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Marathon Petroleum Corp. v. Secretary of Finance for State of Delaware

United States Court of Appeals, Third Circuit

December 4, 2017


          Argued June 15, 2017

         On Appeal from the United States District Court for the District of Delaware (D.C. No. 1-16-cv-00080) District Judge: Hon. Leonard P. Stark

          Diane Green-Kelly, Esq. [ARGUED] Reed Smith R. Eric Hutz, Esq. Reed Smith Counsel for Appellants

          Marc S. Cohen, Esq. Loeb & Loeb Jennifer R. Noel, Esq. Caroline L. Cross, Esq. Delaware Department of Justice Steven S. Rosenthal, Esq. [ARGUED] Tiffany R. Moseley, Esq. John D. Taliaferro, Esq. Loeb & Loeb Counsel for Appellees

          Jameel S. Turner, Esq. Bailey Cavalieri Counsel for Amicus Curiae

          Before: CHAGARES, JORDAN, and KRAUSE, Circuit Judges.


          JORDAN, Circuit Judge.

         Whether or not money makes the world go around, it is certainly the motive force in this case. Two Delaware business entities, Marathon Petroleum Corporation ("Marathon") and Speedway LLC ("Speedway") (collectively "the Companies"), may have a particular pot of money that the State of Delaware wants to take. The companies are naturally not eager to assist the State in that effort. They challenge Delaware's right to conduct an audit examining whether certain funds paid for stored-value gift cards issued by their Ohio-based subsidiaries (the "Ohio Subsidiaries") are held by Marathon and Speedway and thus subject to escheatment. Their argument relies on Supreme Court precedent that lays out a strict order of priority among states competing to escheat abandoned property. Constructed as federal common law, that order of priority gives first place to the state where the property owner was last known to reside. If that residence cannot be identified or if that state has disclaimed its interest in escheating the property, second in line for the opportunity to escheat is the state where the holder of the abandoned property is incorporated. Any other state is preempted by federal common law from escheating the property. In this case, money left unclaimed by owners of the stored-value gift cards is - at least according to Marathon and Speedway - held by the Ohio Subsidiaries, and Delaware can have no legitimate escheatment claim on the property. Marathon and Speedway have therefore filed suit and argue that, under the rules of priority and preemption laid down by the Supreme Court, Delaware is not permitted to escheat the gift-card money. Therefore, the argument goes, the State must also be barred from auditing Marathon and Speedway in connection with the gift cards.

         Delaware responds that the Companies' preemption claim is not ripe because no action has been taken to enforce compliance with the audit and thus participation in the audit has been and still is voluntary. The District Court ruled that the dispute is ripe because Marathon and Speedway challenge Delaware's authority to conduct the audit at all. But the Court also concluded that private parties, such as the Companies here, cannot invoke the escheatment priority and preemption rules laid down by the Supreme Court, so it dismissed the Companies' suit.

         The District Court treated this case with due care and admirable skill but, in the end, we disagree with its conclusion that private parties cannot invoke federal common law to challenge a state's authority to escheat property. We also have a somewhat different approach to the question of ripeness. We see two ways to construe Marathon's and Speedway's arguments. Viewed one way, their claim is ripe; viewed the other, it is not. More specifically, to the extent the Companies are challenging Delaware's authority to initiate an audit in the first instance, the claim is ripe but wrong. The notion that the State cannot conduct any inquiry into abandoned property to verify a Delaware corporation's representations regarding abandoned property lacks merit. But, to the extent the Companies are challenging the scope or means of the examination in this case, the claim is not ripe, since the State has taken no formal steps to compel compliance with the audit. Either way, the preemption claim was rightly subject to dismissal.[1] Nevertheless, we will vacate the order of dismissal so that the District Court can clarify that dismissal is without prejudice, which may allow Marathon and Speedway to bring their claim again at a later date, if appropriate.

          I. Background[2]

         A. Marathon and Speedway

         Marathon and Speedway are Delaware corporations with their principal places of business in Ohio. Marathon refines, markets, retails, and transports petroleum, and also sells its gasoline through independently owned gas stations located in the Midwest and Southeast. Speedway is an indirect subsidiary of Marathon and operates gas stations and convenience stores.[3] "[D]uring the audit period[, ]" all of Speedway's stations "were outside of Delaware."[4] (Opening Br. at 7.) The Ohio Subsidiaries are Marathon Prepaid Card LLC and Speedway Prepaid Card LLC. Their primary purpose is to issue non-expiring stored-value gift cards for their respective brands. According to the contracts between, on the one hand, Marathon and Speedway and, on the other, the Ohio Subsidiaries, the latter are "solely liable and obligated for the value of all [c]ards" that they issue. (App. at 217, 246.) Neither of the Ohio Subsidiaries obtain addresses of gift card purchasers or recipients, and both "conducted business solely outside of Delaware during the audit period."[5](Opening Br. at 8.)

