United States: What To Do With A Delaware Unclaimed Property Audit Document Request? Pending Litigation May Provide An Answer.

If you have received a request for information in connection with a Delaware unclaimed property audit that appears to be excessively broad and you don't know how to respond, you are in good company—even Delaware seems to be unsure about the significance of these requests. However, pending litigation in the recently argued Plains All American Pipeline1 case and the recently filed Blackhawk Engagement Services2 case may provide much needed clarity.

Background In 2014, Delaware, through its agent, Kelmar, initiated an unclaimed property audit of Plains All American Pipeline, LP ("Plains"). As a part of the audit, Kelmar issued initial document requests to Plains. Plains submitted objections to Kelmar and to Delaware, arguing that the initial document requests were overly broad and sought information not reasonably relevant to the audit. Delaware responded with a letter that, according to the complaint, threatened to impose penalties and interest if Plains did not comply with the audit.3 Plains initiated a lawsuit in federal district court contesting, among other things, Delaware's right to issue broad audit requests and to require compliance through threats of imposing penalties and interest.

Late last month, oral arguments were held on the state's motion to dismiss in the Plains case.4 During oral argument, counsel for Delaware noted that holders can ignore audit letters and requests for documents until the state issues and enforces a summons. The state further argued that because Delaware had not yet issued such a summons in the Plains audit, Plains had suffered no harm and its case must be dismissed.

Ironically, on the same day as oral argument in the Plains case, Delaware filed a separate lawsuit in Delaware Chancery Court in Blackhawk Engagement Services ("Blackhawk") to enforce an administrative summons issued in another unclaimed property audit. According to a series of statements made by counsel for the state during the Plains oral argument, the action for injunctive and declaratory relief to enforce compliance with the summons in Blackhawk is the first time Delaware has ever: (1) issued a summons in connection with an unclaimed property audit; and (2) sought enforcement of a summons by a court in connection with an unclaimed property audit.5 Nevertheless, Delaware is arguing that the Blackhawk case will establish the proper procedure to be applied.

Holders Caught in the Middle Based upon the aforementioned litigation, unclaimed property holders find themselves caught between conflicting state positions. Delaware has taken at least three different approaches in the past year:

  • Delaware's attorney stated in open court that businesses "can ignore our letters with impunity."6
  • Delaware's unclaimed property audit manager told a business "that the state [will] consider the level of [the target's] cooperation [with the document request] when determining whether penalties should be assessed . . ."7
  • Delaware issued an administrative summons and filed a suit to enforce the summons against a business that refused to comply with a document request.8

In the face of these conflicting positions, businesses that receive a request for information that appears to be excessively broad are caught in a bind. On one hand, a business cannot ignore a request "with impunity"; at the very least, it will face litigation or the threat of penalties. On the other hand, compliance with requests that may be overly broad is expensive and time-consuming, and potentially violates the business' rights.

Until Delaware develops a consistent position, holders may want to provide the records that are responsive, accessible within the time provided by the document request, and relevant for purposes of allowing the state, or its third-party agent, to verify the holder's compliance with the Delaware escheat law. Simultaneously, the holder should consider notifying the auditor that additional time may be necessary for completing the response to the request, which could also allow time for a decision in either the Plains or Blackhawk case (or both) to provide parameters governing the permissible scope of document requests in unclaimed property audits. Courts have been pushing back on broad document requests by states.9 Thus, if either federal court or Delaware state court gives even a hint that Delaware's requests must be limited, it will likely have a significant impact on Delaware's position in other cases.

If you have questions about Delaware's approach to unclaimed property audits, please contact one of the authors of this alert or another member of the Reed Smith State Tax Group. For more information on Reed Smith's tax practice, visit www.reedsmith.com/statetax.

  1. Plains All American Pipeline, LP v. Cook, No. 15-00468-RGA (D. Del., filed June 5, 2015). A copy of the complaint is available here.
  2. Department of Finance v. Blackhawk Engagement Services, Docket No. 11737-CB (Del. Ch., filed Nov. 20, 2015). A copy of the complaint is available here.
  3. Complaint at 5, 18 and 27, Plains All American Pipeline, LP, No. 15-00468-RGA.
  4. A copy of the transcript from the oral argument in the Plains case is available here.
  5. However, the state recently submitted correspondence to the court on December 11, 2015 noting that it had identified an additional complaint that had been filed by the state in the Court of Chancery for the State of Delaware in 2005 seeking an order requiring the holder to produce documents related to the State's examination of the holder's unclaimed property compliance. The case was not litigated to decision and was resolved by Stipulation of Dismissal when the holder agreed to produce copies of all abandoned property reports as requested by the state.
  6. Transcript of Oral Argument at 6, Plains All American Pipeline, LP, No. 15-00468-RGA (oral arg. held Nov. 20, 2015).
  7. Complaint at 18, Plains All American Pipeline, LP, No. 15-00468-RGA (referencing letter from Michelle Whitaker to Jeril R. Benedict & Kathy D. Klumpyan (Mar. 30, 2015)).
  8. See Blackhawk Engagement Services, Docket No. 11737-CB.
  9. See, e.g., Order Denying Defendants' Motion for Preliminary Injunction, Thrivent Financial for Lutherans v. Chiang, No. CGC-13-535156, (San Francisco Sup. Ct. Sept. 2, 2014) (concerning the appropriate scope of requests made by third-party auditors); Stahl v. 1st Pa. Bank & Trust Co., 411 Pa. 121, 126 (Pa. 1963) (noting that an unreasonable investigation amounts to "nothing but a very expensive onerous and harassing fishing expedition for a school of mythical fish which expert government fishermen ... have been unable to discover.")

This article is presented for informational purposes only and is not intended to constitute legal advice.

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