Category: breaking news

Temple Inland Scores Win in Estimation Suit Against Delaware — How Big Remains to Be Seen

In 2014, Temple Inland filed a lawsuit against the State of Delaware, challenging the results and methodology of an unclaimed property audit performed by that state.  As part of a 2008 audit, the State of Delaware assessed Temple Inland unclaimed property liabilities for a 22 year time period, allegedly because of Temple Inland’s failure to maintain records (notwithstanding the fact that no Delaware law requires a holder to keep such records).  After availing itself of the state’s administrative appeal process, Temple Inland filed a lawsuit in feeral  challenged the state’s use of estimation in the audit context, arguing that the technique (1) was preempted by the Supreme Court’s Texas v. New Jersey decision; (2) violated Temple Inland’s rights under the Due Process Clause of the Constitution; (3) represented an unconstitutional “taking” of Temple Inland’s property; and (4) violated the ex post facto clause of the Constitution.

Initially, both parties moved for a quick knockout — Temple Inland sought a preliminary determination that the use of estimates was completely prohibited by the U.S. Supreme Court’s decision in Texas v. New Jersey, while Delaware asked the court to dismiss the suit in its entirety.  In March 2013, the court denied both those arguments, allowing the case to continue.

Later both parties moved for summary judgment (a ruling providing that there is no need for a trial because one party is right as a matter of law) on the remaining claims that estimation was barred by the Due Process Clause, represented an unconstitutional taking of Temple Inland’s property, or violated the ex post facto clause.  The court ruled on those motions yesterday.

The Court Rules Against Delaware on Due Process Claim, Leaves Remedy Open

The court began its substantive opinion with a section titled “Delaware’s Dependence on Unclaimed Property Revenue.”  While none of the following facts will be particularly startling to unclaimed property professionals, seeing them acknowledged by a federal judge is notable.  In  particular, the court recognized:

  • Unclaimed property represents Delaware’s third largest revenue source;
  • In 2007, Delaware transferred over $350 in unclaimed property to the general fund, but only returned $20 million to owners; and
  • It is estimated that 90% of the property collected by Delaware is owner-unknown property (meaning it will likely never be paid out to its rightful owner).

Against this backdrop, the court evaluated whether Delaware’s use of estimation was consistent with its obligation to provide Temple Inland with due process of law.  As the court noted, the key protection of the due process clause is to prevent “arbitrary” government action.  Under the relevant caselaw, the court recognized, action by a government agency like the Delaware Department of Finance is deemed to be arbitrary when it “shocks the conscience” of the court.  While noting that no clear precedent existed for the court to determine whether any of Delaware’s individual actions met this threshhold, the court concluded that “in combination, defendants’ executive actions shock the conscience.”

In particular, the court singled out the following actions for criticism:

  • The fact that Delaware attempted to avoid the three or six year statute of limitations (which does not apply where no report has been filed) by not requiring negative reports and by not (apparently) keeping copies of reports filed by holders;
  • That Delaware never gave the holder notice that it must keep records of unclaimed property compliance (Delaware has no unclaimed property records retention statute) then tried to capitalize on the lack of such records to justify its estimation practices;
  • Delaware’s attempt to impose the estimation statute retroactively;
  • The mechanics of the estimation process itself.  In particular, the he court intimated that Delaware may not properly take custody of estimated sums where the underlying liabilities upon which those estimates are based relate to amounts owed in other states.  Specifically, the court explained that “[I]f the property in base years shows an address in another state, then the characteristic of that property has to be extrapolated into the reach back years;” and
  •  The potential for double liability if other states estimate the same period.

While the court ruled that this conduct amounted to a violation of Temple Inland’s due process rights, it did not decide the appropriate remedy.  Instead, it deferred to Delaware for suggestions, explaining that “[i]t is defendants who are best able to know which remedy will be the most palatable in its anticipated efforts to normalize the enforcement of its unclaimed property laws.  Thus, the court will defer its decision on the subject of an appropriate remedy until another day.”

