Decision Striking Down Delaware’s Estimation Method for Auditing Unclaimed Property to Stand as Parties Settle

By Bob Bazata, CPA, New York City, and Sarah Toi, CAPP, Stamford, Conn.

Editor: Michael Dell, CPA

On Aug. 5, 2016, Delaware and the unclaimed property holder (holder) in Temple-Inland, Inc. v. Thomas Cook, Civ. No. 14-654-GMS (D. Del. 6/28/16), filed a joint motion to dismiss the case with prejudice, after reaching a settlement agreement. The voluntary settlement agreement "fully and finally resolves all claims" in the case. Therefore, the case will not be appealed to the Third Circuit by the state, as was originally anticipated.

Background

At the end of June, in a long-awaited and highly anticipated case, the U.S. District Court for the District of Delaware held that Delaware's executive action of auditing and assessing a multistate corporation's unclaimed property violated substantive due process because the state's action, when taken together, "shocks the conscience." Most notably, the court held that the state's use of the existence of unclaimed property in the base year to infer the existence of unclaimed property in the reach-back year without replicating the characteristics and qualities of the property within the sample creates significantly misleading results.

Implications

Although the terms are unknown, this settlement leaves in place the court's June ruling. The court's assertion that Delaware's estimation process violates substantive due process creates a historic, landmark change in the unclaimed property environment, requiring immediate attention by the holder community.

Delaware's settlement of the suit without addressing the need for remedies proposed by the trial judge will create further uncertainty for holders as they consider critical issues that remain unanswered, such as:

  • Formation of a reasonable estimation calculation;
  • Appropriate lookback periods; and
  • Record retention obligations.

It is anticipated that Delaware will communicate that the findings in the initial decision apply only to one holder's specific set of facts and have no bearing on ongoing or future audits and voluntary disclosure agreements (even though the estimation calculation and lookback period within Temple-Inland are commonly and widely used to conduct examinations). As a result, more litigation that challenges the state's audit methods may surface (as already is being seen with cases such as Office Depot, Inc. v. Cook, No. 1:2016-CV-00609 (D. Del. 7/18/16) (complaint filed)).

Temple-Inland, together with additional significant movements in the landscape, such as a new proposed Uniform Unclaimed Property Act and potential for the U.S. Supreme Court to revisit long-standing priority rules (see Brief for the Unclaimed Property Professionals Organization as Amicus Curiae, Delaware v. Pennsylvania and Wisconsin, No. 22O145 (U.S., brief filed 8/1/16)), creates a period for holders to:

  • Closely monitor the unclaimed property environment for litigation and legislative changes;
  • Immediately examine the unclaimed property footprint and current reporting processes to ensure 50-state compliance, allowing organizations to be well-poised for impending changes; and
  • Discuss and examine the appropriate course of action associated with any state of incorporation settlements, whether currently contemplated or planned for the future.

EditorNotes

Michael Dell is a partner at Ernst & Young LLP in Washington.

For additional information about these items, contact Mr. Dell at 202-327-8788 or michael.dell@ey.com.

Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP.

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