Historically, lawsuits challenging Delaware’s unclaimed property audit practices were fairly rare, as companies under examination may have felt that their dissatisfaction with Delaware’s audit process was outweighed by the risks, and costs, associated with bringing a legal challenge against the state. Unfortunately, as two recent cases illustrate, even with the increase in litigation there still remains a lack of precedent on which holders can look to for guidance.
In late June the United States District Court for the District of Delaware (“District Court”) in Temple-Inland, Inc. v. Cook et. al, Civ. No. 14-654-GMS, (D. Del. June 28, 2016) granted Temple-Inland, Inc.’s (“Temple-Inland’s”) motion for summary judgement on its substantive due process claim challenging Delaware’s estimation practices during unclaimed property audits, finding that Delaware’s historic estimation methods and practices to determine a potential unclaimed property liability were unconstitutional.
Despite the problems with Delaware’s approach, the District Court held that estimation can be appropriately used when “it balances the competing interests between an unlawful taking by the state and improper windfall for holders.” In addition, the District Court believed that Delaware was in the best position to suggest a palatable remedy regarding its estimation practices, so it deferred “its decision on the subject of an appropriate remedy until another day.”
That day will have to wait. On August 5, 2016, Temple-Inland and Delaware agreed to settle the dispute and filed a joint motion to dismiss with prejudice with the District Court. While the terms of the settlement have not been made public, some sources have stated that in exchange for the settlement, Delaware agreed to withdraw its entire assessment and pay all of Temple-Inlands attorney’s fees and other costs associated with the case.
On October 22, 2014, Plains All American Pipeline, L.P. (“Plains”) received letter from the State of Delaware notifying it that the state would be conducting an examination of Plains and its subsidiaries to determine its compliance with Delaware’s Unclaimed Property Law. However, Plains refused to submit to the examination and on June 5, 2015 filed an action in District Court against the Secretary of Finance, State Escheator, and Audit Manager for the State of Delaware (“Delaware”) as well as its third-party auditor, Kelmar Associates, LLC (“Kelmar”, together with Delaware, the “Defendants”), alleging violations of the Fourth Amendment, substantive due process, procedural due process, the Ex Post Facto Clause, the Takings Clause, and the Equal Protection Clause of the United States Constitution.
The Defendants moved to dismiss the case, claiming that Plains had failed to demonstrate both standing and ripeness to bring the lawsuit. The District Court agreed. On August 16, 2016, it issued the opinion in the case of Plains All American Pipeline, L.P. v. Cook, Civ. No. 15-468-RGA, (D. Del. August 16, 2016). In granting its motion to dismiss, the District Court found that the third-party auditor “ made no attempt to seek judicial enforcement of any examination”, and that even if the state could penalize Plains for failing to submit to an audit, Plains had failed to demonstrate that Kelmar has the authority to do so. As a result, the court held that Plains lacked standing to assert its claims against Kelmar. It also found that Plains’ claims against Delaware were not ripe as the “Plaintiff challenges certain aspects of an audit which had yet to occur.” As for the allegation that targeting wealthy corporations for audit violated the Equal Protection Clause, the District Court held that as “the wealthy are not a suspect class” deserving of heighted scrutiny, and that a state targeting “entities which are more likely than others to hold large amounts of unclaimed property” meets the required rational basis standard.
What can companies learn about the current state of unclaimed property from these cases? First, the Temple-Inland opinion remains published precedent and is not nullified by the later settlement and dismissal of the suit. Delaware’s historic estimation methods and practices were deemed unconstitutional, and it would follow that a challenge could be brought to these practices, whether related to an audit or a voluntary disclosure agreement with the state. Holders wishing to challenge Delaware’s estimation processes may need to analogize their facts and circumstances to those of Temple-Inland or opt to use the case as a starting point to negotiate an alternate basis for assessing liability. From the Plains decision, companies should be reminded of the risks of preemptive/premature challenges to a state’s audit process, as well as the challenges of asserting standing to sue third-party auditors acting on behalf of the state. In addition, it’s worth noting that in Plains the District Court reaffirmed its positon that a state has the right to use a reasonable estimation methodology to determine a company’s potential unclaimed property liability.
As the states continue to rely on unclaimed property as a potential source of revenue, we expect that more disputes like the ones filed this year are likely to arise. If you’d like to know more about unclaimed property, what it can mean to your clients, call or visit our website.
Email us: Unclaimed.Property@TPCtax.com