Mark McQuillen, president of Kelmar Associates, LLC, was misinformed when he was quoted as saying “I’ve never been sued” on May 26—less than one week after suit was filed against Kelmar and three Delaware state officials in a Delaware Federal District Court. See 72 State Tax Notes 455 (May 26, 2014). While the timing of this statement was an unfortunate – but likely honest – mistake, the lawsuit filed by Temple-Inland Inc. asserts the conduct of Kelmar in conducting an unclaimed property audit on behalf of the state of Delaware was anything but.

According to the complaint, Temple-Inland was initially asked to pay over $2 million to the state based on the “fatally flawed” extrapolation methodology used by Kelmar to calculate Temple-Inland’s liability (and Kelmar’s paycheck from Delaware). While the demand was reduced to $1.38 million after the plaintiff initiated administrative review, the result and details of how they got there remains alarming. Of note, Kelmar estimated that nearly $1 million was due to Delaware for the seven-year period of 1986 through 2003 after identifying a single unreported check for $147.30 during a subsequent six-year period (Complaint ¶ 84). The complaint contains countless examples of voided and reissued checks (even checks that escheated to other states) that were used in Kelmar’s extrapolation formula. Ultimately the result for Temple-Inland was a demand from Delaware alone of over $100,000 escheatable for prior year’s accounts payable, despite having only around $15,000 escheatable to all other states on these accounts for a five year period actually reviewed.

Based on these practices, Temple-Inland asserts that Kelmar and the state auditing officials have unconstitutionally applied the amendment to Delaware Escheat Law allowing for estimations of unclaimed property liability to years prior to its enactment in violation of the Ex Post Facto Clause. Along those same lines, the state penalized Temple-Inland for failing to maintain records for periodsprior to 2010, when a substantive document retention requirement was imposed in the state (seeS.B. 272 § 4). Nonetheless, Temple-Inland asserts that the methodology used by Kelmar violates federal common law, the Full Faith and Credit Clause, Commerce Clause and Takings Clause of the U.S. Constitution.

Practice Note: While Delaware has settled every suit raising these questions and has an economic incentive to keep them from reaching what would likely be an adverse decision to the state’s (and Kelmar’s) financial interest, the discussion should not end there. Temple-Inland Inc. had a long history of solid compliance with the unclaimed property laws across several states, yet still was the target of a flawed and likely unconstitutional audit by Kelmar on behalf of the state of Delaware. The company was forced to hire counsel and litigate against Kelmar’s questionable practices. While two new Delaware bills have been introduced in an effort to eliminate unclaimed property contingent fee auditing practices (S.B. 215 and S.B. 228), holders should stand firm in opposition to Kelmar’s aggressive extrapolation methods and keep their fingers crossed that Temple-Inland Inc. goes the distance in court.  Either the court house or the state house need to fix the problem.

This article was written with contributions from Eric Carstens.