
provide grounds for quashing or modifying the Subpoena.
Section 1171 gives the State Escheator the authority to “[e]xamine the records of a
person or the records in the possession of an agent, representative, subsidiary, or affiliate
of the person under examination in order to determine whether the person complied with
[the Escheat Law].” 12 Del. C. § 1171(1). The complaint frames the purpose for the
Subpoena in different terms. It alleges that the Department served the Subpoena to
35
“identify abandoned and unclaimed property in the custody of [AT&T] . . . to which the
State is entitled to custody” and “to determine the property being held by AT&T that
shall be escheated to the State pursuant to the [Escheat Law].” Compl. ¶¶ 6, 23.
AT&T argues that the Department is exceeding the authority granted to the State
Escheator by seeking to identify escheatable property rather than by seeking to determine
whether AT&T complied with the Escheat Law. See Dkt. 10 at 25. This argument is
meritless. The process of examining a party’s compliance with the Escheat Law
necessarily involves determining whether that party has unclaimed property in its custody
that should be escheated to the State of Delaware. A party who has complied with the
Escheat Law will have identified and escheated any escheatable property. A party who
has not complied with the Escheat Law either will not have identified escheatable
property, not have escheated the property, or both. The Escheat Law authorizes the State
Escheator to conduct this inquiry, and the Department can issue a subpoena for that
purpose.
AT&T also complains that “[t]he Complaint does not contain a single allegation
addressing why the documents requested are relevant to Delaware’s unclaimed property
law.” Id. That omission is not inherently fatal, because the law governing the
enforcement of agency subpoenas rejects any bright-line requirement that the agency
provide an explanation for its actions or meet a standard of proof such as probable cause.
The Supreme Court of the United States addressed this issue in Powell. In March
1963, the Internal Revenue Service issued an administrative subpoena for records relating
to tax returns from 1958 and 1959. Powell, 379 U.S. at 49. A three-year statute of
36
limitations barred the assessment of additional deficiencies for those years, except in
cases of fraud. Because more than three years had passed, the taxpayer argued “that
before he could be forced to produce the records the Service had to indicate some
grounds for its belief that a fraud had been committed.” Id. The IRS “declined to give any
such indication . . . .” Id. The IRS then sought to enforce its subpoena and filed an
affidavit from an agent stating that he “had reason to suspect the taxpayer had
fraudulently falsified its 1958 and 1959 returns by overstating expenses.” Id. at 50. The
trial court enforced the subpoena, but the court of appeals reversed, holding that the IRS
failed to give “probable cause” to suspect fraud. Id. The Supreme Court of the United
States reversed the court of appeals, holding 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.” Id. at 57. The
opinion used the term “probable cause” to refer not only to that level of proof in a
specific legal sense, but more generally “to include the full range of formulations offered
by lower courts.” Id. at 50 n.7.
Subsequent decisions have relied on Powell to reject any requirement that an
agency show cause before obtaining the information it seeks. See, e.g., Am. Express, 758
F. Supp. at 221 (“The agency need not meet any standard of probable or reasonable
cause.”). “[A]n agency ordinarily ‘can investigate merely on suspicion that the law is
being violated, or even just because it wants assurance that it is not.’” Univ. of Med. &
Dentistry, 347 F.3d at 64 (quoting Powell, 379 U.S. at 57). “‘Judicial supervision of
agency decisions to investigate might hopelessly entangle the courts in areas that would
37
prove to be unmanageable and would certainly throw great amounts of sand into the gears
of the administrative process.’” Wheeling-Pittsburgh, 648 F.2d at 127 n.12 (quoting
Dresser Indus., Inc. v. United States, 596 F.2d 1231, 1235 n.1 (5th Cir. 1979)).
Delaware decisions take the same view. See Blue Hen, 314 A.2d at 201
(recognizing that defendant “fail[ed] to point to any case that would support its position
that subpoenas duces tecum must be supported with probable cause”). In Hawkins, the
recipient of a subpoena from the Attorney General objected that “the subpoena fails to
show on its face the subject matter of the investigation to which the demanded records
relate.”123 A.2d at 116. The recipient argued that “a witness is entitled for his own
protection to know the nature of the inquiry and the purpose of the subpoena so that he
may challenge its propriety if he so desires.” Id. The Delaware Supreme Court rejected
this argument:
The simple answer to this contention is that the limits of the investigation
and the relevancy of the documents sought are matters which are of no
concern to the witness. Such is the rule when a witness is called before a
grand jury, and we think it equally applicable when he is summoned before
the Attorney General.
Id. (citation omitted).
A statute certainly could require an agency to provide some reason or make some
showing before conducting an investigation or obtaining an order enforcing a subpoena.
The Escheat Law does not contain any such requirement. Section 1171 does not require
the State Escheator to have any purpose for seeking documents beyond “determin[ing]
whether the person complied with [the Escheat Law].” 12 Del. C. § 1171(1).
38
These authorities demonstrate that an agency does not inherently exceed its
authority by failing to provide an explanation for its investigation or a justification for its
information requests. These general rules do not mean that an agency can never be
required to make some showing or provide some explanation before a court will enforce
its subpoena. In Blue Hen, the Attorney General issued an administrative subpoena
seeking information from Blue Hen Country Network, Inc. and its president. Blue Hen
had been formed only two years earlier, and the firm raised capital by selling securities.
