Litigation Update – Summer 2016

June 27, 2016

During Q4 2015 and Q1 2016, important unclaimed property-related lawsuits were filed and significant developments occurred in two existing cases.  Interestingly, with the exception of the Minnesota case, the lawsuits are focused on gift cards, retail credits, and money orders.  Summaries of these lawsuits and their potential implications are provided below.

Retail Merchandise Credits – California

Bed, Bath and Beyond v. Chiang, No. 37-2014 (Super. Ct. San Diego, CA), Mar. 4, 2016)

A recent California lower court determination sheds some light on the abandoned property treatment of retail merchandise credits.  On March 4, 2015, a California Superior Court determined that the California unclaimed property law’s (UPL) reach does NOT extend to unused merchandise credits redeemable for merchandise only.  Further, the Court stated that the credits were exempted from the law as the features of the credits are similar to loyalty or promotional cards which are a subset of gift cards under California law.

The lawsuit, Bed Bath, & Beyond (“BB&B”), Inc. v. John Chiang[1] was filed in 2014 by BB&B against the California Controller to retrieve over $1.8 million dollars in store merchandise credits that it had reported and remitted to the California Controller’s unclaimed property division from 2004 to 2012.   BB&B tried to reclaim the funds from the Controller’s unclaimed property division contending that it was reported in error.  The claim was denied by the Controller and BB&B filed suit.

In response to the lawsuit complaint, the Controller argued that the property was properly escheated under the UPL’s “catchall” provision (Section 1520) which covers all “intangible personal property…..that is held or owing in the ordinary course of the holder’s business”.  However, in the order granting BB&B’s motion for summary judgment, the Court indicated that since the merchandise credits in question are not redeemable for cash, BB&B did not “owe” money to the owner.  Further, the Court noted that the law permits the BB&B’s “no cash refund” policy for return without a sales receipt and that under the Controller’s analysis, “those same store credits could then be escheated and operate as cash available to a consumer when the consumer was never entitled to cash.”

In addition, the Court indicated that the credits in question are similar to gift certificates/card issued under awards, loyalty or promotional programs.  As gift certificates/cards that do not have an expiration date are exempted from UPL, the Court went on to say that, “the UPL does not apply to BB&B’s store credit because they are in the form of a gift certificate.”

While this decision is favorable for retailers that issue store credits for returned merchandise and could have a ripple effect in other jurisdictions, it is likely that the Controller will appeal the Superior Court’s decision.  Further, some will argue that its application may be limited to the factual situation presented in this case: 1) there is a legal store policy in place that cash refunds are not provided for returns without a sales receipt; and 2) the store issues a credit for merchandise only which must be presented at the time it is being redeemed; and 3) the credit has no expiration date. In this case, the Court declined to opine about the situation when the customer returns merchandise, submits the original sales receipt and is provided a store credit certificate, but fails to redeem it within the catchall dormancy period stated in the UPL.

“Other Similar Instruments“ and the Priority Rules

Commonwealth of Pennsylvania, et. al  v. Delaware State Escheator, No.  1:16-cv-00351-JEJ,USDC Middle District of Pennsylvania,  February 2016

In late February, the Pennsylvania State Treasurer initiated a lawsuit against the Delaware State Escheator and Money Gram Payment Systems, Inc. (“MoneyGram”) alleging that Delaware advised MoneyGram to escheat – and retained the escheatment of – nearly $10.3M dollars in official checks that were purchased in Pennsylvania.

In its complaint, Pennsylvania asserts that the federal Disposition of Abandoned Money Orders and Traveler’s Checks Act [2] applies to the checks in question in the suit.  This federal law prescribes that for money orders, travelers checks or “other similar instruments” (other than third party bank checks) on which a banking or financial organization or business association is liable, the state where the instrument was purchased is the state entitled to take custody.  Pennsylvania argues that their unclaimed property law includes a definition of financial organization applicable to MoneyGram.  Further, they indicate that because MoneyGram’s money orders and official checks have the same characteristics (i.e., the funds used to purchase both are held by MoneyGram until the instruments are negotiated), they are considered “other similar instruments” covered by the federal law.  More directly, the complaint states, “no material commercial difference exists between money orders and official checks.”

