Office Depot, Inc., et. al. v. Delaware - Unclaimed Property Law Update
On January 22, 2018, the United States Court of Appeals for the Third Circuit (“Court”) issued its opinion in the case of Office Depot, Inc. v. Secretary of Finance for the State of Delaware.
Unsurprisingly, because the facts of Office Depot were identical to those in the recently-decided Marathon Petroleum case, the Court vacated the District Court’s judgment determining that the priority rules outlined in the Texas Trilogy did not apply to disputes between states and private parties.
The Office Depot decision, while brief, contains noteworthy analysis regarding the scope of Marathon as it applies to state unclaimed property audits:
- Private Parties’ Standing to Sue: In the Court’s words, a review of the facts of Office Depot “compels the same result” as in Marathon, where the court “squarely held” that “private parties have standing to challenge a state’s authority to conduct an audit and escheat abandoned property.” Accordingly, Office Depot affirms the position the Court outlined in Marathon confirming the Primary and Secondary Rules preempt state law when state law conflicts with those Rules.
- Determination of the True Holder of Unclaimed Property: The Court also reiterated its position from Marathon that “the Texas cases do not prevent [a state] from initiating an inquiry to determine the true holder of abandoned property.” As outlined in Texas and confirmed by the Court, the state may conduct an “appropriate examination” into records “that will assist it” in determining “the precise debtor-creditor relationship” that gave rise to the unclaimed property.
- Limits of Legitimate Inquiry into Subsidiaries: The Court later noted that it intentionally “emphasized in Marathon” that “the narrow issue of whether [a state] may conduct an audit does not bar private parties from bringing suit to challenge the audit if and when the state’s demands from information . . . extend beyond a legitimate inquiry into whether a subsidiary company is bona fide . . .” In other words, the Court set the upper limit for when a state’s demands go beyond a “legitimate inquiry” – when the state seeks information that has no bearing on whether the subsidiary is genuine.
Office Depot continues recent momentum favoring holders in federal and state courts. It further expands upon the Court’s understanding of the precedent set in Marathon. It also reaffirms Marathon’s primary objectives, while at the same time further expounding upon the restrictions that federal common law places on state investigations into the books and records of subsidiaries, including gift card subsidiaries.
By limiting the state’s requests for information about a subsidiary to only that information necessary to determine that a subsidiary is bona fide, Office Depot provides additional clarity regarding what categories of information need to be produced about a subsidiary in the audit context. Such information should be limited to: (i) conformation the subsidiary is duly formed and in good standing under the law of its state of domicile, and (ii) general accounting information, such as a sample journal entry, demonstrating the subsidiary (and not the parent) is the “true holder” of a debt owed to another.
While Marathon and Office Depot leave no doubt about the limited scope of the state’s legitimate inquiry into the books and records of subsidiaries, they also highlight the importance of adhering to corporate formalities and performing necessary accounting tasks diligently and accurately when documenting business activities conducted by subsidiaries.