Marathon Petroleum Corp. v. Secretary of Finance Ex Rel. Delaware ( 2017 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 16-4011
_____________
MARATHON PETROLEUM CORPORATION;
SPEEDWAY LLC; MARATHON PREPAID CARD LLC;
SPEEDWAY PREPAID CARD LLC,
Appellants
v.
SECRETARY OF FINANCE FOR THE STATE OF
DELAWARE; STATE ESCHEATOR OF THE STATE OF
DELAWARE; AUDIT MANAGER FOR THE STATE OF
DELAWARE
_______________
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
_______________
Argued
June 15, 2017
Before: CHAGARES, JORDAN, and KRAUSE, Circuit
Judges.
(Opinion Filed: December 4, 2017)
_______________
Diane Green-Kelly, Esq. [ARGUED]
Reed Smith
10 South Wacker Drive
40th Floor
Chicago, IL 60606
R. Eric Hutz, Esq.
Reed Smith
1201 Market Street
Suite 1500
Wilmington, DE 19801
Counsel for Appellants
Marc S. Cohen, Esq.
Loeb & Loeb
10100 Santa Monica Boulevard
Suite 2200
Los Angeles, CA 90067
Jennifer R. Noel, Esq.
Caroline L. Cross, Esq.
Delaware Department of Justice
820 N. French Street
Carvel Office Building
Wilmington, DE 19801
Steven S. Rosenthal, Esq. [ARGUED]
Tiffany R. Moseley, Esq.
John D. Taliaferro, Esq.
Loeb & Loeb
2
901 New York Avenue, N.W.
Suite 300 East
Washington, DC 20001
Counsel for Appellees
Jameel S. Turner, Esq.
Bailey Cavalieri
10 West Broad Street
Suite 2100
Columbus, OH 43215
Counsel for Amicus Curiae
_______________
OPINION OF THE COURT
_______________
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
3
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
4
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.
1
Marathon and Speedway narrowly argued that Texas
v. New Jersey, 379 U.S. 674 (1965), and its progeny foreclose
a state’s ability to examine whether a corporation has
committed fraud such that property held by its out-of-state
subsidiaries may be escheated. They did not clearly argue in
the alternative that there is a point at which an otherwise
legitimate state inquiry into the bona fides of a subsidiary
triggers the priority rules, nor did they develop the factual
record necessary to assess the merits of such an argument
such as might have been available had there been an
enforcement proceeding.
5
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
2
The District Court granted Delaware’s motion to
dismiss. Accordingly, on appeal we “must accept all of the
complaint’s well pleaded facts as true[.]” Fowler v. UPMC
Shadyside, 578 F.3d 203, 210 (3d Cir. 2009).
3
The exact corporate structure is complicated and not
entirely clear from the record before us. The Companies are
(or were during the audit period) subsidiaries of Marathon Oil
Corporation. Marathon Petroleum Corporation (the
“Marathon” that is the party here) was organized in 2009 as a
direct subsidiary of Marathon Oil Corporation, but in 2011 it
was spun off and became a separate, publicly traded
corporation.
4
That may have changed, but, for purposes of the
relevant audit period under review, it is enough that
Speedway did not have any stations in Delaware when this
case was first filed.
6
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
5
As far as we know, that is still the case.
6
In February of this year, Delaware revamped its
escheat statute. The General Assembly recognized that, “for
ease of administration and organizational clarity, existing
subchapters should be struck in their entirety and the statute
restructured in a more orderly manner[.]” S.B. 13, 149th
7
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.
Gen. Assemb. (Del. 2017). In enacting “significant changes
to the State’s unclaimed property law[,]” id. at Synopsis, the
legislature decided to limit the look-back period of all audits
to ten years and to impose a ten-year statute of limitations.
Id. The new law also creates a process for companies under
audit prior to July 22, 2015, which would include the parties
in this case, to either seek an expedited audit review process
or participate in a voluntary disclosure program. Id. We are
relying in this opinion on the amended version of the law,
which is now in effect, and will note changes when relevant.
7
Before the 2017 amendments, it was not clear
whether the Escheator had the authority to subpoena records.
The recent statutory changes make that power explicit. Id.
§ 1171.
8
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
8
We recently concluded that a corporation being
audited by Kelmar had standing to bring a due process
challenge based on the allegation that Kelmar had conflicts of
interest. Plains All Am. Pipeline LLC v. Cook, 866 F.3d 534,
537 (3d Cir. 2017).
9
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
10
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
11
[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.
12
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
9
Standing and ripeness are issues in this case, so our
jurisdiction is in dispute. See Nat’l Park Hosp. Ass’n v. Dep’t
of Interior, 538 U.S. 803, 808 (2003) (noting that ripeness “is
drawn” at least in part “from Article III limitations on judicial
power” (internal quotation marks omitted)); Lujan v. Defs. of
Wildlife, 504 U.S. 555, 560 (1992) (emphasizing that “the
core component of standing is an essential and unchanging
part of the case-or-controversy requirement of Article III”).
But, assuming that Marathon and Speedway have standing
and that their claims are ripe, the District Court had
jurisdiction under 28 U.S.C. § 1331. Our jurisdiction is then
predicated on 28 U.S.C. § 1291. We review de novo the
District Court’s determination of jurisdiction, as well as its
decision to grant Delaware’s motion to dismiss for failure to
state a claim. Ballentine v. United States, 486 F.3d 806, 808
(3d Cir. 2007).
13
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
14
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 jurisdiction”). In response to those concerns, the
Supreme Court, in a set of cases that we will call for
convenience the “Texas trilogy” or the “Texas cases,” laid
down the rules of priority governing the escheatment of
intangible property.
10
In fact, it has been pointed out that Delaware in
particular “rel[ies] on decidedly old-fashioned methods [for
providing notice of escheatment, methods] that are unlikely to
be effective.” Taylor v. Yee, 136 S. Ct. 929, 930 (2016)
(Alito, J., concurring).