Pennsylvania explains that prior to being incorporated in Delaware, MoneyGram was incorporated in Minnesota, and in 2015, Minnesota turned over $200,000 to Pennsylvania for abandoned official checks issued by MoneyGram which were purchased in Pennsylvania. Also, the Pennsylvania Treasurer explains that other states (including Texas and Colorado) have requested that the Delaware State Escheator remit to them sums payable on abandoned MoneyGram checks that were purchased in their respective states, but remitted by MoneyGram to Delaware.

The complaint details the history of Pennsylvania’s outreach to the Delaware State Escheator in its effort to retrieve the MoneyGram funds remitted to the Escheator, which began in mid-2015 and included letters and requests for meetings with Delaware to resolve the issue.  Delaware was somewhat unresponsive and initially refused to meet in person or by phone with Pennsylvania officials taking the position that the MoneyGram official checks were “third-party bank checks” which are not subject to the federal law but covered by the Delaware abandoned property statute.

Regarding MoneyGram, Pennsylvania notes that they had recently audited MoneyGram, which is how the almost $10.3M of abandoned official checks purchased in their state was uncovered, and that they had communicated to MoneyGram their belief that these were owed to Pennsylvania.  Further, Pennsylvania indicates in its complaint that they have requested that MoneyGram “immediately cease remitting sums payable on official checks purchased in Pennsylvania to Delaware,” and have asked the court to award it the $10.3M and penalties and interest from MoneyGram.

As of the time of this writing, discovery had been stayed by the Court pending decision on motions to dismiss the suit for lack of subject matter jurisdiction which were filed in late April by Delaware State Escheator Gregor and MoneyGram.

The case is resonating with Delaware politicians, some of whom have recently argued that Delaware’s reliance on unclaimed property as a revenue stream is unstable and inconsistent. As Representative Paul Baumbach noted in a recent article on the case, “[t]his particular amount of money is relatively small for us, so I don’t think it’s going to create any big shifts by itself… but it reinforces the need for us to work together to come up with systemic changes.”[3] State Senator Bryan Townsend echoed that sentiment and emphasized that the case shows that Delaware is not the only state that relies on unclaimed property as a revenue stream: “I think it shows how important this is to Delaware, and that other states are going to try and grab as much as they can….”[4]

Audits and Rebates

Delaware Department of Finance v. Blackhawk Engagement Solutions, Inc., Case No. 11737, Delaware Court of Chancery

In November, 2015 the Delaware Department of Finance (“DOF”) brought suit against Blackhawk Engagement Solutions, Inc. (“Blackhawk” formerly Parago, Inc.) incorporated in Delaware.  Blackhawk is a third party rebate processor serving retail company clients.  The action was brought to enforce the administrative summons that the DOF served on Blackhawk in February 2015, under which the DOF sought sworn testimony and the production of documents (including client contracts) related to uncashed rebate check payments returned to Blackhawks client companies or subject to an express per-transaction fee discount to its Client companies.

Originally, the DOF issued a notice of examination to Blackhawk’s predecessor company, Parago, Inc., in February 2011. Kelmar Associates was contracted by the DOF/State Escheator to perform the examination.  According to the recent complaint, “Parago has refused to fully cooperate with the State Escheator and has interfered with the State’s ability to exercise its statutory right to examine Parago’s records….” Further, the DOF alleges that Parago indicated that it would not comply with the summons without a court order directing it to so comply.

This factual situation is reminiscent of the Fitzgerald v. Young America Corporation lawsuit[5], when third party rebate processor Young America was under audit by 40+ states (including Delaware) through their audit contractor, Affiliated Computer Services, Inc. In that litigation, particular Young America client companies were impleaded into the case and those companies (i.e., Sprint, T-Mobile, and Walgreens) settled with the states participating in the audit.

