State of Delaware, Department of Finance v. Univar, Inc.

• Court: Court of Chancery of Delaware
• Decided: May 21, 2020
• Docket: C.A. No. 2018-0884-JRS
• Status: Published

Opinion

COURT OF CHANCERY OF THE STATE OF DELAWARE

417 S. State Street JOSEPH R. SLIGHTS III Dover, Delaware 19901 VICE CHANCELLOR Telephone: (302) 739-4397 Facsimile: (302) 739-6179

Date Submitted: March 10, 2020 Date Decided: May 21, 2020

Caroline Lee Cross, Esquire Michael P. Kelly, Esquire Elizabeth R. McFarlan, Esquire David A. White Esquire Delaware Department of Justice Matthew J. Rifino, Esquire 820 North French Street McCarter & English LLP Wilmington, DE 19801 405 North King Street, Suite 800 Wilmington, DE 10801 Melanie K. Sharp, Esquire Martin S. Lessner, Esquire Mary F. Dugan, Esquire Michael A. Laukaitis, II, Esquire Young Conaway Stargatt & Taylor, LLP 1000 North King Street Wilmington, DE 19801

Re: State of Delaware, Department of Finance v. Univar, Inc. C.A. No. 2018-0884-JRS

Dear Counsel:

Plaintiff, the Delaware Department of Finance (the “Department” or the

“State”), has statutory authority to audit Delaware corporations to assess their

compliance with Delaware’s unclaimed property law. Defendant, Univar, Inc. State of Delaware, Department of Finance v. Univar, Inc. C.A. No. 2018-0884-JRS May 21, 2020 Page 2

(“Univar”), received a notice of examination regarding unclaimed property from

Brenda Mayrack, the State Escheator, in 2015. It has declined to comply with the

examination, igniting litigation in this Court and the United States District Court for

the District of Delaware (the “District Court”). The proceedings in this Court

concern the State’s attempt to enforce an administrative subpoena compelling

Univar to produce certain corporate books and records.

Univar has moved to dismiss, arguing this case is not ripe for adjudication

because the State has failed to satisfy the statutory prerequisites for enforcing a

subpoena. The State responds that, to the extent there are such prerequisites, they

have been satisfied and this case is ripe for adjudication. After carefully weighing

the parties’ arguments, I am convinced Univar has not met its burden of

demonstrating, as a matter of law, that the claims asserted here are not ripe.

Its Motion to Dismiss, therefore, must be denied. State of Delaware, Department of Finance v. Univar, Inc. C.A. No. 2018-0884-JRS May 21, 2020 Page 3

I. BACKGROUND

I have drawn the facts from the well-pled allegations in the Complaint and

documents incorporated by reference or integral to the Complaint.1 “Any additional

facts [discussed here] are either not subject to reasonable dispute or subject to

judicial notice.”2

A. The Parties and Relevant Non-Parties

Plaintiff, the Department, is charged with enforcing Delaware’s unclaimed

property law.3 Brenda Mayrack, the State Escheator, performs her function as a

representative of the Department.

1 Citations to the Complaint are to “Compl. ¶ ___.” See Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004) (noting that on a motion to dismiss, the Court may consider documents that are “incorporated by reference” or “integral” to the complaint). I also take judicial notice of the court record in companion litigation pending in the United States District Court for the District of Delaware (Univar, Inc. v. Geisenberger, C.A. No. 1:18 Civ. 01909). See Frank v. Wilson, 32 A.2d 277, 280 (Del. 1943) (taking judicial notice of court record in companion litigation when addressing a motion to dismiss); Orloff v. Shulman, 2005 WL 3272355, at *12 (Del. Ch. Nov. 23, 2005) (same). 2 Cedarview Opportunities Master Fund, L.P. v. Spanish Broadcasting Sys., Inc., 2018 WL 4057012, at *1 (Del. Ch. Aug. 27, 2018). 3 Compl. ¶ 3; 12 Del. C. § 1102. In this Opinion, I use “escheat law” and “unclaimed properly law” interchangeably. State of Delaware, Department of Finance v. Univar, Inc. C.A. No. 2018-0884-JRS May 21, 2020 Page 4