15
1. The Texas Trilogy
In Texas v. New Jersey, the Supreme Court took up
the question of which among several competing states was
entitled to escheat abandoned intangible property. 379 U.S.
at 677. At least four states wanted the money that backed
uncashed checks held by the Sun Oil Company. Id. at 675-
77. Sun Oil, now widely known as Sunoco, was incorporated
in New Jersey and had its principal offices and place of
business in Pennsylvania. Id. at 676. Many of the people to
whom the checks were issued were in Texas while others
were in Florida or in parts unknown. Id. at 675-77. Texas
sued New Jersey, Pennsylvania, and Sunoco, and Florida
moved to intervene. Id. All four states sought to escheat
some or all of the money in question. Id. at 676-77.
The Supreme Court considered several possible rules
to govern the order of priority among the states. Id. at 678. It
emphasized the importance of adopting bright line rules
rather than a test that would require case-by-case analysis. 11
Id. at 679-80. Using the terms “debtor” and “creditor” to
designate, respectively, the “holder” and the “owner” of
11
The Court rejected the proposal to apply the “most
significant contacts” test because applying that test “would
serve only to leave in permanent turmoil a question which
should be settled once and for all by a clear rule which will
govern all types of intangible obligations like these and to
which all [s]tates may refer with confidence.” Texas, 379 U.S.
at 678. For similar reasons, the Court rejected use of the
debtor’s (i.e., the property holder’s) principal place of
business. Id. at 680.
16
unclaimed property, 12 the Supreme Court granted first priority
to the state of the last known address of the creditor,
according to the debtor’s books and records. Id. at 680-82.
The Supreme Court emphasized that such a rule was fair
because “a debt is property of the creditor, not of the
debtor[.]” Id. at 680. Moreover, such a rule would involve
factual questions that are “simple and easy to resolve.” Id. at
681. And the rule would “tend to distribute escheats among
the [s]tates in the proportion of the commercial activities of
their residents …, rather than technical legal concepts of
residence and domicile[.]” Id.
Having determined which state had first priority, the
Supreme Court then considered which state should have
priority when there is no record of any address for the
creditor, or when the “last known address is in a [s]tate which
does not provide for escheat of the property owed[.]” Id. at
682. The Court concluded that in such cases the state of the
debtor’s state of incorporation would be entitled to escheat
the property. Id. at 683. The Court acknowledged that the
“case could have been resolved otherwise.” Id. But it
emphasized that “the rule [it] adopt[ed] is the fairest, is easy
to apply, and in the long run will be the most generally
acceptable to all the [s]tates.” Id.
In Pennsylvania v. New York, 407 U.S. 206 (1972), the
Supreme Court considered in greater detail the situation in
12
In the context of escheat, the holder of unclaimed
property such as the money owed to the bearer of an uncashed
check or a gift card is called a “debtor,” while the owner of
the check or gift card is called a “creditor” because he is
entitled to the money on demand.
17
which there is no record of the creditors’ addresses.
Pennsylvania sought to escheat unclaimed funds from money
orders purchased within the state, and, naturally, it argued
that “the [s]tate where the money orders are bought should be
presumed to be the [s]tate of the sender’s residence.” Id. at
209, 212. The Court acknowledged that “Pennsylvania’s
proposal has some surface appeal.” Id. at 214.
Notwithstanding that appeal, however, the Court said that not
knowing where many of the creditors lived did not justify a
departure from the rule laid down in Texas: “[T]o vary the
application of the Texas rule according to the adequacy of the
debtor’s records would require [us] to do precisely what we
said should be avoided—that is, ‘to decide each escheat case
on the basis of its particular facts or to devise new rules of
law to apply to ever-developing new categories of facts.’” Id.
at 215 (quoting Texas, 379 U.S. at 679).
Finally, in Delaware v. New York, 507 U.S. 490
(1993), the Court rejected any efforts to loosen or change the
priority rules by broadening the concept of a property-holding
“debtor,” id. at 502, or by allowing the state of the debtor’s
principal place of business to escheat the property, id. at 506.
The Court succinctly summarized the priority rules from
Texas in three steps. First, one must “determine the precise
debtor-creditor relationship as defined by the law that creates
the property at issue.” Id. at 499. “Second … the primary
rule gives the first opportunity to escheat to the state of ‘the
creditor’s last known address as shown by the debtor’s books
and records.’” Id. at 499-500 (quoting Texas, 379 U.S. at
680-81). “Finally, if the primary rule fails because the
debtor’s records disclose no address for a creditor or because
the creditor’s last known address is in a [s]tate whose laws do
not provide for escheat, the secondary rule awards the right to
18
escheat to the [s]tate in which the debtor is incorporated.” Id.
at 500. The Court thus reiterated the importance of “adhering
to [its] precedent” to “resolve escheat disputes between
[s]tates in a fair and efficient manner,” id. at 510, and
explained that “[t]o craft different rules for the novel facts of
each case would” result in “so much uncertainty and threaten
so much expensive litigation” as to frustrate the power to
escheat. Id. In addition, the Court explained that the Texas
priority rules protect individuals from having their property
interests “cut off or adversely affected by state action … in a
forum having no continuing relationship to any of the parties
to the proceedings.” Id. at 504 (quoting Pennsylvania, 407
U.S. at 213). Accordingly, “no state may supersede [the
rules] by purporting to prescribe a different priority under
state law.” Id. at 500. Thus, throughout the Texas trilogy, the
Supreme Court emphasized the importance of having bright-
lines rules for determining which state can escheat disputed
property and preventing states without a recognized interest
from staking a claim.
2. New Jersey Retail Merchants
Applying the guidance given in the Texas cases, our
opinion in New Jersey Retail Merchants Ass’n v. Sidamon-
Eristoff, resolved a significant question that had been left
unsettled, namely whether the priority rules set out by the
Supreme Court are exclusive. 669 F.3d at 391-96. In other
words, if both of the two states empowered to escheat
property under the Texas trilogy – i.e., the creditor’s last
known state of residence and the debtor’s state of
incorporation – are unwilling or unable to escheat the
property, may another state attempt to do so? We said no.
