On Dec. 4, 2017, the Third Circuit Court of Appeals vacated a lower court’s dismissal of the Marathon Petroleum Corporation’s (Marathon) challenge to aspects of Delaware’s unclaimed property laws in Marathon Petroleum Corp. v. Secretary of Finance., 876 F.3d 481 (3d Cir. 2017). The Court of Appeals confirmed that holders of unclaimed property have standing under federal common law to challenge a state’s authority to conduct an unclaimed property audit.
Marathon and Speedway, LLC (Speedway) are Delaware corporations with their principal places of business in Ohio. Marathon and Speedway use Ohio subsidiaries, Marathon Prepaid Card LLC and Speedway Prepaid Card LLC, respectively, to issue Marathon- and Speedway-branded gift cards.
In March 2007, Delaware initiated an unclaimed property audit of Marathon and Speedway. As part of the audit, Delaware’s third-party auditor, Kelmar Associates, requested extensive and detailed information regarding the Ohio subsidiaries. Marathon and Speedway produced documents demonstrating that the Ohio subsidiaries were incorporated in Ohio and had no property in Delaware. Delaware did not therefore have authority, Marathon and Speedway argued, to escheat any unredeemed gift card amounts. Kelmar nonetheless demanded further documentation and threatened to refer the matter to Delaware’s Attorney General for possible enforcement action if Marathon and Speedway did not provide the documentation.
In February 2016, Marathon, Speedway and their Ohio subsidiaries filed suit in the District Court of Delaware, arguing that Delaware’s audit requests were preempted by the federal common law priority rules and constituted an unreasonable search under the Fourth Amendment.
The District Court granted Delaware’s motion to dismiss, holding that Marathon and Speedway’s claims were ripe but that the federal common law rules set forth in Texas v. New Jersey applied only to disputes between states and did not create a private right of action. The District Court also dismissed the Fourth Amendment claim, stating that the audit and information requests did not constitute searches. Marathon and Speedway appealed the dismissal of their preemption claim.
The Court of Appeals concluded that federal common law created a private right of action to challenge Delaware’s authority to conduct an audit and escheat abandoned property. The court noted that the protections against escheatment set forth in the Texas v. New Jersey line of cases would “in many instances, become a dead letter” if a private cause of action were not available. Observing that one of the original defendants in Texas v. New Jersey was a private party, the court remarked that it would be nonsensical to require a private party to wait to be sued by a state before asserting its rights. If a private party can be a defendant when its rights are at stake under the federal priority rules, that party should be able to sue for enforcement of those same rights.
The Court of Appeals also reaffirmed its holding from New Jersey Retail Merchants Ass’n v. Sidamon-Eristoff that the priority rules set forth in the Texas v. New Jersey line of cases are exclusive. If neither the property owner’s last known state of residence nor the property holder’s state of residence are willing or able to escheat the unclaimed property, no other state may attempt to do so.
Although the Court of Appeals reversed the District Court on the question of whether Marathon and Speedway had standing to sue, the Court of Appeals nonetheless dismissed the suit. The Court of Appeals said there were two ways to construe Marathon and Speedway’s challenge to Delaware’s audit: (a) as a challenge of Delaware’s authority to initiate and conduct the audit in the first place or (b) as a challenge to the scope of the audit.
To the extent Marathon and Speedway were challenging Delaware’s authority to conduct the audit, the Court of Appeals determined that Delaware “plainly” had such authority. A state must be able to determine who the holder of escheatable funds is. Delaware must be permitted to examine Marathon and Speedway’s relationships with their Ohio subsidiaries to determine the true holder-owner relationship with respect to the abandoned property in question, i.e., the gift cards.
To the extent Marathon and Speedway were challenging the scope of the audit, the Court of Appeals held that the claim was not ripe because Delaware had taken no enforcement action to compel compliance with the audit. But the Court of Appeals specified that its decision did not “foreclose the possibility that a state’s demands for information may become so obviously pretextual or insatiable” that the priority rules would be triggered and preemption would apply.
Although the suit was dismissed, the decision is, overall, a win for property holders. While Delaware can investigate the relationship between affiliated entities, the Court of Appeals clarified that the scope of such an investigation is not unlimited and can be challenged by holders.
The opinion confirms that holders have standing under the federal common law priority rules and can bring suit when a state abuses the investigation process. States can examine subsidiaries records to confirm that those subsidiaries are not alter egos of the parent. But states cannot use document requests to go on fishing expeditions.
Holders can decline to provide information in response to unreasonable document requests because the requests are outside the scope of the state’s audit authority. If the state does not agree, it will be forced to take enforcement action and be prepared to litigate the matter.
Finally, the opinion affirms that the only two states with the right to escheat unclaimed property are the state of the property owner’s last known address and the state of the property holder’s incorporation. If neither of those states escheats the unclaimed property, other states cannot attempt to escheat the property on other grounds, such as being the state where the unclaimed property sale occurred.
The opinion is precedential and applies to the jurisdictions of Delaware, New Jersey, Pennsylvania and the United States Virgin Islands.
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