Del. court rules in suit over company's unclaimed property

By Jessica M. Karmasek | Jun 5, 2012



WILMINGTON, Del. (Legal Newsline) - A Delaware superior court last month granted in part and denied in part a motion to dismiss a complaint against a company over alleged violations of the state's unclaimed property laws.

SourceGas Holdings LLC, a Delaware company headquartered in Colorado, is the parent company of SourceGas LLC and SourceGas Distribution LLC.

SourceGas, through its wholly-owned subsidiary SourceGas Distribution, is a natural gas local distribution utility that services customers in Arkansas, Colorado, Nebraska and Wyoming.

SourceGas Distribution operates more than 17,000 miles of pipeline for the collection, servicing, delivery, distribution and transmission of natural gas to its nearly 420,000 customers in those states.

In 2006, SourceGas entered into a purchase agreement with Kinder Morgan Inc., an oil and gas pipeline company incorporated in Delaware.

Pursuant to the agreement, SourceGas acquired Kinder Morgan's retail gas distribution and related utility business. The company also assumed Kinder Morgan's liabilities.

In August 2008, plaintiff Anthony Higgins was hired as a transaction tax manager for SourceGas Distribution. His primary responsibilities included managing the defendants' sales and use taxes, personal property liabilities, franchise fees and general accounting issues. He later assumed responsibility for unclaimed property.

Shortly after Higgins took on the unclaimed property responsibilities, he discovered that accounts transferred to the defendants -- as a result of the Kinder Morgan acquisition -- contained unclaimed and uncashed utility deposits, or other utility customer payments, that were due back to customers.

Aware of the potential for liability on the part of the company for failing to report this alleged unclaimed property, Higgins notified his employer of his findings and urged it to fulfill its reporting obligations under Delaware law.

However, the company refused to act. Consequently, no unclaimed property report was filed with Delaware in 2008.

Then, in 2009, the company installed a new billing system that enabled Higgins to obtain detailed reports on unclaimed property. The system revealed numerous unclaimed customer utility deposits, refunds, credits and other unreimbursed accounts, some dating back to 1992.

Higgins again shared his findings with the company's upper management, but was rebuffed. Consequently, no unclaimed property report was filed with Delaware in 2009.

At some point in 2010, he performed a detailed analysis to determine the company's total unclaimed property exposure.

As a result, Higgins identified potential unclaimed property liability of more than $500,000 for Delaware alone -- and more than $1.1 million in liability to 33 other states.

In November 2010, Higgins was fired.

He claims his termination was "motivated by defendants' desire to retaliate against him for refusing to stand by silently and allow defendants to continue ignoring their obligations to Delaware."

Soon after, he filed a qui tam action under the Delaware False Claims and Reporting Act, or DFCRA, against SourceGas Holdings, SourceGas and SourceGas Distribution, asserting claims on behalf of the State.

DFCRA, enacted by state lawmakers in 2000, aims to protect government funds and property from fraudulent claims. The act imposes civil liability for a broad range of conduct that may result in financial loss to the government.

The State, represented by Attorney General Beau Biden's office, later intervened and proceeded with Higgins' suit.

The defendants then filed a motion to dismiss all claims asserted against them in the complaint.

In particular, the company claims that the plaintiffs have failed to assert any allegations of wrongdoing by either SourceGas or SourceGas Holdings and, therefore, the two parties should be dismissed from the suit.

Also, the company argues that because the complaint does not plead with particularity the circumstances constituting fraud, it should be dismissed.

Finally, the defendants contend that the complaint fails to state valid claims under DFCRA.

The New Castle County Superior Court held oral arguments on the company's motion March 12. In its May 15 ruling, it granted the motion in part and denied it in part.

The court sided with the defendants in finding that the plaintiffs failed to state a valid claim against SourceGas and SourceGas Holdings.

"The complaint is devoid of any allegations of wrongdoing on the part of SG and SGH. The only reference to these entities is contained in the 'Introduction' section of the complaint where plaintiffs set forth the corporate structure of defendants," Judge Mary M. Johnston wrote.

The judge called the plaintiffs' attempt to pierce the corporate veil "unavailing," noting that the court lacks the jurisdiction to do so.

"Even if this court had jurisdiction to pierce the corporate veil, plaintiffs have failed to allege facts sufficient to demonstrate a prima facie case that SG and SGH were the alter egos of SGD," Johnston wrote in the 30-page opinion.

As for the defendants' urging that the court impose an additional requirement for claims brought under subsection (a)(7) -- or "presentment" -- the court said such an element does not exist.

"The plain language of subsection (a)(7) requires a defendant to make or use a false record or statement in order to conceal, avoid or decrease an obligation to pay the government. There is no presentment language in subsection (a)(7) and the court declines to read such a requirement into this subsection," Johnston wrote.

"Therefore, under subsection (a)(7), liability may be imposed against those who fraudulently attempt to reduce an obligation owed to the government."

In their complaint, the plaintiffs identify four of the company's accounts that allegedly held unclaimed property creating a liability to the State.

However, they only allege that one of these accounts was "reclassified and renamed" by the company to try to conceal the true nature of the funds. The account "Converted Balance from December 2004" was originally named "Unclaimed Property Liability."

"The court finds that with respect to the allegations regarding the account entitled 'Converted Balance from December 2004,' plaintiffs have stated a valid claim under Section 1201(a)(7). Plaintiffs allege that defendants owed an obligation to the State and that defendants made or used a false record to avoid or conceal that obligation. Therefore, the complaint satisfies Rule 9(b)'s particularity requirement," Johnston explained.

"The Court finds that the allegations concerning the remaining three accounts, however, do not state a valid claim under Section 1201(a)(7). Plaintiffs do not allege the existence of an essential element of subsection (a)(7) -- a false record or statement."

As for the claims under DFCRA, the court said the plaintiffs have not alleged the company received any type of certificate or receipt from the State.

"Plaintiffs' complaint is devoid of any reference whatsoever to a receipt or certificate being issued by the State. Therefore, plaintiffs' Section 1201(a)(4) claim lacks the specificity required by Rule 9(b), and must be dismissed," Johnston wrote.

However, the court noted, a factual question exists regarding whether the alleged unclaimed property escheats to Delaware.

Additionally, a question of law exists as to when the company's reporting obligations to Delaware arise, the court said.

"Because there appear to be issues of first impression that cannot be resolved at this stage of the proceedings, defendants' motion to dismiss the Section 1201(a)(7) claims against SGD must be denied," Johnston wrote.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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