In May 2014, Temple Inland, a Delaware incorporated company, filed a lawsuit against Delaware, challenging the extrapolation methodology used by Kelmar Associates during an audit to examine the company's compliance with the state's unclaimed property laws. In addition to challenging Delaware, the case was instantly noteworthy because of the large extrapolation that resulted from one small payroll check.
Today, Temple Inland survived a motion to dismiss the case. The case will proceed with questions regarding the validity of Delaware's methodology for estimating unclaimed property liability for years where transactional records are no longer available. Temple Inland argues that this process is an unlawful taking in violation of several constitutional provisions regarding due process.
Delaware won a dismissal on count I of the complaint alleging violation of and preemption by federal common law. Specifically, the Court found that the Delaware v. Texas and other Supreme Court cases were to resolve a conflict among the states and not between private parties and a state. The Court ruled in the company's favor on the remaining claims.
On the substantive due process and taking clauses claims, Temple Inland argued that the deprivation of property caused by Kelmar's extrapolation results in two or more states claiming the same property as prohibited by the Supreme Court cases. The extrapolation is based on items that may be traced to identifiable creditors and as such are impermissible takings by the state.
In addition, the Court also denied the state's motion to dismiss and the company's motion for summary judgment on the Ex Post Facto claims. The Court left open the issue whether the 2010 amendments to permit estimation and require document retention was a change of practice or a codification of a pre-existing practice.
The Court declined to dismiss the Full Faith and Credit claims based on insufficient information. The Court said that "[g]iven the brevity of the parties' briefing, the court is unprepared, at this stage, to determine whether the Supreme Court intended secondary priority to attach if the laws of the creditor's State are silent on the question of escheat or if, as defendants allege, secondary priority attaches if the laws of the creditor's State actively exempt certain property from escheat." On the other hand, the Court did note, in a footnote, that it was inclined to agree with the US District Court for the District of New Jersey that "inherent in the State's sovereignty is its choice not to exercise custodial escheat." In addition, the Court noted that if the estimation was based on cashed checks and property actually escheated to other states, it would be in violation of the Full Faith and Credit Clause.
Unclaimed property is Delaware's third largest source of revenue. The state estimates that it will collect in excess of $550 million. A significant portion of the annual collections are based on extrapolations or estimates and have no hope of ever being reunited with an owner as no owner actually exists.