Compliance Update, August 2017: On August 9, 2017 the US Court of Appeals for the Third Circuit reversed the US District Court’s dismissal of Plains All American Pipeline’s procedural due process claim against Delaware & Kelmar Associates. Read the recap post.
On Monday, August 16th, the Delaware Federal District Court dismissed the lawsuit brought by Plains All American Pipeline, LLC (“Plains”) against certain Delaware Department of Finance employees (in their official capacities) and Delaware’s contracted auditor, Kelmar Associates (“Kelmar”) in regards to an unclaimed property audit. The court ruled that Plains did not have standing to sue Kelmar and that the allegations against the state officials were not ripe for judicial review. The case had been pending since it was filed in June 2015.
Plains All American Pipeline & Audit Background
Plains is a Delaware limited partnership formed in 1998 and headquartered in Houston, Texas. Plains was notified by Delaware in October, 2014 that Kelmar would be conducting an unclaimed property audit of Plains (and all “subsidiaries and related entities”). The letter stated that the lookback period would be to 1986 if the audit was completed by June 30th, 2015 or to 1981 if completed thereafter. Between October 2014 and January 2015, twelve more states joined the audit. Plains was notified that the audit would include broad documentation and entity scoping requests to which it objected. In its complaint, Plains indicated that “The requests reveal that Kelmar’s objective in the Audit is to first determine which of Plains’ subsidiaries and affiliates will be the most lucrative audit targets.” 
In late November, 2014, Plains received a copy of a confidentiality and non-disclosure agreement (“NDA”) from Kelmar. Plains sent Kelmar an email requesting that it be permitted to evaluate Kelmar’s data security procedures and controls. Plains indicated that this was necessary so that they could evaluate Kelmar’s NDA. Kelmar denied this request indicating that their client states do not require Kelmar to undergo such a review and that Kelmar is not a vendor selected by Plains. In January 2015, Plains sent the Delaware audit manager a letter listing many objections to the audit. In a letter dated March 30, 2015, the Delaware audit manager responded dismissing all of Plains’ objections. Plains then sued Delaware and Kelmar in federal court seeking a declaratory judgment and injunctive relief.
In its complaint, Plains alleged several Constitutional violations, including substantive and procedural due process, equal protection under the Fourteenth Amendment, Article One’s prohibition on ex post facto laws, a 5th Amendment takings violation, and violation of the 4th Amendment protections to be free from unreasonable searches and seizures. Some of the acts (and omissions) of Delaware and Kelmar that were alleged to substantiate these claims included:
- An irrational and illogical audit target selection process;
- Overly broad, unreasonable, and warrantless demands for information;
- The continual threat of penalties and interest for failure to submit to the examination;
- Failure to ensure adequate protections for Plains’ confidential business information;
- Implementing a thirty-five year look back period;
- The estimation technique that will likely be employed;
- Retroactive application of the penalty and estimation provisions of Delaware’s law;
- Lack of a record retention requirement by Delaware;
- Lack of additional audit procedures to protect a holder’s due process rights
The Court’s Dismissal
The court based its dismissal of the case against Kelmar on its conclusion that Plains did not have standing to sue Kelmar. In its opinion, the court indicated that there was no “injury in fact” (actual, not hypothetical) that was traceable to Kelmar. Specifically, the court states that “Kelmar made no attempt to seek judicial enforcement of its audit demand. Kelmar does not appear to have any authority to litigate on any state’s behalf”
With regard to the dismissal of the case against the Delaware state officials, the court focused on the fact that all of Plains’ claims except the Fourth Amendment equal protection claim, are directed at speculation that certain Delaware actions may occur (i.e., unreasonable estimation techniques will be applied). To this point, the court noted, “Plaintiffs claims, aside from equal protection, are directed to conduct which the Delaware Defendants may or may not undertake, which may or may not result in harms to Plaintiff at some later point in time. Far from a “real and immediate” threat, Plaintiff’s claimed harms are tenuous an uncertain.” Ultimately, the court indicated that the majority of Plains’ claims were not “ripe” with regard to the Delaware defendants.
On the other hand, the court stated that with regard to Plains’ Fourth Amendment claim, the action which Plains indicated violated the equal protection clause had occurred. Particularly, Plains argued that Delaware was selecting large wealthy companies for audit without any legitimate justification. Addressing this argument, the court first pointed out that the wealthy are not a “suspect” class. Further, the court determined that Delaware had a rational basis for targeting wealthy businesses as, “it is entirely legitimate for an agency with limited resources to target entities which are more likely than others to hold large amounts of unclaimed property.”
Keane will continue to monitor pertinent pending litigation, as judicial guidance or interpretation on the compliance and unclaimed property audit-related issues could have significant impacts on holders in managing escheatment compliance and with ongoing exams.
Plains All American Pipeline, L.P. v Cook, Civ. No. 15-468-RGA
Plains Complaint, pp. 13-14
Plains All American Pipeline v. Cook, Civ. No. 15-468-RGA (memorandum opinion), p. 8
 Ibid, p. 12
 Ibid., at p. 18