By Heather Gabell, J.D., Director of Compliance
December 4, 2018
December 4, 2018
Unclaimed Property Guidance or Regulation? California Superior Court Decides.
On July 17, 2018, the California Superior Court issued an order granting a motion for summary judgment in favor of Thrivent Financial in a decision that significantly impacts life insurance holders reporting unclaimed property to California.
In Thrivent Financial for Lutherans v. Betty T. Yee, et al., Case No. CGC-15-548384, the court held that the guidance issued by the Controller’s Office in its holder handbook amounted to improperly promulgated regulations under the California Administrative Procedure Act, which requires a public comment period, and were therefore unenforceable.
The court enjoined the Controller’s Office from enforcing or threatening to enforce the “Dormancy Trigger Regulation” and the “External Database Regulation” and ordered the removal of any such reference in any material issued to life insurance companies, unless accompanied by a disclaimer stating that these are the views of the Controller’s Office and have no legal effect.
Under Section 1515 of the California unclaimed property law, the dormancy period for life insurance proceeds begins three years after the funds become due and payable, as established from the records of the insurer. Under the Dormancy Trigger Regulation, however, dormancy begins three years after the date the insurer had reason to know of the death of the insured (date of death).
Thrivent Financial maintained that this date could be less than three years from the date of death disclosed by the insurer’s records (proof of death and receipt of a claim). The court rejected the Controller’s argument that the Dormancy Trigger Regulation was not a regulation since it was not generally applied, and that even if it were generally applied, that it was “the only legally tenable construction of Section 1515(a).” The court concluded that the regulations were of general application, that the Controller’s Office did not provide evidence that the regulations were not adopted as law, and that Thrivent’s interpretation of Section 1515 was a tenable interpretation of the law.
The court also determined that the External Database Regulation, which requires life insurers to perform comparisons of policies against the Social Security Administration’s Death Master File or similar database to determine whether any of their insureds are deceased, is not a requirement under Section 1515.
The court barred the Controller’s office from “knowingly [imposing] any financial consequences of any kind on any life insurance company for failing to comply with [the] regulations,” unless and until the Controller’s Office either promulgates the regulations in accordance with the California Administrative Procedure Act or amends Section 1515 of the law.
It remains unclear if and how the court’s order impacts current audits and/or settlement agreements. What is clear is that the Controller’s Office can no longer force life insurers to use date of death as the dormancy trigger for life insurance proceeds or require comparisons using the death master file, nor can the Controller’s Office enforce or threaten to enforce penalties and interest against life insurers who choose not to comply with these “underground” regulations.
Verdict Rendered Against Overstock in Qui Tam Litigation Over Unclaimed Gift Card Balances
On September 20, 2018, following a one week jury trial, the jury in the State of Delaware ex. rel. William Sean French v. Overstock.com, Inc. found Overstock liable under the False Claims Act for the failure to report approximately $2.9 million in unredeemed gift card balances to Delaware. Overstock was the sole defendant at trial, as the other two dozen retailers had either settled or had their cases dismissed (to the tune of $25-35 million) prior to trial. After awarding treble damages, the total estimated liability is over $7 million, not counting attorney fees.
The jury found that the “giftco” gift card structure entered into by Overstock and CardFact (now Card Compliant) was a sham and that unredeemed gift card balances issued between 2004 and 2007 should have been reported by Overstock, as the true holder and issuer of the gift cards, to Delaware, its state of incorporation. By contracting with CardFact, an Ohio based entity, to issue the gift cards and act as the holder of the gift cards, Overstock was said to have evaded its unclaimed property reporting obligations, as gift cards are exempt from unclaimed property reporting in Ohio.
Implications of the Decision & Next Steps for Retailers
Even if Overstock appeals the verdict, Overstock and all of the retailers that were a party to the litigation could face further action by Delaware. The state had tried to bring in an additional four years (2008-2012) where unredeemed gift card balances were purportedly not escheated to Delaware, but the judge ruled earlier in the case that the plaintiffs had failed to do so in a timely manner and thus those years were excluded. These retailers could face a separate lawsuit brought by Delaware to account for these years, or the state could choose to pursue the funds by way of audits.
The verdict against Overstock likely means that Delaware will further scrutinize companies utilizing similar giftco structures and could possibly subject them to litigation or audit, even forcing some to re-domesticate outside of Delaware to avoid such scrutiny. Gift card holders should be overly cautious and be prepared to defend their organizational structures to the state.
In addition to audit enforcement, Delaware may now arm itself with the threat of litigation in order to force companies into large settlements instead of costly trials, which appears contrary to the nature and ultimate goal of unclaimed property – to reunite the owner with his lost property.
 The State of Delaware ex. rel. William Sean French v. Overstock.com, Inc. (Superior Court of Delaware C.A. No. N13C-06-289 PRW CCLD).