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Plains All American Pipeline L.P. v. Cook

United States Court of Appeals, Third Circuit

August 9, 2017

THOMAS COOK, in his capacity as the Secretary of Finance for the State of Delaware; DAVID M. GREGOR, in his capacity as the State Escheator of the State of Delaware; MICHELLE M. WHITAKER, in her capacity as the Audit Manager for the State of Delaware; KELMAR ASSOCIATES LLC

          Argued April 5, 2017

         On Appeal from the United States District Court for the District of Delaware (District Court No. 1-15-cv-00468) District Judge: Honorable Richard G. Andrews

          Phillip B. Dye, Jr. Deborah C. Milner Vinson & Elkins Jeremy C. Marwell ARGUED Christian D. Sheehan Vinson & Elkins James E. O'Neill, III Colin R. Robinson Bradford J. Sandler Pachulski Stang Ziehl & Jones Attorneys for Appellant.

          Caroline L. Cross Jennifer R. Noel Delaware Department of Justice Marc S. Cohen Loeb & Loeb Tiffany R. Moseley Steven S. Rosenthal ARGUED John D. Taliaferro Loeb & Loeb Attorneys for Appellees Thomas Cook, David M. Gregor and Michelle M. Whitaker.

          Marc J. Phillips Manion Gaynor & Manning Stephen W. Kidder Ryan P. McManus ARGUED Hemenway & Barnes Attorneys for Appellee Kelmar Associates LLC.

          Before: CHAGARES, SCIRICA, and FISHER, Circuit Judges



         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.

         In this case, Plains All American Pipeline ("Plains") seeks to attack the constitutionality of several provisions of the Delaware Escheats Law, as well as Delaware's demand that it submit to an abandoned property audit. But because Plains brought suit before Delaware assessed liability based on its audit or sought a subpoena to make its audit-related document requests enforceable, the District Court dismissed the suit, finding that Plains's claims were unripe except for an equal protection claim that it dismissed for failure to state a claim. Although we disagree with the District Court that Plains's as-applied, procedural due process claim is unripe and will therefore reverse and remand in part, we will affirm the District Court's dismissal in all other respects.



         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, [1] the law provides 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. Del. Code Ann. tit. 12, §§ 1142, 1143. When filing the yearly report, the holder must "pay or deliver . . . the property described in the report" to the State Escheator, id. § 1152, who then takes custody of the property and may sell it.

         To ensure compliance with the law, the statute permits the 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." Id. § 1171(1). And the "State Escheator may contract" with private third-parties to perform this audit on his or her behalf. Id. § 1178(a). If the person subject to examination "does not retain the records required, " the "State Escheator may determine the amount of property due using a reasonable method of estimation." Id. § 1176(a). And if the State Escheator completes its examination and "determines 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." Id. § 1179(a). When liability is assessed, the State may charge interest and penalties. Id. § 1183. But the holder of the abandoned property may seek judicial review of the Escheator's decision in the Court of Chancery. Id. § 1179(b).


         On October 22, 2014, Delaware's Audit Manager, Michelle Whitaker, sent Plains a notice that the State intended to audit its records from 1986 through present to evaluate its compliance with Delaware's Escheats Law. In that notice, Whitaker informed Plains that Kelmar Associates, a private auditing firm that conducts a large percentage of Delaware's unclaimed property audits, would conduct the audit; that she was "the final arbiter of any disputes that may arise during the course of the examination"; and that the audit would be expanded back to 1981 if not completed by June 30, 2015. J.A. 200.

         After Kelmar sent Plains its initial document requests, Plains sent a letter raising several constitutional objections to the audit and informing Whitaker that it would not respond to Kelmar. Dismissing Plains's concerns as unfounded, Whitaker responded that multistate audits were common and Delaware's actions were legal. She directed Plains to "produce the records requested" by Kelmar and noted that "the State will consider the level of [Plains's] cooperation when determining whether penalties should be assessed, or whether any other statutorily available actions should be taken, in connection with any past due unclaimed property that is identified as a result of the examination." J.A. 325.

         Plains did not respond to Whitaker. Instead, it sued Kelmar, Whitaker, Delaware Secretary of Finance Thomas Cook, and Delaware State Escheator David Gregor in federal court for a declaration that the proposed audit violated the Constitution, an injunction preventing the defendants from pursuing the audit, and attorney's fees. In its initial complaint, Plains alleged that the proposed audit and portions of Delaware's Escheats Law violated the Fourth Amendment, as well as the Ex Post Facto, Due Process, Equal Protection, and Takings Clauses of the Constitution. But Plains later amended its complaint to add one claim that Kelmar conspired with Delaware to violate its rights and two claims that Delaware's Escheats Law was void for vagueness and preempted by federal law.

         In July 2015, the Defendants moved to dismiss the amended complaint under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). The District Court dismissed this case on August 16, 2016, finding that Plains's claims were all unripe except for an equal protection ...

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