Defendant, Univar, is a Delaware corporation.4 It received a notice of an

unclaimed property examination from the State on December 11, 2015.5

B. The Escheat Law

Delaware’s escheat law allows the State to acquire title to abandoned property

if, after the statutory waiting period, no rightful owner appears.6 Until the property

is claimed, the State may (and does) use the funds in its operating budget.7 Large

sections of Delaware’s escheat law were struck down as unconstitutional by court

order in 2016 (the “Old Law”).8 Apparently in response to the Temple-Inland, Inc.

decision, the escheat law was substantively amended in 2017 (the “New Law”).9

4 Compl. ¶ 1. 5 Compl. ¶ 9. 6 See 12 Del. C. §§ 1130, et seq. This property often takes the form of bank accounts, stocks or unused gift cards. 7 See Univar, Inc. v. Geisenberger, 409 F. Supp. 3d 273, 276 (D. Del. 2019). 8 See Temple-Inland, Inc. v. Cook, 192 F. Supp. 3d 527 (D. Del. 2016). 9 See 8 Del. C. §§ 1101, et seq. State of Delaware, Department of Finance v. Univar, Inc. C.A. No. 2018-0884-JRS May 21, 2020 Page 5

Delaware’s recovery of unclaimed property is facilitated by the priority rules

set forth by the United States Supreme Court in Texas v. New Jersey.10 There, the

court explained that only one state may escheat unclaimed property.11 The first

priority goes to the state of the owner’s last known address.12 When, as often is the

case, that address is unknown, the second priority, in the entity context, goes to the

state where the holder is incorporated.13 Because so many business organizations

call Delaware home, our state often has priority to escheat unclaimed property held

by those entities.14

As an entity incorporated in Delaware, Univar is a potential holder of

unclaimed property under the New Law.15 As such, the New Law, like the Old Law,

authorizes the State Escheator to “[e]xamine the records of a person or the records

10 379 U.S. 674 (1965). 11 Id. at 677. 12 Id. at 681–82. 13 Id. at 682. 14 Federal Complaint ¶ 20. 15 Compl. ¶ 2; 12 Del. C. § 1130(9). State of Delaware, Department of Finance v. Univar, Inc. C.A. No. 2018-0884-JRS May 21, 2020 Page 6

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].”16 Delaware utilizes an agent, Kelmar Associates LLC

(“Kelmar”), to perform audits to investigate whether entities are complying with

Delaware law.17 As a part of this auditing procedure, the New Law, unlike the Old

Law, authorizes the State to issue administrative subpoenas that can direct a

company to turn over corporate books and records to Kelmar.18

C. Procedural History

As noted, the State sent an examination notice to Univar in late 2015.19

Kelmar sent its first document request to Univar on September 23, 2016. 20 Since

16 Compl. ¶ 4 (quoting 12 Del. C. § 1171(1)). 17 Compl. ¶ 10. 18 Compl. ¶¶ 6, 10. 19 Compl. ¶ 9. 20 Compl. ¶ 10. State of Delaware, Department of Finance v. Univar, Inc. C.A. No. 2018-0884-JRS May 21, 2020 Page 7

then, Univar has declined to cooperate with the State’s audit and has refused to

produce any documents in response to Kelmar’s requests.21

On October 30, 2018, the State issued an administrative subpoena, pursuant

to 12 Del. C. § 1171(3), directing Univar to provide responsive documents by

December 3, 2018.22 Again, Univar did not comply and, instead, filed an action in

the District Court challenging the New Law’s constitutionality.23

The State responded by filing its Complaint in this Court seeking a summary

order enforcing its subpoena. Specifically, the Complaint seeks an Order under

12 Del. C. § 1171(4) requiring Univar to comply with the State’s administrative

subpoena.24

21 Compl. ¶ 11. 22 Compl. ¶ 13. 23 Compl. ¶ 14; see Univar, 409 F. Supp. 3d at 273. 24 Compl. ¶ 7. See 12 Del. C. § 1171(4) (“The State Escheator . . . may . . . [b]ring 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.”). State of Delaware, Department of Finance v. Univar, Inc. C.A. No. 2018-0884-JRS May 21, 2020 Page 8

