Since the publication of our recent white paper on "The Future of Unclaimed Property: A Look into the Crystal Ball" that appeared in Compliance Week, there have been some significant developments.
First, on the heels of the Temple-Inland court decision, the parties agreed to settle the remaining issues without prejudice. This means that there will be no appeal of the Federal District Court decision by Delaware to the Federal Circuit Court and, most importantly, there will be no resolution by the Federal District court on the important issue of establishing a uniform estimation methodology, which would have served as a precedence for the approximate 800 companies that are currently under audit or in the midst of resolving a voluntary disclosure submission with the State.
What are the circumstances that led the parties to settle the matter after years locked in controversy?
In the case of Temple-Inland, it is evident that the Federal Court decision was a huge victory, and settling the case averted having to tie up future resources and time defending the favorable decision achieved thus far. From Delaware's perspective, appealing the case created huge potential risk that an unfavorable appeal would crater any hopes of salvaging any future revenue stream from unclaimed property collections. And for Delaware, make no mistake; loss of unclaimed property collections would represent a major budget crisis since such collection has historically represented the 3rd largest source of revenue for the state and 14% of its budget.
What did Delaware have to give up reaching a favorable settlement with Temple-Inland?
Quite a lot. Apparently, not only did Delaware agree to abandon its entire initial demand for payment of $1.4 million, but also agreed to pay all court costs incurred by Temple-Inland including all legal fees and expert witness costs to defend its position.
What does Delaware accomplish by foregoing its right to appeal?
Flexibility, and the ability to live to see another day. The State can now claim that the facts in Temple-Inland were unique to that decision, and unless others have similar facts and circumstances, the State will not be bound by the decision reached in Temple-Inland. Doing so will require each of the 800 companies currently under audit to demonstrate its facts and circumstances are similar, if not identical, to those experienced by Temple-Inland. If the circumstances differ, then Delaware can argue that there is no violation of the company's constitutional due process rights, as was decided in Temple-Inland.
What about the 800+ companies currently under audit or who came forward voluntarily?
Delaware is expected to issue additional guidance shortly on how it will revise (loosen) its historic estimation methodologies that raised the ire and "shocked the conscience" of the judge in reaching its decision which estopped Delaware from enforcing its demand for payment against Temple-Inland.
Another Challenge to Delaware's Audit Process Recently Struck Down
On August 16th, the Federal District Court for Delaware (same court that decided Temple-Inland) issued an opinion in the case of Plains All American Pipeline, L.P. v. Cook ("Plains All American") Civ, No. 15-468-RGA, which granted Delaware its motion to dismiss federal Constitutional challenges to its unclaimed property audit process. However, unlike Temple-Inland where a motion was brought against Delaware after the Company exercised its standard appeal rights once an audit assessment was presented, in Plains All American Pipeline, the company attempted to prevent Delaware and its unclaimed property auditors, Kelmar, from commencing its audit before any information had been exchanged. In what can best be characterized as much like a race horse or an Olympian leaving the gate early, the Judge denied Plains All American's motions as being premature and "premised on contingencies". The Court held that there was any "injury in fact" that could be traceable to Kelmar. The Court also concluded that Plains All American's claims assertions challenging Delaware's ability to estimate a liability was entirely speculative as to whether estimation would be used, and if so how it might be used. Most importantly, however citing Temple-Inland the Court held that "reasonable estimation" is constitutionally permissible and that such determinations are highly fact specific.
It would not be surprising if Delaware cites this recent decision in its anticipated announcement providing guidance to those under audit and in the VDA program referencing the court's affirmation on the use of estimation. Moreover, we can anticipate that they will also use this as an opportunity to reinforce the notion that the Temple-Inland decision was specific to its facts and circumstances, and that the methodology applied in other situations will also be specific to each holder's individual facts and circumstances.