If the DOF prevails, holders involved with rebate and incentive programs or that use other third party disbursement vendors, should review their program or agreement terms and take measures to minimize possible exposure related to such arrangements.

As of this writing, in the Blackhawk case a motion by the plaintiff for a judgment on the pleadings had been filed and was pending.

Application of Gift Card Exemptions

Delaware ex. Rel. French v. Card Compliant, LLC, et al., C.A. No.: N13C-06-289 FSS (CCLD), Delaware Superior Court for New Castle County

In June, 2013, a qui tam (“whistleblower”) suit under the Delaware False Claims and Reporting Act[6] (“DFCRA”) was filed under seal in Delaware Superior Court against about two dozen retail businesses (including Netflix, Sony Electronics and Sketchers), their third party contractor Card Compliant, and the National Restaurant Association. The plaintiff is a former Card Compliant employee who also was the founder of Card Fact, a company that competed with and was purchased by Card Compliant.  He was joined by the State of Delaware as a plaintiff in March, 2014. The plaintiffs claim that the defendants entered into agreements with Card Compliant (then Card Fact) to avoid paying Delaware the value of unredeemed gift card balances. The suit was unsealed and became public during the first few months of 2014 when many of the defendants became aware of the lawsuit.

The plaintiffs assert that the scheme involved the use of special corporations to issue the gift cards on behalf of the retailers.  These corporations were incorporated in states whose unclaimed property statutes exempt unredeemed gift card balances from being reported and remitted as unclaimed property.  Under United States Supreme Court decision[7] the applicable unclaimed property law for items where the owner is unknown is that of the state of incorporation of the business holding the property. Due to the nature of gift cards the owner is typically unknown to the gift card issuer and therefore, unredeemed balances would be governed by the state unclaimed property law where the issuing business is incorporated.

In 2015, the defendants filed a motion to dismiss the suit. The defendants argued, among other things, that due to the agreements the retailers had with the third party contractor and its special corporations, the retailers delegated the debt to the contractor/special corporations.  As the contractor/special corporations are not incorporated in Delaware, the defendants argued that Delaware escheat laws do not apply to them.  The Court rejected this argument indicating that as the debt involves personal services it could not be delegated without the express consent of the party to whom the debt is owed. So, the “customer” would have to have expressly agreed to the debt delegation to the contractor/special corporation.

Six of the retail defendants moved to dismiss based on the fact that they are limited liability companies (LLC) with principal places of business outside of Delaware.  However, the Court indicated that Texas v. New Jersey[8] and Delaware law would dictate that jurisdiction is based upon the LLCs’ state of formation/organization which for these defendants is Delaware.

The Court did grant motions to dismiss for 3 of the defendants that were not parties to the third party contractor agreements and for a defendant that successfully argued that as it was previously audited by the Delaware State Escheator that it could not be subjected to proceeding involving the same allegations. The Court also granted the motion to dismiss of the National Restaurant Association as its’ part of the purported scheme in marketing the service to its members was too tenuous to have caused the harm alleged.

Owner Notice and Just Compensation

Timothy Hall Hr., Beverly Herron, Michael Undlin and Mary Wingfield v. State of Minnesota and Commerce Commissioner Michel Rothman, No. 62-CV-15-2112, Minnesota Second Judicial District Court, County of Ramsey

The plaintiffs filed a class action lawsuit during the second quarter of 2015 in which they claim that the state of Minnesota, through its Department of Commerce, has over a period of years developed a scheme that minimizes efforts to notify owners of the unclaimed property the state has received while maximizing the receipt of such revenues. They claim that the due process and takings clauses in the United States and Minnesota Constitutions are violated by this scheme.  In their complaint they indicate the systematic lowering of dormancy periods and dilution of owner notice requirements (i.e., elimination of required owner outreach mailings and newspaper publication) have created a situation where owner communication efforts are inadequate (via providing information on and permit the state to retain owner funds.

