Advisories August 15, 2017

Unclaimed Property Advisory: Delaware’s Escheats Law Faces Due Process Challenge

Executive Summary
Minute Read

Our Unclaimed Property Team delves into the Third Circuit decision that gives Plains’s due process claim its day in court and could give holders a leg up on Delaware’s Escheats Law.

  • The district court dismisses on all counts
  • Third Circuit allows due process claim
  • The implications

In 2015, following Delaware’s commencement of an unclaimed property audit of Plains All American Pipeline, that holder initiated a lawsuit in the U.S. District Court for the District of Delaware seeking declaratory judgment that the proposed audit was unconstitutional because the proposed audit and components of the state’s Escheats Law violated the Fourth Amendment and the Ex Post Facto, Due Process, Equal Protection, and Takings Clauses of the U.S. Constitution.

The state defendants moved for dismissal of all claims, and in August 2016, the district court granted the defendants’ motion to dismiss Plains All American Pipeline LLP v. Cook. In part, the court said the plaintiffs brought their suit based on potential and not actual threats – the case was not “ripe” because the state had not conducted its audit yet (i.e., no assessment of liability had been issued, nor had subpoenas been issued by the state to enforce audit-related document requests). Hence, while Plains anticipated that Delaware’s outsourcing of its audit to a contingent-fee contract audit firm, Kelmar Associates, would violate Plains’s due process rights, and that the audit practices of Kelmar and Delaware (including the estimation of liability) would violate other constitutional mandates, there were no actual injuries to present to the court for its consideration.

In addition, the district court dismissed Kelmar from the lawsuit because a judgment against Kelmar could not redress its proposed injuries. In essence, while unclaimed property audits can be time intensive, expensive, and administratively burdensome, the district court opinion suggested that holders would need to engage in the audit process in order to develop a sufficient factual record to support their claims before litigating.

Plains appealed this decision to the Third Circuit Court of Appeals, and on Aug. 9, 2017, that court reversed the dismissal of Plains’s procedural due process claim while affirming the district court’s dismissal in all other respects. The court’s decision begins with a statement that seemed to foreshadow a more welcoming review of the plaintiff’s claims, if not the due process ruling itself: “[I]n recent years, state escheat laws have come under assault for being exploited to raise revenue rather than reunite abandoned property with its owners. Delaware’s Escheats, or Unclaimed Property, Law is no exception….”

The court applied a three-part test it had articulated in an earlier case to assess whether any of the plaintiff’s claims were ripe for judicial review:

  1. Whether the parties’ interests were adverse (i.e., will harm result if declaratory judgment is not entered?).
  2. Whether judgment in the matter would be conclusive (i.e., is there a real controversy where specific relief could be provided by the court?).
  3. Whether judgment in the matter would be useful (i.e., will the parties’ plans/actions be affected by the judgment, and can the judgment affect others?).

The court wrote, “We hold that the District Court improperly concluded that Plains’s as-applied procedural due process claim is not justiciable. To establish a due process violation, all Plains must show is that it was required to submit a dispute to a self-interested party.” Kelmar was identified as the self-interested party for purposes of this analysis “because Kelmar has been vested with responsibility for conducting the Plains audit and has issued document demands.” As for the other two prongs of the test, the court concluded that a ruling on the procedural due process claim could be issued by a court at this stage of the examination, and such ruling would have impact on the plaintiff as well as other holders. Lastly, the court stated that the state defendants had not identified any “exceptional circumstances” that would override this justiciability analysis. The case is now remanded to the district court for review of the procedural due process claim.

What are the implications of this development for holders, both those under audit by Delaware and those that may in the future undergo such an examination?

  • Continuing Litigation of the Plains Due Process Claim: This development is not a ruling that outsourcing an audit to a financially interested contract audit firm per se violates holders’ procedural due process – there is potentially a long road ahead for the parties to this case, with the prospect of having to conduct discovery in order to secure evidence from and about other holders’ treatment by Delaware and Kelmar (since Plains does not yet have its own facts to present to the court).
  • Pending Delaware Contract-Firm Audits: Holders currently under audit by Delaware – whether the audit is conducted by Kelmar Associates or another of Delaware’s stable of contract audit firms – may well be considering an election to convert to a VDA if the recently amended Escheats Law election is available to them; but if not, they will need to consider whether this development provides any real opportunity to slow down or even halt their audit or otherwise to secure concessions from the state in the context of audits that have proceeded.
Media Contact
Alex Wolfe
Communications Director

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