The Attorney General’s stated purpose for the subpoena was its “continuing investigation
of sales of securities within the State of Delaware to determine if materially misleading or
fraudulent representations have been made in connection with the offerings thereof.” Blue
Hen, 314 A.2d at 199 (internal quotation marks omitted). The Attorney General had
issued the subpoena pursuant to its statutory power “‘to investigate matters involving the
public peace, safety and justice, and to subpoena witnesses and evidence in connection
therewith . . . .’” Id. (quoting what is now 29 Del. C. § 2504(4)). The subpoena instructed
Blue Hen’s president to “appear at the office of the Attorney General . . . and to bring
with you all stock records, stock transfer records, books of account, and minutes of
Directors’ meetings of Blue Hen . . . and its subsidiaries.” Id. (internal quotation marks
omitted).
Blue Hen and its president challenged the subpoenas on multiple grounds. For
purposes of this decision, the relevant challenge was their claim that the subpoena was
both “unconstitutionally broad” and inconsistent with “the Fourth Amendment
prohibition against unreasonable searches and seizures.” Id. The trial court concluded that
39
the Attorney General had authority to issue the subpoenas, reasoning that “[t]he purpose
stated by the Attorney General . . . is a proper purpose under the statute,” and the statute
was constitutional. Id. at 200. The trial court also concluded that it was “not unreasonable
to require the production of materials covering the two year period of its corporate
existence.” Id. at 202. But the trial court observed that “[w]hile it is clear that stock
records and stock transfers would contain information relevant to stock sales, it is not
clear that books of account and minutes of directors’ meetings, in general, would contain
information relevant to the investigation.” Id. The court therefore directed the Attorney
General to “submit justification for the production of those records.” Id.
As Blue Hen demonstrates, a court can take into account the fact that an agency
has not provided an explanation or a justification when evaluating whether it would be an
abuse of the court’s process to enforce a subpoena. If an agency has served a wide-
ranging request, and if the responding party has raised valid concerns about the request,
then as in Blue Hen, some form of explanation or justification may be warranted before a
court will enforce the subpoena.
b. Records Of Rebates And Checks Where Any Claim For Escheat
Would Be Barred By The Statute Of Limitations
In its second argument, AT&T maintains that the Department exceeded the
authority granted to the State Escheator by seeking information for years that are barred
from assessment under the applicable statute of limitations. Framed in this bright-line
fashion, this argument does not provide grounds for quashing or modifying the Subpoena.
40
Analyzing AT&T’s argument requires determining whether the statute of
limitations in fact would bar the State Escheator from issuing a notice of deficiency and
escheating abandoned property for any of the years that the Subpoena covers. If the
statute of limitations would not bar the claim, then AT&T’s argument fails on its own
terms.
Before July 22, 2002, the Escheat Law did not impose a statute of limitations
restricting the State Escheator’s ability to recover unclaimed property. Millar et al.,
Unclaimed Property, supra, § 1600.05(J)(1). Under this regime, the State Escheator in
theory could recover property that should have been escheated at any point in history. No
one argues that the pre-2002 regime applies to this case.
In 2002, the General Assembly amended the Escheat Law by imposing a statute of
limitations tied to the filing of annual reports. A holder of escheatable property is
required to file an annual report on March 1 of each year and describe “property
presumed abandoned and subject to the custody of the State Escheator.” 12 Del. C. §
1142(a); see id. § 1144(a). Under the 2002 amendments, the State Escheator could
recover unreported unclaimed property only if the State Escheator issued a notice of
deficiency for an annual report. 73 Del. Laws ch. 417, § 1 (2002). In ordinary
circumstances, the State Escheator had three years to issue a notice of deficiency. Id. If
“an omission of abandoned or unclaimed property from a report ha[d] a value in excess
of 25 % of the amount of abandoned or unclaimed property disclosed in [the] report,”
then the State Escheator had six years. Id. And if “no report [was] filed, or if a false or
fraudulent report [was] filed with the intent to evade the obligation to pay over
41
abandoned property,” then the State Escheator could issue a notice of deficiency at any
time. Id. If the State Escheator failed to issue a notice of deficiency within the statutory
time period, then it was barred from suing to recover the unclaimed property. This
decision refers to this regime as the “Old Statute of Limitations.”
Effective February 22, 2017, the 2017 Amendments changed the limitations
period. As amended, the Escheat Law prohibits the State Escheator from “commenc[ing]
an action or proceeding to enforce . . . the reporting, payment, or delivery of property
more than 10 years after the duty arose.” 12 Del. C. § 1156(b). As amended, the Escheat
Law also provides that the “period of limitation established . . . is tolled by the State
Escheator’s delivery of a notice of an examination . . . , or if the State Escheator
reasonably concludes that the holder has filed a report containing a fraudulent or willful
misrepresentation.” Id. This decision refers to this regime as the “New Statute of
Limitations.”
The Department began its current examination of AT&T in 2012. Thus, if the New
Statute of Limitations were to apply, then the commencement of the investigation would
toll the statute of limitations, and the State Escheator could recover property that became
escheatable as far back as 2002. The State Escheator would not be able to recover
property that became escheatable during years pre-dating 2002.
