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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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Chancery Court Voids Overreaching Delaware Subpoena

Posted By Administration, Thursday, July 23, 2020

In a July 10, 2020, decision in Delaware Department of Finance v. AT&T Inc., a Delaware Chancery Court ruled in favor of AT&T, voiding a Delaware subpoena for information requested during an unclaimed property examination.

 

History

In 2012, the Delaware Department of Finance began an unclaimed property examination of AT&T via its third-part auditor, Kelmar. AT&T provided most of the information requested but declined to provide two categories of documents. 

 

Among the information sought by Kelmar was identification of all general ledger accounts used by AT&T since 1992 – a 20-year lookback – to track its rebate accrual and expense activity, along with the time period each account was used for that activity. This request also asked AT&T to identify each third-party administrator used to issue rebates. 

 

Another request sought information for every check AT&T had issued from 27 accounts since 1992. The request required AT&T to identify each check issued, the general ledger account to which it was recorded, the disposition status, the payee name and address, and the amount. It also sought information regarding checks marked void, cleared, stopped, or void and reissued.

 

AT&T initially worked to provide the requested information, including the rebate and disbursement requests. However, the state notified AT&T beginning in May 2019 that of requests that had not been fulfilled and warned that the company’s participation in an expedited examination, initiated by AT&T after Delaware updated its escheat law following the Temple-Inland decision, could be terminated. 

 

In November 2019, Delaware issued an administrative subpoena. AT&T refused to comply and filed action in U.S. District Court. Delaware responded by filing action to enforce the subpoena. AT&T asked the court for relief. 

 

Decision

The court granted one of three requests for relief requested by AT&T – that the subpoena be quashed or modified because the Department of Finance exceeded the authority granted to the escheator in the state’s escheat law. Although the state’s law gives the escheator subpoena power, AT&T successfully argued that the subpoena was so expansive that enforcement would be an abuse of power. The court quashed the subpoena in its current form.

 

In its 63-page decision, the court noted multiple concerns, including the state’s lack of meaningful involvement in the information request and the contingency nature of Delaware’s relationship with Kelmar.

 

“The Department appears to have lent the State Escheator’s investigatory authority to Kelmar to use as it sees fit. Kelmar is compensated contingently,” the court wrote. “That arrangement benefits the State by minimizing fixed costs, but it gives Kelmar an incentive to engage in aggressive enforcement tactics. It potentially creates a pernicious incentive for Kelmar to serve broad information requests and engage in expansive audits that impose substantial burdens on companies, thereby inducing settlements that generate income for Kelmar. The breadth of the Subpoena in this case is suggestive of such tactics.”

 

In quashing the subpoena, the court gave Delaware the ability to issue a subpoena with a narrowed scope or appeal the decision, so this saga may continue. UPPO will continue to monitor and report on developments. 

 

Additional Resources

Tags:  AT&T  Delaware  Kelmar  litigation  subpoena 

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Overstock Triumphs in Appeal of Delaware Qui Tam Decision

Posted By Administration, Thursday, July 9, 2020

On June 24, 2020, the Supreme Court of Delaware ruled on behalf of Overstock.com in a reversal of a 2018 Superior Court decision that awarded the state of Delaware more than $7 million in treble damages for Delaware False Claims and Reporting Act violations.

 

At issue in The State of Delaware ex. rel. William Sean French v. Overstock.com Inc. was Overstock’s relationship with Card Compliant LLC (previously CardFact), a third-party Ohio-based company used to issue gift cards and assume certain gift card responsibilities. The case came about when a former Card Compliant employee filed a qui tam (whistleblower) lawsuit, alleging fraud against the government. Dozens of other defendants were dismissed from the lawsuit or settled, leaving Overstock as the only defendant.  

 

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

 

Overstock raised multiple claims on appeal. The court addressed only one – that the Superior Court misinterpreted the Delaware False Claims and Reporting Act and improperly instructed the jury that the knowing failure to file escheat reports when required to do so was no different than actively making a false statement.

 

Overstock argued that the failure to file escheat reports does not satisfy the Act’s requirement that a false record or statement be made or used to avoid, conceal or decrease an obligation to the government. The company also argued that it did not make or use any false record or statement in connection with gift cards that violated the Act.