The Court Defers the Takings Clause Claim

The court made no final decision on the “taking” claim.  Pursuant to the Fifth Amendment (made applicable to the states by the Fourteenth Amendment) a state may not take private property for public use without just compensation.  Temple Inland argued that, by demanding estimated property in the context of an unclaimed property audit, the state was impermissibly taking Temple Inland’s property for public use.  The court rejected the absolute nature of this argument.  While the court recognized that an inaccurately performed estimate could result in the taking of a holder’s property, the court held “reasonable” estimation, in and of itself, did not represent an unconstitutional taking of a holder’s property.  Noting that the parties had not yet presented evidence on whether the estimation at issue was “reasonable,” the court deferred a decision on this issue.

The Court Rejects the Ex Post Facto Challenge

The court found in favor of Delaware on the ex post facto cause claim.  The Constitution’s ex post facto clause (Art. I, Sec. 10) prevents states from retroactively punishing an act that was not prohibited at the time of the act.  As the court recognized, however, violations of the ex post facto clause have generally only been found in connection with criminal statutes, or civil statutes that operate as criminal punishments.  Because the court found that the estimation provisions of Delaware’s unclaimed property law were civil, not criminal, in nature it rejected this claim.

The Temple Inland decision is no doubt a big win for the unclaimed property holder community that, for years, has been complaining about Delaware’s overly aggressive and at times seemingly arbitrary estimation practices.  That said, the Court has expressly left open the issue of how Delaware’s violation is to be remedied.  Until the court’s ruling is given some practical effect, it is unclear just how much of a game changer this ruling will be.

Breaking News: Delaware Sued Over VDA/Audit Demand has an article from Randall Chase of the Associated Press with the story of a lawsuit by Select Medical against the State of Delaware arising from a VDA initiated with the Delaware Division of Revenue*.  According to the complaint, which was filed in Delaware federal court on Wednesday, Select Medical entered into a VDA with Delaware in 2006.  As a result of its own review, it attempted to close out the VDA in 2008 with a payment of approximately $20k of Delaware (in addition to some $300k filed in other states).

In response to this payment (again, according to the allegations of the Complaint) Delaware initiated an audit of the company, going back to 1981.  As a result of that audit, Delaware demanded an additional $300k from Select.  The lawsuit raises a number of challenges to the Division of Revenue’s normal audit practices including:

  • the use of estimation prior to the enactment of Delaware’s statute authorizing estimation;
  • the alleged use of “arbitrary and capricious” estimation methods;
  • the inclusion of non-dormant property in Delaware’s estimation procedures; and
  • Delaware’s claimed disregard of the Texas v. New Jersey priority rules.

 The Complaint seeks a preliminary injunction preventing Delaware from demanding the $300k audit assessment, or imposing interest and penalties on that assessment, until such time as the court can review the case.  The case is named Select Medical Corp. v. Cook, et al., Case No. 1:13-cv-00694 in the United States District Court for the District of Delaware.

* Note that the VDA program described in the complaint appears to be the Division of Revenue’s VDA program, not the temporary VDA program currently being offered by the Delware Secretary of State.

Breaking News: Delaware Secretary of State VDA Process Signed Into Law

Last week, we mentioned that Delaware was considering a second voluntary disclosure process, separate from the one run by the Department of Finance.  That legislation was approved, and was signed by the Governor yesterday.  A copy of the legislation can be found here, but the highlights are as follows:  holders who come forward by June 2013 (and pay outstanding amounts by June 2014) will only have to review records back to 1996.  Holders who come forward by June 2014 (and pay by June 2015) will only have to review records back to 1993. 