AT&T contends that when the 2017 Amendments amended the statute of
limitations effective February 22, 2017, the three-year default period under the Old
Statute of Limitations had already run for any report filed on February 21, 2014, or
earlier, i.e., three years or more before the amendment. AT&T filed a report on March 1,
42
2014, which is subject to the New Statute of Limitations, but AT&T maintains that its
reports for earlier years are subject to the Old Statute of Limitations. The State Escheator
has never issued a notice of deficiency for any of its earlier reports, so AT&T maintains
that the three-year statute of limitations applies to the reports filed in 2013 or earlier.
In this case, the Department is investigating property that takes the form of rebates
or checks issued in connection with employee compensation. See Compl. Ex. J. Both
forms of property are presumed abandoned five years after issuance.6 AT&T reasons that
to be escheatable, a rebate or check would have had to be issued at least five years before
the applicable report was filed. Under AT&T’s theory of how the Old Statute of
Limitations worked, the latest report that the State Escheator could pursue was filed in
2013 and covered rebates and checks issued through December 31, 2007. AT&T
6
For checks, the Escheat Law specifies the five-year period. 12 Del. C. §
1133(11). For rebates, the analysis is more complicated. Before the 2017 Amendments,
rebates were escheatable under the “catch-all” provision of the Escheat Law. See 12 Del.
C. § 1198(11) (2016); Staples, Inc. v. Cook, 35 A.3d 421, 424–27 (Del. Ch. 2012)
(finding that rebates at issue were “either ‘bills of exchange’ or ‘credits,’ and therefore
properly subject to escheatment by the State”); see also Millar et al., Unclaimed
Property, supra, § 1600.04(M) (explaining that ordinarily “a rebate is subject to escheat
under the state’s ‘catch-all’ provision”). After the 2017 Amendments, rebates which
cannot “be redeemed for money or otherwise monetized by the issuer” are no longer
escheatable property. 12 Del. C. § 1130(11) (including “rebate” in the definition of
“loyalty card”); see id. § 1130(18) (excluding “loyalty card” from the definition of
“property”). AT&T has not argued, and this decision does not address, whether the 2017
Amendments apply retroactively to rebates issued before the amendments went into
effect. Both parties proceeded as if the rebates are presumed abandoned after five years.
See Dkt. 30 at 28, 38–39; Dkt. 10 at 28, 34.
43
concludes that the State Escheator cannot recover any rebates or checks from that date or
earlier (i.e., before 2008).
Having reasoned in this fashion, AT&T asserts that the Department should not be
able to demand information for years in which the State Escheator would not be able to
recover escheatable property. The Subpoena seeks records dating back to 1992. 7 AT&T
concludes that the Subpoena therefore exceeds the authority granted to the State
Escheator.
Under the Old Statute of Limitations, if the State Escheator could prove the value
of the checks and rebates exceeded the total value of unclaimed property disclosed in an
7
On November 26, 2019, representatives from AT&T met with the State
Escheator to discuss the scope of the Subpoena. In a letter sent to the State Escheator the
next day, AT&T expressed its understanding that “Delaware’s revised request for
documents is limited to 2008 and forward. . . . That is, Delaware is not requesting data for
periods prior to 2008, nor is it requesting that AT&T confirm whether it can access or
research such data.” Dkt. 10 Ex. H at 1. When the Department filed this action to enforce
the Subpoena, the Department did not limit its request to documents from 2008 forward.
See Compl. Ex. J. In its opening brief, AT&T asserted that the Subpoena seeks records
dating back to 1992 and devoted eight pages of briefing to the relevant statute of
limitations. See Dkt. 10 at 26–34. In its answering brief, the Department did not challenge
AT&T’s assertion that the Subpoena seeks records dating as far back as 1992. See Dkt.
16 at 23–26. In its reply, AT&T spent another three pages responding to the
Department’s arguments about the statute of limitations. At oral argument, counsel for
the Department asserted for the first time that the Rebates Request only seeks records
dating back to 1998 and the Disbursements Request only seeks records dating back to
2008. Dkt. 30 at 38–39. Counsel for AT&T expressed surprise, indicating that “AT&T
has been trying to get the Department to commit only to look back to 2008 in requesting
records” but that the Department “has refused to do so.” Id. at 71. Because the narrowing
of the requests was not raised until oral argument, and because the Department did not
explain its position, this decision treats the Subpoena as seeking records dating back to
1992.
44
annual report by 25%, then the Old Statute of Limitations would increase from three
years to six, bringing into play reports filed in 2010 and covering rebates and checks
issued through December 31, 2004. And if the State Escheator could prove AT&T filed a
report fraudulently with the intent to evade the obligation to turn over abandoned
property, the State Escheator could recover any checks or rebates that should have been
covered by that report. AT&T’s answer to these problems is that the complaint does not
allege any basis to think that AT&T’s reports were off by 25% or more or filed
fraudulently. Ironically, under AT&T’s reasoning, the State Escheator could sue to
recover checks or rebates issued before 1994, because AT&T did not start filing reports
until 1999, but neither AT&T nor the Department has addressed that possibility.