19
In New Jersey Retail Merchants, a variety of sellers of
stored-value cards brought a challenge to New Jersey’s
abandoned property law. Reminiscent of the law at issue in
Pennsylvania v. New York, the New Jersey law contained a
place-of-purchase presumption whereby, if the address of a
purchaser of a card was unknown, the law would presume the
address to be the place where the stored-value card was
purchased. Id. at 394. After reviewing the Texas trilogy, we
concluded that New Jersey’s presumption was invalid
because the State did “not have a sufficient connection with
any of the parties to the transaction to claim a right to escheat
the abandoned property.” Id. We explained that the Supreme
Court’s “primary concern” in the Texas cases “was to clearly
and definitively resolve disputes among states regarding the
right to escheat abandoned property,” and that “allowing
states to implement additional priority rules” was
incompatible with that precedent and would create
uncertainty. Id. at 395-96. Therefore, the two states allowed
to escheat under the priority rules of the Texas cases are the
only states that can do so.
We thus expressly rejected New Jersey’s argument
“that[,] without the place-of-purchase presumption, [debtors]
that are incorporated in states that do not escheat abandoned
property would unfairly have the right to retain the abandoned
property.” Id. at 395. We said that that “potential of a
windfall” did not justify departing from the rules set out by
the Supreme Court. Id. (relying on Pennsylvania, 407 U.S. at
214). Moreover, since “a state’s power to escheat is derived
from the principle of sovereignty,” a state is also entitled to
choose not to escheat property. Id. “[S]tates may want to
incentivize companies to incorporate in their jurisdiction by
choosing not to escheat abandoned property.” Id. Efforts by
20
a state outside of the established rules of priority to escheat
the property would be disrespectful to “the principle of
sovereignty” and would effectively be an attempt to “force a
state to escheat against its will.” Id.
The implications of New Jersey Retail Merchants for
this case are clear. If it is true, as Marathon and Speedway
allege, that the Ohio Subsidiaries are the holders of the
abandoned gift card money, then Delaware cannot escheat
that money even though Ohio has disclaimed any interest in
doing so. And Delaware does not contest that conclusion.
Indeed, it asserts that its law is fully consistent with the Texas
trilogy and that it does not claim the right to escheat such
property. See Del. Code Ann. tit. 12, §§ 1139-1141 (2017)
(laying out when Delaware can escheat property in a manner
compatible with the Texas trilogy). Instead, the State argues
that it is entitled to conduct an examination to determine if the
money is in fact held by the Ohio Subsidiaries, an argument
that we will turn to later. First, however, we consider
threshold questions of standing and ripeness.
B. Private Party Standing
The Texas cases involved states suing each other over
escheatment rights. Not surprisingly, then, the language of
those decisions focuses on resolving claims among states.
See, e.g., Texas, 379 U.S. at 679 (“[W]e are faced here with
the ... problem of deciding which [s]tate’s claim to escheat is
superior to all others.”). The Supreme Court did not have
occasion to determine whether a private party has standing to
challenge a state’s application of the priority rules to escheat
21
property. 13 As a result, a split has emerged on that question
in opinions issuing from lower federal courts. While there are
13
Neither the parties nor the District Court framed
Marathon’s and Speedway’s ability to bring suit as a question
of standing. Nevertheless, we address it as such because it
fundamentally asks “who may bring the action.” Presbytery
of N.J. of Orthodox Presbyterian Church v. Florio, 40 F.3d
1454, 1462 (3d Cir. 1994) (“Correct analysis in terms of
ripeness tells us when a proper party may bring an action and
analysis in terms of standing tells us who may bring the
action.”); cf. Am. Exp. Travel Related Servs. Co. v. Sidamon-
Eristoff, 755 F. Supp. 2d 556, 597 (D.N.J. 2010), order
clarified (Jan. 14, 2011), aff’d sub nom. Am. Exp. Travel
Related Servs., Inc. v. Sidamon-Eristoff, 669 F.3d 359 (3d
Cir. 2012), and aff’d sub nom. New Jersey Retail Merchants
Ass’n v. Sidamon-Eristoff, 669 F.3d 374 (3d Cir. 2012)
(treating the issue of a private party’s ability to challenge a
state’s escheat laws as a question of standing).
Even if we frame the question as whether the federal
common law escheatment scheme created in the Texas trilogy
contains a private right of action, the primary inquiry remains
one of standing. Cf. Middlesex Cty. Sewerage Auth. v. Nat’l
Sea Clammers Ass’n, 453 U.S. 1, 11 & n.17 (1981) (stating
that certiorari was granted to determine “whether a private
citizen has standing to sue for damages under the federal
common law of nuisance[,]” but ultimately concluding that
the Court did not need to address the issue because federal
common law was replaced by federal statutes). We do not
believe the Supreme Court’s decision in Lexmark Int’l, Inc. v.
Static Control Components, Inc., 134 S. Ct. 1377 (2014),
counsels otherwise. There, the Supreme Court said that “the
zone-of-interests analysis, which asks whether ‘this particular
22
class of persons ha[s] a right to sue under this substantive
statute[,]’” focuses on whether a party “has a cause of action
under the statute” and requires application of “traditional
principles of statutory interpretation.” Id. at 1387-88.
Lexmark clarified that, for those reasons, the zone-of-interests
analysis is not a constitutional or prudential standing inquiry
meant to ensure federal court jurisdiction but rather is a
statutory question to be addressed on the merits. See id. at
1387 n.4 (indicating that “statutory standing” and “prudential
standing” are not proper descriptions of the zone-of-interests
analysis because “the absence of a valid (as opposed to
arguable) cause of action does not implicate subject-matter
jurisdiction, i.e., the court’s statutory or constitutional power
to adjudicate the case’” (emphasis in original)); see also
Maher Terminals, LLC v. Port Auth. of N.Y. & N.J., 805 F.3d
98, 105 (3d Cir. 2015) (noting that “[t]he Court clarified [in
Lexmark] that the zone-of-interests requirement goes to
whether a particular plaintiff has a cause of action under a
given law, not a plaintiff’s standing” and “Lexmark strongly
suggests that courts shouldn’t link the zone-of-interests test to
the doctrine of standing”).
Here, the question does not involve a statute and is not
resolvable using traditional tools of statutory interpretation.
