A private sector firm lacks critical decision-making authority in audits that it conducts on behalf of Delaware, officials said Thursday as they wrapped up briefing in a renewed effort to dismiss a constitutional challenge to the state’s system for collecting unclaimed property.
Attorneys for Delaware’s finance secretary said that Kelmar Associates, a Boston-based independent auditor, only conducted the reviews according to Delaware statute and under the guidance of the state escheator, who ultimately decides whether companies are complying with Delaware unclaimed property laws.
The argument, outlined in a 15-page filing in the U.S. District Court for the District of Delaware, aimed to undercut claims from Plains All American Pipeline that Kelmar’s role in the process had violated its due process rights by requiring the company to submit its dispute to a self-interested party.
“Delaware’s escheats law could not be more clear: It is the state and not Kelmar that makes a determination of unclaimed property liability, it is the state and not Kelmar that imposes an unclaimed property liability on a holder, and Delaware courts have jurisdiction to review the state’s determination,” Caroline Lee Cross, an attorney for the Delaware Department of Justice’s Finance Department wrote in the state’s reply brief in support of a motion to dismiss the suit.
A federal appeals court in August upheld the dismissal of the bulk of Plains’ claims, finding they were too speculative to support a lawsuit. The panel, however, allowed Plains to proceed on its as-applied due process claim and remanded the issue for another round of briefing.
Plains’ attorneys argued that Kelmar, which contracts with the state on a contingency fee basis, has a direct financial interest in the unclaimed property audits because its compensation is tied to the amount of money it finds companies owe to Delaware.
And as a biased adjudicator, the attorneys said, the firm improperly makes key determinations that should be left to a neutral arbitrator.
“Among other things, Kelmar collects, reviews and weighs evidence; makes factual findings; applies the law to those facts; and reaches a conclusion as to whether the examinee owes money to the state of Delaware,” Plains’ Pachulski Stang Ziehl & Jones attorneys said. “As such, Plains plausibly stated a claim that Kelmar’s role implicates due process protections.”
State attorneys responded that all “adjudicative functions” are left to the state, and Kelmar’s role is limited to that of a nonjudicial examiner. Under Delaware law, they said, only the state has the power to decide which companies are audited and the scope of documents those firms have to produce in a dispute.
The state must also sign off on Kelmar’s method of estimation prior to an examination, and targeted firms maintain the ability to appeal adverse findings to the Delaware Court of Chancery, the attorneys said.
“Thus, Plains cannot succeed on its pending due process claim as a matter of law,” Cross wrote. “Additionally, allowing Plains to amend its complaint will not cure the defect in Plains’ claim since Delaware’s escheats law and related escheats regulations prevent by their very terms the contract examiner from acting in a quasi-judicial capacity.”
It was not clear on Friday whether U.S. District Judge Richard G. Andrews would hear oral argument on the motion.
Plains’ lawsuit is one of several high-profile cases to challenge Delaware’s system for collecting unclaimed property, which accounts for the state’s third-largest source of revenue. The practice has come under attack in Delaware, since a 2016 district court ruling in the case Temple-Inland v. Cook blasted Delaware’s escheat laws for allowing overly aggressive audits.
Delaware has since amended its statute to address constitutional concerns, and lawmakers have said that additional changes may be needed in the future.
The state defendants are represented by Cross, Jennifer R. Noel and Edward K. Black of the DOJ.
Kelmar is represented by Stephen W. Kidder and Ryan P. McManus of Hemenway & Barnes and Marc J. Phillips of Manion Gaynor & Manning. Plains is represented by Phillip B. Dye Jr., Deborah C. Milner, Jeremy C. Marwell and Christian Sheehan of Vinson & Elkins and James E. O’Neill, Colin R. Robinson and Bradford J. Sandler of Pachulski Stang Ziehl & Jones.
The case is captioned Plains All American Pipeline v. Geisenberger.
Tom McParland can be contacted at 215-557-2485 or at firstname.lastname@example.org. Follow him on Twitter @TMcParlandTLI.