New Jersey Gift Card Legislation Passes

According to Escheatable’s contacts in the New Jersey State Government (read: the Internet) Governor Christie signed Senate Bill 1928 into law.  While it did not go as far as many hoped it would (by, for example, repealing all references to gift cards in New Jersey’s unclaimed property law) it does provide some regulatory relief for gift card issuers.  In particular, this bill:

  • extends the dormancy period for stored value cards to 5 years (up from the current 2);
  • restricts the application of expiration dates and dormancy fees; 
  •  provides that retail gift cards are escheatable at 60% of the face value (thereby giving retailers the benefit of some profit margin).  Note that this does not apply to “general purpose” cards as defined in the legislation;  and
  • requires issuers to redeem cards in cash if there is a balance of less than $5

The full text of the legislation can be found here.  While the gift card industry’s response to the bill is yet to be seen, already gift card provider InComm has announced that it will return to New Jersey.  The issuer previously left the state in April, citing the requirements of the unclaimed property law.

Breaking News: New Jersey Legislature Passes Gift Card Bill, Legislation Headed to Governor (Updated)

We continue the seemingly never ending saga of New Jersey’s 2010 gift card legislation.  A brief recap:  In July, 2010 New Jersey passed Assembly Bill 3002, which, among other things, applied the state’s Unclaimed Property Act to gift cards (using a 2 year dormancy period), reduced the dormancy period for travelers’ checks from 15 years to 3 years, and reduced the dormancy period for money orders from 7 years to 3 years.  In addition, the legislation provided that all gift cards, even those for the purchase of merchandise only, would escheat to the state at full face value (the “Face Value Requirement”), required all gift card issuers to collect at least zip code information from the gift card purchasers (the “Zip Code Requirement”), and provided that in the absence of such zip code information, it would be presumed that all gift cards sold in New Jersey were sold to New Jersey residents (the “Location Presumption”).  Got all that?  Good.  Sadly, were not even close to being done with the summary.

Unhappy with several parts of the legislation, gift card issuers, money order transmitters, and travelers’ check sellers sued the state to challenge the new law.  Specifically, opponents of the legislation challenged New Jersey’s authority to shorten money order and travelers’ check dormancy periods, to apply the Unclaimed Property Act to gift cards, and to enforce the Face Value Requirement, the Zip Code Requirement, and the Location Presumption (more details here).  Initially, a federal court in New Jersey entered an injunction temporarily prohibiting the state from retroactively enforcing the Face Value Requirement or the Location Presumption.  The court declined, however, to prevent application of the 2 year dormancy period for gift cards or the shortened dormancy periods for money orders and travelers’ checks.  Still there?  Great.  Still not done.

Ultimately, the lower court’s decision was appealed to the U.S. Court of Appeals for the Third Circuit in Philadelphia.  That court ultimately upheld most of the lower court’s decision.  Specifically the Court of Appeals held that, as a preliminary matter, the gift card issuers challenging the law had shown that they are likely to succeed on their claim that the retroactive Face Value Requirement unconstitutionally interfered with the sellers’ contract rights and reasonable expectation of making a profit (because generally retailers do not sell $50 worth of merchandise for $50; there is usually a profit margin). The Court also ruled that the Location Presumption was invalid (and thus could not be enforced) because of the Supreme Court’s decision in Texas v. New Jersey.  Thus, cards sold in New Jersey without name and address (more on that later) are still escheatable to the holder’s state of incorporation.  At the same time, the Court ruled in favor of New Jersey on two fronts.  First, the Court ruled that the 2 year dormancy period itself was permissible.  Moreover, the Court held that the law’s requirement that sellers collect name and address information (or at least zip code info) from the purchaser is constitutional.  Hello?  Still getting the story up to speed.  We’re almost at the new stuff.  Really.

While all this legal wrangling was going on, the legislature was also at work trying to improve, amend (or completely undo) the previous legislation.  Industry also got into the act.  In particular, several gift card issuers pulled their products from the shelves in New Jersey, citing an inability or unwillingness to comply with the challenged legislation (including particularly the requirement to collect zip code information for every transaction).