Instead, whether a private party has the right to invoke the
federal common law crafted by the Supreme Court as a matter
of its original jurisdiction in the Texas trilogy implicates our
constitutional power to adjudicate the case at all. In the
absence of a private cause of action under federal common
law to enforce the priority rules, there is no cognizable case
or controversy over which a federal court may exercise its
limited subject matter jurisdiction. See Illinois v. Milwaukee,
406 U.S. 91, 100 (1972) (concluding that “[28 U.S.C. §] 1331
23
plausible arguments on both sides, we conclude that the
Supreme Court’s precedent does permit a private cause of
action to enforce the priority rules.
Our decision in New Jersey Retail Merchants, has
already said as much, albeit by implication. See generally
669 F.3d 374. The United States District Court for the
District of New Jersey had rejected the State of New Jersey’s
argument that private parties were without standing to
challenge the State’s escheat guidelines. Am. Exp. Travel
Related Servs. Co. v. Sidamon-Eristoff, 755 F. Supp. 2d 556,
597 (D.N.J. 2010), order clarified (Jan. 14, 2011), aff’d sub
nom. Am. Exp. Travel Related Servs., Inc. v. Sidamon-
Eristoff, 669 F.3d 359 (3d Cir. 2012), and aff’d sub nom. N.J.
Retail Merchants Ass’n v. Sidamon-Eristoff, 669 F.3d 374 (3d
Cir. 2012). The district court emphasized that private parties
have a significant interest in requiring compliance with the
rules of priority. Id. at 598. If a stored value card issuer is
incorporated in a state that does not escheat certain types of
abandoned property, then that party is “entitled to retain the
abandoned [property] when the address of the owner is
unknown.” Id. at 597. Accordingly, any priority rules
contrary to the Texas trilogy would “deprive[] corporations of
the benefit of the secondary rule.” Id.
On appeal to us, the parties in New Jersey Retail
Merchants fully briefed the question of private party standing
to sue for enforcement of the Texas priority rules. We
affirmed on the merits, without discussing the question of
standing or the right of private parties to bring suit, N.J.
will support claims founded upon federal common law as
well as those of a statutory origin”).
24
Retail Merchs., 669 F.3d at 400, but because the issue had
been framed as a question of standing, our decision to address
the merits certainly suggests that we accepted there was
standing.
In any event, even if our decision in that case had not
effectively determined that a private party can enforce the
Texas priority rules, we would come to that conclusion here.
In Texas, the Supreme Court noted that the escheatment
priority scheme it provided was the product of a particular
need. “Since the States separately are without constitutional
power to provide a rule to settle this interstate controversy
and since there is no applicable federal statute,” the Court
said, “it becomes our responsibility in the exercise of our
original jurisdiction to adopt a rule which will settle the
question of which State will be allowed to escheat [the]
intangible property.” Texas, 379 U.S. at 677. Nonetheless,
the reasoning of the Texas cases is directly applicable to
disputes between a private individual and a state. The
Supreme Court established those priority rules in part because
subjecting individuals to the risk of “double liability” would
violate the Due Process Clause. Id. at 676; see also Standard
Oil Co. v. New Jersey, 341 U.S. 428, 443 (1951) (“The Full
Faith and Credit Clause bars any … double escheat.”). In
other words, the priority rules were created not merely to
reduce conflicts between states, but also to protect
individuals. See W. Union, 368 U.S. at 79 (noting that
overlapping escheat inquiries “present[] problems of great
importance to the [s]tates and persons whose rights will be
adversely affected by escheats”).
Moreover, the Supreme Court has strictly applied its
priority rules to prevent “intangible property rights” from
25
“be[ing] cut off or adversely affected by state action … in a
forum having no continuing relationship to any of the parties
to the proceedings.” Pennsylvania, 407 U.S. at 213 (internal
quotation marks omitted); Delaware, 507 U.S. at 504. That
concern for action by a state without a “continuing
relationship” to the people whose property is at issue would
make little sense if the Texas trilogy were solely concerned
with the competing interests of states. After all, a state with a
superior interest could seek to recover property even after it
has been escheated by another state. See Texas, 379 U.S. at
682 (noting that a state escheating property under the Texas
trilogy “retain[s] the property for itself only until some other
[s]tate comes forward with proof that it has a superior right to
escheat”). Additionally, one of the defendants in the original
Texas case was in fact a private party, which strengthens the
conclusion that such parties can sue to enforce the Texas
priority rules. See Texas, 379 U.S. at 675-76 (acknowledging
that the Sun Oil Company was a party to the suit and had
asked “to be protected from the possibility of double
liability”). It makes little sense to require a private party to
wait to be sued by a state before that party can assert its
rights. If private parties may be defendants in disputes over
the priority rules when their interests are at stake, they by
rights should also be allowed to sue for enforcement of the
priority rules to ensure protection of those same interests.
In reaching the opposite conclusion, the District Court
in this case relied on an earlier opinion from the District of
Delaware, Temple-Inland, Inc. v. Cook, 82 F. Supp. 3d 539
(D. Del. 2015). The Temple-Inland court decided that the
“Texas cases apply to disputes among [s]tates, not to disputes
between private parties and [s]tates[.]” Id. at 549. It cited
“the well-established principle that federal courts may not
26
ordinarily displace state law,” absent clear indications to the
contrary. Id. at 550. We share the Temple-Inland court’s
concern about turning ordinary matters of state law into
questions of federal law. But without a private cause of
action, the Texas trilogy’s protections of property against
escheatment would, in many instances, become a dead letter.
Denying a private right of action would leave property
holders largely at the mercy of state governments for the
vindication of their rights. 14 Making private rights contingent
on state action would likewise undermine the Supreme
Court’s goal of national uniformity, because whether an
individual is protected would depend on whether a state
brings suit to contest escheatment of the property. Cf. Am.
Petrofina Co. of Tex. v. Nance, 697 F. Supp. 1183, 1187
(W.D. Okla. 1986) (concluding that private parties could
enforce the Texas trilogy “because the decision was rendered
as a result of the Supreme Court exercising its original
jurisdiction and to ensure uniformity”), aff’d, 859 F.2d 840,
842 (10th Cir. 1988) (agreeing with “the [district] court’s
findings and conclusions on the preemption issue”).