 

The court agreed with Overstock on this point and reversed the Superior Court decision.

 

“In order for Overstock to be found liable for making a reverse false claim under the applicable 2009 statute, it must have submitted a false record or statement that gave the state the impression that Overstock either did not owe the state money or owed the state less money than Overstock was required to pay,” the Delaware Supreme Court wrote in its decision. “The absence of a record or statement cannot form the basis of a reverse false claim under 6 Del. C. § 1201(a)(7) (2009).”

 

Read the complete decision.  

Tags:  Delaware  False Claims Act  Litigation  Overstock  Unclaimed Property 

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Litigation Update: AT&T, Siemens, Eaton and Fruit of the Loom Challenge Delaware’s Authority

Posted By Administration, Thursday, June 18, 2020

AT&T Capital Services, Inc. et al. v. Geisenberger, et al.

Siemens USA Holdings, Inc. v. Geisenberger et al.

Eaton Corporation et al. v. Geisenberger et al.

Fruit of the Loom, Inc. et al. v. Geisenberger et al.

 

Among the most noteworthy unclaimed property court cases currently in progress are separate lawsuits filed in December 2019 against the state of Delaware by AT&T Capital Services, Siemens USA Holdings, Eaton Corporation and Fruit of the Loom.

 

Although not identical, the cases have similarities. In all four cases, the companies had been undergoing an audit conducted by a third-party auditor for at least five years. The companies joined the state’s expedited audit program after Delaware passed S.B. 13, which – among other unclaimed property reforms – allowed companies under audit to request an expedited audit within 60 days after the escheator adopted new estimation regulations. As the 18-month expedited audit period ended, Delaware claimed the companies had not complied with its information requests for information about claims with addresses in states other than Delaware. The state then terminated the companies’ participation in the expedited audit program.

 

The plaintiff companies’ claims include:

 

Unreasonable search and seizure

  • Delaware is subpoenaing and demanding documents that are not legitimate exercises of authority, are too indefinite and not reasonable relevant. These include records regarding unclaimed property claims with addresses other than Delaware.

Procedural due process and equal protection

  • Delaware is using Kelmar, a self-interested, third-party auditor as an adjudicator.

Substantial due process, ex post facto clause, takings clause and federal common law

  • Delaware uses records requested from the companies to prepare ex post facto estimation of amounts owed.
  • Estimation conflicts with federal common law established in the Texas trilogy of cases by using information from states other than Delaware in violation of the supremacy and due process clauses, and represents unreasonable search and seizure.
  • Requests for transactions associated with non-Delaware addresses and termination from the expedited audit for not complying violate substantive due process as deliberate and arbitrary abuses of power.
  • Delaware demands documents it lacks authority to take in violation of the takings clause.
  • Many of the information requests are ex post facto because they penalize the failure to keep records companies were not previously obligated to keep until S.B. 13 was passed in 2017.

 

Delaware claims the federal cases are not yet ripe and should be dismissed. The state also claims the companies failed to state claims in part because Delaware interprets the federal common law from the Texas trilogy of cases differently.

 

In only the AT&T case, Delaware asked for the case to be stayed or the District Court to decline jurisdiction because of a pending state action regarding Delaware’s escheat laws and the state court needs the opportunity to address those issues before the federal court proceeds.

 

In December 2019, the companies filed suit alleging violations of constitutional and federal law. Delaware responded by filing suit in the Chancery Court only against AT&T, seeking enforcement of the administrative subpoena. In January 2020, Delaware filed motions to dismiss the federal cases, and the parties filed motions to keep the cases in federal court.

 

UPPO will continue to monitor and report on these cases as noteworthy developments occur.

 

 

Tags:  Delaware  litigation  unclaimed property 

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Court Upholds Delaware’s Subpoena Power

Posted By Administration, Thursday, June 4, 2020

A May 21, 2020, Delaware Chancery Court opinion was a win for the state of Delaware in its ongoing battle with Univar Inc. Vice Chancellor Joseph R. Slights III denied a motion to dismiss from Univar, which argued that the state did not satisfy the statutory prerequisites to enforce a subpoena.

