The tide may be starting to shift in corporate unclaimed property risk as Delaware’s aggressive audit approach faces credible legal challenges.
Temple-Inland Inc., a paper products company recently purchased by International Paper, has sued Delaware state officials in U.S. District Court, along with Kelmar, the third-party audit firm Delaware dispatched to collect unclaimed property against the company. Temple-Inland says Delaware’s method of estimating the company’s unclaimed property obligation that should be “escheated,” or handed over, to state officials violates the U.S. Constitution and federal common law in a number of ways.
The potential for the case to upend Delaware’s unclaimed property methods is significant, says Bob Peters, managing director for Duff & Phelps. “It’s one of the very few cases challenging Delaware’s ability to use what has been termed as aggressive audit techniques to apply against companies and come up with very large assessments,” he says.
Unclaimed property can include uncashed checks, abandoned pension or 401(k) balances, unspent gift cards, and forgotten deposits or layaways, among others. Companies are required to hand over unclaimed property to state authorities where it can be held until returned to the rightful owners. Delaware has gained a reputation as ruthless among states in exercising its authority over unclaimed property and using estimations methods where companies cannot produce records going back as far as 1981, even hiring audit firms that work on a contingent fee basis.
Hit with a $1.4 million assessment after a Kelmar unclaimed property audit, Temple-Inland filed suit saying Delaware’s method of estimating unclaimed property absent any records to show property that is unclaimed is tantamount to taking the company’s own property. The company says its right to due process has been violated, and Delaware has failed to adhere to prior Supreme Court decisions limiting what states can claim as unclaimed property.
According to Peters, companies that have challenged Delaware’s methods have done so unsuccessfully in Delaware state courts, prompting many companies to agree to settlements rather than take up fresh challenges of their own. Temple-Inland’s objections rest more on federal law and are argued in a federal court, giving Corporate America some hope, he says. “The risk has always been that the interest and penalties in these matters could equal or exceed the amount of liability,” prompting companies to settle rather than litigate, he says.
As the case makes its way through the system, Delaware recently extended the deadline for companies to enter the state’s voluntary disclosure program, enabling companies to voluntarily update their unclaimed property compliance in exchange for a reduced period of liability and elimination of any interest or penalties. Entry to the program is extended to Sept. 30.