On August 5, 2016, Delaware and the unclaimed property holder (holder) in Temple-Inland, Inc.¹ filed a joint motion to dismiss the case with prejudice, after reaching a settlement agreement. The voluntary settlement agreement "fully and finally resolves all claims" in the case. Therefore, the case will not be appealed to the US Third Circuit Court of Appeals by either party, as originally anticipated as a possibility.

Background

At the end of June, in a long-awaited and highly anticipated case, the US District Court for the District of Delaware (Court) held Delaware's executive action of auditing and assessing a multistate corporation's unclaimed property violated substantive due process because the state's action, when taken together, "shocks the conscience." Most notably, the Court held that the state's use of the existence of unclaimed property in the base year to infer the existence of unclaimed property in the reach back year without replicating the characteristics and qualities of the property within the sample, creates significantly misleading results.

For more on the Court's earlier ruling and background on the significance of the principles examined in the case, see Tax Alert 2016-1158.

Implications

Although the terms are unknown, this settlement leaves in place the Court's June ruling. The Court's assertion that Delaware's estimation process violates substantive due process creates an historic, landmark update in the unclaimed property environment, requiring immediate attention by the holder community.

Delaware's settlement of this suit without addressing the need for remedies proposed by the Judge will create further uncertainty for holders as they consider critical issues that remain unanswered, such as:

— Formation of a reasonable estimation calculation

— Appropriate look back periods

— Record retention obligations

It is anticipated that Delaware will communicate that the findings in the initial decision apply only to one holder's specific set of facts and has no bearing on on-going or future audits and voluntary disclosure agreements (VDAs) (even though the estimation calculation and look back period within Temple-Inland are commonly and widely utilized to conduct examinations). As a result, more litigation that challenges the state's audit methods may surface, (as we have already begun to notice with cases such as Office Depot).² Temple-Inland, together with additional significant movements in the landscape, such as a new proposed Uniform Unclaimed Property Act and potential for the US Supreme Court to revisit long-standing priority rules (see Amicus brief filed August 1st),³ creates a period for holders to:

— Closely monitor the unclaimed property environment for litigation and legislative changes

— Immediately examine the unclaimed property footprint and current reporting processes to ensure 50-state compliance, allowing the organization to be well-poised for impending changes

— Discuss and examine the appropriate course of action associated with any state of incorporation settlements, whether currently contemplated or planned for the future

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ENDNOTES

¹ Temple-Inland, Inc. v. Thomas Cook, Civ. No. 14-654-GMS (D. Del. June 28, 2016).

² Office Depot, Inc. et al. v. Cook et al., No. 1:2016-CV-00609 (D. Del. July 18, 2016) (complaint filed).

³ Brief for the Unclaimed Property Professionals Organization as Amicus Curiae, Delaware v. Pennsylvania and Wisconsin, No. 22O145 (U.S. S. Ct., brief filed Aug. 1, 2016).