DOVER, Del. (AP) — Attorneys have reached a settlement agreement in a federal lawsuit that has raised serious concerns about the future of Delaware's abandoned property collections, according to court papers.
In court papers filed Friday, attorneys for the state and for packaging company Temple-Inland Inc., a subsidiary of Memphis-based International Paper, said they had reached a voluntary settlement agreement and asked the judge to dismiss Temple-Inland's lawsuit with prejudice.
The attorneys wrote that the settlement agreement "fully and finally" resolves all claims that were asserted, or could have been asserted by Temple-Inland, which challenged Delaware's claim to almost $1.4 million in purported uncashed accounts payable and payroll checks.
The move comes after a June ruling in which U.S. District Court Judge Gregory Sleet blasted Delaware's abandoned property, or escheat, practices, saying they violate due process and amount to a game of "gotcha" that "shocks the conscience."
State Finance Secretary Tom Cook did not immediately respond to email and cellphone messages Saturday.
Abandoned property is a critical source of funding for Delaware's state government, amounting to about half a billion dollars annually and representing the state's third-largest revenue category.
Temple-Inland argued among other things that Delaware's practice of estimating unclaimed property liability for years in which actual records are not available amounted to an unlawful taking of property and violated constitutional provisions regarding due process.
State officials began an unclaimed property audit of Temple-Inland in 2008, telling the company that the audit period would begin in 1981. But because the company was unable to produce records before 2003, officials used an estimation method to extrapolate that the state was owed $2.1 million. The figure was subsequently reduced to the amount that nevertheless remained in dispute.
The Temple-Inland lawsuit is one of several challenging Delaware's abandoned property system, which has become a source of tension between the business world and a state that is the legal or corporate home to more than 1 million business entities, including more than 60 percent of Fortune 500 companies. It also has led other states to challenge Delaware in court over abandoned property.
Abandoned property can include unclaimed stocks and bonds, insurance policies, uncashed checks, unclaimed wages, dividends, even unredeemed rebates and gift certificates. Under federal law, a state can take such property if it remains unclaimed for a certain number of years and the true owner can't be found.
Under U.S. Supreme Court rulings, states follow a two-tier scheme for reporting and claiming abandoned property. Under the primary priority rule, unclaimed property is reported to the state of the owner's last known address appearing on a company's records. But if the owner's address is unknown or incomplete, the unclaimed property is reported to the company's state of incorporation.
Because so many corporations are formed in Delaware, the state benefits significantly from the second-priority rule.
Delaware has been criticized, however, for the way it aggressively targets abandoned property, reaching back several years into companies' records to search for it and using estimates to calculate what it is owed when documentation is lacking.
In his ruling, Sleet said he found several aspects of the state's abandoned property practices troubling. He noted that the state waited more than 20 years to audit Temple-Inland, exploited loopholes in the statute of limitations, never properly notified companies about the need to maintain unclaimed property records longer than is standard, and failed to articulate any legitimate interest in retroactively applying state law except to raise revenue.