The Department responds to AT&T’s laborious analysis with a single sentence,
devoid of authority or argument. According to the Department, “[t]he new Escheats Law
applies to this examination.” Dkt. 16 at 24. As discussed above, the New Statute of
Limitations would allow the State Escheator to seek records of checks or rebates covered
in the 2002 report and therefore issued as early as 1997.
The Department has not provided any grounds for applying the New Statute of
Limitations retroactively. Doing so would break with the “time-honored principle that
[Delaware courts] ‘will not infer an intention to make an act retrospective,’ and that ‘to
give an act a retrospective operation would be contrary to well settled principles of law
applicable to the construction of statutes unless it be plainly and unmistakably so
provided by the statute.’” Chrysler Corp. v. State, 457 A.2d 345, 351 (Del. 1983)
(quoting Keller v. Wilson & Co., 190 A. 115, 125 (Del. 1936)). Nothing in the statute or
45
the legislative history indicates that the General Assembly intended for the retroactive
application of the New Statute of Limitations. See Del. S.B. 13 syn., 149th Gen. Assem.
(2017). Instead, the effective date of February 22, 2017, suggests the opposite. That was
the position that the State Escheator took in connection with the 2002 amendments. 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. Millar et al., Unclaimed Property, supra, §
1600.05(J)(1).
It thus appears correct that there are reports covering years for which the Old
Statute of Limitations would bar the State Escheator from seeking to recover escheatable
property. But AT&T’s bright-line argument that the statute of limitations bars the
Department from investigating those years runs contrary to precedent.
The decision in Powell again provides the answer. To recap the facts, the IRS
issued an administrative subpoena for records for years where it could not assess any
deficiencies under a three-year statute of limitations. Powell, 379 U.S. at 49. The statute
of limitations created an exception for cases of fraud, and the taxpayer argued that the
IRS should have to provide some “grounds for its belief that a fraud had been committed”
before investigating years for which an assessment otherwise would be barred. Id. The
IRS declined to give any explanation and sought to enforce the subpoena. Id. at 49–50.
The trial court enforced the subpoena, but the court of appeals reversed, holding that the
IRS lacked “probable cause” to suspect fraud. Id. at 50. The Supreme Court of the United
States reversed the court of appeals and held that “the Commissioner need not meet any
46
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.” Id. at 57
(emphasis added).
Subsequent decisions have relied on Powell to reject any bright-line limitation on
an agency’s authority to conduct an investigation based on the running of the statute of
limitations that would apply if the agency sought a remedy. The Delaware District Court
addressed this issue in EEOC v. Delaware State Police, 618 F. Supp. 451 (D. Del. 1985).
The agency sought information dating back three years, but a two-year statute of
limitations applied to charges unless the agency could show willfulness. The defendant
argued that the agency should be limited to two years of information. Id. at 453. Chief
Judge Schwartz explained that “[a] party may not defeat an agency’s authority to
investigate by raising what could be a defense if the agency subsequently decides to bring
an action against the party” and held that “[i]t would be an inappropriate exercise of
judicial power in an administrative subpoena enforcement proceeding to determine the
merits of a statute of limitations defense that might be raised to a hypothetical future
complaint . . . .” Id.; accord EEOC v. Karuk Tribe Hous. Auth., 260 F.3d 1071, 1076 (9th
Cir. 2001) (“A party may not defeat agency authority to investigate with a claim that
could be a defense if the agency subsequently decides to bring an action against it.”
(internal quotations marks and alterations omitted)).
The 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. But that fact does not become irrelevant to the Department’s ability to
47
conduct an investigation. The State Escheator only has authority to examine records “to
determine whether the person complied with [the Escheat Law].” 12 Del. C. § 1171(1).
If it appears highly unlikely, even impossible, that the State Escheator could reach
property from a given year, then it becomes more likely, all else equal, that the subpoena
is improper. The extent to which an information request goes beyond the statute of
limitations thus becomes part of the inquiry into whether it would represent an abuse of
the court’s process to enforce a subpoena, absent some creditable explanation addressing
how the information would be used.
c. Records Of Checks Issued To Parties Whose Last Known
Addresses Would Not Result In Escheatable Property
Similar reasoning applies to AT&T’s third argument. The Subpoena requests
information about “all checks issued.” Compl. Ex. J. Ex. 1. As framed, it encompasses
checks issued to parties with addresses in other states. AT&T contends that the State
Escheator lacks authority to investigate checks issued to payees with addresses located in
states other than Delaware because the State Escheator only has standing to escheat
property where the company’s records show no last-known address, a Delaware address,
or an address in a state that does not have an escheat law. As with the statute of
limitations, this defense to an enforcement action does not apply as a matter of law at this
stage.
Under the Supreme Court of the United States’ decision in Texas v. New Jersey, as
applied by this court in Nellius v. Tampax, Inc., 394 A.2d 233 (Del. Ch. 1978), AT&T’s
description of the governing law appears correct. In Nellius, the State Escheator sought to
48
escheat certain shares of Tampax, Inc. and dividends associated with those shares.