         B. The State Escheator

         Like the law of other states, Delaware law presumes the right of the State to lay claim to abandoned property. Carrying into the present the language of feudal property concepts, the exercise of that power is called "escheatment." Del. Code Ann. tit. 12, §§ 1101 - 1224 (2017); see also Escheat, Black's Law Dictionary (10th ed. 2014) (observing that, in escheatment, "the state steps in the place of the feudal lord, by virtue of its sovereignty, as the original and ultimate proprietor of all the lands within its jurisdiction"). Delaware requires corporations organized under its laws to report and transfer to the State any property that has not been claimed by the property owners for five years. Id. § 1133(14).[6] To enforce that requirement, it has created the office of State Escheator under the Department of Finance. Id. § 1102. The Escheator is permitted, "at reasonable times and on reasonable notice, … [to] [e]xamine the records of [a corporation] … in order to determine whether the [corporation has] complied with" the abandoned property laws. Id. § 1171. The Escheator has the authority to "[i]ssue an administrative subpoena to require that the records … be made available for examination, " and may, if necessary, go to the Court of Chancery to enforce the subpoena.[7] Id. If the Escheator determines that a holder of abandoned property has underreported its holdings, the Escheator "shall mail [to the holder] a statement of findings and request for payment, " the payment amount being the value of the property in question. Id. § 1179.

          The Escheator is permitted to rely on third party auditors to conduct an audit, and the vast majority of Delaware's audits are in fact farmed out to an entity called Kelmar Associates, LLC. Kelmar has a financial incentive to classify property as escheatable because it is compensated, at least in part, based on the value of property that Delaware is able to escheat.[8]

         An abandoned property holder receiving the Escheator's request for payment may then choose among the following options: (1) pay the amount demanded; (2) pay and then seek a refund by filing an action in the Delaware Court of Chancery; or (3) refuse to pay and file an action in that same court. Id. The Court of Chancery reviews the Escheator's factual determination deferentially, taking "due account of the experience and specialized competence of the State Escheator, " and the court will uphold the Escheator's determination if it was "the product of an orderly and logical deductive process rationally supported by substantial, competent evidence on the hearing record." Id. § 1179(d). Legal questions related to any such dispute are reviewed de novo. Id.

         C. The Audit

         On March 31, 2007, the Escheator, through Kelmar, commenced an examination of Marathon and Speedway. At first, the audit concerned uncashed checks and payroll disbursement accounts. Also under audit were paper gift certificates issued by Speedway, which are different from the stored-value gift cards at issue in this appeal. Kelmar requested 35 years of "voluminous detailed financial records[.]" (App. at 7.) The Companies produced the requested documents. Kelmar then "requested additional detailed information several separate times[.]" (App. at 44.) In late 2012, more than five years into the audit process, Kelmar issued an Interim Status Report estimating liability of over $8 million for unredeemed gift certificates issued by Speedway from 1986 through 2000. Speedway produced documents drawing Kelmar's estimates into question, but Kelmar still issued a Report of Examination, concluding that Speedway owed that amount. Speedway protested the estimated liability and challenged the methodology used to arrive at it. Kelmar then requested "even more information related to the gift certificate program, " and Speedway complied. (App. at 45.)

         Another three years passed and, in April 2015, Kelmar expanded its audit to include the stored-value gift cards at issue now, requesting "extensive detailed information" about the Ohio Subsidiaries. (App. at 7.) Marathon and Speedway responded by arguing that, since the Ohio Subsidiaries were Ohio corporations, Delaware lacked authority to escheat any sums associated with the unredeemed gift cards. After having produced a selection of documents (including the governing contracts, articles of incorporation for the Ohio Subsidiaries, and W-2 forms for Speedway's Ohio Subsidiary) to prove that the Ohio Subsidiaries were incorporated in Ohio and had no property in Delaware, the Companies objected to producing any further information. Nevertheless, in October 2015, Kelmar sent a letter demanding further documentation. The Companies' counsel then sent a letter to the State Escheator objecting to the requests and repeating the argument that Delaware lacked jurisdiction to inquire further. At the beginning of 2016, Kelmar sent another letter to Marathon and Speedway, this time threatening that "continued failure to provide the requested information will result in the Office referring the matter to the Attorney General's Office for consideration of enforcement action." (App. at 48.)