Defendant moved to dismiss or stay this action on January 11, 2019, in favor

of the first-filed federal action.25 On April 8, 2019, this Court granted the motion to

stay upon concluding that the statute granting the State subpoena power, at issue in

this litigation, was among the statutory provisions Univar was challenging as

unconstitutional in the first-filed federal action.26 On September 17, 2019, the

District Court granted in part and denied in part the State’s Motion to Dismiss.27

In doing so, the court determined that Univar had stated a claim that the State has

violated its due process and equal protection rights.28 The court also held many of

Univar’s claims were not ripe, and stayed that case while this Court decides whether

to enforce the State’s subpoena as a matter of Delaware law.29

25 D.I. 6.

D.I 32; State of Del., Dep’t. of Fin. v. Univar, Inc., C.A. No. 2018-0884-JRS (Del. Ch. 26

Apr. 8, 2019) (TRANSCRIPT) (D.I. 35). 27 Univar, 409 F. Supp. 3d at 273. 28 Id. at 282–84. 29 Id. at 284–85. State of Delaware, Department of Finance v. Univar, Inc. C.A. No. 2018-0884-JRS May 21, 2020 Page 9

Univar has now moved to dismiss this action, arguing the State’s claim is not

ripe for adjudication because the State has failed to comply with the statutory

prerequisites for issuing a subpoena.30 It also argues it has preserved all

constitutional arguments that are properly before the District Court, and that this

Court need not address any constitutional issues when deciding the State’s

entitlement to enforce its subpoena.31

II. ANALYSIS

“Ripeness, the simple question of whether a suit has been brought at the

correct time, goes to the very heart of whether a court has subject matter

jurisdiction.”32 “Courts in [Delaware] decline to exercise jurisdiction over cases in

which a controversy has not yet matured to a point where judicial action is

30 Opening Br. in Supp. of Def. Univar’s Mot. to Dismiss (“OB”) 2. 31 Reply Br. in Supp. of Def. Univar’s Mot. to Dismiss (“RB”) 16–22. 32 Bebchuck v. CA, Inc., 902 A.2d 737, 740 (Del. Ch. 2006). State of Delaware, Department of Finance v. Univar, Inc. C.A. No. 2018-0884-JRS May 21, 2020 Page 10

appropriate.”33 This measured approach both preserves limited judicial resources

and ensures an orderly development of the law.34

At oral argument, Univar made clear that its ripeness defense is predicated on

two points. First, it argues the State has not adequately demonstrated its compliance

with the New Law’s confidentiality provisions, a necessary prerequisite to any

audit.35 Second, it argues the State has not promulgated sufficient regulations to

manage multistate audits fairly, as required by the New Law.36 Separately, the

33 Stroud v. Milliken Enters., Inc., 552 A.2d 476, 479 (Del. 1988). 34 Id. 35 Oral Arg. on Def.’s Mot. to Dismiss (“OA”)13; OB 16–20. 36 OA 13; OB 20–23. While Defendant argued in its briefs that this action was unripe because the State has not made a determination whether the Old Law or New Law applies, it candidly acknowledged at oral argument that the State has made that determination and has communicated as much to Univar within the body of the subpoena at issue here. OA 13, 17. Univar also argued in its opening brief that this Court would have no power to enforce its order with respect to the subpoena, rendering any decision on the State’s claim here an advisory opinion. OB 25–28. It appeared to back off that argument in its reply brief and at oral argument. OA 19. In any event, I am satisfied that nothing about the New Law in any way restricts this Court’s inherent contempt power. See DiSabatino v. Salicete, 671 A.2d 1344, 1348 (Del. 1996) (“Courts have ‘an inherent contempt authority, . . . as a power necessary to the exercise of others.’”) (quoting Int’l Union, United Mine Workers of Am. v. Bagwell, 512 U.S. 821, 831 (U.S. 1994)). If the Court were to order Univar to respond to the State’s subpoena, and Univar were to refuse to comply with that order, the Court would have several coercive options at its disposal to compel compliance. State of Delaware, Department of Finance v. Univar, Inc. C.A. No. 2018-0884-JRS May 21, 2020 Page 11

parties dispute whether Univar has preserved, and may present to the District Court,

its constitutional arguments with respect to the subpoena under England v. Louisiana

State Board of Medical Examiners.37 I address each argument below.

