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UNCLAIMED PROPERTY FOCUS is a blog written by and for UPPO members, featuring diverse perspectives and insights from unclaimed property practitioners across the U.S. and Canada. We welcome your submissions to Unclaimed Property Focus. Please contact Tim Dressen via tim@uppo.org with any questions about submitting a blog post for consideration and refer to our editorial guidelines when writing your blog post. Disclaimer: Information and/or comments to this blog is not intended as a substitute for legal advice on compliance or reporting requirements.

 

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Litigation Update: Court Denies Motion for Summary Judgment in Card Compliant Whistleblower Case

Posted By Administration, Wednesday, May 16, 2018

Delaware ex rel. French v. Card Compliant LLC et al. is a qui tam case – a suit brought when a whistleblower exposes alleged fraud against the government with the incentive of receiving a portion of the recovery as a reward. The defendants include Card Compliant LLC, a third-party company that some defendants used to issue gift cards and assume certain gift card responsibilities, and numerous other defendants. 

 

Among the various allegations, the plaintiffs claim that some defendants didn’t account for the transfer of liability in the manner its contracts specified. According to the state’s allegations, the liability wasn’t truly transferred and, thus, defendants had the obligation to remit unclaimed property to Delaware but didn’t do so. 

 

On April 30, 2018, Judge Paul Wallace denied defendants’ Motion for Summary Judgment seeking the dismissal of all claims.

 

The defendants argued that the plaintiffs cannot legally establish a Delaware False Claims and Reporting Act fraud claim because “the undisputed facts demonstrate the retailers had no legal obligation to pay the unredeemed balances on gift cards issued by and assigned to the card companies.” 

 

The court, however, said the defendants’ subjective beliefs regarding the validity of the giftco structure remain unresolved, and several disputed issues preclude resolution of whether the defendants knowingly acted in bad faith to avoid monetary obligations to the government. 

 

“The plaintiffs must be given the opportunity to present to a jury evidence of defendants’ actual knowledge, subjective belief, and purported bad faith,” the judge wrote.

 

The defendants also argued that a ruling by a previous judge in the case should be struck down. The ruling held that the relationship between the creditor/customer and the retailers (rather than the relationship between the card company and the retailers) is the relevant relationship for the purposes of escheat. 

 

The defendants suggested that the judge made this ruling without the benefit of reviewing documents and testimonial evidence from Delaware audits and VDAs in which the state took the position that when a gift card is assigned before dormancy, the card company is the relevant debtor for escheat purposes. 

 

Judge Wallace ruled that the defendants failed to establish that the prior ruling was clearly wrong and that extraordinary circumstances exist, thus preventing him from second-guessing the previous judge’s decision. 

 

Finally, the judge pointed to the U.S. Court of Appeals for the Third Circuit’s decision in the Marathon Petroleumcase. In that case, the court stated that the federal priority rules do not prevent the state from examining books and records to determine the unclaimed property holder.

 

The defendants had sought refuge through application of the DFCRA’s Administrative Proceedings Bar and took the position that if Delaware had previously engaged in the type of statutory audits (and VDA procedures) the Third Circuit spoke on to examine their giftco activities and escheat obligations, then the defendants had been subject to administrative proceedings that would preclude the court from exercising jurisdiction over the state’s case. 

 

The judge wrote, “To act as a bar, those prior administrative proceedings must have been ‘substantially based upon allegations or transactions which are subject of a civil suit or an administrative proceeding in which the Government is already a party.’ It would be indeed incongruous if the administrative proceeding meant to discover and enforce a Defendant’s true escheat obligation could cover more ground than a qui tam suit claiming fraud in the same allegations or transactions.”

 

Noteworthy issues that remain to be determined in the case include:

  • When are cards escheatable to Delaware?
  • Who is the true holder of the cards – the retailers or the third party?
  • Can cards that have already been issued be assigned to another affiliate or third party?
  • Was the giftco structure a reasonable effort to comply with the law or did the companies act with fraudulent intent?

This case is scheduled to go to trial in September. UPPO will continue to monitor and report on developments in this case.

Tags:  Card Compliant  Delaware  gift cards  litigation  qui tam  unclaimed property  whistleblower 

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Unclaimed Property Trends Shape Annual Conference Sessions

Posted By Administration, Monday, January 8, 2018

For better or worse, this is not a dull time to be an unclaimed property professional. In recent years, numerous state legislatures have considered (and often approved) updating their unclaimed property statutes. Courts continue to look at state unclaimed property practices, including controversial audit practices. And companies from coast to coast and border to border face the ongoing challenge of minimizing their unclaimed property risk.

