The states employ unclaimed property laws (also referred to as escheat laws) to determine if property owned by one person but that is in the possession of another person is subject to the state’s control after the period of abandonment set by state law has passed. In recent years, states have aggressively enforced their unclaimed property laws by both auditing companies and assessing fines for failure to comply with the state’s laws. Large and small companies confront the states’ aggressive tactics pretty regularly and, more recently, companies have been fighting back because complying with the state’s audit requests is expensive and time consuming and, from their perspective, the large fines that a state can assess for failure to comply with the state’s unclaimed property law are unfair and unreasonable. Recently, companies have been turning to federal common law for protection against state actions of this nature.
On December 3, the U.S. Court of Appeals for the Third Circuit reviewed the District Court’s ruling that dismissed complaints that a Delaware escheatment audit was preempted by federal common law. The case is Marathon Petroleum Corporation, et al., v. Secretary of Finance for the State of Delaware, et al., and involves unclaimed or unredeemed gift cards sold by the plaintiffs, incorporated in Delaware, and their Ohio-based subsidiaries. The Court of Appeals confirmed that
The District Court treated this case with due care and admirable skill but, in the end, we disagree with its conclusion that private parties cannot invoke federal common law to challenge a state’s authority to escheat property.
Marathon Petroleum Corporation (Marathon) refines and markets petroleum and sells gasoline through Speedway LLC (Speedway) gas stations, none of which were located in Delaware at the time this litigation commenced. For several years, the Delaware State Escheator and its third party auditor, have conducted an audit of Marathon’s and Speedway’s books and records to determine whether the unredeemed gift cards are subject to escheat by the State of Delaware, and the probe has expanded to include the records maintained by their Ohio subsidiaries.
The plaintiffs challenged the authority of Delaware and its outside auditor and sought relief from the federal district court in Delaware on Fourth Amendment grounds, but the District Court dismissed their lawsuit. The District Court held that the plaintiffs, as private parties, could not maintain this lawsuit, and that Delaware’s action was not preempted on federal common law grounds. While it is clear that only the state in which tangible property is located can subject such property to escheatment, the issues regarding “intangible” property are muddled, but subject to a trio of U.S. Supreme Court decisions which now constitute a common law doctrine of escheatment.
The Court of Appeals largely affirmed the District Court, but held that there is a private cause of action to enforce the “priority rules” of escheatment developed by the Supreme Court in the Texas v. New Jersey, and its progeny. For the time being, the plaintiffs’ claims are not ripe for review in the federal courts, but the Court of Appeals, clearly troubled by the scope and duration of the audit, suggests that another claim may be brought in the event the State brings an enforcement action against the plaintiffs based on the ongoing audit. The Court of Appeals summarized its analysis as follows:
We see two ways to construe Marathon’s and Speedway’s arguments. Viewed one way, their claim is ripe; viewed the other, it is not. More specifically, to the extent the Companies are challenging Delaware’s authority to initiate an audit in the first instance, the claim is ripe but wrong. The notion that the State cannot conduct any inquiry into abandoned property to verify a Delaware corporation’s representations regarding abandoned property lacks merit. But, 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. Either way, the preemption claim was rightly subject to dismissal. Nevertheless, we will vacate the order of dismissal so that the District Court can clarify that dismissal is without prejudice, which may allow Marathon and Speedway to bring their claim again at a later date, if appropriate.