Delaware’s Unclaimed Property Audit Program Dealt Blow

The judge in a case challenging Delaware’s use of sampling and extrapolation to determine unclaimed property liability denied the state’s motion to dismiss and in doing so, seriously questioned the State’s approach.  Temple-Inland v. Cook, U.S. Dist. Ct. (DE), Civ. No. 14-654-SLR (3/11/2015).  Temple-Inland brought a suit against the State following an unclaimed property audit of its accounts payable balances and before the audit of other property types was completed.  Delaware found Temple-Inland liable for unclaimed property going back to 1986 based on the use of sampling and extrapolation.  On March 11, 2015, Judge Robinson ruled on the Temple-Inland’s summary judgment motion and the State’s motion to dismiss for failure to state a claim.  While the State won one issue, Temple-Inland certainly came out ahead overall.

Let’s start with the bad news first: the one dark spot in the opinion for holders is that the judge decided that the U.S. Supreme Court’s priority rule cases (Texas v. Delaware and its progeny) only applied to disputes over custody between states, not between a private holder and a state.  This decision seems to conflict with a precedential Third Circuit case, Retail Merchants Ass’n v. Sidamon-Eristoff, 669 F.3d 375 (3rd Cir. 2012).  The judge also did not seem to take to heart the role of the U.S. Supreme Court.  The judge oddly stated that “finding that the Supreme Court’s holding in Delaware preempts the State’s valid exercise of regulatory power . . . would be contrary to the well-established principle that federal courts may not ordinarily displace state law.”  That is exactly what the U.S. Supreme Court is supposed to do (in fact, last week the Court ruled federal courts have just such authority in Direct Marketing Association v. Brohl).

With the bad news out of the way, the good news is that not only does the judge agree to move forward with all of Temple-Inland’s other claims, but expresses significant doubt as to the validity of the State’s position regarding the authority to use estimation prior to a 2010 statutory change.  The judge appears to be ready to move forward on hearing factual support for the following claims asserted by the plaintiff:  substantive due process, Ex Post Facto Clause, Takings Clause, Commerce Clause and Full Faith and Credit Clause.

The really good news for holders is that the judge seems to have backed the State into a corner.  In analyzing the due process and ex post facto claims, the judge noted that “[the] defendants are faced with a dilemma:  “If §1155 [the 2010 provision authorizing estimation] is not a penalty provision, it likely violates plaintiff’s rights to substantive due process.  If, on the other hand, § 1155 is a penalty provision, its retroactive application likely violates the Ex Post Facto Clause.  The court is unprepared, at this juncture to determine which scenario is most likely.”  With this opinion, Delaware may finally be feeling the walls closing in and a giant alien cephalopod reaching up from below.

Practice Note: Similar issues have been raised in similar cases in the past and so far, each time the case has been settled before a final decision has been reached by a court.  It will be interesting to see if this case goes the distance.  Holders currently involved in unclaimed property audits should carefully consider their settlement and other resolution opportunities in light of this opinion.

Diann SmithDiann Smith
Diann Smith focuses her practice on state and local taxation and unclaimed property advocacy. Diann advises clients at any stage of an issue, including planning, compliance, controversy, financial statement issues and legislative activity. Her goal is to find the most effective method to achieve a client's objective regardless of when or how an issue arises. Diann emphasizes the importance of defining a client's objective - whether it is finality of a frequently audited issue, quick resolution of a stand-alone tax liability, or avoiding competitive disadvantages in the application of a tax. The defined objective then governs the choice of the path to a solution. Read Diann Smith's full bio.


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Stephen P. KranzStephen P. Kranz
Stephen (Steve) P. Kranz is a tax lawyer who solves tax problems differently. Over the course of his extensive career, Steve has acquired specific skills and developed a unique approach that helps clients develop and implement holistic solutions to all varieties of tax problems. He combines strategic thinking with effective skills for the courtroom, the statehouse and the conference room. Read Stephen P. Kranz's full bio.

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