The Delaware Department of Finance’s (the “Department”) unclaimed property enforcement practices continue to undergo challenges in state and federal courts through claims involving both companies and other states. The following is brief overview of the latest developments in a few noteworthy cases.
Temple-Inland
In Temple-Inland, Inc. v. Cook, 1:14-cv-00654 (D. Del., filed May 21, 2014), the US District Court for the District of Delaware declared some of the Delaware Department of Finance’s controversial unclaimed property enforcement practices to be unconstitutional executive action that “shocks the conscience.” See our July 14, 2016 North America Tax Client Alert Federal District Court Holds Delaware’s Unclaimed Property Enforcement Practices “Shock the Conscience” available under insights at www.bakermckenzie.com.
Open questions remained following the District Court’s order, including the remedy for Delaware’s substantive due process violations and disposition of Temple-Inland, Inc.’s (“Temple-Inland”) takings clause claim. However, on August 5, 2016, through a Joint Motion to Dismiss with Prejudice, the parties agreed to settle the case. While this likely is the end of the Temple-Inland saga, the District Court’s opinion stands and will provide valuable support for companies challenging Delaware unclaimed property audits. There are also indications that the Department is considering changes to its unclaimed property enforcement practices in response to the Temple-Inland opinion − Delaware’s Secretary of Finance, Thomas Cook, informally stated that officials are “conducting a thorough review of the state’s escheat statutes, regulations, policies and procedures, with the intention of improving the program going forward.” However, it remains to be seen what − if any − changes will be made. In the meantime, the Department’s audit practices will continue to be challenged. For example, a case filed by Office Depot in July raises many of the same issues that were central to Temple-Inland. See Office Depot, Inc. v. Cook, 1:16-cv- 00609 (D. Del., filed July 18, 2016).
Plains All American Pipeline
In addition to Temple-Inland, another Delaware unclaimed property case involving similar constitutional arguments has likely reached its end. On August 16, 2016, the US District Court for the District of Delaware dismissed the plaintiff’s case in Plains All American Pipeline, L.P. v. Cook, No. 1:15-cv-00468 (D. Del., filed June 5, 2015). In that case, Plains All American Pipeline, L.P. (“Plains”) filed a pre-emptive suit in the District Court, seeking, in part, an injunction against continuation of an audit authorized by Delaware and conducted by Kelmar Associates, LLC (“Kelmar”), the Department’s primary contract auditor.
The District Court’s dismissal of Plains’ case was not due to the merits of the company’s constitutional arguments. Rather, the court held that the company lacked standing to sue Kelmar and that most of Plain’s constitutional claims were not yet ripe. The practical implication of the Plains dismissal is that before bringing a judicial challenge to Delaware’s unclaimed property enforcement practices, a company will either need to wait for an audit to be completed and exhaust available administrative remedies, or force the state to engage in a formal enforcement action, such as issuing a subpoena. Whether the Department has the authority to enforce such a subpoena in the first instance is currently being litigated in Delaware’s Chancery Court. See Department of Finance v. Blackhawk Engagement Solutions (DE), Inc., No. 11737-CB (Del. Ch., filed Nov. 20, 2015).
MoneyGram
Unclaimed property holders are not the only ones protesting Delaware’s unclaimed property enforcement practices. In Delaware v. Pennsylvania, No. 22O145 ORG (U.S., filed May 31, 2016), and two other almost identical cases, nearly half of US states have alleged Delaware circumvented federal law by escheating up to $400 million in uncashed checks issued by MoneyGram Payment Systems Inc. (“MoneyGram”).
MoneyGram, one of the largest money transfer companies in the world, regularly escheated uncashed checks to Delaware, its state of incorporation. However, other states have now asserted that the state where the checks were purchased are exclusively entitled to escheat the uncashed checks in accordance with federal law. With multiple states claiming jurisdiction over the same property, the nation’s highest court is now being asked to provide clarity on competing state positions.
This article originally was originally published in the August 2016 edition of Tax News and Developments (Volume XIV, Issue 4) and is available under insights at www.bakermckenzie.com.
Contact the Authors: Drew Hemmings
