Delaware has a unique state law when it comes to corporate finance. The government is allowed to seize unclaimed property from businesses, meaning any accounts payable or payroll checks that haven’t been cashed can be claimed by the government as a way to raise state funds.
According to reports in the Wall Street Journal late last week, the policy provides Delaware’s third-largest source of revenue. But a federal court last week is putting the law in jeopardy.
Reports said U.S. District Court Judge Gregory Sleet ruled that the state improperly applied tax law when it sought to recover unclaimed property and fees from Temple-Inland, a Delaware-based subsidiary of International Paper Co.
Delaware accused Temple-Inland of failing to turn over un-cashed accounts payable and payroll checks to the state between 1986 and 2008. Auditors fined the company $1.4 million. But Temple-Inland sued on grounds that the laws used to reclaim those funds are unfair.
Judge Sleet ruled in favor of the company, noting that the state waited more than two decades to audit the firm and failed to establish “clear record-retention guidelines,” according to reports. While it’s a win for Temple-Inland, reports said the ruling may call into question the state’s law altogether, marking a potential big victory for Delaware businesses.
According to reports, the state is in the process of 425 unclaimed property audits; analysts are unsure how, or if, last week’s ruling will impact those outstanding cases.
The company isn’t the first to sue Delaware for the law, considered to be one of the most aggressive unclaimed property laws in the country. Staples is one of several major corporations that commenced legal action against the state for similar situations, but ultimately settled out of court, reports said.
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