Plains All American Case Dismissed – Federal Court Determines Holder Must Develop Factual Record Before Challenging Kelmar Unclaimed Property Audit

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On August 16, 2016, the U.S. District Court for the District of Delaware granted Kelmar’s and Delaware’s motions to dismiss in Plains All American Pipeline, L.P., v. Cook, et al.[1]  The court determined that the Plaintiff (1) lacked standing to sue Kelmar, (2) had not demonstrated ripeness of declaratory relief against Delaware for any of its claims, except equal protection, and (3) failed to state a cause of action regarding its equal protection claim.

Background

In 2014, Delaware, through its third-party auditor, Kelmar, initiated an unclaimed property audit of Plains All American Pipeline, L.P. (“Plains”).  Plains refused to submit to the audit, communicating a number of objections, which included Kelmar’s financial stake in the audit’s outcome, Kelmar’s authorization to share confidential information with other states, the breadth and rationale of Kelmar’s initial document requests, and Kelmar’s use of estimation.  In 2015, Plains filed a lawsuit for declaratory judgment and injunctive relief alleging violations of the Fourth Amendment, substantive and procedural due process, the Ex Post Facto Clause, the Takings Clause, and the Equal Protection Clause.  Kelmar and Delaware moved to dismiss.

The District Court’s Dismissal

The Delaware District Court dismissed Plain’s lawsuit citing three separate grounds.

First, the court determined that Plains lacked standing to sue Kelmar.  The court held that Plains could not demonstrate an “injury in fact” with respect to Kelmar, as Kelmar “has made no attempt to seek judicial enforcement of any examination,” “has neither issued any subpoenas, nor sought judicial enforcement of its audit demand,” and “does not appear to have any authority to litigate on any state’s behalf.”  The court also found that Plains could not demonstrate causation – i.e., even if there were an actual or threatened injury, “there is no indication that such injury would be fairly traceable to Kelmar.”  Finally, the court held that Plains had not established redressability, as the court found that Plains had not explained how a judgment against Kelmar would redress its proposed injury.

The court also determined that Plains had not demonstrated ripeness of declaratory relief against Delaware for any of its claims, aside from the equal protection claim.  In particular, the court found that Plains and the state did not have adverse legal interests because Plains’ non-equal protection claims “are, at their core, premised on contingencies,” and “are directed to ways in which the audit process may be undertaken and what the ultimate result of that process may be.” The court also found that Plains did not demonstrate “conclusiveness” (i.e., that a declaratory judgment definitively would decide the parties’ rights) and that Plains’ claims (particularly its substantive due process and takings challenges) were not predominantly legal and required an “actual factual setting.”  Finally, Plains did not demonstrate “practical utility,” which goes to “whether the parties’ plans of action are likely to be affected by a declaratory judgment, and considers the hardship to the parties of withholding judgment.”  The court rejected Plains’ argument that undergoing a long and expensive audit process satisfied this requirement.

Finally, the court determined that Plains failed to state a cause of action regarding its equal protection claim, which was premised on Delaware targeting large, wealthy companies for audit.  The court found that it “is entirely legitimate for an agency with limited resources to target entities which are more likely than others to hold large amounts of unclaimed property,” and thus that the actions of the state “are rationally related to that interest.”  Accordingly, the court found that the “audit selection process satisfies rational basis review.”

Observations

While unclaimed property audits can be time intensive, expensive, and administratively burdensome, Judge Andrews’ opinion suggests that holders will need to engage in the audit process in order to develop a sufficient factual record to support their claims before litigating.  The opinion is replete with references noting that Plains’ “audit process … has hardly begun,” and “nothing has happened,” and supports the notion that holders can expect many of the traditional constitutional claims raised in unclaimed property litigation (e.g. due process violations) to be dismissed when raised in preemptive-strike litigation at the initiation of an audit.  This is particularly important in light of the recent Temple-Inland opinion, which concluded that Delaware’s audit of Temple-Inland (including its estimation methodology) violated Temple-Inland’s substantive due process rights, and the expected rise in holder lawsuits challenging Delaware’s estimation practices.

The Plains opinion also calls into question whether it is worth naming a third-party auditor as a defendant in a lawsuit against a state on whose behalf it conducts an audit.
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[1] No. 15-00468-RGA (D. Del., filed June 5, 2015).