The Delaware Supreme Court Addresses Four Novel Questions of Escheat Law

In A.W. Fin. Services, S.A. v. Empire Res., Inc., C.A. No. 55, 2009 (Del. Sept. 15, 2009), the Delaware Supreme Court addressed four novel questions of law related to the Delaware Escheat Statute¹ pursuant to certification by the United States District Court for the Southern District of New York (the "District Court") under Article IV, § 11(8) of the Delaware Constitution and Delaware Supreme Court Rule 41.

Plaintiff, A.W. Financial Services, S.A. ("A.W. Financial"), was the successor-in-interest to Tertiaire Investissment, S.A. ("Tertiaire"), which purchased what ultimately became 30,462 shares of Empire Resources, Inc. ("Empire"). During 2000, Tertiaire requested and received a replacement stock certificate for its shares of Empire from Empire's transfer agent. Four years and five months later, Tertiaire's shares of Empire were delivered to the State of Delaware as escheated property. After learning of this in 2006, A.W. Financial, as successor-in-interest to Tertiaire, asserted several causes of action, including negligence, conversion, breach of fiduciary duty and failure to register against Empire and its transfer agent for turning over its shares of Empire to the State of Delaware in violation of the Escheat Statute, which at the time included a five-year dormancy period before stock qualifies as escheatable. It is within the context of defendants' motion to dismiss these claims in the District Court that the novel questions of Delaware escheat law arose and were certified to the Delaware Supreme Court.

The Delaware Escheat Statute was amended, effective June 30, 2008, to shorten the "period of dormancy" for stocks from five to three years (the "2008 Amendment"). In addressing the District Court's first certified question as to whether the 2008 Amendment applied retroactively and thus eliminated A.W. Financial's claim for wrongful escheatment, the Supreme Court held that the 2008 Amendment does not apply retroactively in civil actions involving stocks that were escheated prior to June 30, 2008. In so holding, the Supreme Court noted that under Delaware law there is a presumption against retroactivity. The 2008 Amendment would only have retroactive application if the General Assembly made its intent that the statute applies retroactively plain and unambiguous, which it did not. Additionally, a statute may apply retroactively if it is remedial and thus does not affect a substantive right. The Supreme Court found that the 2008 Amendment is substantive both because it permits the State to divest the property right of a stockholder two years earlier than the previous version of the statute and because it permits the State to take a stockholders' property right without due process.

The Supreme Court also held that while property owners cannot bring claims for wrongful escheatment against the State based on common law causes of action, as they have been superseded by the Escheat Statute, property owners can bring common law claims for wrongful escheatment against parties other than the State.

Having determined that plaintiff can bring a common law claim for wrongful escheatment against defendants, the Supreme Court turned to the District Court's second certified question regarding the legal theories on which plaintiff's civil action can be based. Delaware law recognizes common law causes of actions for damages based on theories of negligence, conversion and breach of fiduciary duty, as well as a statutory duty under the UCC and the Delaware General Corporation Law to register shares held by an equitable owner seeking to become a stockholder of record. However, due to the limited record, the Supreme Court could not evaluate whether the claims had been adequately pled, nor could it speculate as to the viability of some of these claims or of any other additional causes of action available to plaintiff.

The Escheat Statute includes two provisions--12 Del. C. §§ 1203(a) and (b)--that, in certain circumstances, provide immunity from liability to certain parties involved in the escheat of private property to the State. Section 1203(a) applies broadly to the escheat of "property" and immunizes a "holder" of property from "any and all" liability to an owner. On the other hand, Section 1203(b) applies more narrowly only to the escheat of "duplicate certificated" securities and registration of "uncertificated" securities, and immunizes holders, transfer agents, registrars and agents of holders from liability of "every kind to every person," provided that the person seeking immunity acted "in good faith." The Supreme Court next addressed the District Court's third certified question inquiring as to whether Section 1203(a), Section 1203(b) or both apply to cases involving escheatment of stock. The Supreme Court found that, where securities are the property being escheated, the two immunity provisions must be interpreted to be mutually exclusive. To hold otherwise would create an absurd result where holders that are seeking immunity would be subject to a good faith requirement under Section 1203(b), but would not be subject to a good faith requirement under Section 1203(a). Section 1203(a) is broadly worded to cover all categories of escheated property, while Section 1203(b) is specifically tailored to cover only escheated securities. Additionally, from a policy standpoint, it is likely that Section 1203(b), which was added after Section 1203(a), was included to address the increased risk of improper escheatment of securities due to the more indirect relationship between an owner of securities and the intangible assets that typically are monitored by third parties. Where, as here, the action involves the escheat of securities, the only immunity provision that applies is Section 1203(b).

The District Court's final certified question inquired as to what allegations are sufficient to plead that a party did not meet the "good faith" requirement included in Section 1203(b). The Supreme Court held, however, that the good faith requirement included in Section 1203(b) is asserted as an affirmative defense to a claim for civil relief as opposed to an element of a cause of action to establish civil liability, and as such, the burden of pleading and proving good faith falls on the defendant holder who is seeking immunity under the Escheat Statute. While Section 1203(b) does not explicitly provide that immunity is an affirmative defense to be pled by the holder, Section 1203(a) does so explicitly provide. The Supreme Court found that it makes no sense procedurally to make immunity an affirmative defense under Section 1203(a) but not under Section 1203(b). Thus, the omission in Section 1203(b) is "better viewed as additional evidence of inartful draftsmanship that failed to harmonize" the two sections.

¹12 Del. C. §§ 1101-1224.