Comptroller of Treasury v. PHH Corp.

SALMON, Judge. This case concerns the circumstances under which the Comptroller of the Treasury (“Comptroller”), may audit the books of a business to find out whether the business holds abandoned property that is required to be turned over to the Comptroller pursuant to the Commercial Law Article (“CL”), Md.Code, §§ 17-301 through 17-326 (1990), Maryland Uniform Disposition of Abandoned Property Act (the “Act”). Section 17-322 of the Act reads: Examination of records of persons who have failed to report property; compelling testimony; contempt proceedings. (a) Examination of records. — At reason-able times and on reasonable notice, the administrator may examine the records of any person if there is reason to believe that the person has failed to report property that should have been reported under this title.

(b) Compelling testimony. — If any person refuses to permit the examination of records, the administrator may issue a subpoena to compel the person to testify and produce records. The subpoena shall be served by the sheriff of the county where the person resides or may be found. The person shall be entitled to the same per diem and mileage as witnesses appearing in a circuit court of the State, which shall be paid by the State. ²¹⁷ (c) Contempt proceedings. — If any person refuses to obey any subpoena so issued or refuses to testify or produce records, the administrator may present a petition to the circuit court of the county where the person is served with the subpoena or where the person resides. The court then shall issue an order to require the person to obey the subpoena or to show cause for failure to obey it.

Unless the person shows sufficient cause for failing to obey the subpoena, the court immediately shall direct the person to obey and, on refusal to comply, adjudge the person to be in contempt of court and punished as the court may direct. In Maryland, the Comptroller has been designated as the Administrator under the Act. Three questions are presented in this appeal: 1. In applying the “reason to believe” test as set forth in CL § 17-322(a), when must the Comptroller have reason to believe that a person has failed to report abandoned property? 2.

What does the term “reason to believe” mean? 3. Under the facts of this case, did the Comptroller’s knowledge suffice to give him reason to believe that PHH Corporation (“PHH”), had failed to report abandoned funds? I. BACKGROUND The Maryland Uniform Disposition of Abandoned Property Act This is the first time that an appellate court in Maryland has been asked to interpret a provision of the Act. A brief review of the Act’s history and purpose is therefore useful.

In the early 1950’s, individual states “beg[a]n clamoring for uniform legislation addressing the escheat of intangible property. In response, the National Conference of Commissioners on Uniform State Laws began drafting comprehensive legislation.” K. Reed Mayo, Virginia’s Acquisition of Unclaimed and Abandoned Personal Property, 27 Wm. & Mary L.Rev. ²¹⁸ 409, 417-18 (1986). The product that emerged, in 1954, was the Uniform Disposition of Unclaimed Property Act (the Uniform Act). The Uniform Act was revised in 1966 and again in 1981 to, among other things, “strengthen[ ] enforcement provisions to assist the states’ efforts to monitor compliance by holders.” Id. at 418.

To date a majority of states has adopted some version of the Uniform Act. The Uniform Act is remedial legislation “designed to put an end to the unearned and fortuitous enrichment of the holders of abandoned property and to provide instead for the interests of the citizens ... and ensure that any such escheat would be for public benefit rather than for private gain.” Riggs Nat’l Bank of Washington, D.C. v. District of Columbia, 581 A.2d 1229, 1233-34 (D.C.App.1990). In 1966, Maryland enacted its version of the Uniform Act. The Maryland Act was based substantially on the 1954 Uniform Act; Maryland has only partly adopted the changes that were made in the 1966 and 1981 revisions to the Uniform Act.

In Maryland, “abandoned property” is defined as tangible and intangible personal property “including] property in the custody of the federal government that is classified as ‘unclaimed property’ under federal law.” CL § 17 — 101(b),(e). In most instances, property is considered “abandoned” if it remains unclaimed for more than five years after becoming payable. CL §§ 17-301 to 17-308. Moreover, property is considered abandoned regardless of whether the owner later makes a demand for payment.

CL § 17-308(a) — (c). Under the Act, businesses in Maryland have an annual obligation to (among other things) file with the Comptroller a report listing the abandoned property that they have in their possession. CL § 17-310. The property holder must then deliver the abandoned property to the Comptroller, CL § 17-312, who acts as guardian for the true owner.

CL § 17-313. Because there is no statute of limitations as against the true owner of the property, the property owner may at any time petition the Comptroller for return of his or her property. CL § 17-318. ²¹⁹ II. THE TWO COMPLAINTS On May 24, 1996, the Comptroller filed a complaint against PHH requesting declaratory and injunctive relief.

The Complaint alleged, in part: 7. If the Administrator [Comptroller] has reason to believe that a person has failed to report property that should have been reported, he may examine the records of the person at reasonable times and on reasonable notice. Md. Comm. Law Code Ann. § 17-322(a). 8.

The Administrator reviews approximately 12,000 reports of abandoned property each year. In addition, the Administrator examines the records of approximately 190 to 215 holders per year, most of whom have failed to file reports. 9. The Administrator has limited resources available with which to conduct the examinations of records of holders of abandoned property. Consequently, the Administrator has a contract with several private vendors, including the National Abandoned Property Processing Corporation (“NAPPCO”) to conduct the reviews of selected unclaimed property records.

