Posted on Sep 26, 2019 by JMS Advisory Group |
As noted in our earlier post on this matter: Univar, Inc. alleged in a late 2018 Complaint filed against the state of Delaware five separate infringements of Constitutional rights, as follows: 1) 4th Amendment right to be free from unreasonable search and seizure; 2) deprivation of substantive due process rights under the 14th Amendment; 3) deprivation of procedural due process rights under the 14th Amendment; 4) unconstitutional taking of private property for public use without just compensation; and 5) violation of the company’s 14th Amendment equal protection rights. As of the time of our last update, Delaware’s attempt to have its subpoena enforced in the state’s Chancery Court was unsuccessful and as a result Delaware filed a Motion to Dismiss the action in the U.S. District Court for the District of Delaware (“federal court”); the state’s arguments in this pleading were mostly based on the argument of ripeness. In plain terms, the state argued that the issues presented by Univar in its federal court Complaint were not ready for litigation at the federal level, because no actual audit – or findings related thereto – had occurred.
On September 17, 2019, the federal court issued an opinion stating that indeed, some of Univar’s constitutional claims were not ripe because it had yet to suffer any injury at the hands of the state or its auditors. Specifically, the court found that because there is no certainty that Univar would be subjected to elements of the audit to which it objected, it cannot proceed on its claims relating to those arguments. Importantly, the court noted that as in the Plains All-American and Marathon Petroleum cases, should the state Chancery Court decide that the subpoena is enforceable, Univar would still be in a position to “simply refuse to cooperate” with the audit proceedings. However, the federal court found that Univar’s equal protection and procedural due process claims were ripe for litigation and could proceed – but there’s a twist…
Simply by notifying Univar of its intention to conduct an audit, the parties became “adverse” which thereby gives rise to a proper claim of equal protection. The court went on to opine that an equal protection claim is proper in this case because Delaware’s typical audit targets are large, “wealthy companies”, and there is no legitimate purpose of selecting these targets besides raising revenue for its general fund.
Additionally, the court found that because the state was using a third party auditor (in this case Kelmar), Univar could appropriately claim that its procedural due process rights were being violated by this act. The court went on to state that Kelmar cannot be considered a ‘neutral decisionmaker’ because its compensation is contingent upon the amount of unclaimed property liability that Kelmar determines, and that Delaware ultimately assesses against an audit target. To dismiss such a claim would disallow the presentation of evidence during litigation that could ultimately prove Kelmar’s self-interest and the state’s unfettered reliance on Kelmar’s findings.
A motion to dismiss made by a party to litigation is largely procedural. It does not decide the core issues, but rather makes a determination as to whether the case should continue based on the facts, and what the parties have argued. At its essence, such a pleading determines whether the party defending the motion has a likelihood of success should the case proceed based on the merits of the defending party’s arguments. Here, the court made an interesting ultimate finding: it decided to stay the case in federal court until a determination is made at the state level as to whether the original subpoena issued to demand compliance with document production in the audit is enforceable. The court did so recognizing that if the subpoena is not enforced, continued litigation of the two issues considered ripe may not be necessary. Conversely, if enforcement is granted by the state Chancery Court, then Univar would have the opportunity to amend its original complaint to include only the issues determined to be ripe for litigation by this court’s opinion.
What does all this mean? By pivoting back to the state Chancery Court, it gives the parties (especially Delaware) a chance to reassess their respective positions relating to the original audit and the subpoena giving rise to this controversy. If the state decides that the audit of this holder is not worthwhile because further litigation would ensue, perhaps it decides to drop the audit altogether and moves on to prosecute other holders. This would obviously save it the expense and vexations of future litigation on the constitutional issues determined to be ripe, where an adverse holding could be especially damaging to its revenue collections via escheat audits. All remains to be seen as we continue to watch these proceedings closely.
Stay connected to our blog and hear more about these developments as they occur. Contact us and we’ll send you a , and provide answers to any questions you may have about Delaware unclaimed property, audits, or annual compliance with these laws. JMS is here to help.