Court Opinion

ID: 4238236
Source: CourtListenerOpinion
Date Created: 2018-01-22 21:00:23.236915+00
Date Added: 2024-06-11T07:48:03.304195
License: Public Domain

NOT PRECEDENTIAL

                      UNITED STATES COURT OF APPEALS
                           FOR THE THIRD CIRCUIT
                                ___________

                                     No. 17-1594
                                     ___________

                        OFFICE DEPOT, INC.;
           NORTH AMERICAN CARD AND COUPON SERVICES, 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. Del. Civ. No. 1-16-cv-00609)
                     District Judge: Honorable Leonard P. Stark
                 ___________________________________________

                     Submitted under Third Circuit L.A.R. 34.1(a) *
                                on September 27, 2017

  Before: AMBRO and KRAUSE, Circuit Judges, and CONTI, Chief District Judge. **

                           (Opinion filed: January 22, 2018)

      *
        The case was held in abeyance pending this Court’s decision in Marathon
Petroleum Corp. v. Secretary of Finance, 876 F.3d 481 (3d Cir. 2017).
      **
         Honorable Joy Flowers Conti, Chief Judge of the United States District Court
for the Western District of Pennsylvania, sitting by designation.
                                      ____________

                                       OPINION ***
                                      ____________
KRAUSE, Circuit Judge.

       In this case we are asked to decide whether Delaware may conduct an audit

examining whether monies paid for stored-value gift cards issued by a Delaware

company’s out-of-state subsidiary are held by the parent company and thus subject to

escheat, or whether such an audit is preempted by the federal common law governing

escheat. Appellants are Office Depot, Inc., a Delaware corporation with a principal place

of business in Florida, and North American Card and Coupon Services, LLC (NACCS),

Office Depot’s special-purpose subsidiary organized in Virginia.

       In all material respects, this case is identical to Marathon Petroleum Corp. v.

Secretary of Finance, 876 F.3d 481 (3d Cir. 2017)—which we decided after the District

Court issued its opinion in this case—and compels the same result. Like the appellants in

Marathon, Office Depot and NACCS contend that the District Court erred in (1) ruling

that private parties lack standing to invoke the federal common law to challenge a state’s

authority to escheat property, and (2) dismissing Appellants’ claim that the Texas

trilogy—a set of cases in which the Supreme Court set out the rules of priority governing

the escheat of intangible property—preempted Delaware’s audit of NACCS’s gift cards.

       ***
          This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7
does not constitute binding precedent.

                                             2
See Texas v. New Jersey, 379 U.S. 674 (1965); Pennsylvania v. New York, 407 U.S. 206

(1972); Delaware v. New York, 507 U.S. 490 (1993). 1

       Appellants are correct that, as we indicated in New Jersey Retail Merchants Ass’n

v. Sidamon-Eristoff, 669 F.3d 374, 383 (3d Cir. 2012), and recently squarely held in

Marathon, 876 F.3d at 493, private parties have standing to challenge a state’s authority

to conduct an audit and escheat abandoned property. However, as we explained at length

in Marathon, the Texas cases do not prevent Delaware from initiating an inquiry to

determine the true holder of abandoned property. Id. at 499. The Supreme Court has

observed that the first step in assessing a state’s right to escheat intangible personal

property is “determin[ing] the precise debtor-creditor relationship as defined by the law

that creates the property at issue,” Delaware, 507 U.S. at 499, and Delaware may seek

information that will assist it in making that determination, Marathon, 876 F.3d at 499.

“We do not read the Texas trilogy as foreclosing a state’s right to 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.” Id. at

501. Therefore, we must reject Appellants’ claim.

       That said, we emphasized in Marathon that our resolution of the narrow issue of

whether Delaware may conduct an audit does not bar private parties from bringing suit to

       1
          Just as in Marathon, here Delaware contends that Appellants’ preemption claim
is not ripe. But the claim is ripe insofar as Appellants are challenging Delaware’s
authority to initiate the audit at all; it is not ripe to the extent they are challenging the
scope or means of the examination because “Delaware has as yet taken no formal steps to
compel cooperation with its audit,” Marathon, 876 F.3d at 497 n.18.

                                              3
challenge the audit if and when the state’s demands for information become “so

obviously pretextual or insatiable . . . that ‘it is evident that the result of [the] process

must lead to conflict preemption.’” Id. (quoting NE Hub Partners, L.P. v. CNG

Transmission Corp., 239 F.3d 333, 348 (3d Cir. 2001)). An audit process that extends

beyond a legitimate inquiry into whether a subsidiary company is bona fide may well

trigger the priority rules. Although no such argument is available where, as here, the

state has not initiated an enforcement proceeding, it is possible that Appellants will have

a viable claim as to the scope of the audit at a future date. 2

       For the foregoing reasons, we vacate the District Court’s judgment and remand

with instructions to dismiss Office Depot and NACCS’s preemption claim without

prejudice.

       2
         Appellants allege that, in light of their failure to provide requested documents,
the third-party auditor employed by Delaware, Kelmar, notified them that it had referred
the matter to the Attorney General’s office for consideration of enforcement action,
whereas in Marathon the subsidiaries alleged only that Kelmar had threatened to refer the
matter. This factual distinction is not material, however, because in neither case has the
state formally sought compliance.

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