Therefore, we conclude that the Supreme Court’s desire for a
14
Arguably, private parties would not be totally
without recourse, even if we rejected a private cause of action
to enforce the Texas trilogy. Since the Due Process and Full
Faith and Credit clauses protect individuals from being forced
to pay the same property value to multiple states, a private
party could seek legal relief to prevent additional states from
claiming the same property. That would not, however,
protect a corporation from having its assets escheated in the
first place, nor would it do anything to prevent overlapping
and invasive examinations.
27
uniform and consistent approach to escheatment disputes
indicates that a private right of action is fully appropriate. 15
Finally, allowing private parties to sue also provides
secondary benefits that serve the public interest. In protecting
their own interests, private parties may also be aiding states in
the maintenance of their sovereignty. As we noted in New
Jersey Retail Merchants, states are entitled to choose not to
escheat property. They may well choose to do so “to
incentivize companies to incorporate in their jurisdiction.”
N.J. Retail Merchs., 669 F.3d at 395. Ohio could have made
the decision to not exercise its power to escheat for precisely
that reason, and Marathon and Speedway responded by
choosing to incorporate their gift-card subsidiaries in Ohio. If
Marathon and Speedway cannot sue, then Ohio is wrongly
placed in a dilemma. It can either do nothing, allow the
property of Ohio corporations to be seized by another state,
and thus see the incentive to incorporate in Ohio being
undermined, or it can engage in costly litigation to defend
property it has no interest in escheating. 16 Allowing private
15
One of the benefits of the Texas trilogy is a clear set
of rules that allows for “ease of administration.” Texas, 379
U.S. at 683. Denying a private cause of action would make it
easier for states outside of the line of priority to escheat
property and would require the Supreme Court to exercise or
delegate its original jurisdiction in a greater number of cases,
undermining one of the chief benefits of the rules of priority.
16
There is of course a third option – Ohio could
change its laws to escheat the property itself. But as we noted
in New Jersey Retail Merchants, allowing one state to “force
a[nother] state to escheat against its will” is in contravention
28
parties to sue thus provides a check against one state
undercutting another’s decision not to escheat.
Delaware argues against a private cause of action by
saying it is unnecessary since a holder of abandoned property
has no lawful interest in the funds. From the Supreme Court
opinion that bears its name, Delaware quotes the Court’s
statement that “[f]unds held by a debtor become subject to
escheat because the [holder] has no interest in the funds” and
that “a law requiring the delivery of such [funds] to the [s]tate
affects no property interest belonging to the [holder].”
Delaware, 507 U.S. at 502. Delaware reasons that if a holder
has “no property interest” in the funds, the holder does not
need to be able to enforce the Texas priority rules. There is
some precedent for that position. For instance, the Texas
Supreme Court has said that allowing Texas to escheat
unclaimed property, even if the state would not have priority
under the trilogy, would prevent an unjust windfall to those
holding unclaimed property and would “bring the funds into
the custody” of the state “where reports and procedures would
be available” to allow “other [s]tates to learn of the funds and
assert … any superior rights which they may claim.” State v.
Liquidating Trs. of Republic Petroleum Co., 510 S.W.2d 311,
315 (Tex. 1974); see also Riggs Nat. Bank of Wash., D.C. v.
District of Columbia, 581 A.2d 1229, 1245 (D.C. Ct. App.
1990) (concluding that Texas concerned only “the competing
claims of different jurisdictions for escheat of the same
property” and was silent with regard to “the relative rights to
custody of abandoned property as between a private holder
and a state”).
of “the principle of sovereignty.” N.J. Retail Merchs., 669
F.3d at 395.
29
But that is, at bottom, the very argument we rejected in
New Jersey Retail Merchants. And adopting that position
would leave us blind to reality. In this case, there are no
records indicating where the purchasers reside. Ohio has
disclaimed any interest in escheating abandoned gift card
property. That means the Ohio subsidiaries are entitled to
keep the property (assuming that they have it) unless and until
someone holding a gift card comes forward to claim the value
of the card. Delaware would have us shut our eyes and
pretend that Marathon’s and Speedway’s very real entitlement
to hold the property did not exist. There is no persuasive
precedent counseling that approach.
C. Ripeness
Having decided that Marathon and Speedway have
standing to raise their federal common law claim based on the
Texas trilogy priority rules, we must next determine whether
that claim presents a ripe “case[]” or “controvers[y].” U.S.
Const. art. III, § 2. The claim, as framed in the complaint, is
that Delaware’s abandoned property laws are preempted to
the extent they allow Delaware to inquire into and escheat
property that could not be claimed under the Texas priority
rules. Based on that claim, the Companies seek both
declaratory and injunctive relief.
“[T]he contours of the ripeness doctrine” are
particularly difficult to define “with precision” when a party
seeks a declaratory judgment. Step-Saver Data Sys., Inc. v.
Wyse Tech., 912 F.2d 643, 646 (3d Cir. 1990). Yet, as we
recently discussed in deciding Plains All American Pipeline,
866 F.3d at 540, there are three key considerations that guide
30
our judgment: “the adversity of the interest of the parties, the
conclusiveness of the judicial judgment[,] and the practical
help, or utility, of that judgment.” Step-Saver, 912 F.2d at
647.
Marathon’s and Speedway’s preemption claim is
equivocal. Read one way, the claim is not ripe; read another
way, it is ripe but fails on the merits. More specifically, to
the extent the Companies question the scope and intensity of
Delaware’s audit, that claim is not ripe at this time. On the
other hand, to the extent they argue that Delaware cannot
even conduct an audit to verify the allegation that the
abandoned property in question is held by the Ohio
Subsidiaries, that is a ripe but meritless claim.
1. Challenge to the Scope of the Audit
The first variation of the Companies’ claim – focusing
on the scope and intensity of the audit – is like one we
recently agreed was unripe in Plains All American Pipeline.