According to the company’s records, Tampax had originally issued 200 shares of stock in
1941 to William C. Russell at an address in Canton, Massachusetts. Id. at 234. Sometime
thereafter, Russell transferred the shares to a man named Cronin, but notice of the
transfer was never given to Tampax. As a result, the company’s records always reflected
Russell as the owner. In 1945 and 1946, Tampax mailed four separate dividend checks to
Russell. Each time, he returned the check and informed Tampax that he had sold the
shares. Tampax stopped sending further dividends to Russell. As of 1978, the original
200 shares had grown through stock splits and stock dividends to 7,200 shares, and
Tampax was holding $145,072 in cash dividends payable on those shares. Tampax had
reason to believe that the “Cronin” in question was a John G. Cronin, who had died in
1944. Id. at 234–35.
The State Escheator argued that on the facts presented, the address of the owner of
the shares was unknown, and so the shares and associated dividends should escheat to
Delaware. This court held that “the existence of Russell’s name and his Massachusetts
address on the records of Tampax bars the State of Delaware from bringing this action to
escheat the stock and accumulated dividends despite the State Escheator’s contention . . .
that the address of the last actual owner of the original two stock certificates is unknown .
. . .” Id. at 237.
The Department suggests that the Nellius court reached this conclusion because
the Delaware General Corporation Law affords special status to a corporation’s list of
stockholders to determine who are the record holders of its shares. Dkt. 30 at 59–60. That
49
is not correct. The Nellius court reasoned that this holding was mandated by the decision
of the Supreme Court of the United States in Texas v. New Jersey, which established
priorities for which state is entitled to escheat abandoned property. The Supreme Court of
the United States had previously held that “the Due Process Clause of the Fourteenth
Amendment prevents more than one State from escheating a given item of property.”
Nellius, 394 A.2d at 235 (citing W. Union Tel. Co. v. Pennsylvania, 368 U.S. 71 (1961)).
In Texas v. New Jersey, the Supreme Court of the United States considered what rules
should govern intangible property, taking into account the competing claims of the state
of incorporation, the state of the company’s principal place of business, the state where
the documents evidencing the property were physically located, and the state where the
owner’s last known address was located. See 379 U.S. at 678. Any dispute between the
states over which jurisdiction could escheat property would invoke the original
jurisdiction of the Supreme Court of the United States, so that court sought to establish
clear rules that would govern the competing claims. Id. at 675, 683.
The Supreme Court of the United States held initially that an item of intangible
property “is subject to escheat only by the State of the last known address of the [owner],
as shown by the [company’s] books and records.” Id. at 682. The Court then held “where
there is no last known address,” then the property is “subject to escheat by the State of
corporate domicile . . . .” Id. If the state of the last known address did not provide for
escheat, then the property was again subject to escheat by “the State of corporate
domicile.” Id.
50
In Nellius, this court held that the State Escheator’s effort to claim that the
Tampax shares had no known address ran afoul of the ruling in Texas v. New Jersey:
Viewed hypothetically, if the issue here was between Massachusetts and
Delaware as to which of them had the prior right to escheat the stock and
accumulated dividends, Delaware would have to prove those very
evidentiary elements on which the State Escheator is relying here in his
effort to defeat the motion for summary judgment, namely, Russell’s
rejection of the various dividend checks in 1945 and 1946, Russell’s
deposition testimony as to what he did and what he recollected, the certified
copies of the probate records of John G. Cronin’s estate, etc. In other
words, it would be Delaware’s burden to establish by sufficient evidence
that the last Actual owner of the stock was a person, known or unknown,
other than the owner shown of record on the stock ledger of Tampax. This
appears to be the type of situation that the rationale behind the primacy
rules of Texas v. New Jersey sought to avoid.
Nellius, 394 A.2d at 237. This court therefore held that the State Escheator lacked
standing to dispute the last known address of the owner of the shares as it appeared on
Tampax’s records. Id. at 235.
Under Nellius, the State Escheator could not attempt to look behind the last known
address of a check recipient as it appears on AT&T’s records. Under Texas v. New
Jersey, the State Escheator can only seek to escheat property where (i) the last known
address is in Delaware or (ii) the company is domiciled in Delaware and (a) there is no
last known address or (b) the last known address is in a jurisdiction that does not escheat
property. The Escheat Law memorializes these rules. See 12 Del. C. §§ 1140, 1141(a).
The problem for AT&T is that the issue of standing recognized in Nellius applies
when the State Escheator seeks to escheat property, not when the State Escheator is
conducting an investigation to determine compliance with the Escheat Law. As with the
statute of limitations, Nellius is a defense to an enforcement action, not an investigation.
51
But as with the statute of limitations, the two issues are interrelated. Because the
State Escheator can never reach property that does not fall into one of the escheatable
categories, the State Escheator acts at the outer limit of its auditing authority when it
requests records involving that type of property. The State Escheator might have grounds
to request the information. For example, although the parties did not brief the issue, it
seems likely that Nellius and Texas v. New Jersey assume that a company has not
engaged in a pattern or practice of fraud when recording addresses on its books and
records. A legitimate concern with investigating fraud might warrant some inquiry into
records relating to property that does not fall into one of the escheatable categories. All
else equal, however, a broad request for information concerning property that does not
fall into any escheatable category makes it more likely that enforcing a subpoena would
be an abuse of this court’s process.
d. Records Of Cleared, Stopped, And Cancelled Checks
In what is becoming a refrain, the same reasoning applies to AT&T’s fourth
argument. The Subpoena requests all records of checks issued, whether they were
“cashed, voided, stopped, voided and reissued, [or] still outstanding.” Compl. Ex. J. Ex.
