Prepared by GRAC Committee Member, Michael Houghton
Provided with permission from Morris, Nichols, Arsht & Tunnell

On February 2, 2012, the Delaware Court of Chancery issued an important ruling in the ongoing unclaimed property litigation between Staples, Inc. ("Staples”) and the State of Delaware ("Delaware” or the "State”), granting the State's motion for partial judgment on the pleadings and denying Staples's cross-motion.

In his opinion, Chancellor Strine determined that rebates, which Staples's counsel conceded at the December 19, 2011 oral argument are issued in the form of checks or credits, are included in the definition of "property” in 12 Del. C. §1198(11) as either "bills of exchange” or "credits.” Because "rebates consist of specifically enumerated items of property under § 1198(11),” "the State's claims cannot be barred by any statute of limitations.” Specifically, the Court noted:

In other words, if a type of property does not fall within any of the "specifically enumerated” categories set forth in § 1198(11) of the Escheat Statute, and the statute of limitations applicable to the owner's claim to that property is less than the five-year dormancy period, the property will not count as "property” for escheatment purposes and the holder of such property will not be required to deliver it to the State. But, the opposite is also true, rendering the running of the statute of limitations against the owner irrelevant when the property at issue is one of the specifically enumerated types set forth in § 1198(11).

This ruling will likely make it more difficult for holders to argue that a specific statute of limitations or contractual provision excludes property from the scope of Delaware's unclaimed property laws. For example, as to a statute of limitations arising under the Delaware version of the Uniform Commercial Code ("UCC”), advocated by Staples as cutting off the State's claims to property as unclaimed prior to the Delaware five-year dormancy period, the Chancellor noted in his opinion that UCC statute of limitations questions appear irrelevant once "the form of property [is] specifically enumerated in §1198(11) of the Escheat Statute.” The Chancellor noted:

Staples argues that the rebates were subject to a statute of limitation shorter than the five-year dormancy period under the Escheat Statute. Specifically, Staples contends that any claims by owners of the unclaimed rebates are limited by §2-725 of the Delaware Uniform Commercial Code (the "UCC”), which provides that "[a]n action for breach of any contract for sale must be commenced within 4 years after the cause of action has accrued,” 6 Del. C. §2-725, because the rebates at issue were given to business customers under supply contracts. [Because rebates took the form of property specifically enumerated in §1198(11),] I need not and thus do not determine whether this is so.

The Court rejected Staples's argument that "a ‘rebate' is not itself a check or a credit just because it might be paid with a check or issued as a credit, and that instead the court must look to the ‘underlying property' – the rebate,” noting that if "the General Assembly had intended to carve out from escheat categories of otherwise specifically enumerated property because of the reasons for their creation, the General Assembly would have done so with words, and not have left it to the judiciary to, in the first instance, invent for itself the authority to carve out certain categories on the basis of the why, and then to determine what reasons why justified exclusion from escheat.”

The Court's opinion discussed only the rebate issue, as noted above, and did not address any of the discovery disputes between the parties which consumed a significant portion of the oral argument at the December 19, 2011 hearing. Instead, Chancellor Strine had previously ruled from the bench at the hearing 1) that the State could depose two Staples's executives, despite Staples's objections; and 2) that the State should revisit its information requests regarding accounts receivable, due to certain data limitations disclosed by Staples. At the hearing, the Court also declined to grant, based on the present factual record, the State's motion in limine alleging the spoliation or destruction of certain electronic information of former Staples's employees, but Chancellor Strine did express concern that Staples at least should have anticipated litigation and taken steps to preserve the information after employees left the company and encouraged further factual development regarding this issue.

With this ruling, Count I of Staples's Complaint has been eliminated. Staples's remaining charges against the State include that Delaware's estimation method is arbitrary and capricious (Count II); that Delaware has violated the three-year and six-year statutes of limitations to audit in 12 Del. C. §1158 (Count III); that Delaware has violated Staples's state and federal Substantive Due Process rights (Counts IV and VII); and that Delaware's assessment constitutes an unlawful taking under the U.S. and Delaware Constitutions (Counts VI and IX). Components of Count II, concerning rebates, and parts of Counts IV, VI, VII, and IX, concerning the application of the four-year UCC statute of limitations generally, may well now be affected by the Court's decision. As previously noted,[1] Count V and Count VIII of Staples's Complaint, which allege a violation of Staples's Procedural Due Process rights, have been addressed by the establishment of an administrative appeals process in July 2010 by amendments to 12 Del. C. §1156 and regulations promulgated thereunder.[2]

The State's Counterclaim, which the State successfully amended in June 2011 to include the accounts receivable portion of the examination, remains intact, and the State has continued to advance its case against Staples. Since the December 19, 2011 hearing, apparently the depositions of Staples's Chief Financial Officer as well as other Staples's employees have been noticed by the State. The State has also continued its attempt to further explore, with additional depositions which have been noticed, Staples Value, LLC, the Virginia legal entity though which Staples has issued gift cards and the State has alleged did not exist as a bona fide legal entity for a significant portion of the audit period. The State has also noticed depositions to further attempt to develop the factual record for its motion in limine concerning the spoliation of evidence, which Chancellor Strine had declined to grant based on the available information.

We will continue to monitor and provide information regarding future developments of concern to holders in this ongoing litigation.