Delaware has developed a reputation for being very aggressive in its unclaimed property auditing procedures through the use of third-party contract auditors. Several appeals filed in federal court challenging Delaware’s estimation and sampling techniques were ultimately resolved by confidential settlement (e.g., Select Medical Corp. v. Cook, et al., Case No. 1:13-CV-00694 (D. Del)). A challenge filed by Temple-Inland, Inc. may, however, be moving forward to a decision on the merits. In an important procedural decision issued on March 11, 2015, the U.S. District Court for the District of Delaware denied Delaware’s motion to dismiss four categories of federal constitutional claims raised by Temple-Inland in challenging Delaware’s unclaimed property estimation procedures, thus allowing Temple-Inland to move forward with those claims. See Temple-Inland, Inc. v. Cook et al, Civ. No. 14-00654-SLR. If the Temple-Inland case proceeds to a decision on the merits, it may have important implications not only for companies being audited by Delaware, but also for companies facing unclaimed property audits by other states, including Pennsylvania, where estimation techniques are being used to determine unclaimed property liabilities.

Temple-Inland is a Delaware corporation with a principal place of business in Memphis, Tennessee. The Delaware State Escheator commenced an audit in late 2008 for an audit period going back to 1981. The company was unable to produce relevant records for periods prior to 2003. However, it did provide accounts payable records starting with the year 2003 and payroll records starting with the year 2004. The audit resulted in no unclaimed property liability from the payable disbursement account, and only $147.30 in unclaimed property from the payroll disbursement account. Nevertheless, as a result of the company’s failure to produce records for periods prior to 2003, the State Escheator used an estimation method to extrapolate the company’s unclaimed property liability for those years and computed an underpayment of approximately $2.1 million, which was later reduced to approximately $1.388 million after an administrative appeal. (This liability was presumably based, in part, on the fact that the company had escheated a cumulative total of over $1.3 million of unclaimed accounts payable and payroll checks to various states, including Delaware, during the audit period. Since the company had no records for periods prior to 2003, Delaware would likely assert all unclaimed property for those years was reportable to Delaware since the company was incorporated in Delaware.)

Temple-Inland subsequently filed a complaint with the U.S. District Court for the District of Delaware seeking various types of relief for violation of its rights under federal law and the United States Constitution. In addition to arguing that Delaware’s actions violated federal common law, Temple-Inland contended that Delaware’s audit procedures violated its rights to Substantive Due Process under the Fourteenth Amendment to the United States Constitution, the Ex Post Facto Clause of the United States Constitution, the Takings Clause of the Fifth Amendment to the United States Constitution and the Commerce and Full Faith and Credit Clauses of the United States Constitution. Delaware officials asserted that no legitimate federal question was raised in Temple-Inland’s complaint and that the federal court lacked jurisdiction over the case.

Temple-Inland overcame substantial procedural hurdles in the case when the federal court rejected Delaware’s Motion to Dismiss for Failure to State a Claim (and on the basis of lack of subject-matter jurisdiction) with respect to all four categories of constitutional claims raised by Temple-Inland. While the court dismissed Temple-Inland’s claim that Delaware’s estimation techniques were preempted by federal common law, the court’s decision allowing Temple-Inland to move forward with its various constitutional claims was a significant victory for the company.

We will continue to monitor the Temple-Inland case and provide updates regarding further developments in the matter.