Third Circuit Breathes Life Into Procedural Due Process Claims In Pipeline’s Case Against Delaware’s State Escheator


In the case of Plains All American Pipeline L.P. v. Cook, et al., decided on August 9, the U.S. Court of Appeals for the Third Circuit largely affirmed the dismissal of Plains All American Pipeline L.P.’s (Plains) complaint that the State of Delaware’s proposed escheat audit of the pipeline is unconstitutional. The Third Circuit held that, at present, Plains’s claims are unripe and not suitable to be decided by the courts. Except that it reversed the District Court’s dismissal of Plains’s procedural due process claim, and remanded it to the District Court for further consideration.

In October 2014, Delaware’s Audit Manager notified Plains that the State intended to conduct a multi-state audit of its records for the period 1986 to the present, and that a private auditing firm engaged by the State would perform the audit. If the audit was not completed by June 30, 2015, it would be expanded to include the records from 1981 as well.

In response, Plains filed this lawsuit, arguing that this proposed audit violated the Constitution, seeking injunctive relief and an appropriate declaratory judgment. The U.S. District Court dismissed the complaint, “finding that Plains’s claims were unripe except for an equal protection claim that it dismissed for failure to state a claim.”

On appeal, the Third Circuit noted that

All states have laws authorizing them to seize private property through escheat, ‘a procedure with ancient origins whereby a sovereign may acquire title to abandoned property if after a number of years no rightful owner appears.’ Texas v. New Jersey, 379 U.S. 674, 675 (1965). But in recent years, state escheat laws have come under assault for being exploited to raise revenue rather than reunite abandoned property with its owners. Delaware’s Escheats, or Unclaimed Property, Law is no exception; as unclaimed property has become Delaware’s third-largest source of revenue, companies have brought a wave of lawsuits challenging the constitutionality of Delaware’s escheat regime.

“Rooted in a practice that dates back to feudal times, Delaware’s Escheats Law is the mechanism by which Delaware takes custody of abandoned property in the State.” As amended, Delaware’s Escheat Law requires that a holder of “property presumed abandoned” must file a yearly report with the State Escheator in which it provides information about the property and its possible owner. When filing the report, the holder must also “pay or deliver . . . the property described in the report’ to the State Escheator[], who then takes custody of the property and may sell it.”

“To ensure compliance with the law,” Delaware’s Escheats Law permits the “State Escheator to ‘[e]xamine the records of a person or the records in the possession of an agent, representative, subsidiary, or affiliate of the person under examination in order to determine whether the person complied with this chapter.” This examination may be performed by private third-parties on the State Escheator’s.

If the person subject to examination does not retained the required records, the “State Escheator may determine the amount of property due using a reasonable method of estimation.” If it is determined “that a holder has underreported unclaimed property due and owing,” the State Escheator “shall mail a statement of findings and request for payment to the holder that filed.” If liability is assessed, the State may also charge interest and penalties. The holder of the abandoned property may then seek judicial review of the State Escheator’s decision in the Court of Chancery.

Four of Plains’s claims were facial challenges—”three allege that the estimation provisions of the Delaware Escheats Law are preempted, void for vagueness, and violate substantive due process, while the fourth alleges that the Delaware Escheats Law violates the Fourth Amendment by not affording precompliance judicial review of an auditor’s document demands.” Plains’s two as-applied claims before the Third Circuit included “a Fourth Amendment challenge to the scope of Kelmar’s document requests and a procedural due process challenge to Kelmar’s appointment to conduct the audit.”

Applying Supreme Court and Third Circuit precedent, the Third Circuit ultimately  agreed that these claims are unripe. Plains argued that “its interests are adverse to Delaware’s because it is being forced to choose between complying with a burdensome law and risking serious penalties.” The Third Circuit agreed that “a challenge to government action is typically ripe when a party is faced with that dilemma, we simply cannot find that Plains confronts such a situation here.” The Third Circuit found, in part, however, that “the only alleged harm Plains could suffer from estimation is based on contingencies and its substantive due process, void-for-vagueness, and preemption claims lack both sufficient adversity for ripeness and a cognizable Article III injury.” (The Third Circuit also noted that “[b]ut because Plains is bringing a preenforcement action, the justiciability issue in this case can equally be described in terms of standing.”)

It further confirmed that Third Circuit “precedent confirms that in all but those cases where the administrative process is at issue and imposes burdens that directly affect an entity’s day-to-day business, the costs of administrative investigations are usually not sufficient, however substantial, to justify review in a case that would otherwise be unripe.” In addition, “[s]ince this audit is an investigation confined to past conduct, it does not have the ‘direct effect’ on ‘day-to-day business.”

With respect to Plains’s Fourth Amendment Claim, the Third Circuit recognized that Third Circuit precedent “makes clear that ‘plaintiffs raising predominantly legal claims must still meet the minimum requirements for Article III jurisdiction.”

[T]he burden of an administrative investigation cannot usually itself confer Article III jurisdiction…Whether put in terms of ripeness or standing, because the audit is not enforceable, and because its occurrence is still based on contingencies, Plains has not alleged a ‘sufficiently imminent injury’ that would give rise to a justiciable case under Article III of the Constitution.

However, the Third Circuit agreed with Plains that the District Court erred in dismissing its as-applied procedural due process argument, based on the appointment of this outside auditor, described by Plains as being “self-interested” and having a stake in the outcome, to conduct the audit.

To establish a due process violation, all Plains must show is that it was required to submit a dispute to a self-interested party… Because the conduct being challenged by Plains is the appointment of Kelmar to conduct this audit, the harm alleged for this claim is not based on a contingency; it is based on conduct that has already occurred.

The Third Circuit confirmed that Plains’s procedural due process claim is ripe and the District Court erred in dismissing it.