In Delaware Department of Finance v. AT&T Inc.,1 the Delaware Department of Finance (“Department”) served an administrative subpoena on AT&T to produce records relating to an unclaimed property audit. Delaware’s unclaimed property audits are known to last for many years and involve extensive records requests. The Delaware Supreme Court affirmed the lower court’s judgment to quash the subpoena.
The Department sent AT&T a notice of unclaimed property examination, and the audit began in 2012. AT&T complied with all document requests except two. While the audit was ongoing, Delaware’s unclaimed property laws were amended. The statute of limitations for unclaimed property audits was extended from three years to 10 years.
In 2018, the auditor informed AT&T of the Disbursements Request. The request sought information on all checks issued from 27 accounts since 1992. AT&T was asked to identify which business unit each check was issued on behalf of; the general ledger account where it was recorded; the payee’s name and address; and whether the check was cashed, voided, stopped, still outstanding, or voided and reissued. AT&T responded to the requests with quarterly payment data for about eight years. This data amounted to more than 10.5 million lines of information. The Department sent notices of deficiencies and a termination notice to AT&T. The Department issued an administrative subpoena demanding the production of documents related to the Disbursements Requests. AT&T filed an action and asked the court to dismiss the case or to quash or modify the subpoena.
Lower Court Outcome
The Court of Chancery quashed the subpoena. The court concluded that the Department was authorized to issue the subpoena and that it complied with the elements for enforcing an administrative subpoena from United States v. Powell.2 However, a court should not enforce an “unreasonable” subpoena. The court held that AT&T had established that the subpoena was unreasonable because it was overly broad in terms of time period and subject matter. The court quashed the subpoena because the parties did not offer an adequate basis to narrow the subpoena.
Delaware Supreme Court Outcome
On appeal, the Department argued that the Court of Chancery erred in multiple respects. First being that once the court found that the Department satisfied the Powell test, it should not have quashed the subpoena. In Powell, the United States Supreme Court held that an administrative subpoena is enforceable when the agency satisfies four elements: 1) the investigation is conducted for a legitimate purpose, 2) the inquiry may be relevant to the purpose, 3) the information sought is not already within the agency’s possession, and 4) the administrative steps required by the statute have been followed.
Additionally, a court can also consider whether enforcing the subpoena would constitute an abuse of the court’s process. This asks whether the court is being asked to join the agency in an act of bad faith. Bad faith occurs when an agency acts for reasons unrelated to the merits of the investigation such as when an agency serves a subpoena in support of a claim, the agency knows it cannot win. If a subpoena satisfies the four Powell elements, it is strong evidence of an agency’s good faith. However, the party opposing the subpoena can rebut the presumption of good faith.
The Delaware Supreme Court agreed with the Department that it satisfied the Powell factors and was afforded a strong presumption of good faith. Despite this, when a court has questions about the subpoena’s scope, the court has discretion to inquire further before enforcing the subpoena. The Delaware Supreme Court agreed with the Court of Chancery’s finding that the subpoena was expansive in terms of both time period and subject matter. When asked to clarify the subpoena’s scope, the Department refused to provide answers. The court was left to only consider the allegations in the complaint. Therefore, the Court of Chancery did not err in quashing the subpoena.
The Department’s second argument was the court erred in applying the three-year statute of limitations rather than the amended 10-year statute of limitations to assess the reasonableness of the subpoena. The Court of Chancery applied the three-year statute of limitations because neither the statute nor the legislative history showed the intention to apply the 10-year statute of limitations retroactively. The court used the three-year period as a measuring stick to assess the reasonableness of the Department’s information demands. Both the Court of Chancery and Delaware Supreme Court agreed that the statute of limitations does not operate as a bright-line rule that invalidates a subpoena solely because it seeks records outside of the limitations period. Rather, when records are sought outside of the period, the requests are assessed in relation to the subpoena’s purpose. The audit sought information over 20 years, which was well outside the statute of limitations period.
The Delaware Supreme Court affirmed the Court of Chancery’s decision. Because the Court announced new procedural and substantive standards governing administrative subpoenas, the Court allowed the Department the opportunity to amend and serve a new subpoena on AT&T.
This decision is highly relevant to companies that are obliged to comply with Delaware’s unclaimed property laws. The case reviewed several audit-related issues that are central to the enforcement of those laws. Ryan’s unclaimed property experts are always available to assist you in navigating the treacherous waters of a Delaware unclaimed property audit.
1 2021 WL 2200973.
2 379 U.S. 48 (1964).
TECHNICAL INFORMATION CONTACTS:
Mark A. Paolillo
The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at firstname.lastname@example.org.