The district court there rejected the claim on ripeness
grounds, 201 F. Supp. 3d 547, 559 (D. Del. 2016), and we
affirmed, with a limited exception not relevant here. 17 The
reasons for our affirmance are fully present now. The
Companies’ challenge is predicated on the speculative
assumption that Delaware will ultimately attempt to escheat
17
The plaintiff in Plains also argued that Kelmar’s
involvement in the audit violated due process since Kelmar
had a conflict of interest. That claim could be resolved
without factual development, and so we concluded that the
District Court erred in dismissing it. Plains All Am. Pipeline,
866 F.3d at 545.
31
property that it is not entitled to escheat. But at this point,
Delaware has not even formally demanded compliance with
the audit, so Marathon and Speedway are “not yet in a place
where [they] must choose between submitting to the audit or
facing penalties[.]” 18 Plains All Am. Pipeline, 866 F.3d at
542. And even if Delaware makes a formal demand for
documents, “the costs of administrative investigations are
usually not sufficient, however substantial, to justify review
in a case that would otherwise be unripe.” Id. Moreover, the
validity of Delaware’s audit may “turn largely on how it is
enforced,” and also on the question of who in fact is the
holder of the property, suggesting that a decision at this time
would be inconclusive and lacking in practical utility absent
further factual development. Id. at 544.
To be sure, Marathon and Speedway make troubling
accusations about Delaware’s escheat auditing process. And
those allegations are supported by the thorough opinion in
Temple-Inland, Inc. v. Cook, 192 F. Supp. 3d 527, 527 (D.
Del. 2016). The court in that case noted that Kelmar, the
State’s contract auditor, had “relie[d] heavily on property
escheatable only to other states to increase the amount of
unclaimed property owed to Delaware.” Id. at 537.
Accordingly, Marathon and Speedway have good reason to be
concerned that Delaware may claim property that it is not
entitled to escheat, placing them “at risk of multiple liability.”
18
While there are factual differences between this case
and Plains, for instance, the fact that an audit has been
ongoing for several years in this case and was in its infancy in
Plains, those differences do not alter the critical fact that
Delaware has as yet taken no formal steps to compel
cooperation with its audit of Marathon and Speedway.
32
Id. at 541. In addition, if Delaware’s examination process
proves in this case to be “a game of ‘gotcha’ that shocks the
conscience,’” id. at 550, as it did in Temple-Inland, then
Marathon and Speedway are justified in their fear that
Delaware will draw out the audit and continue to find new
reasons for a prolonged investigation. And Kelmar’s
financial incentive to claim as much escheatable property as
possible taints the entire process with an appearance of self-
interested overreaching. Nevertheless we cannot ignore that,
at this junction, Marathon and Speedway are effectively in
control: they can simply refuse to cooperate.
We are also cognizant of the availability of state law
remedies if Delaware does make a formal demand for
documents. In light of recent amendments to Delaware’s
abandoned property laws, there are some unanswered
questions that bear on the audit. 19 As a matter of comity, it
would be well if Delaware had the opportunity to address
19
Indeed, a proposed Abandoned or Unclaimed
Property Reporting and Examination Manual was recently
before the public for notice and comment. It concerns,
among other things, the estimation methods that the Escheator
is entitled to use, record retention requirements, and the
process for requesting an expedited examination. Delaware
Department of Finance, Public Notice 104 Department of
Finance Abandoned or Unclaimed Property Reporting and
Examination Manual, http://regulations.delaware.gov/register/
august2017/proposed/21%20DE%20Reg%20123%2008-01-
17.pdf.
33
those issues in the first instance. 20 So, even if this challenge
were ripe, we might “decline jurisdiction over a declaratory
20
We encourage Marathon and Speedway to take
advantage of state remedies. But, while we do not decide the
matter here, we note that challenging the audit in state court
may bar a subsequent challenge in a federal district court. If
the Companies bring their state law and federal law claims in
state court, the Rooker-Feldman doctrine may prevent the
District Court from entertaining an attempt to relitigate those
claims. See Exxon Mobil Corp. v. Saudi Basic Indus. Corp.,
544 U.S. 280, 284 (2005) (holding that the Rooker-Feldman
doctrine prevents federal district courts from exercising
jurisdiction over “cases brought by state-court losers
complaining of injuries caused by state-court judgments
rendered before the district court proceedings commenced
and inviting district court review and rejection of those
judgments”). And to the extent Rooker-Feldman and 28
U.S.C. § 1257 do not “stop a district court from exercising
subject-matter jurisdiction simply because a party attempts to
litigate in federal court a matter previously litigated in state
court[,]” primarily because the “federal plaintiff ‘present[s]
some independent claim, albeit one that denies a legal
conclusion that a state court has reached in a case to which he
was a party[,]’” id. at 293 (second alteration in original),
preclusion doctrine may bar that subsequent independent
claim from being heard in federal district court. Nevertheless,
we do not at this time opine on the potential preclusive impact
of a state court judgment because that issue depends on an
interpretation of state law and, in any event, is not before us.
See Parsons Steel, Inc. v. First Ala. Bank, 474 U.S. 518, 523
(1986) (“[A] federal court must give the same preclusive
effect to a state-court judgment as another court of that State
34
judgment action” to allow the state court system an
opportunity to resolve those questions of state law. 21 See
Reifer v. Westport Ins. Corp., 751 F.3d 129, 137 (3d Cir.
2014) (concluding that it was not abuse of discretion for the
district court to decline jurisdiction over a declaratory
judgment action because state law issues “peculiarly within
the purview of the [state] court system” were raised). In any
would give.”). Finally, we are not saying anything about
whether Marathon and Speedway are required to raise their
federal complaints in state court. Cf. Bradley v. Pittsburgh
Bd. of Educ., 913 F.2d 1064, 1071 (3d Cir. 1990) (discussing
the requirements for the reservation of federal issues when a
party is forced to litigate a claim in state court).
21
Our discretion under the Declaratory Judgment Act
is “not limited” by the parameters of a “more limited doctrine
of abstention” such as Burford or Colorado River Abstention.