 

Throughout 2017, UPPO helped members keep up with the trends affecting unclaimed property professionals. Many of these same trends shape the agenda for the 2018 UPPO Annual Conference, March 4-7, 2018, in Tampa, Florida.

 

Delaware

In February 2017, Delaware Gov. John Carney signed S.B. 13 into law, triggering significant changes to the state’s unclaimed property practices. Since then, the state has adopted new audit rules and encouraged holders currently under audit to convert to the state’s VDA program.

 

As we approach the one-year mark since S.B. 13, its effects continue to unfold. The Delaware Reforms: One Year Later session at the 2018 UPPO Annual Conference will examine the status of changes in Delaware and their ramifications. The Advocacy Efforts in the Age of Reform session will shine a light on UPPO’s work to promote fair unclaimed property requirements not only in Delaware, but in all states.

 

Audits

Fueled by activity in Delaware, controversy continues to swirl around state audit practices. The use of third-party auditors incentivized by contingency fees has been the focus of litigation and advocacy efforts. As states update their unclaimed property statutes, some, such as Michigan, are enacting new audit standards. Some states also help offer a fairer playing field for holders by providing the opportunity to appeal audit assessments. The examination process, particularly that of multi-state audits, often strains holder resources, as it stretches over several years.  

 

The Audit 101, Navigating Your Audit and Mock Trial sessions, along with several of the Industry Focus sessions, at the 2018 UPPO Annual Conference will provide attendees with insight into strategies holders can employ when facing examination.

 

Litigation

The courts have provided several favorable rulings for holders in recent months. Appeals court rulings in cases brought by Plains All American Pipeline, Bed Bath and Beyond, and Marathon Petroleum have yielded positive results. Similar cases, including those brought by Office Depot and the multi-state squabble over MoneyGram official checks, continue to proceed through the courts.

 

Attendees at the 2018 UPPO Annual Conference will learn about these and other relevant litigation trends during the Legislative and Litigation Update session.

 

Operational Practices

In addition to exploring unclaimed property trends, the 2018 UPPO Annual Conference agenda is packed with sessions to provide practical knowledge attendees can apply to be more effective at their jobs. Sessions will examine a wide range of topics, including: state reporting basics, managing due diligence, self-assessments, record retention, exemptions and deductions, fraud, policies and procedures, foreign jurisdictions and much more.

 

View complete details about educational sessions and other 2018 UPPO Annual Conference events. The early-bird registration deadline is Jan. 10, so register today for the best rate.

Tags:  audits  Delaware  litigation  trends 

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Marathon Decision Signals Big Win for Holders

Posted By Administration, Thursday, January 4, 2018

Marathon Petroleum Corporation et al. v. Secretary of Finance, State of Delaware et al.

 

On Dec. 4, 2017, the Third Circuit Court of Appeals overturned a lower court’s dismissal of Marathon Petroleum’s lawsuit against Delaware. The appeals court decision is exciting for holders for multiple reasons:

  1. It provides holders reassurance that they can sue for violations of federal common law.
  2. It limits states’ ability to look at subsidiaries only to confirm that they’re legitimate and not simply alter egos of the parent company.
  3. It reassures holders that they can “just say no” when faced with unreasonable information requests.

Background

Marathon uses a gift card management company incorporated in Ohio, a state that exempts such property from escheatment. After Marathon objected to an $8 million estimated liability for gift certificates for which the company said it had issuance and redemption records, third-party auditor Kelmar – on behalf of Delaware – requested records related to the gift card company’s creation and operations. 

 

Among the information requested were contracts, meeting minutes, vendor agreements and accounting records. Marathon refused, arguing that such a request is outside of Delaware’s jurisdiction. Again, Kelmar suggested it would turn over the issue to the attorney general for enforcement action. 

 

In February 2016, Marathon filed suit. arguing violation of the federal priority rules and the Fourth Amendment. The Marathon case also took issue with the state’s estimation practices. 

 

Delaware argued that Texas v. New Jersey applies only to disputes between states, not audits of private entities. The defendants also argued that Marathon’s claims were premature, as they would have their chance to make their case in state court if they continued to resist turning over requested documents. Attorneys for Marathon took issue with the state’s interpretation of federal law and compared the nine-year audit of the company to a “fishing expedition.”

