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Marathon Decision Signals Big Win for Holders

Posted By Administration, Thursday, January 4, 2018

Marathon Petroleum Corporation et al. v. Secretary of Finance, State of Delaware et al.

 

On Dec. 4, 2017, the Third Circuit Court of Appeals overturned a lower court’s dismissal of Marathon Petroleum’s lawsuit against Delaware. The appeals court decision is exciting for holders for multiple reasons:

  1. It provides holders reassurance that they can sue for violations of federal common law.
  2. It limits states’ ability to look at subsidiaries only to confirm that they’re legitimate and not simply alter egos of the parent company.
  3. It reassures holders that they can “just say no” when faced with unreasonable information requests.

Background

Marathon uses a gift card management company incorporated in Ohio, a state that exempts such property from escheatment. After Marathon objected to an $8 million estimated liability for gift certificates for which the company said it had issuance and redemption records, third-party auditor Kelmar – on behalf of Delaware – requested records related to the gift card company’s creation and operations. 

 

Among the information requested were contracts, meeting minutes, vendor agreements and accounting records. Marathon refused, arguing that such a request is outside of Delaware’s jurisdiction. Again, Kelmar suggested it would turn over the issue to the attorney general for enforcement action. 

 

In February 2016, Marathon filed suit. arguing violation of the federal priority rules and the Fourth Amendment. The Marathon case also took issue with the state’s estimation practices. 

 

Delaware argued that Texas v. New Jersey applies only to disputes between states, not audits of private entities. The defendants also argued that Marathon’s claims were premature, as they would have their chance to make their case in state court if they continued to resist turning over requested documents. Attorneys for Marathon took issue with the state’s interpretation of federal law and compared the nine-year audit of the company to a “fishing expedition.”

 

The Decision

On Sept. 23, 2016, a U.S. District Court agreed with Delaware’s arguments and dismissed the case. In overturning the District Court ruling, the Third Circuit Court of Appeals stated, “…we disagree with [the] conclusion that private parties cannot invoke federal common law to challenge a state’s authority to escheat property.”

 

The Appeals Court, however, agreed with the earlier court’s ruling that the case was not yet “ripe.” “To the extent the companies are challenging the scope or means of the examination in this case, the claim is not ripe, since the state has taken no formal steps to compel compliance with the audit,” the court wrote.

 

The case has been referred back to the District Court to clarify that the case’s dismissal is without prejudice, giving the plaintiffs time to refile the lawsuit at a later date.

 

Effects of the Decision

Through its decision, the appeals court confirmed that holders can rely on the federal common law priority rules from Texas v. New Jersey. The decision tells holders that the priority rules apply to all relationships involving the remittance of unclaimed property to a state, not just disputes between states.

 

“To finally have confirmation that holders have standing to sue under the federal common law rules for violations and potential alleged violations is a really big win for holders,” said Jameel Turner, attorney at Bailey Cavalieri LLC. “It forces the states to negotiate audit settlements in good faith because any audit or audit dispute could lead to a federal lawsuit.”

 

Looking at the holder-subsidiary relationship, the court tackled the long-standing question of what extent the state can investigate subsidiaries incorporated in in another jurisdiction as part of an audit examination. The court confirmed that states have the ability to conduct an inquiry into subsidiaries to determine if they are legitimate and not just alter egos of the parent.

 

“If the holder asserts that its gift card subsidiary is incorporated in Virginia and holds the company’s gift card liabilities, then producing a certificate of good standing, the articles of organization and a sample journal entry to show how liabilities are booked should be sufficient,” Turner said. “Beyond that, there’s no need to go down a rabbit hole with the state and look at voluminous card-level detail and other irrelevant documents that are typically requested. To receive some clarity about what records holders need to produce relative to their gift card subsidiaries is a significant win for the holder community.”

 

These limits reassure holders of the ability to “just say no” to information requests outside states’ audit authority. If the state disagrees, it would need to sue and let a court decide.

 

“I think this case will embolden holders to stand firm in their legal rights,” Turner said. “When they think a state is making information requests that are outside the scope of the state’s audit authority, holders will be more apt to just say no. Marathon provides holders with legal authority to say no to unlawful information requests and force a state to file an enforcement action.”

 

Disclaimer: This case summary contains a general description of the case. It is not intended as business, financial, legal, tax, reporting or compliance or other professional advice or services. This summary blog is not a substitute for such professional advice.

Tags:  gift cards  litigation 

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