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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 Dismisses $14.5 Billion Case Against Life Insurers

Posted By Administration, Thursday, May 30, 2019

On April 3, 2019, New York Supreme Court Justice Andrea Masley granted a motion to dismiss by defendant life insurers in Total Asset Recovery Services LLC v. Met Life Inc., a whistleblower (qui tam) case brought by audit firm Total Asset Recovery Services on behalf of the state of New York. 

 

Filed in 2010 and amended by TARS in 2011 and 2017 under the New York False Claims Act, the case alleged that nearly a dozen life insurance companies failed to escheat to the state unclaimed funds held under mature life insurance policies. The plaintiff alleged more than $14.5 billion in damages.

 

TARS based its claim, in part, on the defendant life insurers’ alleged failure to use the Social Security Administration’s Death Master File to locate beneficiaries of deceased insureds and to report and escheat to the state funds that had not been claimed by the beneficiaries. However, the court pointed out in its ruling that insurance companies had no obligation to search the DMF when the case brought in 2010. New York did not require such searches until April 2012. 

 

“TARS’ assertion that death alone, not proof of death triggers the three-year dormancy period of escheatment requirement… lacks merit. The pleadings do not allege that any of the defendants received notice and proof of death of any insureds,” the court wrote. 

 

The court also denied a request to amend its pleading, saying it had already done so twice and “any further amendment would be futile.” 

 

Created and maintained by the Social Security Administration, the Death Master File has been a controversial tool. Government agencies and private businesses rely on the DMF to verify the death of U.S. citizens, but questions about its accuracy and, thus, reliability continue to make it a contentious issue among insurers, consumers, government agencies and politicians. Life insurers’ use of the DMF has been a source of debate, scrutiny, litigation and regulation in recent years.

Tags:  Death Master File  DMF  qui tam  whistleblower 

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Jury Rules Against Overstock in Qui Tam Lawsuit

Posted By Administration, Thursday, October 25, 2018

On Sept. 20, 2018, a Delaware Superior Court jury ruled in The State of Delaware ex. rel. William Sean French v. Overstock.com Inc. that Overstock.com violated the state’s False Claims and Reporting Act by failing to escheat unredeemed gift card balances as unclaimed property. 

 

At issue in the lawsuit 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 claim that some defendants didn’t account for the transfer of liability in the manner its 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.

 

“It’s unusual in this line of business to have a jury verdict,” said Diann Smith, counsel with McDermott Will & Emery LLP. “Usually we get an opinion from the judge that will provide the facts and explain how the law applies to those facts, but that’s not the case with a jury verdict. We don’t really know why they came to this conclusion, leaving some mystery about what it means for other holders.”

 

Although the decision against Overstock has no precedential value, it certainly could have a ripple effect, encouraging Delaware to pursue similar actions against other retailers who use the giftco structure to shift unclaimed property liability. 

 

“Given this verdict, one would expect that Delaware will continue to take the position that the CardFact structure, as least in its current form, doesn’t work,” said Ethan Millar, partner with Alston & Bird LLP. “Although jury verdicts have no precedential value, it is also possible Delaware may use the verdict as an excuse to become more aggressive about challenging other types of gift card structures.”

 

This decision should encourage other companies with third-party giftco arrangements to review their practices to ensure the structures have substance and avoid the issues alleged by the whistleblower and Delaware. 

 

“Holders should consider carefully not just what was at issue in this case but also how it was brought – as a qui tam action, “Smith said. “They should think about what their compliance positions are and whether they are at risk for this type of action. The Delaware decision could raise the profile for people who are inclined to bring this type of action, and you want to avoid being a target.” 

 

Because whistleblowers receive a portion of the settlement/recovery for actions they bring, the incentive to report a former employer, for example, is high. A lawsuit that results in a multi-million dollar decision or settlement can provide a life-changing windfall for the whistleblower. 

 

One complaint that Delaware had in this case was that companies didn’t reach out to the state to ask whether the structure was valid. That raises the question whether companies with ambiguous issues related to their escheat practices, such as giftcos, should consult with the states. 

 

“In the Overstock case, Delaware argued that Overstock should have asked the state for guidance regarding the structure.  Technically, of course, there is no requirement to do so,” Millar said. “Consulting with counsel should be sufficient. Nonetheless, it would be helpful to understand what Delaware believes is necessary for a gift card structure to be effective. Accordingly, there could be something to gain from dialogue with the states on this and other issues.”

 

Even if the state’s response doesn’t affirm a specific practice, documenting the interaction and demonstrating that the state’s response wasn’t backed by a compelling argument or specific reasoning could prove useful if a dispute arises later. 

 

If Overstock appeals or if this decision leads to further action by Delaware, UPPO will continue to monitor and report on any noteworthy developments.  

Tags:  card compliant  Delaware  litigation  overstock  qui tam  unclaimed property 

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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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Litigation update: Motions in Card Compliant whistleblower case raise noteworthy issues

Posted By Contribution from Sam Schaunaman, J.D. and GRAC member, Thursday, November 3, 2016

The State of Delaware, Plaintiff, and William Sean French, Plaintiff-Relator, v. Card Compliant LLC, et al., Defendants (Superior Court of the State of Delaware)

 

Background

Delaware ex rel. French v. Card Compliant LLC et al. (Card Compliant) 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.

 

Motions to Dismiss

The Card Compliant case currently has approximately 80 defendants. As indicated in a recent order in the case, there are generally two main types of entities created by defendants in the case that are being closely examined. First, there are non-Delaware card issuers, which include card issuers affiliated with the Delaware retailers with which they contracted, which the order refers to as “giftcos.” Second, there are card issuers (including card companies, banks and financial institutions) not affiliated with the Delaware retailer with which it contracted, which the order refers to as “cardcos.” Some defendants have filed Motions to Dismiss and/or Motions of Summary Judgment, raising several issues:

  • Before this suit was brought, some defendants were the subjects of Delaware audits or voluntary disclosure agreements (VDAs). Thus, they believe they should be dismissed from the case under the Administrative Proceedings Bar in the Delaware False Claims and Reporting Act (DFCRA), which generally precludes parties from seeking liability based on transactions that have been the subject of a state-involved administrative proceeding. They argue that audits and VDAs fall within the established definition of “administrative proceeding” and, thus, should not be parties in this suit.
  • Under the DFCRA, the state is generally required to make an independent investigation of whistleblower claims before defendants are included in a qui tam action. Defendants point out that arguably the state did not make such an investigation. As such, the defendants argue that they should be dismissed from the case.
  • Before the action, it is alleged that certain Delaware officials generally held the position that unredeemed gift cards that emanated from out-of-state entities were not escheatable to the state. Thus, defendants don’t believe the state can claim they committed fraud, as they operated under the same position as the state.

 

Status

On Oct. 17, 2016, Judge Wallace ordered Delaware to produce all documents from 2001 forward related to Delaware VDAs or audits that indicate, among other things, the state’s prior positions on how gift cards were treated. Although unconfirmed, we have heard from reputable sources that the court has engaged the services of a mediator in an effort to resolve the pertinent issues in the Card Compliant case. 

 

This suit is one of the more interesting unclaimed property cases currently working its way through the court system. While it will likely be some time before the suit is either settled or decided, interested parties anxiously await the court’s resolution of the issues raised by recent defendant motions. UPPO will continue to monitor and report on developments in this case.

 

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 and is a frequent author of unclaimed property articles and whitepapers. Schaunaman is a member of the Oklahoma Bar Association and American 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:  Card Compliant  Delaware  gift cards  litigation  qui tam  unclaimed property  whistleblower 

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