United States v. Commonwealth of Pa., Dep’t of Envtl. Res.,
923 F.2d 1071, 1074 (3d Cir. 1991). When a claim for
injunctive relief is “dependent on declaratory claims,” we also
“retain[] discretion to decline jurisdiction of the entire
action[.]” Rarick v. Federated Serv. Ins. Co., 852 F.3d 223,
229 (3d Cir. 2017). That is the case here, as entry of
injunctive relief would require us to thoroughly examine
Delaware’s unclaimed property laws to determine the extent
to which a potential conflict with the Texas priority rules is
possible. (See App. at 55 (requesting that the District Court
“[d]eclar[es] that the DUPL violates and is preempted by the
federal common law established in the Texas Cases”).) Since
the preemption claim cannot “be adjudicated without the
requested declaratory relief,” we have the discretion to
decline to hear it. Rarick, 852 F.2d at 228 (citation omitted).
35
event, a challenge to the scope of Delaware’s audit is not
properly before us at this time.
2. Challenge to Delaware’s Auditing
Authority
If one considers the Companies’ claim, as the District
Court did, to be a challenge to Delaware’s authority to
conduct any audit at all, then this case is distinguishable from
Plains. “[T]he adversity of the interest of the parties, the
conclusiveness of [a] judicial judgment and the practical help,
or utility, of [a] judgment” would all then favor resolving
Marathon’s and Speedway’s complaint. Step-Saver, 912 F.2d
at 647. In Plains, the claim was not that “Delaware lacks the
authority to conduct its audit.” Plains All Am. Pipeline, 866
F.3d at 542. When the claimed injury “is the process itself,”
Sayles Hydro Assocs. v. Maughan, 985 F.2d 451, 454 (9th
Cir. 1993), in the manner it is here, then the interests of the
parties are clearly adverse. Cf. Freehold Cogeneration
Assocs., L.P. v. Bd. of Regulatory Comm’rs of State of N.J.,
44 F.3d 1178, 1188 (3d Cir. 1995) (concluding in a different
context that a preemption claim could proceed “[i]n light of
the ongoing proceedings before” a regulatory agency). 22
22
Delaware argues that since its “law provides
Marathon protection from the risk of double liability,” there is
no real risk of injury and no true adversity. (Ans. Br. at 29.)
It points to a section of the Delaware Code which provides
that “[i]f a holder pays or delivers property to the State
Escheator in good faith and thereafter ... another state claims
the money or property ... , the State Escheator, acting on
behalf of the State, upon written notice of the claim, shall
defend the holder against the claim and indemnify the holder
36
Likewise, any judgment we issue regarding the authority to
audit will be conclusive because it “definitively would decide
the parties’ rights.” NE Hub Partners, L.P. v. CNG
Transmission Corp., 239 F.3d 333, 344 (3d Cir. 2001). If
Delaware is not entitled to even ask the Companies for
information, then the audit is effectively at an end.
Accordingly, a decision would be of real practical value to the
parties, since a judgment would “clarify [the] legal
relationships so that plaintiffs (and … defendants) could
make responsible decisions about the future.” Step-Saver,
912 F.2d at 649. In short, to the extent that Marathon and
Speedway are challenging the authority of Delaware to
conduct an audit, that claim can be addressed now.
D. Delaware’s Auditing Authority
Marathon and Speedway argue that Delaware has
abused its examination authority and violated the Texas
trilogy by conducting an audit into property that is not
escheatable. In essence, they say that Delaware must take
them at their word and cannot inquire into their books and
against any liability on the claim.” Del. Code Ann. tit. 12,
§ 1153(c) (2017). But despite the promise of indemnification,
a party subject to escheat investigations still incurs the costs
of a lengthy inquiry, the risk of penalties based on the failure
to comply, and the risk of overlapping inquiries by other
states. Though the costs of complying with an administrative
investigation will not typically create a ripe dispute where
none exists, see supra p. 27, their existence is a meaningful
rebuttal to Delaware’s indemnification argument. The State
cites no authority for its claim that a duty to indemnify
negates ripeness.
37
records to see if the property belongs to them or the Ohio
Subsidiaries.
We disagree. The Texas cases do not prevent
Delaware from examining books and records to determine the
true holder of abandoned property. To the contrary, the
Supreme Court has noted that the first step in determining the
right to escheat property involves a “determin[ation] [of] the
precise debtor-creditor relationship as defined by the law that
creates the property at issue.” Delaware, 507 U.S. at 499. By
requesting an opportunity to look at the books and records of
Marathon and Speedway and their Ohio Subsidiaries,
Delaware is seeking information that it says will help make
that determination. It is possible that once the debtor-creditor
and parent-subsidiary relationships have been fairly
examined, Delaware may determine that some portion of the
property is actually held by Marathon and Speedway rather
than the Ohio Subsidiaries and is therefore subject to
escheatment in Delaware. At the very least, that is not an
illegitimate basis for an appropriately targeted audit. 23
23
Marathon and Speedway rely heavily on language
from NE Hub to argue that preemption is required in this
case. See NE Hub, 239 F.3d at 348 (“[I]f it is evident that the
result of a process must lead to conflict preemption, it would
defy logic to hold that the process itself cannot be
preempted[.]”). However, in NE Hub, we expressly warned
that our opinion “should not be overread.” Id. at 349 n.18.
The language from NE Hub that the Companies cite does not
apply here. We are not focused on Delaware’s auditing
process itself. We are discussing in the abstract the ability of
the State to audit, and we have concluded that Delaware’s
ability to conduct an examination is not directly contrary to
38
The Companies argue that Delaware is entitled only to
look within the four corners of their contracts with their Ohio
Subsidiaries but no further. (See Opening Br. at 42 (arguing
that all that is needed is “simple contract interpretation.”).)
Because the contracts state that the Ohio Subsidiaries are
ultimately responsible for the gift cards, Marathon and
Speedway say the case is closed. (See Oral Arg. Tr. at 10
(positing that “there can be no further inquiry” by the State
after a contract is shown).) But the Texas trilogy does not
stand for the proposition that states must ignore anything
beyond the pages of a contract. “[D]etermining the precise
debtor-creditor relationship,” Delaware, 507 U.S. at 499, may
at times be a fact-based inquiry into whether the formalities
of corporate separateness have been observed, not just in
the Texas trilogy, and at times such an examination may even
be necessary under the first step of the Supreme Court’s
three-step test. Whether the specific process Delaware
employs to conduct its audits, and the result of that process,
are preempted is not decided today because that issue is not
ripe.
