Using a Third-Party to Audit Unclaimed Property? Take Note…

States that use third-parties to audit unclaimed property liability may want to take note of Univer v. Geisenberger, et al., (C.A. No. 18-1909 (MN), Sep. 17, 2019), a recent U.S. District Court ruling out of Delaware.

In Univer,  the U.S. District Court for the District of Delaware held that procedural due process and equal protection claims arising out of Delaware’s use of a third-party unclaimed property auditor were ripe and stated a claim.

Use of Third-Party Auditor

Like many states, Delaware allows unclaimed property audits to be conducted by third-parties. The third-party auditor in this case was paid based on the amount recovered in the audit. In total, 22 states joined the audit.

After several months of negotiating, the parties could not reach an agreement regarding confidentiality and non-disclosure. Ultimately, Delaware issued a document subpoena.

The company being audited did not comply with the subpoena and instead filed a complaint alleging constitutional claims. The court found that the equal protection and procedural due process claims were ripe for review.

Procedural Due Process Claim

For a procedural due process claim to proceed, a party must show that it was required to submit a dispute to a self-interested party.

To support its claim, the company argued that the third-party auditor had a financial interest in the outcome of the audit, as fees were contingent on the amount of liability assessed. The company asserted that the contingent fee structure netted the third-party auditor over $104 million since 2013. 

Delaware argued that the third-party auditor only collected evidence to determine liability, which was then reviewed by the state escheator. Delaware claimed that the state escheator was not limited by the audit report and was free to make its own decision. Further, Delaware pointed out that liability may be challenged in the state court of chancery.

However, the court was not convinced that Delaware’s process met the requirement of a de novo review that would neutralize the appearance of a self-interested party having control over the audit and liability determination.  Thus, the company had a ripe procedural due process claim.

Equal Protection Claim

The company argued that its equal protection was violated because the third-party auditor and Delaware targeted companies that would bring in large amounts of money.

Delaware argued that it was legitimate for an agency with limited resources, such as the state escheator, to target a company that was more likely than others to hold large amounts of unclaimed property.

However, the court noted that the state escheator was well-funded and outsourced its work to an outsider that was then paid on commission. Because Delaware ffered no legitimate purpose for selecting wealthy companies, other than raising revenue, the equal protection claim was also ripe.

Claims Stayed

However, since there was an action pending in the state court of chancery, the federal district court issued a stay until the state court decided whether to enforce the subpoena against the company. The district court noted that if the subpoena was not enforced, this action may no longer be necessary. Alternatively, if the subpoena was enforced, the ripe issues in this case may proceed and other issues raised may become ripe and an amended complaint may become appropriate.

By Emily Baugh, J.D., LL.M

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All stories by: CCHTaxGroup