A. This Action is Ripe for Adjudication

As noted, Univar maintains this action is not ripe because the State has not

demonstrated its compliance with the New Law’s confidentiality requirements for

multistate audits.38 In this regard, Univar maintains that the audit being conducted

by the State is a multistate audit, notwithstanding the State’s insistence that it is

conducting a “Delaware-only” audit.39 Univar then argues that, because the public

records laws of the other states participating in this supposed multistate audit

materially conflict with the confidentiality requirements of the New Law, this action

will not be ripe for decision until the State demonstrates its full compliance with

Delaware’s confidentiality requirements.40

37 375 U.S. 411 (1964) (addressing constitutional abstention). 38 OA 8; 12 Del. C. §§ 1181, 1189. 39 OB 16–20; RB 12–16. 40 OB 16–20; 12 Del. C. § 1189. State of Delaware, Department of Finance v. Univar, Inc. C.A. No. 2018-0884-JRS May 21, 2020 Page 12

I am not persuaded. First, there is no basis to conclude as a matter of

undisputed fact that the State is conducting a multistate audit.41 More to the point,

even if the State were conducting a multistate audit, Kelmar is bound by Delaware

law not to share any of Univar’s confidential information with “any person who is

not a current officer or employee of [Delaware]. . . .”42 This Court has the authority,

backed by its inherent contempt powers, to order that any books and records Univar

produces in response to the subpoena be subject to a confidentiality order that

complies with (and imposes) Delaware law.43 Such an order could include, for

example, a provision prohibiting the Kelmar auditors who receive Univar’s

information pursuant to the Delaware subpoena from sharing that information with

others, including other Kelmar auditors.

41 AB, Ex. A. 42 12 Del. C. § 1189(a). Violation of the New Law’s confidentiality provisions is a misdemeanor, with the Superior Court having “exclusive original jurisdiction over such misdemeanor.” 12 Del. C. § 1189(d). 43 See generally Hallett v. Carnet Hldg. Corp., 809 A.2d 1159, 1162 (Del. 2002) (noting that the court has inherent authority to enter appropriate confidentiality orders); In re Trust for Gore, 2011 WL 13175994, at *1 (Del. Ch. Dec. 22, 2010) (same). State of Delaware, Department of Finance v. Univar, Inc. C.A. No. 2018-0884-JRS May 21, 2020 Page 13

Univar next argues that the State has failed to demonstrate it has promulgated

regulations that will allow it to ensure that the New Law is being enforced as

intended.44 Here again, I disagree. Section 1172 of the New Law empowers the

Department of Finance to promulgate regulations.45 The State has written a number

of rules and regulations pursuant to that statutory grant of rule-making authority.46

Nothing in the New Law, however, sets some qualitative or quantitative regulatory

threshold against which the State’s authority to enforce its administrative subpoenas

should be measured. While Univar may not like the number or content of regulations

that have been promulgated, that does not mean this case is unripe. Any gap that

might exist in the regulations can easily be filled by the well-developed common law

standards in Delaware for enforcing subpoenas.47 When the question of the

subpoena’s enforceability is called, this Court can and will look to that body of law.

