Keane's Unclaimed Property Blog

Plains All American Disputes Delaware & Kelmar Audit Tactics

By Karen Anderson, Vice President – Reporting Compliance
William King, Associate General Counsel & Project Manager

This is part two in our series focusing on recent unclaimed property litigation. If you missed our previous entry on National Freight, Inc. v. Sidamon-Eristoff you can read it here.

Plains All American Pipeline, L.P. v. Thomas Cook, et. al.

The second case we will be watching closely was filed by Plains All American Pipeline, L.P. (Plains) in early June. Plains is a Delaware limited partnership formed in 1998 and headquartered in Houston, Texas. Plains was notified by Delaware on October 22, 2014 that Delaware’s third party audit agent, Kelmar, would be conducting an 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 31st and January 31st, an additional twelve 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.”[1]

Amongst the preliminary issues that also remain unresolved, 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 they be permitted to evaluate Kelmar’s data security procedures and controls. Plains indicated that this was necessary in order for them to evaluate Kelmar’s NDA. Kelmar summarily 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 has subsequently brought its action for declaratory judgment and injunctive relief in the United States District Court of Delaware. In its complaint, Plains alleges several Constitutional issues, including substantive and procedural due process, as well as equal protection violations under the Fourteenth Amendment, violation of Article I’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. Amongst other facts, the acts (and omissions) of Delaware and Kelmar that are alleged to substantiate these claims include:

  • 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 multi-state nature of the exam;
  • The compensation arrangement of Kelmar;
  • 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

Keane will continue to monitor the NFI and Plains cases, as judicial guidance or interpretation on the implicated federal preemption, B2B exemption, and Constitutional issues could have sweeping impacts on holders in ongoing exams as well as future administration and enforcement measures. If you have any questions about these cases or would like additional information, please contact Will King, Associate General Counsel and Project Manager.

[1] Plains Complaint, pp. 13-14.

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