Instead, other language in NE Hub is instructive. In
that case, we also said, “it would be entirely logical in an
appropriate case to hold that the process is not preempted but
to hold later that the result of the process is preempted.” Id.
at 348. This is “an appropriate case,” id., where we have
concluded that the ability to have a process is not preempted,
without saying anything about the result or specifics of the
process as actually carried out. Of course, none of this should
be taken to suggest that Delaware is free to use a “we’re just
trying to define the debtor-creditor relationship” rationale as a
pass for abusive auditing practices.
39
theory but in practice. Cf. Pearson v. Component Tech.
Corp., 247 F.3d 471, 484-85 (3d Cir. 2001) (noting that the
test for determining if one corporation is merely an alter ego
involves consideration of a variety of factual questions such
as the “nonpayment of dividends” or the “nonfunctioning of
officers and directors”); United States v. Kayser-Roth Corp.,
910 F.2d 24, 27 (1st Cir. 1990) (determining whether a parent
corporation is an operator of a subsidiary by examining a
variety of factual matters such as the existence of overlapping
directors and officers). 24
According to Marathon’s and Speedway’s rendering of
the law, a corporation can avoid an audit or any other inquiry
merely by setting up a shell company. All the corporation
needs is a well-worded contract. And Delaware indeed
alleges that some corporations have been taking exactly that
route to hide abandoned property. See State ex rel. French v.
Card Compliant, LLC, No. N13C-06-289PRWCCLD, 2017
WL 1483523, at *1 (Del. Super. Ct. Apr. 21, 2017)
(discussing Delaware’s argument that a number of the State’s
corporate citizens had “attempted to cheat Delaware out of its
portion of unused gift card balances via use of out-of-state
‘shell’ entities devised to hold [those] funds”), interlocutory
appeal refused sub nom. French v. Ruth’s Hosp. Grp., Inc.,
No. 205, 2017, 2017 WL 2290067 (Del. May 23, 2017). We
do not read the Texas trilogy as foreclosing a state’s right to
24
At oral argument, Marathon and Speedway took the
position that doctrines such as piercing the corporate veil,
which allow courts to disregard corporate forms in the face of
fraud, are inapplicable in the escheat context. (Oral Arg. Tr.
at 19-20.) We know of no basis for that assertion and the
Companies have certainly not provided one.
40
conduct an appropriate examination to determine if there is
fraud or another basis for determining that property may be
escheated, even if a contract viewed in isolation might
suggest otherwise. Marathon’s and Speedway’s argument to
the contrary is unpersuasive and we reject it.
Our decision today does not, however, foreclose the
possibility that a state’s demands for information may
become so obviously pretextual or insatiable, and the record
so clearly developed, that “it is evident that the result of [the]
process must lead to conflict preemption[.]” NE Hub, 239
F.3d at 348. In such circumstances, “it would defy logic to
hold that the process itself cannot be preempted.” Id. When
an audit process drags beyond a legitimate inquiry into
whether subsidiary companies are in fact bona fide, separate
entities, the priority rules may be triggered and the State’s
audit process preempted. Determining the difference between
a state’s legitimate inquiry into a parent-subsidiary
relationship, on the one hand, and, on the other, an abusive
process designed to force a monetary settlement, may not
always be a simple matter. Hard or not, though, it will have
to be done and, in the event, the effort will likely be guided in
part by asking whether the state has gone past what is needed
to address familiar standards used to distinguish bona fide
subsidiaries from mere alter egos. See, e.g., Maloney-Refaie
v. Bridge at Sch., Inc., 958 A.2d 871, 881 (Del. Ch. 2008)
(reciting the factors that guide alter ego analysis under
Delaware law); Island Seafood Co. v. Golub Corp., 759
N.Y.S.2d 768, 769-70 (N.Y. App. Div. 2003) (same with
respect to New York law); Lumax Indus. v. Aultman, 669
A.2d 893, 895 (Pa. 1995) (same with respect to Pennsylvania
law).
41
At some point, consistent application of the Texas
trilogy’s priority rules may require the adoption of a uniform
federal standard for determining corporate separateness. Cf.
Texas, 379 U.S. at 677 (indicating that the priority scheme
was developed as a matter of federal common law); United
States v. Pisani, 646 F.2d 83, 87-89 (3d Cir. 1981) (crafting a
federal common law alter ego test for determining personal
liability under the federal Medicare statute); United States v.
Kimbell Foods, Inc., 440 U.S. 715, 728-29 (1979) (supporting
adoption of a uniform federal common law rule when state
law would frustrate specific objectives of a federal scheme, a
need for national uniformity exists, and a federal rule would
not disrupt commercial relationships founded upon state law).
But that is an issue for another day. It is enough for now to
note that there is well developed law on that subject under
various state and federal precedents. The only question
properly before us today is whether Delaware has the
authority to dig for information about who, a parent or a
subsidiary, is the true holder of escheatable funds, and the
answer to that is plainly yes. The preemption claim brought
by Marathon and Speedway is otherwise unripe and subject to
dismissal.
E. Dismissal Shall Be Without Prejudice
Even though we agree with the District Court’s
determination to dismiss the preemption claim, we will
nevertheless vacate and remand so that the Court can clarify
that the claim is dismissed without prejudice. See Presbytery
of N.J. of Orthodox Presbyterian Church v. Florio, 40 F.3d
1454, 1461 (3d Cir. 1994) (noting that dismissals for lack of
justiciability are ordinarily without prejudice). While the
challenge to the scope of the audit is not now ripe, it is
42
possible that Marathon and Speedway will have a viable
claim in that regard at a later date.
III. Conclusion
For the foregoing reasons, we will vacate the District
Court’s judgment and remand with instructions to enter an
order of dismissal of Marathon’s and Speedway’s preemption
claim that is without prejudice to it being revived at a later
date, if appropriate.
43