Plains All American Pipeline Sues Delaware Over Abandoned Property Audit

Plains, a Delaware limited partnership, has filed a lawsuit seeking a declaratory judgment and injunctive relief from the state-initiated unclaimed property audit. Like many other Delaware audits that have resulted in litigation, this audit was assigned to Kelmar Associates, a third party contingent fee auditor, which was also named as a defendant in this case.

Plains says that the entire unclaimed property audit process in unconstitutional, both facially and as it is applied to the company. The company objects to the audit selection process, the document requests and the estimation process. While other recent cases have focused on the results of an audit, this case focuses on the initiation of the audit and the boundaries for the state and its third party auditor.

Plains objects to the method that Delaware uses to select companies for an unclaimed property audit, saying that it was chosen based on its perceived profitability and “not based on neutral criteria or any criteria bearing a rational relationship to a legitimate governmental interest.” Plains says that the scoping requests, including tax returns, balance sheets, a profit and loss statements, are intended to determine which legal entities will be most profitable to Delaware and Kelmar, by selecting entities that are most likely to be subjected to the estimation process. Plains says that Delaware has not provided “reasonable notice” as required by state law.

Plains further objects to Kelmar’s authority over the audit, unchecked by a state administrator or court oversight. All of Plains objections to date, made to Delaware’s audit manager, have been summarily rejected, seemingly without consideration. In practice, she has deferred all decisions to Kelmar [which] decides the entities, the property types, the timing, and the methodology of the audit. [Since 2013, it should be noted, Delaware has paid Kelmar in excess of $104 million.]

Plains says that the Delaware statute does not authorize the state to issue administrative subpoenas and no warrants have been issued for a physical inspection of the company’s records. The company says that even if the state has the statutory authority to issue document requests, the actual requests issued by Kelmar exceed those permissible under the Fourth Amendment.

Kelmar routinely asks for documents dating back to January 1, 1981, based on a Delaware regulation issued in 2012. Meanwhile, Delaware does not have an express statutory record retention requirement and it was not until July 2010 that Delaware provided statutory authority to estimate a holder’s liability when records are insufficient to prepare a report.

Most egregiously, Delaware statutes do not protect the company’s confidential records and the sharing of information between states. [Nor does Delaware commit to indemnifying public companies for any breaches of duty that its third-party agents might commit.] Kelmar, which is requesting a significant amount of confidential, sensitive and valuable corporate information, will not subject itself to a review of data security procedures and controls.

The company, like other unclaimed property holders, objects to the estimation process, saying that it violates substantive due process rights and is an unconstitutional taking of private property for public use without compensation. Unlike the application of the 1995 model act, Delaware has taken the position that the 2010 estimation amendment does apply retroactively, effectively punishing a corporation for failing to maintain records that it was not legally required to maintain. Plains says the estimated number is “an absolute fiction designed to maximize the revenue stream to the State and also Kelmar’s coffers.”

Many thanks to Barganier and Associates, from whose website we have excerpted and lightly edited this excellent summary of the Plains Pipeline case. Their website also noted that a similar Temple Inland case against Delaware recently survived a motion to dismiss - and, on a much less happy note, that New York State recently issued RFPs for third-party “auditors” of abandoned property…so more troubles for public companies still to come.