         D. The Lawsuit

         Marathon and Speedway responded by filing a complaint in the District Court, seeking declaratory and injunctive relief. They alleged that "any action by [the State] to enforce the request for documents is unlawful" because Delaware's escheat law "violates and is preempted by the federal common law … by authorizing the State Escheator to claim purported unclaimed property that Delaware lacks standing to claim under federal law." (App. at 34.) The Companies also asserted that the document requests constituted an unreasonable search in violation of the Fourth Amendment.

         Delaware filed a motion to dismiss for failure to state a claim, which the District Court granted, though it rejected Delaware's argument that the case was not ripe. The Court held instead that the interests of the parties were adverse and that a judgment would be conclusive and of practical utility to the parties. More particularly, it noted that, even though Marathon and Speedway were "not currently the subject of an enforcement action, the aggressive and persistent nature of [the] audit, in conjunction with [the] letter threatening referral to the Attorney General, " placed them in the difficult position of facing a lengthy audit or the risk of large penalties. (App. at 13.) The Court acknowledged "the real and detrimental effects of the audit process" and the impact of continued uncertainty. (App. at 14-15.) It also noted that a decision would be conclusive because Marathon and Speedway were challenging the legal authority of the State to conduct any audit at all into the gift cards. Finally, the Court said that a decision would be of substantial utility because it would either stop the audit or pave the way for a battle over the scope of Delaware's requests.

         Turning to the merits of the preemption claim, the District Court concluded that the rules governing priority to escheat unclaimed property applied only to conflicting claims between states and not to disputes between a private party and a state. Therefore, the preemption claim failed. The Court also dismissed the Companies' Fourth Amendment claim because there had been no compulsion to cooperate with the audit. Marathon and Speedway have filed this timely appeal, challenging only the dismissal of their preemption claim.

          II. Discussion[9]

         This case poses several intertwined questions concerning Delaware's power to search for revenue by auditing companies and escheating abandoned property. The first, is whether, under the Supreme Court's rules of priority, private parties have standing to challenge a state's authority to conduct such an audit and escheat abandoned property. We conclude that they do. The second question is whether Marathon's and Speedway's challenge to Delaware's authority to conduct an audit is ripe, even though there has been no formal effort to compel cooperation. We conclude that the challenge to the authority to audit is ripe but that any challenge to the scope of this specific audit is not. Finally, we consider the merits of the one ripe dispute: whether, consistent with federal common law, Delaware can conduct an audit to determine whether abandoned property ostensibly held by Marathon's and Speedway's Ohio Subsidiaries is escheatable in Delaware. Before we delve into any of those issues, however, we begin with an overview of the governing precedent concerning a state's authority to escheat abandoned property.

         A. Escheat Priority and Preemption

         Every state and the District of Columbia has a set of escheat laws, under which holders of abandoned property must turn such property over to the State "to provide for the safekeeping of abandoned property and then to reunite the abandoned property with its owner." N.J. Retail Merchs. Ass'n v. Sidamon-Eristoff, 669 F.3d 374, 383 (3d Cir. 2012). But, "in recent years, state escheat laws have come under assault for being exploited to raise revenue rather than" to safeguard abandoned property for the benefit of its owners. Plains All Am. Pipeline L.P. v. Cook, 866 F.3d 534, 536 (3d Cir. 2017). Two Justices of the United States Supreme Court recently noted their concern that states are "doing less and less to meet their constitutional obligation to" reunite property owners with their property before seeking escheatment, even as they more aggressively go about classifying property as abandoned. Taylor v. Yee, 136 S.Ct. 929, 930 (2016) (Alito, J., joined by Thomas, J., concurring in the denial of certiorari) (discussing a challenge to California's procedure for notifying property owners). Delaware is "no exception[, ] as unclaimed property has become Delaware's third-largest source of revenue[.]" [10] Plains All Am. Pipeline, 866 F.3d at 536.

         Whether a state can properly escheat property is therefore often a high-stakes question. "With respect to tangible property, real or personal, it has always been the unquestioned rule in all jurisdictions that only the State in which the property is located may escheat." Texas v. New Jersey, 379 U.S. 674, 677 (1965). Intangible property, by comparison, presents a challenge because it cannot "be located on a map." Id. Therefore, without clear rules governing which state is entitled to escheat abandoned intangible property, like a right to access funds through a gift card, states could - and often have - come into conflict. When that occurs, those who hold apparently abandoned property may be at risk of facing competing escheatment claims to that property, an obviously troubling proposition. See W. Union Tel. Co. v. Pennsylvania, 368 U.S. 71, 75 (1961) (explaining that "the holder of … property is deprived of due process of law if he is compelled to relinquish it without assurance that he will not be held liable again in another ...

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