 

The Decision

On Sept. 23, 2016, a U.S. District Court agreed with Delaware’s arguments and dismissed the case. In overturning the District Court ruling, the Third Circuit Court of Appeals stated, “…we disagree with [the] conclusion that private parties cannot invoke federal common law to challenge a state’s authority to escheat property.”

 

The Appeals Court, however, agreed with the earlier court’s ruling that the case was not yet “ripe.” “To the extent the companies are challenging the scope or means of the examination in this case, the claim is not ripe, since the state has taken no formal steps to compel compliance with the audit,” the court wrote.

 

The case has been referred back to the District Court to clarify that the case’s dismissal is without prejudice, giving the plaintiffs time to refile the lawsuit at a later date.

 

Effects of the Decision

Through its decision, the appeals court confirmed that holders can rely on the federal common law priority rules from Texas v. New Jersey. The decision tells holders that the priority rules apply to all relationships involving the remittance of unclaimed property to a state, not just disputes between states.

 

“To finally have confirmation that holders have standing to sue under the federal common law rules for violations and potential alleged violations is a really big win for holders,” said Jameel Turner, attorney at Bailey Cavalieri LLC. “It forces the states to negotiate audit settlements in good faith because any audit or audit dispute could lead to a federal lawsuit.”

 

Looking at the holder-subsidiary relationship, the court tackled the long-standing question of what extent the state can investigate subsidiaries incorporated in in another jurisdiction as part of an audit examination. The court confirmed that states have the ability to conduct an inquiry into subsidiaries to determine if they are legitimate and not just alter egos of the parent.

 

“If the holder asserts that its gift card subsidiary is incorporated in Virginia and holds the company’s gift card liabilities, then producing a certificate of good standing, the articles of organization and a sample journal entry to show how liabilities are booked should be sufficient,” Turner said. “Beyond that, there’s no need to go down a rabbit hole with the state and look at voluminous card-level detail and other irrelevant documents that are typically requested. To receive some clarity about what records holders need to produce relative to their gift card subsidiaries is a significant win for the holder community.”

 

These limits reassure holders of the ability to “just say no” to information requests outside states’ audit authority. If the state disagrees, it would need to sue and let a court decide.

 

“I think this case will embolden holders to stand firm in their legal rights,” Turner said. “When they think a state is making information requests that are outside the scope of the state’s audit authority, holders will be more apt to just say no. Marathon provides holders with legal authority to say no to unlawful information requests and force a state to file an enforcement action.”

 

Disclaimer: This case summary contains a general description of the case. It is not intended as business, financial, legal, tax, reporting or compliance or other professional advice or services. This summary blog is not a substitute for such professional advice.

Tags:  gift cards  litigation 

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Litigation Update: New Jersey Court Issues Merchandise Certificate Decision

Posted By Administration, Thursday, November 16, 2017

BBB Value Services Inc. v. Treasurer, State of New Jersey, Department of the Treasury et al. and Bed Bath & Beyond Inc. v. Treasurer, State of New Jersey, Department of the Treasury et al.

 

On Sept. 21, 2017, the New Jersey Superior Court Appellate Division issued an important decision regarding merchandise certificates. The plaintiffs in the original cases under appeal were Bed Bath and Beyond and its subsidiary, BBB Value Services Inc. The respondents were unclaimed property officials with the state of New Jersey. Both plaintiff companies had filed for refunds with New Jersey for escheated amounts attributable to merchandise certificates and were denied.

 

The merchandise certificates in question resulted from a Bed Bath and Beyond policy that customers who returned merchandise without a receipt would be given a certificate for merchandise or services, but not cash. From 2004 to 2012, Bed Bath and Beyond reported and remitted these certificates to New Jersey’s unclaimed property administration. In 2014, the subsidiary reported a sum attributable to certificates issued between 2010 and 2011. When denying the refund claims from both entities, the state argued that the merchandise certificates were considered credit memoranda.

 

The court reversed the state’s denial of both entities. Bed Bath and Beyond successfully argued that the merchandise certificates weren’t covered under New Jersey’s unclaimed property act, in part because they weren’t redeemable for cash. The court agreed that they didn’t fit the definition of “property,” ruled in favor of Bed Bath and Beyond and said the company was entitled to a refund.

 

The subsidiary, BBB Value Services, argued that the items in questions were stored-value cards and not credit memoranda under a July 2010 amendment to New Jersey’s unclaimed property act. As such, they weren’t presumed abandoned until after five years of inactivity and, even then, they should have been reportable at only 60 percent.

