Disputes over the unclaimed property priority rules continue to intensify. The U.S. Supreme Court accepted review of a clash involving more than 20 states regarding the right to take custody of official checks. Meanwhile, a holder will appeal a federal district court’s decision that Delaware can audit gift cards issued by Ohio subsidiaries of a Delaware corporation.
20+ States Versus Delaware
On October 3, the U.S. Supreme Court accepted original jurisdiction over an interstate dispute brought by more than 20 states seeking to force Delaware’s remittance of up to $400 million in uncashed official checks to those states. The complaining states allege that Delaware took custody of the funds as the state of incorporation under the second priority rule when, in fact, the funds should have been reported to the state where the official check was issued. The normal federal law priority rules established by the Supreme Court give first priority to the state of the owner’s last-known address and second priority to the state of incorporation. The 20+ states suing Delaware contend that the Abandoned Money Orders and Traveler’s Checks Act, 12 U.S.C. §§ 2501-2503, trumps the standard common law priority rules for money orders issued as official checks. The case will resolve a dispute between states regarding who should take possession of unclaimed “money orders, traveler’s checks or other similar written instruments” under this Act. Please refer to our Legal Alert on earlier developments in the case.
Marathon Petroleum v. Delaware
In another pending unclaimed property dispute, a holder has indicated that it will appeal a decision by a Delaware federal court that the federal priority rules do not apply to disputes between private holders and a state.
Earlier this year, Marathon Petroleum (Marathon) filed suit against Delaware in federal court to enjoin the state’s audit of gift cards issued by out-of-state affiliates. Delaware’s motion to dismiss the suit was granted, allowing the audit to proceed. Marathon Petroleum Corp. v. Cook, No. 16-80-LPS (D. Del. Sept. 23, 2016). In granting the motion, the district court held that the Supreme Court’s priority rules governing the distribution of unclaimed property among competing states did not apply to disputes between private holders and a state. It also held that the audit was not an unlawful search and seizure in violation of the Fourth Amendment.
The suit arose when, nine years into an unclaimed property audit, Delaware’s auditor Kelmar expanded the scope of the audit and turned its attention to unredeemed gift cards. Delaware estimated the value of the cards at $8.2 million and threatened enforcement action if the holders did not cooperate with burdensome document requests. Resisting, Marathon sued, arguing that the gift cards were issued by subsidiaries incorporated in Ohio and were hence unreachable by Delaware’s audit. In response, Delaware filed a motion to dismiss, arguing both that Marathon’s suit was not ripe and that Delaware was entitled to audit the gift cards.
The district court ruled first that the holders did not file suit prematurely and that the case was “ripe” for decision. Relying on the recent decision in Temple-Inland, Inc. v. Cook, 2016 WL 3536710 (D. Del. June 28, 2016), the court highlighted the “real and detrimental effects of the audit process,” parts of which the Temple-Inland court found were “troubling” and “shocked the conscience.” In light of the audit’s harmful effects, the court held that the holders need not wait until the audit’s conclusion to sue. This is useful guidance after a recent decision holding that it was premature to file suit at the inception of an audit. Plains All American Pipeline, L.P. v. Cook, 2016 WL 4414773 (D. Del. Aug. 16, 2016).
On the merits, however, the district court sided with Delaware. The central issue was whether the priority rules articulated in Texas v. New Jersey, 379 U.S. 647 (1965), would prevent Delaware from escheating gift cards issued by Marathon’s Ohio-based subsidiaries. The court held that they would not, reasoning that the rules apply only to competing claims between states, not, as here, to a dispute between private holders and a state. Notably, the court’s interpretation of the priority rules appears to conflict with binding precedent in New Jersey Retail Merchants Association v. Sidamon-Eristoff, 699 F.3d 374 (3rd Cir. 2012). The court distinguished that case by reasoning that here, unlike in New Jersey Retail Merchants, Delaware is alleging potential fraud by Marathon in setting up the Ohio subsidiaries for the purpose of avoiding escheat to Delaware. This is a questionable rationale for distinguishing New Jersey Retail Merchants, and one that could be central to the appeal. If Marathon’s alleged fraud is the basis for distinguishing New Jersey Retail Merchants, then the court is suggesting that Delaware, not Ohio, may be able to assert second priority under federal law by proving fraud and disregarding the corporate form. That approach would be inconsistent with the court’s broader statements that Delaware can disregard federal law entirely.
The court also dismissed Marathon’s Fourth Amendment argument, noting that a separate enforcement action would be required to compel Marathon’s compliance with the audit. Therefore, Marathon’s compliance with the auditor’s “search” would be voluntary at this stage.
These cases illustrate that disputes arising out of aggressive unclaimed property audits are increasingly spilling over into litigation. Delaware’s practices, in particular, have been subject to court challenges. Holders are continuing to push courts to put questionable audit tactics in check.