Constitutional Challenge to Delaware’s Unclaimed Property Law Dismissed on Standing/Ripeness Grounds
On August 16, 2016, the United States District Court for the District of Delaware issued an opinion in the case of Plains All American Pipeline, L.P. v. Cook, Civ. No. 15-468-RGA, granting defendants’ motions to dismiss federal Constitutional challenges to Delaware’s unclaimed property law for lack of subject matter jurisdiction where plaintiff failed to demonstrate that it had standing to assert such claims and that the claims were ripe for decision. This decision is a significant follow-on to the Delaware District Court’s recent opinion in Temple Inland, Inc. v. Cook, 2016 WL 3536710 (D. Del. Jun. 28, 2016), to the extent that it clarifies and reinforces the State’s ability to estimate holder liability and rejects the use of the declaratory judgment action to challenge the audit process in advance of a demand for payment. Among the noteworthy rulings made by the Court are findings concerning a holder’s standing to sue third party contract auditors, the ripeness of challenges to unclaimed property audit methodologies (including estimation), and the constitutionality of the State’s selection of holders for audit.
Following receipt of an audit notice letter from the State of Delaware, Plains All American Pipeline, L.P. (“Plains”) sued the Secretary of Finance, State Escheator, and Audit Manager for the State of Delaware (the “Delaware Defendants”) and Delaware’s third-party auditor, Kelmar Associates, LLC (“Kelmar”), alleging violations of the Fourth Amendment, substantive due process, procedural due process, the Ex Post Facto Clause, the Takings Clause, and the Equal Protection Clause of the United States Constitution. Defendants moved to dismiss the case in its entirety on a number of grounds, including lack of standing and ripeness. Turning first to the claims asserted against Kelmar, and relying on the Eighth Circuit’s decision in Young America Corp. v. Affiliated Computer Services, Inc., 424 F.3d 840 (8th Cir. 2005), the Court held that Plains lacked standing to assert claims against Kelmar where it failed to demonstrate that Kelmar had attempted to seek judicial enforcement of an examination or audit demand. The Court thus held that Plains had failed to allege an “injury in fact” traceable to Kelmar.
As for the identical claims asserted against the Delaware Defendants, the Court held that, with the exception of the Equal Protection claim, Plains’ claims were “premised on contingencies” and were, therefore, premature. Finding that the majority of the claims asserted concerned challenges to the State’s ability to estimate liability, the Court held that it was entirely speculative whether estimation would be used and, if so, in what manner. Citing Temple Inland for the proposition that “reasonable estimation” is constitutionally permissible, and noting that such determinations are highly fact specific, the Court held that an advance ruling in a matter where estimation had yet to be employed would “constitute an impermissible advisory opinion.”
Turning to Plains’ Equal Protection challenge to the State’s practice of selecting wealthy corporate holders for audit, the Court made a strong pronouncement with respect to the State’s ability to choose candidates for audit. Finding that the wealthy are not part of a “suspect class” deserving of heightened protection under the Equal Protection Clause, the Court held that the State need only show a legitimate reason for targeting those holders, and that for a State agency with limited resources, focusing on entities with a greater likelihood of holding large amounts of unclaimed property was sufficient.
Holders should take note of this decision for its findings with respect to claims against third party auditors and the proper timing of challenges to the State’s audit methodologies, as well as the affirmation of the State’s ability to target wealthy holders. Likewise, the Court’s validation of the State’s ability to estimate a holder’s unclaimed property liability in appropriate circumstances leaves unresolved, for the time being, the precise boundaries of the State’s ability to estimate consistent with the United States Constitution and federal common law.
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