 

On Dec. 11, 2015, Delaware notified Univar it would be subject to an unclaimed property examination, conducted by Kelmar. Upon receiving document requests from Kelmar, Univar objected, citing confidentiality concerns, Kelmar’s self-interest, the estimation process and other aspects of the audit. According to Univar’s complaint, Delaware rejected or ignored the objections and continued to do so for more than two years.

 

On Oct. 30, 2018, the state issued a subpoena for the records Kelmar had previously requested. Univar declined to comply and filed a District Court action challenging the constitutionality of Delaware’s unclaimed property laws, updated in 2017 following the Temple-Inland decision. The state responded by filing a complaint in the Chancery Court, seeking an order enforcing the subpoena.

 

On September 17, 2019, the District Court ruled that many of Univar’s claims lacked “ripeness.” As such, she dismissed the majority of claims, keeping just two alive, pending a decision from the Chancery Court whether to enforce a Delaware subpoena.  

 

Univar’s motion to dismiss the Chancery Court case was based on two arguments:

  • Delaware had not adequately demonstrated its compliance with the unclaimed property law’s confidentiality provisions, a necessary prerequisite to any audit.
  • Delaware had not promulgated sufficient regulations to manage multistate audits fairly, as required by the law.

The court disagreed with both arguments.

 

Univar argued that the audit was a multistate audit, and that, because the public records laws of the other participating states conflict with the confidentiality requirements of the Delaware’s law, the action will not be ripe for decision until Delaware demonstrates its full compliance with its own confidentiality requirements. Delaware maintained that it was conducting a Delaware-only audit.

 

“There is no basis to conclude as a matter of undisputed fact that the state is conducting a multistate audit,” the court stated. “Even if the state were conducting a multistate audit, Kelmar is bound by Delaware law not to share any of Univar’s confidential information with ‘any person who is not a current officer or employee of [Delaware].’”

 

Regarding Univar’s second argument, the court wrote, “The state has written a number of rules and regulations pursuant to that statutory grant of rule-making authority… While Univar may not like the number or content of regulations that have been promulgated, that does not mean this case is unripe.”

 

In denying the motion to dismiss and determining that the state has the ability to enforce its subpoena, the District Court case that was put on hold pending this decision can proceed.

 

UPPO will continue to monitor and report on the progress of the Univar District Court case as noteworthy developments occur.  

 

 

Tags:  Delaware  litigation  Univar 

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Whistleblower Trend Raises Concerns for Unclaimed Property Holders

Posted By Administration, Thursday, October 10, 2019
Updated: Saturday, October 5, 2019

Government politics aren’t the only place whistleblowers are making news these days. Several recent whistleblower lawsuits aimed at unclaimed property practices signal a concerning trend for holders. 

 

Typically, whistleblower, or qui tam, cases under the False Claims Act come about when a company’s employee or former employee (referred to as the “relator”) alleges the company defrauded the government by intentionally paying the government less than what is owed. Allegations usually involve falsifying documents to mislead the government into thinking less money is due. 

 

“Unclaimed property cases don’t fit into the usual False Claims Act mold,” said Ethan Millar, partner with Alson & Bird LLP. “False claims statutes were not intended to apply to regulatory disputes between a state and a holder about when states’ unclaimed property laws apply. They were designed to be quasi-criminal anti-fraud statutes, which is why they impose severe penalties, including treble damages and attorneys’ fees.”

 

Unfortunately, recent qui tam cases have been based on mere regulatory disputes. Given the direction such cases have taken, it’s possible that any noncompliance with unclaimed property statutes could result in accusations of False Claims Act violations. 

 

Decided last September, The State of Delaware ex. rel. William Sean French v. Overstock.com Inc. represents a turning point for False Claims Act cases related to unclaimed property compliance. At issue in the lawsuit was Overstock’s relationship with CardFact (later acquired by Card Compliant LLC), a third-party company used to issue gift cards and assume certain gift card responsibilities. 

 

The case came about when a former CardFact employee filed a qui tam lawsuit, alleging that CardFact and dozens of its retail clients (including Overstock) had violated the Delaware False Claims and Reporting Act by failing to escheat unredeemed gift cards to the State of Delaware. 

