Federal Court Decision Warns Delaware: Be Prepared To Defend Audit Practices In Court

Author:Ms Sara Lima, Michael J. Wynne, Diane Green-Kelly and Michael I. Lurie
Profession:Reed Smith

The United States District Court for the District of Delaware dismissed a lawsuit against the Delaware State Escheator, Abandoned Property Audit Manager, and the Secretary of Finance, and Kelmar Associates, LLC, but it came with an implied warning. In its decision to dismiss Plains All American Pipeline's request for injunctive relief from an unclaimed property audit, the court held that the case was premature.1 The state had not engaged in any action that presented a threat of harm to Plains . . . yet. According to the opinion, to the extent the state decides to continue its audit against Plains, it will have to issue and enforce a subpoena, and Plains can defend against that subpoena in due course.2

Plaintiff Sued to Bar the Audit

Plains brought the action after its objections to the breadth and scope of Delaware's intended unclaimed property audit and document requests from the state's contract-auditor Kelmar were rejected by the state.3 The plaintiff alleged, among other things, that its constitutional rights were violated by being exposed to a costly audit conducted by multiple states by a contract auditor with a financial interest in the outcome, and neither the state nor Kelmar would agree to keep the audit confidential from other states; nor would they agree not to estimate liability for years for which records no longer were available. The estimation is particularly problematic, given the federal court's recent decision holding that the state's typical estimation practices "shocked the conscience."4 Further, the state's Audit Manager, Michelle Whitaker, had threatened in a letter to the company that the state would consider Plains' cooperation when determining whether to impose penalties on any liability. The plaintiff sued for an injunction barring the state and Kelmar from conducting the audit.

The Court Dismisses the Action as Not Yet Ripe

The situation is not unusual. Companies across the nation have been targeted by contract auditors and told to submit to multi-state, multi-year audits that can cost hundreds of thousands of dollars and years of internal and external resources, "or else."5 Document requests often are extensive, broadly drafted, and unlimited as to time period. But the court noted that Plains' challenge to the audit process, a claim Plains based on the Fourth Amendment, was not ripe for an injunction action.

Rather, it held, "If Plaintiff wishes to challenge the enforceability of a future subpoena, it should...

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