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Temple-Inland decision and settlement open the door to changes in Delaware

Posted By Administration, Thursday, August 18, 2016

Delaware’s use of and methodology for estimation in audits has come under the spotlight as a result of the Temple-Inland Inc. v. Cook court case, filed in May 2014. Recent developments in June and August 2016 provided clarity about the legality of Delaware’s practices and subsequently ended the case.

 

Background

The plaintiff, Temple-Inland, alleged violations of several federal laws based on the estimation methods used by Delaware’s third-party agent, Kelmar, which resulted in a $2 million estimated liability (later reduced to $1.3 million) based on a single payroll check for $147.30 that the company failed to escheat to the state.

 

June decision

On June 28, 2016, the U.S. District Court for the District of Delaware issued an opinion, granting Temple-Inland’s request for summary judgment. The court said it “finds several aspects of defendants’ actions troubling,” specifically:

  • Waiting 22 years to conduct an audit.
  • Avoiding the otherwise applicable six-year statute of limitations under dubious circumstances.
  • Giving holders no notice that they would need to retain unclaimed property records to defend against unmeritorious audits.
  • Applying Section 1155 for a prolonged retroactive period for no obvious purpose other than to raise revenue.
  • Failing to follow the fundamental principle of estimation where the characteristics of the sample set are extrapolated across the whole, which also puts the plaintiff at risk of multiple liability.

August settlement

On Aug. 5, 2016, Temple-Inland and the defendants filed a joint motion to dismiss the case, signaling a settlement and ending the dispute. Although details of the settlement were not made public, several published reports indicate that Delaware withdrew the full assessment and agreed to pay all of Temple-Inland’s attorney fees and additional case-related costs.

 

Long-term effects

How the Temple-Inland decision and settlement will affect Delaware’s practices, the litigation landscape, the state’s voluntary disclosure program, and other states’ use of estimation remain to be seen, but some of the results may play out quickly.

 

Delaware’s budget depends on revenue from unclaimed property, the third largest source of state revenue. As such, officials won’t have the luxury of time on their side when retooling unclaimed property systems, processes and practices. Finance Secretary Tom Cook told The News Journal that officials are already “conducting a thorough review of the state’s escheat statutes, regulations, policies and procedures, with the intention of improving the program going forward.”

 

If Delaware finds itself facing a budget crisis as a result of lost unclaimed property funds, it may have to turn to alternative sources, namely a state sales tax. Currently, Delaware is one of just five states that doesn’t charge sales tax, and residents would not be happy to see one implemented.

 

“When you’re getting unclaimed property based on estimation going into Delaware’s general fund, it’s coming from outside sources so Delaware’s not tapping its own citizens for that revenue,” says Kevin Spiegel, senior manager at Crowe Horwath LLP. “Now Delaware may have to tap its own citizens for that revenue the state has come to expect.”

 

Holders facing substantial liability in Delaware as a result of the state’s estimation practices are likely to follow Temple-Inland’s lead, so lawsuits against the state may surge as a result of the case’s outcome.

 

“Holders are lining up to litigate,” says Chris Hopkins, partner at Crowe Horwath LLP. “It would be in Delaware’s best interest to settle these cases before they even hit the administrative appeals level, when they may become public record.”

 

Temple-Inland will also affect the state’s voluntary disclosure program. The results of the case will undoubtedly factor into negotiations for holders with voluntary disclosure agreements already in place and going through the process.

 

While the court’s decision is, in many ways, a victory for holders, it isn’t entirely positive.

 

“The decision was good for Delaware-incorporated and domiciled businesses,” Hopkins says. “However, it may not be such good news for holders in general. The court implicitly sanctioned reasonable estimation by states that aren’t necessarily the states of domicile of holders.”

 

It will take weeks, months and perhaps even years to fully know how Temple-Inland changes the unclaimed property landscape. In the immediate future, it highlights the importance of ongoing compliance.

 

“Not only is there some precedential value here, but there’s also an important takeaway for holders, and that is to be in compliance,” Spiegel says. “One of the important elements Temple-Inland had going for it is that it had filed reports in the past.”

 

Spiegel and Hopkins will provide additional insight into the Temple-Inland case during an upcoming UPPO Lunch ’n Learn event in Chicago. The case will also be part of the Lunch 'n Learn - Boston discussion. Both events will be held on Sept. 21, 2016. Register today.

 

Tags:  audits  compliance  Delaware  estimation  Temple-Inland  unclaimed property  VDAs 

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