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2015 litigation roundup

Posted By Administration, Tuesday, December 29, 2015

The past year saw several noteworthy cases related to unclaimed property move through the U.S. court system. As they progress, these cases could provide clarity regarding a variety of issues, including states’ estimation techniques, gift card liability, the Derivative Rights Doctrine, states’ due diligence responsibilities,  and federal vs. state jurisdiction. Following is a roundup of the most interesting unclaimed property cases filed and proceeding through the courts in 2015.


Temple-Inland Inc. v. Cook

Expected to have a significant effect on the unclaimed property industry, Temple-Inland Inc. v. Cook looks at the legality of Delaware’s estimation techniques. The plaintiff company was audited by Delaware through its third-party agent, Kelmar. A single payroll check in the amount of $147.30 that should have been escheated to Delaware, resulted in an estimate of approximately $2 million (eventually reduced to $1.3 million) due to the state. In May 2014, Temple-Inland filed suit, alleging violations of several federal laws based on the auditor’s estimation methods.


“What’s interesting about this case is that it could blow up Delaware’s whole process for extrapolating a liability due to Delaware based on very small actual amounts,” says Chris Hopkins, partner with Crowe and Horwath LLP.


In March 2015, a U.S. district court dismissed one count of the compliant, which alleged violation of and preemption by federal common law. However, the case is moving forward based on the remaining counts.


“The fact that Temple-Inland will likely go to trial is an indication that the claims have at least enough merit for the court to hear the case,” says Tom Wrocklage, state and local tax manager with Crowe Horwath LLP. “A ruling on this case would resolve a lot of questions about Delaware’s estimation techniques.”


Osram Sylvania Inc. v. Cook et. al.

Another case that examines the legalities of Delaware’s estimation methods is Osram Sylvania Inc. v. Cook et. al. Lighting manufacturer, Osram Sylvania, filed suit in December 2014 challenging Delaware’s estimation methods, posing similar arguments to those in the Temple-Inland case.


After the memorandum opinion issued in Temple-Inland, Osram filed a Notice of Voluntary Dismissal without prejudice. Because most of the allegations of violations of federal law are being contemplated in the Temple-Inland case, this Notice of Voluntary Dismissal was likely based on these issues being addressed by Temple-Inland. Since the court closed the case without prejudice, it could resume if the issues at hand aren’t resolved by a Temple-Inland decision.


Delaware ex rel. French v. Card Compliant LLC

On Nov. 23, 2015, a Delaware Superior Court denied a motion to dismiss the 2013 qui tam (whistle blower) case, Delaware ex rel. French v. Card Compliant LLC. Filed by a former employee of Card Compliant, the lawsuit targets a third-party company that retailers use to move their gift card liability outside of Delaware. Among the allegations, the plaintiffs claim that the company didn’t account for the transfer of liability as it was specified in contracts with the retailers.  Liability wasn’t truly transferred and, thus, the retailers had the obligation to remit unclaimed property to Delaware but didn’t do so.


The case raises the question whether property holders can shift their liability via a contractual arrangement with another company. Because of the allegations brought in this case, however, the court is more likely to focus on technical questions. Did the parties follow their contractual obligations? If not, is there a liability to Delaware for failure to report unclaimed property?


With the court’s rejection of the dismissal motion, litigation continues.


JLI Invest S.A. et al. v. Cook et al.

A case addressing the Derivative Rights Doctrine, JLI Invest S.A. et al. v. Cook et al. also tackles the interplay between federal securities law, international law, and Delaware state law. This case involves two Belgian doctors who were partial owners of a company that merged with a publicly traded Delaware company. Delaware alleged that the doctors were no longer in contact with the company, so their stock was unclaimed property. Within three days of escheatment, Delaware sold the shares for $1.7 million. The doctors learned of the sale when they later attempted to sell shares for $13.72 million.


The lawsuit addresses the question why Delaware, if acting as a custodian of the unclaimed property on behalf of its owners, liquidated the shares rather than simply holding them. The suit also questions whether Delaware has the right to require the escheatment of property belonging to people with foreign addresses.


