3rd Circuit Holds that a State May Audit a Company to Determine if the Company Must Pay Money to the State, Even if the State Likely has No Claim to the Money
The Third Circuit recently ruled that Delaware could audit two Companies to determine whether they were required to escheat money from unused gift cards to the State, notwithstanding the fact that Delaware likely would not have any claim to the money.
In Marathon Petroleum Corp. v. Secretary of Finance for the State of Delaware, Delaware sought to audit two Companies which operated gas stations to determine whether the Companies were required to escheat money from unused gift cards to the State. The Supreme Court has set bright-line rules on how to determine which of competing states are entitled to collect abandoned property by escheat. Specifically, the state of the person who owns the property (e.g, the state of the person who received the gift card but did not spend it) has first priority if that state can be identified from the records of the entity which holds the property (e.g., the company which issued the gift cards). In cases where the person who is owed the property cannot be determined from the property holder’s records, or if that state does not provide for escheat, then the state where the property holder is incorporated is entitled to the unclaimed property.
In this case, the two Companies that Delaware sought to audit were incorporated in Delaware. However, the gift cards had actually been issued and were managed by subsidiaries of those Companies which were incorporated in Ohio, such that any abandoned gift card money in the subsidiaries’ possession would be owed to Ohio and not Delaware (assuming the state of the person owed the money could not be determined). The Companies therefore sought to quash the audit on the theory that Delaware could not have a claim to the money.
The Third Circuit ruled that the State was not outright barred from conducting the audit, notwithstanding that fact that it likely would not be able to recover any of the money at issue. Instead, the State did not need to take the Companies at their word that none of the money at issue would be escheatable to Delaware and could instead audit the Companies to ensure that all of the money was in fact beyond the State’s reach and was not in the possession of the Delaware-incorporated Companies. The Third Circuit speculated that an audit could reveal that certain corporate formalities had not been observed, which could warrant piercing the corporate veil or treating the Ohio subsidiaries as alter-egos of the Delaware companies.
For a copy of the opinion, click HERE.