1. AT&T argues that as framed, the request encompasses property that was not
abandoned. According to AT&T, the Department’s request therefore exceeds the
authority granted to the State Escheator.
In the Motion, AT&T contends that the Department should not be permitted to
examine payments that have been voided or marked cleared. According to AT&T, the
Department is effectively presuming that checks which are neither voided nor cleared
52
within thirty days of issuance constitute unclaimed property. See Dkt. 10 at 39. AT&T
contends this presumption is unwarranted, asserting that the information request
somehow “adjudicate[s] property rights” and “impose[s] [the Department’s] own
accounting standards” on AT&T. Id. AT&T takes the extreme view that that the State
Escheator cannot seek information about “potential or disputed” escheatable property,
but “[o]nly ‘fixed and certain’ amounts clearly owed to a third party and abandoned by
that party.” Id. at 38.
Section 1171 gives the State Escheator the authority to conduct investigations “in
order to determine whether the person complied with [the Escheat Law].” 12 Del. C. §
1171(1). Determining compliance necessarily includes investigating potential or disputed
escheatable property.
In the abstract, it seems apparent why an auditor would seek records regarding
“still outstanding” checks. Those checks are by definition unclaimed. It likewise seems
apparent why the Department would seek records regarding voided or stopped checks,
because it is possible that those checks were voided or stopped because the property was
abandoned.
Similar reasoning does not apply to voided-and-reissued checks, because the
reissued check replaces the original voided check. Similar reasoning also does not apply
to cleared or cashed checks. Cleared checks are not unclaimed; they have been deposited.
Cashed checks are not unclaimed; they have been cashed.
During oral argument, the Department hinted at a reason for requesting these
records by analogizing its audit of AT&T to an IRS audit. If the IRS were examining
53
whether a taxpayer properly reported all of its taxable income, the IRS would not only
request documents about taxable categories of income. The IRS logically would request
information about all types of income so that it could verify how the taxpayer was
categorizing income. See Dkt. 30 at 44–45. The Department could be viewed as making
an analogous request not only for records about escheatable categories of property, but
also for records about property that has been categorized as non-escheatable. One can
hypothesize that the Department might want voided-and-reissued checks, cleared checks,
and cashed checks simply to verify the accuracy of AT&T’s categorizations. An
investigation of this type would fall within the authority granted to the State Escheator.
AT&T contends that permitting the State Escheator to investigate the voided
checks “shifts the burden of proof to AT&T to show that all checks issued were not
abandoned.” Dkt. 18 at 12; accord Dkt. 10 at 39. To the contrary, AT&T only has the
burden to produce records. The State Escheator has the burden to show that a check was
improperly voided because it was unclaimed. Only by doing so can the State Escheator
carry its “burden of proof as to the existence and amount of the [unclaimed] property and
its abandonment . . . by showing evidence of the unpaid debt or undischarged obligation
and passage of the requisite period of abandonment.” 12 Del. C. § 1175(a).
AT&T also contends that because it is already subject to regulatory and financial
oversight, this court should infer that “AT&T only voids a check because it is not owed[,]
not a true liability.” Dkt. 18 at 12 n.12. Mistakes happen. The State Escheator has broad
authority to examine AT&T’s records to determine compliance with the Escheat Law,
including the authority to determine if AT&T is properly voiding checks.
54
The request for records of “all checks issued” is certainly broad. It falls within the
authority granted to the State Escheator, but the expansive nature of the request will be
taken into account when evaluating whether enforcing the Subpoena would be an abuse
of this court’s process.
e. The Obligation To Produce A Spreadsheet
According to AT&T, the Rebates Request exceeds the authority granted to the
State Escheator because it asks AT&T to create documents that do not exist. AT&T
accepts that it has an obligation to produce documents, but it maintains that it does not
have any obligation to create new documents to satisfy the request. Dkt. 10 at 40. AT&T
misconstrues the request, which does not exceed the authority granted to the State
Escheator.
The Rebates Request asks AT&T to “[u]tilize the Excel file embedded [in the
letter] to organize [AT&T’s] responses to the” request to “[i]ndicate whether each [of
AT&T and the Affiliates] utilizes a [third party administrator] for issuance of rebates”
and to “[i]dentify by name and number all [general ledger] accounts used by [AT&T] to
track its rebate accrual and expense activity along with the period of time . . . each
account was utilized to track this activity.” Compl. Ex. J Ex. 2 at 2. The Rebates Request
also asks AT&T “[f]or each [general ledger] account identified . . . , [to] provide in Excel
format the individual transaction detail . . . posted to the [general ledger] account for the
time periods indicated.” Id. at 3. Finally, the request asks for “the associated annual
system screen print for each [general ledger] account identified . . . that will reconcile the
transaction detail provided . . . .” Id.
