Former Employee Blows The Whistle On Delaware Unclaimed Property Exposure

In a recent unpublished decision, the Superior Court of Delaware, New Castle County, decided to allow a business entity's former tax manager, joining with the attorney general for the state of Delaware, to proceed with a False Claims Act ("FCA") case against the entity.1 The claim alleges that SourceGas Distribution, LLC2 ("SourceGas") failed to remit unclaimed property, which the tax manager had identified, to the state. The property came into SourceGas' possession through an acquisition of a retail gas distribution business from Kinder Morgan. The record was unclear regarding whether Kinder Morgan's state of incorporation was Delaware or Kansas.

The court permitted a single allegation to proceed past the defendants' motion to dismiss—the allegation that the company had changed the name of an acquired liability account from "Unclaimed Property Liability" to "Converted Balance from Dec. 2004." The court found this to be a sufficient allegation of an attempt to conceal unclaimed property from the state. The complaint also alleges that the company "refused to act" when Higgins, the tax manager, brought the issue to management's attention.

As companies continue to evaluate their unclaimed property reporting obligations—especially with regard to acquired liabilities—this decision is particularly troubling. Delaware's FCA is modeled on the federal law, and so allows for treble damages.3 Thus, this case adds a potentially material factor to conversations surrounding whether to pursue a Delaware voluntary disclosure agreement. But the heightened risk from FCA lawsuits is hardly the most interesting take-away from this case. The decision establishes that this will be a case to watch in Delaware—both for developments in the False Claims Act arena and in Delaware's Unclaimed Property law.

Unclaimed Property Issues The SourceGas case raises key issues with respect to ambiguities in the unclaimed property priority rules. The U.S. Supreme Court case has established a hierarchy of sourcing rules for unclaimed property.4 In particular, intangible unclaimed property is reportable to the state of the owner's last known address. If the owner's address is unknown by the holder, the property is reported to the holder's state of incorporation.5

But which "state of incorporation" is the second priority state in the context of an acquisition? Should the successor company report dormant unreported property to the predecessor's state of incorporation or to its own...