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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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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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UPPO Advocacy Update: September 2019

Posted By Administration, Thursday, September 26, 2019
Updated: Thursday, September 26, 2019

To help members remain aware of UPPO’s advocacy activities, the Unclaimed Property Focus blog presents the recurring Advocacy Update when legislatures are active or significant advocacy activity has occurred. Following are recent activities and trends from UPPO’s Government Relations and Advocacy Committee (GRAC).

 

Whistleblower Litigation

Among the issues GRAC has been closely monitoring is the increase of whistleblower court cases related to unclaimed property. Bloomberg Law recently covered one such case, which involves allegations surrounding JPMorgan Chase’s unclaimed property liability in New York. 

 

UPPO is concerned that the case could result in unintended consequences affecting unclaimed property compliance: 

  • The outcome of the case could diminish the incentive to voluntarily come into compliance. 
  • The case also raises issues regarding multiple state agencies interpreting the same statute differently.
  • The case could result in new operational burdens for both holders and administrators.

Please watch the UPPO blog in the coming weeks for more information about whistleblower cases and steps holders can take to protect themselves. 

 

Texas H.B. 3598 Questions

Earlier this year, the Texas legislature passed H.B. 3598. Among other things, the legislation outlines requirements for combined reporting of unclaimed property for affiliated companies. The new law raises many questions for holders and service providers. GRAC has begun compiling a list of these questions, which will be used to request clarification from the state. UPPO will email members shortly with additional information and an invitation to contribute questions to GRAC. 

 

Do You Have Ideas for GRAC?

GRAC is interested in your feedback. To make it easier for members to submit ideas and issues for the committee’s consideration, UPPO has added a form to the advocacy web page. Please use this form to share advocacy suggestions, ideas and issues for GRAC to consider. 

 

As more and more legislatures and regulatory agencies take on issues affecting unclaimed property compliance, advocacy has become an increasingly important role for UPPO.

Please take a few minutes to complete our 
Government Relations and Advocacy Survey to help us build our grassroots network. Responses will give us the ability to mobilize UPPO members when we are faced with legislative and regulatory challenges and opportunities.

Tags:  consolidated reporting  litigation  qui tam  Texas  whistleblower 

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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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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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