A lawsuit has been filed against the State of Delaware and their third-party auditor over the validity and accuracy of the liability estimation and extrapolation methods utilized in the course of an unclaimed property audit. The Complaint, which seeks declaratory judgment and injunctive relief against Delaware and Kelmar, has once again brought the topic of audit methodologies and enforcement efforts to the forefront of industry news.
After exhausting the administrative appeals process mandated by Delaware’s Unclaimed Property Law, a complaint was filed on May 21, 2014, in United States District Court by Temple-Inland Inc., a manufacturing and supplier of corrugated packaging headquartered in Memphis, Tennessee and incorporated in Delaware.
According to the Complaint, an unclaimed property audit of Temple-Inland’s accounts payable and payroll disbursements was commenced in 2008 by Kelmar Associates, LLC on behalf of the State of Delaware. During the course of the audit, Temple-Inland acknowledged that it failed to report a single uncashed payroll check for $147.30. However, at the conclusion of the audit, Kelmar estimated the company’s liability for payroll and accounts payable as in excess of $2,033,398.74 for the time period of 1986-2009 ($856,975.63 for unclaimed payroll for the period 1986-2009, and $1,176,423.11for unclaimed accounts payable checks for the period 1986-2007).
After the Statement of Findings and Request for Payment was issued, Temple-Inland appealed the Secretary of Finance’s findings to the Secretary of State who, pursuant to Delaware’s established appeals process set forth in Regulation 959, appointed an independent review. After a hearing the Independent Reviewer recommended a recalculation resulting in a final determination of liability of $1,388,573.97.
Temple-Inland now presents the following issues on appeal to the Federal District Court:
- Whether the state’s estimation methodology was valid and reasonable
- Whether the State’s use of estimation violates federal common and constitutional law because it requires Temple-Inland to escheat property to Delaware that;
- is not subject to escheat to Delaware
- Temple-Inland already escheated to other states,
- is exempted from escheatment by states with a priority claim to such property under the primary rule, and
- was already returned to owners so it is not unclaimed property.
- Whether the State’s estimation techniques utilized for the years 1986-2004, constitutes an unlawful retroactive application of Delaware’s record retention law enacted in 2010.
We will continue to monitor the status of this unclaimed property lawsuit and provide any updates here on our blog.