44 OB 20. 45 12 Del. C. § 1172(e). 46 See OB, Ex. A. 47 The parties have not pointed to any Delaware authority that provides guidance on the standards for enforceability of a subpoena specifically under the unclaimed property law. But there is abundant authority with respect to the parameters for enforcement of administrative subpoenas generally. See, e.g., State v. Salasky, 2013 WL 5487363, at *14– State of Delaware, Department of Finance v. Univar, Inc. C.A. No. 2018-0884-JRS May 21, 2020 Page 14

B. The District Court Should Decide Any Issues Concerning Abstention Doctrines

The State argues that, having moved to dismiss this action, Univar should be

forced, here and now, to litigate the facial challenges it has mounted to the New Law,

and its failure to do so in its Motion should result in a declaration from this Court

that those challenges have been waived.48 The State acknowledges that it would

then take that declaration to the District Court, drop it in on the district judge’s

proverbial lap and argue—presumably with the intent to suggest issue or claim

preclusion—that the abstention issues have already been decided.49 For its part,

Univar denies it has raised a facial challenge to the statute in the current action, and

15 (Del. Super. Sept. 26, 2013) (discussing the Attorney General’s statutory subpoena power under 29 Del. C. §§ 2505(4), 2508(a)); U.S. v. Powell, 379 U.S. 48, 57–58 (1964) (Finding an administrative subpoena is enforceable when “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 [law] have been followed . . . .”). 48 AB 33–38; OA 32. 49 OA 32. State of Delaware, Department of Finance v. Univar, Inc. C.A. No. 2018-0884-JRS May 21, 2020 Page 15

maintains that all constitutional issues were properly presented to, and preserved for

argument in, the District Court.50

Given that a ruling by this Court that the subpoena was not enforceable as a

matter of Delaware law would moot certain claims in the federal action, the District

Court understandably deemed it appropriate to stay that case pending adjudication

of this case.51 In doing so, the District Court acknowledged that asking this Court to

rule on the subpoena’s enforceability before addressing Univar’s constitutional

claims would bring “certain abstention doctrines [] into play.”52 The District Court

further noted “that according to Supreme Court precedent certain issues may be

preserved for adjudication in federal courts if those issues are explicitly noted and

deliberately avoided during state court litigation.”53

Nothing in the District Court’s opinion suggests the court there intended that

this Court would adjudicate whether either party has properly preserved its

50 RB 16–21; OA 45–51. 51 Univar, 409 F. Supp. 3d at 284. 52 Id. at 285. 53 Id. at 285 n.5 (citing England, 375 U.S. at 420). State of Delaware, Department of Finance v. Univar, Inc. C.A. No. 2018-0884-JRS May 21, 2020 Page 16

constitutional arguments under England, much less that this Court would actually

decide constitutional issues that are clearly at the heart of the federal litigation.

Indeed, the State has pointed to no authority where a Delaware state court took it

upon itself to decide whether a party had preserved constitutional arguments for

presentation in a federal court. In my view, that decision is properly left to the

District Court.54 My reading of the District Court’s opinion is that the presiding

judge there shares that view.55

*****

Having determined that the State has stated a justiciable claim for enforcement

of its subpoena under the New Law, the next step is to present the claim for decision

54 See Temple of Lost Sheep Inc. v. Abrams, 930 F.2d 178, 183 (2d Cir. 1991) (federal court ruling that a plaintiff was precluded from asserting its federal claims); Lupin Pharm., Inc. v. Richards, 2015 WL 4068818, at *4 (D. Md. July 2, 2015) (federal court determining it should abstain). 55 Univar, 409 F. Supp. 3d at 285. This is not to say that Univar will be prohibited from making arguments that narrowly implicate constitutional considerations when addressing, on the merits, whether the State’s administrative subpoena is enforceable. See In re Blue Hen Country Network, Inc., 314 A.2d 197, 200 (Del. Super. 1973) (noting that the State’s subpoena must comply with the Fourth Amendment). State of Delaware, Department of Finance v. Univar, Inc. C.A. No. 2018-0884-JRS May 21, 2020 Page 17

on the merits promptly. With this in mind, the parties shall confer and submit a joint

or, if they cannot agree, separate proposed case scheduling order(s) within the next

ten (10) days.

III. CONCLUSION

For the foregoing reasons, Defendant’s Motion to Dismiss is DENIED.

IT IS SO ORDERED.

Very truly yours,

/s/ Joseph R. Slights III