This, in turn, also fomented a public relations battle between the gift card industry and the state.  Basically, the state argued that the gift card retailers were greedy corporate oligarchs bent on stealing innocent citizens’ funds with gift cards designed to suddenly dematerialze without warning.  For their part, the gift card retailers essentially argued that New Jersey wanted to outlaw gift cards entirely, through stiff criminal penalties, up to life imprisonment, for persons caught using, possessing, or even thinking about gift cards.  (Editor’s note:  This is, perhaps, not a completely accurate recitation of each sides’ respective position, though that seemed to be the gist of it).

ANYWAY:  Earlier this year, the New Jersey Assembly passed a bill that would effectively undo the 2010 legislation, by removing stored value cards from the scope of the New Jersey Unclaimed Property Act, and (re)extending the dormancy periods for money orders and travelers’ checks back to 7 and 15 years, respectively.  That bill then went to the State Senate for consideration.  Earlier today, the State Senate took action with respect to the 2010 gift card legislation.  Given the twists and turns thus far, what do you think that the State Senate did?

A.  Passed the Assembly Legislation As Is
B.  Passed the Assembly Legislation With Some Minor Changes
C.  Voted Down the Assembly Legislation; Gift Card Laws to Remain As Is
D.  None of the above

Congratulate yourself if you chose “D.”  According to the Newark Star-Ledger, the State Senate unanimously passed Senate Bill 1928.  This bill extends the dormancy period for stored value cards to 5 years (up from the current 2) and provides that retail gift cards are escheatable at 60% of the face value (thereby giving retailers the benefit of some profit margin).  The bill also requires issuers to redeem cards in cash if there is a balance of less than $5.  This bill will now (presumably) be considered by the State Assembly.

UPDATED 6/26/2012:  The Assembly passed the same bill later on the evening of June 25.  The bill now goes to the Governor for signature.

Breaking News (Updated): Second (and Third) Gift Card Retailer Leaves NJ

Coincidence or Exodus?  According to the Associated Press, a second company is pulling gift cards from New Jersey shelves in response to that state’s unclaimed property requirements.  According to the article, Atlanta based InComm (which provides Visa, Macy’s, iTunes and other gift cards to more than 2,500 retail locations) is leaving New Jersey at the end of June.  InComm, like AmEx before it, has cited compliance with New Jersey’s unclaimed property law (which requires sellers to collect purchaser name and address information at the point of sale) as the reason for the withdrawal.

UPDATE (5:15pm):  According to an additional AP article, a third card seller, Blackhawk Network, has joined the exodus.

Gift Card Litigation Fallout — AMEX Pulls Out of New Jersey

Earlier this year, the U.S. Court of Appeals for the Third Circuit ruled on New Jersey’s 2010 legislation concerning stored value cards.  Though the appellate court ruled that certain parts of the law probably had to be struck down — most notably the use of a so-called “transactional rule” at odds with Texas v. New Jersey, the court upheld what was colloquially referred to as the “Zip Code Requirement.”  As you might imagine, that portion of the law required gift card sellers to collect purchaser and/or owner zip code information at the point of sale (presumably to avoid unused funds from escheating, if at all, to the state of the card issuer’s domicile.

In connection with that litigation, some card issuers indicated that they would simply stop doing business in New Jersey if the new law was upheld.  At the time, it is unclear whether anyone took that to be a serious threat.  Yesterday, according to The Associated Press, American Express made good on its threat, pulling gift cards from third-party sellers like grocery stores, pharmacies, etc.  Among other things, AmEx contends that it can ensure compliance with New Jersey’s law with regard to those items sold by third-parties.  According to the article, New Jersey residents will only be able to buy AmEx gift cards through the company.

For its part, the New Jersey Treasury Department denies that the legislation puts an unfair burden on issuers, and claims that it will not begin to enforce the Zip Code Requirement until it figures out how to do so in a manner “that is uniform and as least onerous as possible.”  No word on whether other issuers will follow AmEx’s lead.

