Many companies are particularly susceptible to significant unclaimed property exposure in Delaware because holders of property for which the owners’ addresses are unknown generally must report and remit such property to their state of domicile (state of incorporation for corporate entities), which often is Delaware. Delaware has been using a contingent fee contract auditor, Kelmar Associates, LLC, to conduct unclaimed property audits on the state’s behalf, and has developed a reputation for being very aggressive in its unclaimed property auditing procedures. Select Medical Corporation (“SMC”), a Pennsylvania-based operator of hospitals and rehabilitation centers that was incorporated in Delaware, filed an action in the U.S. District Court for the District of Delaware earlier this year, seeking to enjoin Delaware officials from enforcing their request for payment of about $300,000 demanded as alleged unclaimed property owed to the state for years covered by a voluntary disclosure agreement submitted by SMC. See Select Medical Corp. v. Cook, et al., Case No. 1:13-CV-00694 (D. Del. Apr. 17, 2013).
Through voluntary disclosure, SMC had reported approximately $17,000 to Delaware and approximately $300,000 to other states for the years 1997-2001. Kelmar Associates then conducted an audit of SMC for the years 2002-2008 and found no under-reporting of unclaimed property based on a review of the company’s principal disbursement account for that period. The Complaint filed by SMC alleges, however, that the auditor found a liability of almost $300,000 for the period 1997-2001 “based solely on an estimate calculated by extrapolating, inter alia, [SMC’s] unclaimed property owed to all other states for the period 2002-2008.” (Paragraph 52 of SMC’s Complaint). SMC has asserted that an assessment based on estimation was inappropriate because it has actual records for the years for which the assessment was issued (and the auditor had declined to examine those records). Although the state eventually agreed to examine SMC’s records for the period 1997-2001, the State Escheator did not withdraw his Demand for Payment. SMC then filed suit in the U.S. District Court for the District of Delaware challenging the state’s Demand for Payment.
SMC has raised a number of other legal challenges in its complaint. Among other things, SMC has challenged the retroactive application of Delaware’s extrapolation statute. Statutory authority for the state to use estimation procedures to determine unclaimed property liabilities was not enacted until 2010.
In addition, SMC contends that Delaware violated Federal common law by demanding that SMC report to Delaware property that was exempted by states with a priority claim to the property under Federal priority rules. SMC asserts that, by requiring the reporting of property exempted by other states pursuant to a business-to-business exemption provision, the Delaware officials have violated the U.S. Constitution by not giving full faith and credit to the other states’ laws.
In response to SMC’s request for injunctive relief, the Delaware officials have argued that no legitimate Federal question was raised in SMC’s Complaint, and therefore the Federal court lacks jurisdiction over the case. The officials have also contended that SMC failed to exhaust the administrative and judicial remedies provided in the Delaware Escheat Law.
Assuming the case is not resolved by settlement, the court’s decision in this case could impact unclaimed property audit procedures in other states, including Pennsylvania. Please contact a member of the McNees SALT group if you need assistance with unclaimed property reporting or with an unclaimed property audit.