“If Delaware even has the right to get this property, it seems that the state should have a heightened fiduciary responsibility to people outside of this country who may not have unclaimed property laws,” says Jamie Ryan, member with Bailey Cavalieri LLC. “These folks may have no concept under their country’s laws that they need to have ongoing contact with the property holder. The concept of unclaimed property may be completely absent. So hopefully we’ll get some guidance out of this case.”


Plains All American Pipeline L.P. v. Thomas Cook et al.

A limited partnership incorporated in Delaware, Plains All American Pipeline (Plains), received notification in 2014 that Delaware’s third-party agent, Kelmar, would be conducting an audit of the company. Plains objected to the initial information request, claiming, in part, that the company was being audited not because of any suspicion of wrongdoing, but rather because of its profitability. When Delaware dismissed the company’s objections, Plains filed suit. Among the complaint’s allegations, Plains argues that Kelmar’s request for information about subsidiaries organized outside of Delaware constitutes illegal search and seizure under the Fourth Amendment. The company believes the state and its agent have no right to that information and, if they did, they would need to have reasonable grounds to search for it. The complaint also directly challenges Delaware’s right to use estimation.

“The most interesting part about the Plains case is that the audit hadn’t even started,” Ryan says. “They said the fact that Delaware is asking for certain information violates the Fourth Amendment, which is a very interesting point of view.”


National Freight Inc v. Sidamon-Eristoff

National Freight is a New Jersey trucking company subject to federal law—the Interstate Commerce Act. In 2010, New Jersey began an unclaimed property audit of the company. After the audit, National Freight filed suit, challenging the audit. In part, the challenge took on the method used to calculate the penalty portion of the assessment, saying it included disbursements and credits owed to states other than New Jersey, including states that exempt certain things like business to business property. The suit claims the penalty calculation didn’t take into account other states’ exemptions.


The compliant also argues that New Jersey is preempted from regulating certain parts of National Freight’s business, including pricing, routes and services provided, which are regulated under federal law. Because the property type challenged in this case—customer credits—is part of pricing, National Freight argues it falls under the Interstate Commerce Act rather than state law. The company also claims the state is imposing a burden on interstate commerce, which is prohibited under the U.S. Constitution’s Commerce Clause.


“This is an important case because we have a lot of businesses regulated by federal law—banking, securities and brokers, for example—who will be interested in the preemption argument and the interplay between federal and state law, for which we currently have very few case law decisions,” Ryan says.


Taylor v. Yee

Since 2007, California has required holders to send owners a due diligence letter and file a preliminary report to the state, which then sends a second notice. After the owner fails to respond to both notices, the holder remits the property to the state. The plaintiff in Taylor v. Yee argues that California should search its other databases to find better addresses for the second, state-sent notice. The Ninth Circuit Court’s decisions have upheld the state’s process.


The plaintiff has petitioned the U.S. Supreme Court to review the Ninth Circuit Court’s decision. On Sept. 8, 2015, UPPO submitted an amicus brief, supporting the plaintiff’s petition. The defendant responded by filing a motion opposing UPPO’s rights to file an amicus brief. Although it is common for a defendant to argue against the content of an amicus brief, opposing the right to file a brief entirely is much less common. The court has not yet respond to the defendant’s motion – to date the court’s conference has been rescheduled four times.


Kemper companies v. Michael Frerichs and Verus Financial LLC

Three Kemper Corporation insurance companies filed suit on Oct. 26, 2015, against the Illinois state treasurer and auditor Verus Financial. The suit addresses the question of when the obligation of a life insurance company to pay benefits arises, and when the applicable state dormancy period begins. The plaintiff takes issue with the “Death Master File (DMF) standard” that would compel an insurer to pay benefits upon an insured’s name appearing on the DMF rather than when a claim is filed. Learn more about this case.


For additional information about noteworthy unclaimed property cases, check out UPPO’s govWATCH website. If you’re planning to attend the 2016 Annual Conference, March 20 – 23 in Palm Springs, Calif., check out the session titled 2015 in Review: Litigation Update, for additional discussion.


Tags:  litigation  unclaimed property 

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