What do an admitted heroin dealer and a holder under an unclaimed property audit have in common? Both may be subject to excessive civil penalties, particularly when the government seeks to raise non-tax revenue. In the case of the heroin dealer, the Supreme Court of the United States recently issued a 9-0 decision applying an analysis of the Excessive Fines Clause of the Eighth Amendment that struck the penalty imposed by Indiana as excessive, since it was not commensurate with the offense. In Timbs v. Indiana,the Court considered the extensive historical background surrounding the Clause and the reasons for its inclusion in the federal constitution and subsequent inclusion in the constitutions of all 50 states. The scathing review of the potential for states to abuse individual constitutional rights is a must read for any holder that is subject to a massive estimation for the “offense” of not having records sufficient to meet an auditor’s demands.
In Timbs, the defendant plead guilty in an Indiana state court to dealing in a controlled substance and conspiracy to commit theft. The value of controlled substance amounted to $225. The trial court sentenced Mr. Timbs to one year of house arrest and assessed fees and costs totaling $1,203. At the time of his arrest, the police seized his Land Rover SUV. The defendant had recently purchased the vehicle for $42,000 using insurance proceeds resulting from the death of his father. The state sought civil forfeiture of the vehicle, claiming that it had been used to transport heroin. The maximum monetary fine assessable based on his drug conviction, however, was $10,000. Ultimately, the Indiana court found that the forfeiture would be “grossly disproportionate” to the gravity of the defendant’s offense and therefore unconstitutional under the Eighth Amendment’s Excessive Fines Clause. The Indiana Supreme Court reversed the decision, theorizing that the Excessive Fines Clause only constrains federal action and is not applicable in the context of state crimes. Disagreeing with Indiana, the Supreme Court of the United States found that the Excessive Fines Clause isan incorporated protection applicable to the states under the Fourteenth Amendment’s Due Process Clause.
The analysis undertaken by the Court may be instructive in the context of the application of interest and penalties in unclaimed property audits. Undertaking a historical inquiry that reached back to the Magna Carta, the Timbs opinion emphasized that the protection against excessive fines has been a constant throughout Anglo-American history. Relying on the language of the charter of rights that dates back to 1215, the Court noted that even then, economic sanctions were required to be proportionate to the wrong. Further, according to the Court, the safeguard contemporarily serves as a protection against the abuses of a government’s punitive authority. Such abuses often result in fines being imposed: (1) as a means of retaliation; or (2) as a source of revenue. In the opinion, Justice Ginsburg notes particular criticism of the 17thcentury Stuart kings who used large fines to raise revenue.
States have long asserted that estimation is a penalty for failing to keep the records necessary for the state to determine if the holder is in possession of funds that are due back to owners. This is logical, as there should be both an incentive to comply with unclaimed property statutes and to return funds to owners wherever possible. Estimation also serves as a deterrent against destroying records that might be used to demonstrate compliance or a lack thereof. However, it is the implementation of this concept in practice that invokes the Excessive Fines Clause. For example, proportionality was certainly raised in Temple-Inland, Inc. v. Cook. In that case, the State of Delaware, via its contingent fee auditor, infamously turned a $147.30 liability into a multi-million-dollar demand related to periods for which the auditor claimed that the holder did not have full and complete records. Coupled with the fact that unclaimed property is the State of Delaware’s third largest sources of revenue, Justice Ginsburg’s criticism of the Stuart kings quickly comes to mind. This example also underscores the veracity of the Supreme Court’s notion that the potential for such abuses means that “it makes sense to scrutinize governmental action more closely when the State stands to benefit.” The Court concluded forcefully by stating that “[p]rotection against excessive punitive economic sanctions secured by the Clause is, to repeat, both ‘fundamental to our scheme of ordered liberty’ and ‘deeply rooted in this Nation’s history and tradition.’” It is “a core right worthy of constitutional protection.”
The large multi-national corporations who are subject to unclaimed property audits seeking extensive records dating back decades should take notice of the Land Rover-driving heroin dealer in Indiana who challenged his excessive fine as both illogical and unconstitutional. Holders should use these same arguments in challenging the seven and eight figure estimations of what their unclaimed property liability “might” have been if the records were available. Logically, why should the second priority state of organization get a windfall by charging penalties that represent the amount that first priority states and/or owners would have received if more records were available? This is particularly troubling given the current lack of statutory clarity and specificity as to what records are actually required to be maintained and for how long. From a constitutional perspective, it is nearly impossible to see how an alleged lapse in record keeping should lead to excessive fines that are among the most significant of any fines or penalties assessed by a state government. The penalty is certainly not commensurate with the offense. Thank you, Mr. Timbs, for pulling back the curtain on a troubling state trend.
586 U.S. __ (2019).
All 50 states have a constitutional provision prohibiting the imposition of excessive fines either directly or by requiring proportionality in the imposition of such fines. 586 U.S. __ *6 (2019).
586 U.S. __ *2 (2019).
The right to be free from excessive fines was also described as one of the “privileges or immunities of citizens of the United States.” Timbs v. Indiana,586 U.S. __ (2019) (Gorsuch, J., concurring; Thomas, J., concurring).
586 U.S.___ *4 (2019).
Civ. No. 14-654-GMS (D. Del. June 28, 2016).
Id. at *6-7, citing Harmelin v. Michigan, 501 U.S. 957, 979, n. 9 (1991).
586 U.S. __ *7 (2019).
586 U.S. __ *13 (2019) (Thomas, J., concurring).