The court case challenging Delaware’s unclaimed property audit methodologies has settled following an opinion brutalizing Delaware’s position. This settlement leaves the US District Court for the District of Delaware (District Court) holding as precedent, but the issue of what methods Delaware must jettison remains open.

Last Friday, Temple-Inland and Delaware filed a joint motion to dismiss with prejudice in the District Court after the parties agreed to settle the dispute. While the settlement agreement was not publicly disclosed, we understand that Delaware agreed to withdraw its entire assessment (totaling $2,128,834.13) and pay Temple-Inland’s attorneys’ fees and costs, including expert witness reports. The settlement avoids an affirmation by the US Court of Appeals for the Third Circuit that Delaware’s audit practices and estimation techniques collectively “shock the conscience,” but remains a significant holder victory given that the Temple-Inland District Court opinion, which is detailed in our prior blog, can now be cited as binding (and finally resolved) precedent by similarly situated holders under audit by the State.

The kicker here is that because the appropriate remedy was never resolved, it will need to be negotiated on a case-by-case basis for other holders. In particular, holders and Delaware alike are left to resolve what elements of the collectively invalid audit methodology must be changed to bring it within constitutional boundaries. Notably, Delaware Finance Secretary Tom Cook said in an email to the press subsequent to the settlement that Delaware officials are “conducting a thorough review of the state’s escheat statutes, regulations, policies and procedures, with the intention of improving the program going forward.” After the review, the Department of Finance (Department) will continue to audit companies and resolve examinations on a case-by-case basis.

Note:

With a final resolution of the Temple-Inland litigation coming sooner than expected, Delaware is now on the clock to revise its audit practices and procedures to some extent to cure the current invalidity. While the current audit methodology is definitively invalid, it remains to be seen whether the anticipated revisions are done in a meaningful way, such that the due process rights of similarly situated holders are respected. Neither the State nor holders benefit from continued litigation of the issues covered in Temple-Inland and Delaware would be wise to solicit holder and practitioner input in an effort to avoid further litigation over the scope of the Temple-Inland due process violation.

As Delaware works to internally review and modify its policies and procedures, holders currently under audit (or participating in the voluntary disclosure program) should carefully consider their options prior to responding to audit document requests, concluding voluntary disclosure agreements or finalizing audits. Holders that have previously settled audits should consider reviewing their closing agreements to determine whether the due process concerns cited in Temple-Inland can be raised.

As an aside, a case was filed by Office Depot in the District Court last month raising many of the same issues with Delaware’s audit practices and extrapolation methodology. Should Delaware not provide meaningful relief, it could be a potential vehicle to litigate the scope of the Temple-Inland due process holding.