Nine Year Unclaimed Property Audit Leads to Federal Lawsuit

Photo by smokedsalmon on FreeDigitalPhotos.netLast week, Marathon Petroleum and Speedway filed a lawsuit against the State of Delaware seeking to stop the State’s attempts to collect unclaimed property which it lacks standing and is preempted by federal law.

Delaware, through its third-party contingent fee auditor Kelmar Associates, issued a burdensome request for records relating to the creation of Ohio gift card companies, including documents that would presumably be covered by the attorney-client privilege, and to the ongoing operations of the companies. Marathon responded to show that any property within the entities is outside Delaware’s jurisdiction, as they did not have name or address detail and were organized in other states, but refused to produce further documents. Upon the continued refusal, Kelmar said that the matter would be referred to the Attorney General’s office for enforcement action. As noted in the complaint, the state is currently prosecuting 86 other defendants in a similar case in Delaware v. Card Compliant.

Marathon argues that Delaware’s unclaimed property laws violate and is preempted by federal common law in Texas v. New Jersey and that the audit requests violate the Fourth Amendment protections against unreasonable search and seizures without any reasonable basis for such a search.

Estimation on Paper Gift Certificates

In addition to attempts to audit entities and property that Delaware lacks standing to collect, Delaware also issued a Report of Examination (“ROE”) where it estimated liability for paper gift certificates in excess of $8 million. Marathon objected to the estimated liability because it had actual records of issuances and redemptions for the paper gift certificate. Upon objection to the ROE and estimated liability, Kelmar issued the overbroad and burdensome request for the gift card entities.

Objections to Audit Process

As many holders are coming to realize, there is no mechanism by which holders can raise objections and have them resolved in an orderly manner. Marathon is objecting to the continued request for documents related to the decision to form the gift card companies and specifically in Ohio, all operating agreements of the gift card companies, minutes of meetings of directors, officers, and other similar people, all vendor agreements, and all accounting and finance records of the companies. The objections have been made to both Kelmar and to the Delaware Escheat Audit Manager Michelle Whitaker. Delaware has not responded directly to Marathon, instead directing Kelmar to continue to seek the information or refer the matter to the Attorney General for enforcement. Further, Whitaker and her predecessors continually threaten interest and penalties for failing to cooperate with the audit even when the requests are overbroad and burdensome and will not lead to the identification of additional unclaimed property.

Marathon states the matter is ripe for judicial review at this time because these are purely legal questions, with an express deadline for commencement of enforcement actions by the State, and the company suffers continued harm, including the ongoing accrual of penalties and interest and business uncertainty, and that a decision by the Court would lead to an expedited final resolution of the audit.

In Light of Other Litigation

Almost every aspect of the audit process is currently under court scrutiny. In Plains All American Pipeline, the holder is challenging its selection for audit by Delaware authorities. In Idenix, two investors are challenging whether Delaware has a duty to notify owners prior to escheating property and whether Delaware has the right to claim foreign property. In Blackhawk, Delaware sued the holder for not cooperating with the state and its auditor by refusing to turnover requested information.

But the fight is not over once the records have been produced. Temple Inland contests the extrapolation methodology and record retention requirements as interpreted by the State Escheator. In a New Jersey case brought by National Freight, the holder is fighting against an estimation that uses property properly reportable to other jurisdictions. This is a similar tactic commonly used by Delaware, also a member of the Third Circuit.

Conclusion

While this is only the next step in the audit process for Marathon, the case could lead to greater protections for companies under audit. So far, objections to overbroad and burdensome requests are falling on deaf ears, despite public reassurances that holders can have their objections addressed by state personnel. While waiting for a resolution in this case, holders would be wise to continue to state their objections to these types of requests. In addition to ongoing audit support, Barganier will continue to work to increase these protections through legislative and regulatory processes.

See Also:
Delaware Releases Proposed Audit Regulations
Connecticut Case Alleges Wrongful Escheatment
Florida Bill Would Permit Estimation In Audits When Records Unavailable