Keane's Unclaimed Property Blog

New Lawsuit Brings Delaware’s Audit Enforcement Measures to the Forefront: The Next Temple-Inland?

On December 3, 2018, in Univar, Inc. v. Geisenberger, et al (No. 1:18-CV-01909 (D. Del. 2018)), Univar, Inc. (“Univar” or “Company”), a Delaware corporation, filed an action in the federal court in Delaware, seeking declaratory and injunctive relief against Richard Geisenberger, in his capacity as the Secretary of Finance, Brenda Mayrack, in her capacity as the State Escheator, and Michelle Sullivan, in her capacity as the Assistant Director for the Department of Finance (collectively, “Delaware”).

The full complaint can be viewed by clicking here.

Challenge to Delaware Unclaimed Property Audit Practice

Univar alleges that the unclaimed property audit spearheaded by Kelmar and initiated on December 11, 2015, along with related document requests and the estimation process itself, violates a number of its constitutional rights, including substantive and procedural due process rights, the right to equal protection, the right to be free from unreasonable searches and seizures, and that it constitutes a taking of private property without just compensation.

After Univar’s repeated objections to Kelmar’s document requests, citing confidentiality concerns, Kelmar’s self-interest in the audit, and the estimation process, Delaware issued a subpoena for Univar’s records on October 30, 2018, based on the initial 2015 document request.

Violation of Confidentiality Provisions

Univar alleges that the multi-state audit (19 states, the most recent added in March 2018) exposes Univar’s confidential and proprietary records to the public due to conflicting public records laws in the participating states, and also violates the confidentiality provisions of the unclaimed property laws in those states.

Record Retention Requirements

Additionally, Univar asserts that from 1991 to 2010, the Company was not required by law to maintain unclaimed property records or to provide unclaimed property reports filed in non-participating states to Kelmar, and is not subject to penalties for the failure to do so. Univar further argues that prior to the February 2, 2017 overhaul of Delaware’s unclaimed property law, the law neither provided for a set audit “look back” period nor for a record retention requirement.  Univar maintains that it was not until the law was amended in July 2010 that State Escheator was given the authority to use estimation to calculate liability when a holder’s records were deemed insufficient.

Current law provides a 10-year look back and record retention requirements for audits beginning after February 2, 2017; and grants the State Escheator the authority to use a reasonable method of estimation based on all information available to the State Escheator, including extrapolation and statistical sampling, for the years in which records are not available. Delaware seeks to apply such provisions retroactively to the audit and Univar does not have records dating back to 1991.

Ambiguous Estimation Regulations

Univar also alleges that the Regulations issued by the Department of Finance surrounding estimation are ambiguous and that Delaware has not provided any additional guidance as to how such Regulations apply to audits initiated prior to the effective date of the Regulations (October 11, 2017). Section 2.3 of the Regulations states only that the methods used shall apply to ongoing examinations “to the extent practical.”

The Next Temple-Inland?

In asserting that the estimation methodology used by Kelmar violates the Due Process Clause because it is not based on actual property records, Univar notes that the same court in Temple-Inland v. Cook stated that the same methodology will lead to “significantly misleading results.” Additionally, Univar notes that the estimation process also relies on the use of Univar’s prior unclaimed property filings in non-participating states and subjects Univar to multiple liability for the same property.

Because the Temple-Inland case ultimately settled, the courts have yet to rule on the legality of all of Delaware’s estimation practices. Even after that settlement and revisions to Delaware’s unclaimed property law, has the current law and regulations really changed Kelmar’s estimation methodology?  Document requests continue to raise constitutional concerns and put holders at risk of multiple liability. Also of interest is whether Univar’s claims that the estimation process violated the Ex Post Facto Clause and Takings Clause of the US Constitution, claims that were unsuccessful in Temple-Inland, will prevail in this case.

We will continue to closely monitor this case, which represents the latest attempt by holders to challenge the audit enforcement methods used by Delaware in federal court.

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Compliance, Litigation, Unclaimed Property Audit

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