The determination to utilize the services of NAPPCO is made based on the volume of the records, the scope of the corporation’s business (i.e., whether the business is conducted interstate), any information regarding the corporation that NAPPCO may already have obtained, the number of corporate employees, shareholders and subsidiaries, and the corporation’s prior reporting history. 10. NAPPCO is paid a fee for its services equal to a percentage of the amount of abandoned property actually remitted to the Comptroller as a result of its review. NAPPCO is not paid anything for identifying property as abandoned, unless that propeity is in fact remitted to the Comptroller. 11. NAPPCO routinely executes confidentiality agreements with audit subjects when it conducts a review. 12.

The defendant PHH Corporation (“PHH”) has in recent years filed unclaimed property reports which list ²²⁰ uncashed dividends and other securities as abandoned. However, PHH has never reported any uncashed vendor or employee checks. 13. Based upon the nature of PHH’s business, the Administrator has reason to believe that PHH has uncashed vendor or employee checks or other abandoned property in its possession which it has failed to report. The Complaint went on to allege that the Administrator of the Abandoned Property Division, on September 8, 1995, notified PHH that a review of its records would be conducted by NAPPCO “because of the interstate nature and large volume of PHH’s leasing business.” PHH objected to the audit, by letter dated November 30, 1995, contending that it would not submit to an audit by NAPPCO.

The Complaint asked the Court to declare that the Comptroller had the right to delegate the authority to conduct an audit to private entities such as NAPPCO and to issue an injunction requiring PHH to undergo an audit by NAPPCO. PHH filed a motion to dismiss the Complaint, contending in pertinent part, that [Section 17-322(a) ] authorizes the Comptroller’s Office to examine the records of any person, [but] such an examination may only be conducted “if there is reason to believe that the person has failed to report property that should have been reported” under [the Act]. Where a corporation has filed the required abandoned property reports and has identified abandoned property in accordance with the requirements of [the Act] as PHH has done here, the “reason to believe” standard of Section 17-322 should require more than simply a generalized suspicion of an omission based solely on the nature of the corporation’s business. See, Complaint, ¶ 13.

Since the Comptroller has failed to plead sufficient facts to support its claim that it has “reason to believe” that PHH has failed to report abandoned property as required by Section 17-322, the Comptroller has not established that any audit under [the Act] is appropriate. If the threshold ²²¹ requirement for an abandoned property audit established by Section 17-322 is not satisfied, neither the Comptroller nor NAPPCO has any right to conduct an audit of PHH. In order for declaratory relief to be granted, Section 3-409(a) of the Courts and Judicial Proceedings Article requires that there be a justiciable controversy between the parties. If the Comptroller’s Office cannot establish that an audit is appropriate, then there is no audit and there is no controversy between the parties which is appropriate for resolution by declaratory judgment.

PHH’s motion to dismiss was heard in the Circuit Court for Baltimore County on December 23, 1996. In regard to the question of whether the Comptroller sufficiently alleged facts demonstrating that the Comptroller had “reason to believe” that PHH held abandoned property, the Court ruled that the reasons could be better articulated. Accordingly, the Court granted the motion to dismiss but gave the Comptroller leave to file an amended complaint. An amended complaint was timely filed by the Comptroller on January 21, 1997.

It was in many respects identical to the initial complaint, but the following facts were added: 12. The [defendant, [PHH], is one of the largest corporations in the State of Maryland. It engages in numerous business activities[.] 13. From 1990 to 1994, PHH’s annual sales in each year equaled or exceeded [$2 billion].

It’s [sic] net income for those years ranged from $47,079,000 in 1991 to $64,558,000 in 1994. PHH has over 5,000 employees and thirteen subsidiaries. 14. In recent years, PHH has filed un-claimed property reports that list uncashed dividends and other securities as abandoned. However, PHH has never reported any uncashed vendor or employee checks for unclaimed wages or expense reimbursements. 15.

Subsequent to December 23, 1996 [the date of the hearing on the original motion to dismiss], Lynn Hall, the Manager of the Unclaimed Property Section!,] reviewed ²²² reports filed with the office by eight holders of property presumed abandoned from 1992 to the present, pursuant to Md. Commercial Law Code, § 17-310 (1990 Rep. Vol., 1996 Supp.). None of these holders is as large as PHH nor do they provide the comprehensive services that PHH does. However, each holder provides some of the same services that PHH does.

As a result of this review, Ms. Hall identified $239,888.67 remitted to the Comptroller as property presumed abandoned during that period by these eight holders. The abandoned property reported by these holders ... consists almost entirely of unclaimed accounts payable, wages or payroll, vendor checks and the proceeds of escrow accounts. By contrast, PHH has never reported or remitted such funds to the Unclaimed Property Section. 16. In the normal course of operation of a business of the nature of PHH, checks are periodically issued to employees, either for wages or for expense reimbursements, that are never negotiated.