Further, plaintiffs point to the state’s failure to pay interest on interest bearing property when paying claiming owners. In addition, the complaint indicates the state seizes and liquidates IRAs, mutual funds, HSAs, ESAs and other securities and pays claiming owners only the net proceeds from the sale with no consideration for any appreciation in the value of the property after the sale.

In addition, in their compliant the plaintiffs allege that Minnesota has escalated its effort to enforce the unclaimed property statute.  Specifically, the “Minnesota Department of Commerce attributes approximately half of the 100 percent growth in its unclaimed property since 2005 to its efforts to target life insurance companies and to four new auditors it has added to review company records, locate and force the remittance of funds to the State in that time.”

In August 2015, the defendants filed a motion to dismiss the case based on procedural and substantive issues. The Court entered an order in early December granting the motion to dismiss only with regard to the State of Minnesota and the plaintiffs’ federal 42 U.S.C. Section 1983 claim.  The motion was denied with regard to all the other counts.

Some of the comments made by the Court in its order provide food for thought. With regard to the due process and owner notice claim, they stated, “The Court is skeptical whether the Commissioner’s limited attempts to provide notice satisfies even MUPA.”[9]  Further, with regard to the taking clause and just compensation the Court indicated that, “Plaintiffs have all alleged they did not intend to abandon their property. Yet Defendants have put their property into a fund for use by the State. This is effectively putting Plaintiffs’ property back into the public domain. On such facts, Plaintiffs no longer have an interest in their property, the property has been taken for public use, and Plaintiffs are entitled to just compensation.”[10]

This Minnesota class action lawsuit is somewhat similar to the federal court challenge to the California Unclaimed Property Law that is the basis of Taylor v. Yee[11]. The difference though is that in the Taylor case, the state (California) is sending pre-escheat direct notices to the owners of property valued over $50 if the state has owner social security numbers to use if verifying the owner address or discovering a better address. The Taylor case was appealed by the plaintiffs to the United State Supreme Court (USSC) which on February 29, 2016 denied the request but comments by Justice Alito hinted that while the facts of the case were inappropriate for Supreme Court review the issues presented may be ripe for decision in a different case.

Another similar Oklahoma state court lawsuit where similar constitutional issues were presented about the Oklahoma unclaimed property law and challenges is Dani, et. al. v. Ken Miller, Treasurer of the State of Oklahoma,[12]   The plaintiffs in this suit alleged that the Oklahoma unclaimed property law and its administration was a “taking” equating to a “ponzi scheme” designed to garner state revenue.  The lawsuit was filed in June 2015 and, in November of the same year, the Oklahoma District Court dismissed the lawsuit without merit.  The Oklahoma Supreme Court upheld this decision in March 2016.

After the Court’s decision on the motion in Hall was rendered, the State asked the court to certify questions to the Court of Appeals.  This motion was still pending at the time of this writing.

[1] Bed, Bath and Beyond v. Chiang, No. 37-2014 (Super. Ct. San Diego, CA, Mar. 4, 2016).

[2] 12 USC Sections 2501 – 03.

[3] delawareonline, (March 1, 2016)

[4] Ibid.

[5] Fitzgerald v. Young America Corporation, No. CV 6030 (Iowa District Court, Polk County, Jan. 5, 2009)

[6] 6 Del. C. Section 1201 (2009)

[7] Texas v. New Jersey, 379 U.S. 674 (1965)

[8] Id.

[9]Hall, et. al v. State of Minnesota and Commerce Commissioner Michael Rothman, 12/9/2015 Order, p. 16.

[10] Id. at p. 20.

[11] Taylor v. Yee,  780 F.3d 928 (9th Cir. 2015; writ of certiorari filed 8/5/2015)

[12] Oklahoma County District Court, No. CJ-2015-3445 (11/4/2015).

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