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As a general rule, a party responding to a document request is “not required to
create documents that do not exist, simply for the purposes of discovery.” 8 That said, a
responding party may be required to query a database to extract and export information
when reasonably requested. See, e.g., Apple Inc. v. Samsung Elecs. Co. Ltd., 2013 WL
4426512, at *3 (N.D. Cal. Aug. 14, 2013); Google, 234 F.R.D. at 683. Querying a
database and extracting or exporting information does not constitute the creation of a new
document. It is how a party accesses an electronic records-keeping system in the ordinary
course of business.
Although the requests could have been framed more clearly, the court construes
the requests as asking AT&T to pull information from existing databases and other
records and provide that information in an electronically usable format. Dkt. 16 at 30–31.
That is a permissible request.
AT&T objects that the Rebates Request literally asks AT&T to “fill in the cells of
an excel schedule that Kelmar created.” Dkt. 10 at 40. The Escheat Law confers on the
State Escheator the power to conduct depositions. See Dkt. 30 at 63; see also 12 Del. C. §
1171(2) (permitting the State Escheator to “[t]ake testimony of a person, including a
person’s employee, agent, representative, subsidiary, or affiliate, to determine whether
8
Gonzalez v. Google, Inc., 234 F.R.D. 674, 683 (N.D. Cal. 2006); accord IQVIA,
Inc. v. Veeva Sys., Inc., 2019 WL 6044938, at *6 (D.N.J. Nov. 14, 2019); Mervyn v. Atlas
Van Lines, Inc., 2015 WL 12826474, at *5 (N.D. Ill. Oct. 23, 2015); Van v. Wal-Mart
Stores, Inc., 2011 WL 62499, at *1 n.1 (N.D. Cal. Jan. 7, 2011); Alexander v. FBI, 194
F.R.D. 305, 310 (D.D.C. 2000).
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the person complied with [the Escheat Law]”). The Department could exercise that
power, depose a series of AT&T officials, and have them provide the information so that
the Department could create the spreadsheet, but that would be a far more onerous
request. Asking AT&T to populate the spreadsheet is a more efficient means of reaching
the same result.
A request that asked a party to populate an Excel spreadsheet manually with
millions of transactions would be abusive. In this case, a reasonable interpretation of the
Rebates Request is that AT&T can export the information into an accessible format.
AT&T has not argued that the request is overly burdensome, only that it technically
exceeds the authority granted to the State Escheator. The request to query an electronic
database and export the information into a usable format such as an Excel spreadsheet
does not exceed the authority granted to the State Escheator.
f. Enforcement As An Abuse Of The Court’s Process
Even when an agency has the legal authority to issue an administrative subpoena
and seek the information it contains, a court can decline to enforce the subpoena if doing
so would result in “an abuse of the court’s process.” Powell, 379 U.S. at 58. There is no
bright-line test for abuse, nor is there an exclusive list of abusive practices. La Salle, 437
U.S. at 317 n.19, 318 n.20. A subpoena can be abusive if it is “issued for an improper
purpose, such as to harass the taxpayer 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.” Powell, 379 U.S. at 58. A subpoena can also be abusive if its demands for
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information are “so obviously pretextual or insatiable” as to extend “beyond a legitimate
inquiry.” Marathon, 876 F.3d at 501.
One factor that can suggest abuse is if the agency appears to be “pursuing a claim
it knows it cannot win” on the merits. Wheeling-Pittsburgh, 648 F.2d at 127. Another
factor is when an agency supports its request for information with only “the bareboned
allegations needed for the government’s prima facie showing.” Gertner, 65 F.3d at 968.
Although such a showing may be “enough to satisfy the government’s [initial] burden,”
that tactical decision can “come back to haunt the proponent if it is not later
supplemented by more hearty fare once the challenger succeeds in [its rebuttal].” Id.
(citation omitted). “[M]inor irregularities . . . do not rise to the ‘abuse of process’ level,”
provided “that there is no question about the basic legitimacy of the agency’s
investigation.” In re EEOC, 709 F.2d 392, 402 (5th Cir. 1983).
Here, a combination of factors supports a finding that to enforce the Subpoena
would be an abuse of this court’s process. The Subpoena is expansive, both as to the time
period it covers and the subject matter it embraces. Temporally, the Department requests
records of rebates and checks going back to 1992. The Department did not provide any
rationale for seeking information going back so far. The period covered extends sixteen
years beyond the point at which the Old Statute of Limitations would prevent the State
Escheator from recovering unclaimed property. The Department did not offer any reason
why the Old Statute of Limitations would have been displaced by the New Statute of
Limitations, choosing merely to assert in ipse dixit fashion that the New Statute of
Limitations applied. Even if it did, the request extends five years beyond the point at
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which the New Statute of Limitations would prevent the State Escheator from recovering
unclaimed property. The Department seems to be pursuing information about property
that it knows it cannot recover, and it has supported those requests with only bareboned
allegations.
Similar problems infect the subject matter of the Subpoena. Covering the full
temporal period, the Department asks for records regardless of whether the last-known
address as reflected on AT&T’s records was located in Delaware. Under Nellius and
Texas v. New Jersey, records with last-known addresses outside of Delaware are almost
certainly non-escheatable. Once again, the Department seems to be pursuing information
about property that it knows it cannot recover, and it failed to support those requests with
any creditable explanation.