 

The subsidiary said that if the certificates were indeed considered stored value cards, the five-year dormancy period had not run. If they were not considered stored value cards, then they wouldn’t be subject to New Jersey’s unclaimed property act because they weren’t redeemable for money. The court agreed with BBB Value Services that the certificates were stored value cards.

 

The court ruled the state had erred by not giving BBB Value Services a refund. Thus, the subsidiary was entitled to a refund, but because the five-year dormancy period had now run, some of the property must now be reported. So, BBB Value Services was directed to file a new report.

 

 

Special thanks to Sam Schaunaman, recently retired senior manager at Ryan AUP and longtime member of the UPPO Government Relations and Advocacy Committee, for his frequent contributions to UPPO’s litigation update blog posts.

 

Disclaimer: This case summary contains a general description of the case. It is not intended as business, financial, legal, tax, reporting or compliance or other professional advice or services. This summary blog is not a substitute for such professional advice.

 

Tags:  litigation  merchandise certificates  New Jersey 

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Litigation Update: Supreme Court battle over MoneyGram “official checks” begins taking shape

Posted By Contribution from Sam Schaunaman, J.D. and GRAC member, Monday, June 12, 2017

Delaware v. Pennsylvania and Wisconsin and Arkansas, et al. v. Delaware (U.S. Supreme Court)

MoneyGram has been involved in a number of lawsuits involving Delaware, Wisconsin and Pennsylvania. The states are each claiming right to MoneyGram’s official checks. Delaware claims MoneyGram should escheat the property to Delaware because it is MoneyGram’s place of corporate domicile. Wisconsin and Pennsylvania argue that the official checks should be remitted to the jurisdiction in which the purchase took place. 

 

A key issue is whether the unclaimed funds attributable to the official checks should be escheated in accordance with the federal priority rules set forth in Texas v. New Jersey, or whether they should be escheated in accordance with the rules set forth in the Disposition of Abandoned Money Orders and Traveler’s Checks Act, 12 U.S.C. sec. 2501 et seq.

 

More than two dozen other states have joined Pennsylvania and Wisconsin in the lawsuits against Delaware. In October 2016, the U.S. Supreme Court (“Supreme Court”) agreed to hear the cases, and consolidated the two cases into one.   

 

(Learn more about the cases involving MoneyGram that led to Delaware v. Pennsylvania and Wisconsin: Part 1 and Part 2.)

 

Special master appointment

In disputes involving two or more states, the Supreme Court has original jurisdiction under the U.S. Constitution and the U.S. Code. In order to efficiently consider and manage such original jurisdiction cases, the Supreme Court may appoint a “special master” to act as a de facto trial court, responsible for gathering facts, taking testimony and making recommendations to the Supreme Court.

 

On March 29, 2017, the Supreme Court appointed Circuit Judge Pierre Leval of the Court of Appeals for the Second Circuit as the special master for this case.

 

Case Management Order No. 1

On May 12, 2017, Special Master Leval issued Order No. 1 in the case. It indicated that a status conference would be held in New York City on June 5, 2017, whereby the special master would meet with counsel for the parties and MoneyGram Payment Systems Inc. to discuss formulation of a Case Management Plan. Our understanding is that arguments on certain motions of the parties would be heard at such conference, as well as discussions pertinent to a letter from legal counsel for one of the parties requesting bifurcation of the proceedings. Such request asked that the case be bifurcated into two stages: (i) a first part to determine liability, and (ii) a second phase to determine damages, if needed. 

 

UPPO will continue to monitor and report on this case as it develops.

 

About the contributor
Sam Schaunaman, senior manager at Ryan AUP and member of the UPPO Government Relations and Advocacy Committee, contributes to UPPO’s monthly litigation update blog posts. Schaunaman has over 26 years of unclaimed property experience in all aspects of unclaimed property, is a frequent author of unclaimed property articles and whitepapers, and is a co-author of the Bloomberg BNA Unclaimed Property Portfolio, Corporate Practice Series.  Schaunaman is a member of the Oklahoma Bar Association.    


Disclaimer: This case summary contains a general description of the case, and neither UPPO nor Ryan, or any of their affiliated or related entities, by means of this summary, is rendering business, financial, legal, tax, reporting or compliance or other professional advice or services.  This summary blog is not a substitute for such professional advice.

 

 

Tags:  Delaware  litigation  money orders  MoneyGram  official checks  Pennsylvania  unclaimed property 

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