 

Among the various allegations, the plaintiffs claimed that the contracts between CardFact and its clients were shams and that the retailers rather than CardFact were the true issuers of the cards, and were required to report them to Delaware, as their states of incorporation. All of the defendants in the case other than Overstock were dismissed or settled. 

 

“I don’t think anybody in the holder community believes that Overstock acted with knowledge or reckless disregard for the law,” Millar said. “Overstock’s actions were perfectly reasonable and consistent with what dozens of other retailers were doing in terms of structuring their operations to reduce unclaimed property risks. These structures were not hidden from Delaware. They were openly discussed at conferences, in Delaware audits and in Delaware voluntary disclosures, and nobody ever said you can’t do this kind of thing or have to do it a particular way. To the contrary, Delaware approved very similar structures for well over a decade prior to this case.” 

 

However, a jury decided the third-party “cardco” structure in this case was improper and that Overstock knowingly or recklessly disregarded the law and should have reported its unredeemed gift card balance, less related profits, to Delaware. Along with the decision came a hefty judgment for $7.2 million, including civil penalties, treble damages and other costs. In addition, the state is entitled to attorneys’ fees, though the amount of such fees is still in dispute. Overstock has appealed the decision.

 

This decision leaves the unclaimed property community wondering, if a company can be held liable under the False Claims Act under those circumstances, what other circumstances could be used to hold businesses liable.

 

Relators are motivated by the prospects of a huge financial windfall of 15-25% of any judgment or settlement resulting from their lawsuits. Unfortunately, their self-interests are advancing aggressive enforcement positions regarding unclaimed property laws that not even state administrators are promoting.

 

In another recent case, New York ex. rel. Raw Data Analytics LLC v. JPMorgan Chase & Co., the relator alleges that JPMorgan is liable under New York’s False Claims Act for failing to self-assess interest on late reported unclaimed property. Although the New York Office of Unclaimed Funds does not require holders to self-assess interest, the court ruled that, under New York’s Abandoned Property Law, such self-assessment is mandatory. JPMorgan takes the position that nobody in the industry self-assesses interest and that the states don’t expect or ask holders to do so.

 

“We’re now seeing these sorts of cases where relators are making novel legal arguments about what is required under state unclaimed property laws, and then trying to use this alleged violation of the escheat statutes as the basis for False Claims Act liability,” Millar said. “False Claims Act complaints are no longer confined to scenarios when a company is committing what looks like fraud.”

 

Relief for the unclaimed property community from False Claims Act lawsuits that exceed the law’s intent requires a court to address one big question: Should False Claims Act statutes even apply to unclaimed property? The False Claims Act is intended to apply when money is owed to the government. However, unclaimed property is owed to the property owner. The government acts merely as a custodian of the property. 

 

“I suspect any major False Claims Act case in the future will raise this issue,” Millar said. “There is strong authority in the False Claims Act that a custodial interest alone is not sufficient to trigger the False Claims Act. After all, the False Claims Act statutes were intended to apply to government funds, not to money owed to individuals.”

 

Until such a decision, unclaimed property holders can take steps to protect themselves. First, they should ensure their unclaimed property compliance policies, procedures and practices are current, well documented and thoroughly followed. Next, address “gray areas” where holders and states have differing perspectives. 

 

“There will always be gray areas because no unclaimed property law directly deals with every specific situation,” Millar said. “These gray areas may be exploited by relators. However, holders can protect themselves by obtaining legal opinions to support their positions. Even if a court later disagrees with the holder’s position, the fact that the holder reasonably relied on legal counsel can demonstrate that the holder did not act with the knowledge or recklessness for False Claims Act liability.”

 

Finally, respond to issues raised by employees. Companies should have policies and procedures in place for addressing employee complaints. Don’t retaliate against employees who raise potential issues, and always investigate credible complaints. Giving employees a meaningful complaint process and remediating problems early may reduce the likelihood of issues rising to the level of a full-blown qui tam lawsuit. 

Tags:  JPMorgan  litigation  Overstock  qui tam  trends  unclaimed property  whistleblower 

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