Earlier this summer a company called Temple-Inland commenced a lawsuit against the State of Delaware, challenging the findings of a Kelmar-initiated unclaimed property audit, especially as to how estimated liabilities are calculated. In particular, Temple-Inland alleged that Delaware made an audit demand in excess of $1 million for estimated historical unclaimed property liabilities after having identified only about $150 in actual liability. Delaware promptly moved to dismiss that litigation (that is, that the court should not even hear the dispute) and Temple-Inland responded by asking the Court for summary judgment (an order that Plaintiff is entitled to judgment as a matter of law, without the need for a trial) on the grounds of federal preemption.
Wednesday afternoon, the trial court issued its decision on the dueling motions. In sum, both parties' attempts for a quick knockout were largely rejected, and the case will continue. The one substantive decision that the Court made relates to federal preemption (i.e., the argument that federal law displaces contrary state law). The Court expressly rejected T-I's argument that federal preemption prevented Delaware from employing estimation to assess historical unclaimed property liabilities.
The Federal Preemption Decision
In numerous cases, the Supreme Court has held that a state's jurisdiction to take custody of unclaimed property relates to the debtor-creditor relationship between the holder and owner of unclaimed property. In Delaware v. New York, for example, the Court held that the determination of which state was entitled to escheat property started with a determination of the "precise debtor-creditor relationship" that gave rise to the property. In the T-I case, Temple Inland argued that the use of estimation to calculate unclaimed property liabilities (where no exact debtor-creditor relationship is shown) was preempted (i.e., prohibited) by federal authority relying on the existence of this debtor-creditor relationship, and similar authority refusing to use statistical estimates to apportion unclaimed property among the states in lieu of the Texas v. New Jersey priority rules. T-I also argued that, although the Texas v. New Jersey and Delaware v. New York holdings arose in the context of disputes between states, the Supreme Court's holdings in those cases were nonetheless applicable to disputes between a state and a holder.
The Delaware District Court rejected this argument and dismissed T-I's federal preemption claim. In so doing, the court reasoned that the since the "stated purpose" of the Texas v. New Jersey priority rules was to "apply to disputes among States, not to disputes between private parties and States" there was no relevant federal law to preempt Delaware's enforcement of its unclaimed property act. Accordingly, the District Court avoided the need to determine whether estimation itself was preempted via federal law by finding, in effect, that there was no applicable federal law at all. The court's holding regarding federal preemption necessarily resulted in the denial of T-I's motion for summary judgment.
The Case Will Continue
As to the remainder of T-I's claims, the court held that the complaint stated a set of facts that, if proven, might entitled T-I to relief, and thus denied the remainder of Delaware's motion to dismiss. The case will now continue.