Also covering the full temporal period, the Department asks for records of all
checks, regardless of whether they have been marked cashed, cleared, voided, stopped,
reissued, or still outstanding. This is a massive request for information, and one would
expect the Department to have articulated some rational basis for seeking it. As discussed
previously, it is of course true that an agency need not provide a reason for seeking
information, but when an agency makes so broad a request, it should anticipate having to
proffer some justification.
It seems evident that the Subpoena will sweep in a vast amount of irrelevant data.
At oral argument, the Department argued that it needs “the universe of documents,” to
answer questions like “How do you keep your records? Do our records check out with
your general ledger?” Dkt. 30 at 54–55. The Department thus sees even irrelevant
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documents as relevant to “the audit” and “the audit process.” Id. at 55. That rationale has
no limiting principle. If the Department wishes to understand how AT&T keeps its
records, it could readily depose AT&T’s employees or officers.
This case is also part of a larger picture. “‘[I]n recent years, state escheat laws
have come under assault for being exploited to raise revenue rather than’ to safeguard
abandoned property for the benefit of its owners.” Marathon, 876 F.3d at 488 (quoting
Plains All Am. Pipeline L.P. v. Cook, 866 F.3d 534, 536 (3d Cir. 2017)). Two justices of
the Supreme Court of the United States have expressed concern that “states are ‘doing
less and less to meet their constitutional obligation to’ reunite property owners with their
property before seeking escheatment, even as they more aggressively go about classifying
property as abandoned.” Id. at 489 (quoting Taylor v. Yee, 136 S. Ct. 929, 930 (2016)
(Alito, J., joined by Thomas, J., concurring in denial of certiorari)). As of December
2017, “Delaware [was] ‘no exception[,] as unclaimed property ha[d] become Delaware’s
third-largest source of revenue[.]’” Id. at 489 (quoting Plains, 866 F.3d at 536).
The preparation of the Subpoena in this case provides cause for concern. The
Department delegated its investigation to Kelmar. The Rebates Request and
Disbursements Request appear on Kelmar letterhead, and Kelmar appears to have drafted
them and conducted the investigation. There is no indication that the Department had any
meaningful involvement in the investigation. The Department appears to have lent the
State Escheator’s investigatory authority to Kelmar to use as it sees fit.
Kelmar is compensated contingently. That arrangement benefits the State by
minimizing fixed costs, but it gives Kelmar an incentive to engage in aggressive
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enforcement tactics. It potentially creates a pernicious incentive for Kelmar to serve
broad information requests and engage in expansive audits that impose substantial
burdens on companies, thereby inducing settlements that generate income for Kelmar.
The breadth of the Subpoena in this case is suggestive of such tactics.
The breadth of the Subpoena also suggests that Kelmar may be furthering its own
interests in other ways. Judicial decisions involving escheat indicate that Kelmar works
for other states under similar arrangements. See, e.g., Fidelity & Guar. Life Ins. Co. v.
Frerichs, 2017 WL 4863318, at *4 (C.D. Ill. Sept. 5, 2017) (examining Kelmar’s efforts
to conduct “a multi-state audit performed by several states, including Illinois”); Fidelity
& Guar. Life Ins. Co. v. Chiang, 2014 WL 6090559, at *1–2 (E.D. Cal. Nov. 13, 2014)
(examining Kelmar’s auditing practices on behalf of the Controller of the State of
California). Kelmar’s website describes the firm as “helping unclaimed property
departments across the United States.” About Kelmar, Kelmar,
https://www.kelmarassoc.com/about/ (last visited July 8, 2020). 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 be escheatable to Delaware.
Those records would be helpful to Kelmar in recovering property for other states, but
helping other states recover property is not a purpose of the Escheat Law.
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
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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.
The question therefore becomes whether to modify the Subpoena or quash it
entirely. AT&T has proposed an order that would narrow the Subpoena, but the proposed
limitations track the bright-line legal restrictions that AT&T claimed should confine the
State Escheator’s authority. This decision has rejected those bright-line limitations, and
the court is not convinced that the Department’s investigation needs to be constrained to
such a degree. It could be warranted, for example, for the Department to seek records for
a limited number of years predating the point when the statute of limitations would apply.
AT&T’s proposed form of order would rule that out.
Except for AT&T’s order, the parties have not provided the court with any basis to
narrow the Subpoena. The party to whom the court would prefer to give significant
deference—the Department—has declined to offer any guidance.
The better course is therefore to quash the Subpoena in its entirety. The
Department can pursue an appeal or craft a new subpoena. If the Department chooses to
issue a new subpoena, and if it becomes necessary to enforce it, the court hopes that the
parties will follow the procedures described by Chief Judge Seitz in the McCarthy case
and that the Department will be willing to assist the court in understanding its requests.
III. CONCLUSION
The request to stay this case in deference to the Federal Action is denied. The
request to dismiss this case for failure to join the Affiliates or to stay it pending joinder is
denied. The request to quash the Subpoena is granted. Within ten days, the parties shall
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submit a final order, agreed as to form, that implements this ruling. If there are any
proceedings that are necessary to bring this action to a close at the trial level before such
an order can be entered, then the parties shall submit a joint letter identifying the issues
and proposing a path forward.
63