Similarly, a business such as PHH would ordinarily report payment to vendors that were never negotiated. Mortgage banking services would ordinarily report unclaimed proceeds of escrow accounts. Unlike the other holders reviewed, PHH has never reported any such payments. Based on the nature and scope of PHH’s business and a comparison to other, considerably smaller, holders, it is reasonable to believe that PHH would have i[n] its possession abandoned property in the form of uncashed vendor or employee checks and the proceeds of unclaimed escrow accounts.

PHH moved to dismiss the amended complaint on the grounds that it failed to state a claim upon which relief could be granted. Specifically, PHH contended that the facts set forth in the amended complaint “establish that [the Comptroller] did not have ‘reason to believe that [PHH] has failed to report property that should have been reported’ ” as required by § 17-322(a) of the Act. PHH also contended that the Comptroller was required to allege facts in its complaint, but did not, that would show that PHH was selected for audit on the basis of a general administrative plan, derived from neutral ²²³ sources, for the enforcement of the Act and that the Comptroller had conducted an analysis sufficient to satisfy this statutory prerequisite. The motions judge (Kahl, J.) dismissed the amended complaint for two interrelated reasons.

First, he concluded that “the amended complaint did not contain any allegations to demonstrate that [defendant PHH was selected for audit based on a determination that it had reason to believe that it had failed to report abandoned property.” (Emphasis added.) Secondly, based on the facts alleged as to what Lynn Hall, the Manager of the Unclaimed Property section, said she did after December 23,1996, the court deduced that prior to December 23, 1996, “the Comptroller’s office had no ‘reason to believe’ whatsoever that [defendant PHH failed to report property subject to the Act.” The trial court penultimately concluded: Thus, without resolving the issue regarding the underlying standard to be applied under the “reason to believe” language found within Section 17-322 of the Commercial Law Article, this Court finds that the Comptroller selected [defendant PHH for an audit under the Maryland Uniform Disposition of Abandoned Property Act without having made any prior determination as required by law.

III

ANALYSIS Before addressing the substance of appellant’s legal arguments, we note at the outset, as many previous appellate courts have done, that it is, with a few well defined exceptions, inappropriate to dismiss a declaratory judgment action. As the Court of Appeals said in Christ v. Department of Natural Resources, 335 Md. 427, 435-36 , 644 A.2d 34 (1994): It is proper to dismiss a declaratory judgment action only where there is a lack of jurisdiction or where a declaratory judgment is not an available or appropriate type of remedy. See, e.g., Popham v. State Farm, supra, 333 Md. at 140-141 n. 2, 634 A.2d 28 (declaratory judgment ordinarily is not available when the issue has become moot); Turnpike Farm v. Curran, supra, 316 Md. at 49, 557 A.2d 225 (declaratory ²²⁴ judgment action is not available, and should be dismissed, where there is a pending action between the parties presenting the same issue); Boyds Civic Ass’n v. Montgomery County, supra, 309 Md. at 688-700, 526 A.2d 598 (declaratory judgment action, to be entertained by the court, must present a justiciable controversy); State v. Burning Tree Club, supra, 301 Md. at 18, 481 A.2d 785 (declaratory judgment action should be dismissed where the plaintiff lacks standing); Koontz v. Ass’n of Classified Emp., supra, 297 Md. at 529-530, 467 A.2d 753 (declaratory judgment action was properly dismissed where the dispute had become moot). Where a controversy is appropriate for resolution by declaratory judgment, however, the trial court must render a declaratory judgment.

The court’s rejection of the plaintiffs position on the merits furnishes no ground for dismissal. In East v. Gilchrist, supra, 293 Md. at 461 n. 3, 445 A.2d 343 , this Court, in language directly applicable to the present case, pointed out that “where a plaintiff seeks a declaratory judgment that a particular legal provision is valid (or invalid), and the court’s conclusion regarding the validity of the provision is exactly opposite from the plaintiffs contention, nevertheless the court must, under the plaintiffs prayer for relief, issue a declaratory judgment setting forth the court’s conclusion as to validity.” In the case at hand, the trial court had jurisdiction and declaratory relief was an appropriate remedy. The trial court should have declared the rights of the parties instead of dismissing the complaint. A. Issue 1 When must the Comptroller have reason to believe that a person has failed to report abandoned property?

Both PHH and the trial judge assumed that in order for the Comptroller to be entitled to injunctive or declaratory relief, the Comptroller was required to allege facts demonstrating ²²⁵ that at the moment PHH was selected for an audit the Comptroller, or his designee, had reason to believe that PHH had failed to report abandoned property. The motions judge and PHH also appear to assume that if the reason to believe came after the moment of selection the “reason” came too late and PHH was forever immune from audit. Neither of these assumptions are warranted by the words of the statute, logic, or any pertinent authority. It is also most assuredly not warranted in a declaratory judgment action in which the Comptroller asks the court to declare its curmnt right to review records.

Under the plain wording of CL § 17-322(a), the light to audit comes into being at a discrete and easily identifiable