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Litigation update: Plains All American appeal keeps estimation case alive

Posted By Administration, Thursday, January 12, 2017

One of the more interesting recent unclaimed property cases in recent years is Plains All American Pipeline L.P. v. Thomas Cook et al. In August 2016, the case was dismissed, but Plains has appealed the decision, sending the case to the Third Circuit Court of Appeals.

 

Background

A limited partnership incorporated in Delaware, Plains All American Pipeline, received notification in 2014 that Kelmar would be conducting an audit of the company on behalf of Delaware. 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 argued that 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 challenged Delaware’s right to use estimation.

 

Decision

On Aug. 16, 2016, the U.S. District Court for the District of Delaware granted the defendants’ motion to dismiss. In part, the court said the plaintiffs brought their suit based on potential threats and not actual threats. For example, Plains challenged the state’s right to use estimation before it had done so, as the lawsuit was brought immediately following Kelmar’s initial information request. Regarding the Fourth Amendment claim, the court said the state’s decision to examine businesses based on their profitability was legitimate, as those companies are logically more likely than others to hold large amounts of unclaimed property.

 

Plains was worried about going through this long audit and then getting an estimated liability,” says Diane Green-Kelly, partner with Reed Smith LLP. “They didn’t think estimation was appropriate. The way the court read the complaint was that Plains was unhappy about how the audit might unfold and what the assessment might be. The court said you can’t complain about something that might happen. You have to wait until you’ve suffered an injury. The court didn’t consider the case ‘ripe.’”

 

Status

As with any case a court dismisses with prejudice, parties involved in the case may appeal the decision. Plains All American did just that on Sept. 16, 2016, sending the case to the Third Circuit Court of Appeals.

 

Outlook

The appealed Plains case is developing at a time when Delaware’s unclaimed property practices face several significant challenges. These challenges may affect how the appeals court views the case.

 

“It’s hard to know what the Third Circuit will do, especially in light of other things,” Green-Kelly says. “You can’t look at the Plains case in a vacuum. The court will see that 21 states are suing Delaware for overreaching its unclaimed property authority. Temple-Inland won because of overreaching and ignoring federal law. Marathon and Office Depot sued Delaware. Everyone is suing Delaware. The Third Circuit will see this case in the context of a lot of things happening out there challenging Delaware’s conduct. So, the court could decide this case actually was ripe in light of the context in which it was filed.”

 

Another case, Delaware Department of Finance v. Blackhawk Engagement Solutions, could also influence the outcome of Plains. In 2015, Delaware’s escheator issued a subpoena to Blackhawk requesting documents related to an audit that had been in progress for several years. Blackhawk refused. Delaware filed an action in court to enforce the subpoena, and Blackhawk resisted, claiming the escheator was not authorized to take these actions, among other things. The state filed a motion for judgment on the pleading, at which point Plains All American and Marathon filed a joint amicus brief.

 

The brief cites several areas of the Delaware Code where state agencies are authorized to conduct examinations to determine with a set of laws and expressly authorized to issue a summons for testimony and a subpoena for documents. The unclaimed property statute authorizes the escheator to issue a summons for testimony, but not a subpoena for documents. The amicus brief points out that the code actually included such authorization until it was repealed and revised in 1990.

 

“If the Blackhawk court says the escheator has the authority to issue a subpoena and enforce it, Plains sort of goes away,” says Green-Kelly. “If the escheator actually has subpoena power and can enforce it in court, the resisting company can claim it doesn’t have authority to so and let the court decide. It happens during the audit, so the court can stop it while it’s happening. Because the statute lacks the authority to issue a subpoena, right now there’s no way to stop it other than to file the type of lawsuit Plains filed.”

 

Impact on Holders

In light of the important issues at play in Plains and other current cases, Green-Kelly offers some advice for holders undergoing an audit or considering entering into a voluntary disclosure agreement (VDA).

 

“If you’re a company already under audit and close to the end, you shouldn’t just accept a result that is not supported by documents or anything that is close to an estimate like Temple-Inland,” she says. “If you’re not under audit and are thinking about a VDA, don’t do anything. See what happens with these cases. Under the new audit program, it might be better to be audited than to go through a VDA. Wait and see what the audit program is going to be. I can’t imagine telling any company to go into the VDA program right now unless they get the letter and have to make a decision.”

 

 

Tags:  Blackhawk  Delaware  estimation  litigation  Plains All American  unclaimed property 

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