Osram Sylvania Files Suit Against Delaware

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Update: Osram Sylvania voluntarily dismissed the case without prejudice on March 13, 2015. No further details are available at this time.

The dismissal came just says after Temple Inland survived a motion to dismiss in the same federal court with similar facts.

Originally Posted December 15, 2014:

On December 11, 2014, Osram Sylvania, Inc., a lighting manufacturer incorporated in Delaware, filed a lawsuit against Delaware in U.S. District Court, stemming from a Kelmar audit. The lawsuit alleges that Delaware violated federal common law in its estimation and extrapolation methodologies rather than claiming "actual unclaimed obligations to any actual creditors." In addition, the holder asserts that Delaware is retroactively enforcing a substantive 2010 amendment to the Delaware unclaimed property law, thereby penalizing the holder for conduct that was legal at the time it was conducted.

The 2010 amendment referred to above is the amendment to Section 1155, the section permitting Delaware to audit the holder's books and records. Prior to the 2010 amendment, Delaware did not have any law penalizing holders for failing to retain records for a minimum period of time. According to the lawsuit, Delaware is now trying to apply the record retention requirement to time periods prior to 2010 to unlawfully claim more than $2 million.

Similar to the Temple Inland case, Osram Sylvania claims that Kelmar used $21,833.92 of actual unclaimed property reportable (and paid) to Delaware to demand a sum of $2,239,888.95 after the Kelmar extrapolation methodology was applied. This was limited to accounts payable and accounts receivable (it found zero liability for payroll). The audit is still ongoing for rebate properties. This holder also has a history of annual compliance.

In addition, the Plaintiff's parent company was rejected from the Delaware Department of Finance Voluntary Disclosure Program (not the new Delaware Secretary of State VDA program) in 2009, despite the fact that the company was not currently under audit. It was not until Delaware, through then State Escheator Mark Udinski, rejected the VDA that the holder was notified of an audit.

The Complaint also has some interesting things to say about Kelmar's contract with the State of Delaware, to wit:

31. Specifically, under its contract with Delaware, Kelmar can earn up to a blended rate of $495 per person per hour, it bills Delaware at the rate of $150 per hour. Kelmar accumulates the $345 per hour difference between these two amounts as a “Receivable.” Kelmar’s ability to collect the Receivable is limited, however, because Kelmar can only collect fees up to an amount equal to 12% of the liability actually paid by the audited holder.

32. Kelmar can collect Receivables unpaid from an audit of one holder against a liability paid by another holder Kelmar audits for Delaware, provided Kelmar collects no more than 12% of any liability paid by an audited holder. Receivables expire and Kelmar forfeits those amounts after three years, so Kelmar has an incentive to generate as large a liability as possible on every single audit to ensure that it collects uncollected Receivables from audits generating little or no holder liability from other audits before the Receivables expire. The greater the liability resulting from a Kelmar audit, the more compensation Kelmar can collect and the less it must forfeit.

33. Kelmar created the estimation methodology Defendants use and Kelmar claims it to be its proprietary trade secret. It is no surprise, therefore, that the estimation methodology results in inflated liabilities because Kelmar’s ability to collect fees is dependent in large part on the liability a holder pays as a result of an audit.

34. On information and belief, Delaware has paid Kelmar hundreds of millions of dollars in fees for auditing services. In fiscal 2013 alone, the Delaware Department of Finance paid Kelmar fees for auditing services in the amount of $53,494,091.25. See http://www.checkbook.delaware.gov.

See Also:
Lost That Loving' Feeling in Delaware
Delaware Relies Heavily on Unclaimed Property in Budget Process
Audit Defense Starts with Compliance