Breaking News: Appeals Court Rules in NJ Gift Card Litigation

The U.S. Court of Appeals for the Third Circuit just issued its opinion in the New Jersey gift card litigation.  First, a brief recap.  In July of 2010, New Jersey passed a wide-sweeping gift card law.  Among other things, that law:

  • Imposed a 2 year dormancy period on most stored-value cards;
  • Required sellers of stored value cards to collect name and address information (or at least zip code info) from purchasers (the “Zip Code Requirement”);
  • Required sellers of “merchandise only” stored value cards (i.e., those redeemable solely for goods and services) to escheat the full dollar value of those cards retroactively.  In other words, gift card issuers were required to escheat the full dollar value of cards that were issued long before NJ passed this law (the “Face Value Requirement”); and
  • Created a “place of purchase presumption” for cards sold in New Jersey without collection of name and address, the presumption (of course) being that those cards were sold to owners in New Jersey (the “Location Presumption”).

Unhappy with this legislation, a variety of groups sued New Jersey to prevent enforcement of the new law.  Ultimately, the district court’s ruled that the state was prevented from (1) imposing a presumption that cards sold in New Jersey are escheatable to New Jersey and (2) requiring merchants to escheat the cash value of merchandise only gift cards issued prior to the effective date of the act.  At the same time, the court did allow NJ to require sellers to collect name and address information, and preliminarily held that the 2 year dormancy period was permissible.  Both sides appealed that decision and argument was heard by the appellate court last year.

The court of appeals issued its decision today.  In short, the Court of Appeals affirmed the entirety of the district court’s ruling.  In particular, the Court held that, as a preliminary matter, the issuers had shown that they are likely to succeed on their claim that the retroactive Face Value Requirement unconstitutionally interfered with the sellers’ contract rights and reasonable expectation of making a profit (because generally retailers do not sell $50 worth of merchandise for $50; there is usually a profit margin). 

The Court also ruled that the Location Presumption was (and thus could not be enforced) because of the Supreme Court’s decision in Texas v. New Jersey.  Thus, cards sold in New Jersey without name and address (more on that later) are still escheatable to the holder’s state of incorporation.

At the same time, the Court ruled in favor of New Jersey on two fronts.  First, the Court ruled that the 2 year dormancy period itself was permissible.  Moreover, the Court held that the law’s requirement that sellers collect name and address information (or at least zip code info) from the purchaser is constitutional.

Breaking News: Nevada Passes New Law Targeting High-Dollar Holders

The Governor of Nevada has approved Senate Bill 136.  The new law, which makes several changes to Nevada’s banking laws, also makes some very unique changes to the state unclaimed property act.  The new legislation shortens the dormancy period for several property types, but only for holders who have reported $10 million in the most recent year’s report.

Specifically, the relevant language of the new law provides that for stock, security interests, debt of a business association, deposits and similar accounts, retail credits and for all other non-specified property:

the 3-year period described in each of those paragraphs must be reduced to a 2-year period if the holder of the property reported more than $10 million in property presumed abandoned on the holder’s most recent report of abandoned property

Senate Bill 136 at Section 8.  Though the universe of Nevada holders reporting and remitting $10 million per year is probably minimal, this marks the first time that a state is explicitly targeting large-volume holders for special treatment (i.e., shorter dormancy periods) under the unclaimed property laws.

Breaking News: Federal Appeals Court Reverses Kentucky Travelers Check Injunction

The U.S. Court of Appeals for the Sixth Circuit released an opinion today in which it reversed a Kentucky federal court decision preventing Kentucky from shortening the dormancy periods for traveler’s checks to seven years down from 15.  In so doing, the court ruled that the district court erred by not scrutinizing under the legislation under a straightforward “rational basis” standard of review.  Under a “rational basis” standard, a court will not invalidate legislation so long as it is in furtherance of some legitimate government purpose.  In the earlier proceedings, the district court (i.e., the lower court) ruled that the legislation was required to pass a more restrictive standard. 

This does not end the case.  The appeals court sent the case back to the district court to consider AmEx’s other challenges to the law.  The court did not decide those claims in its prior opinions because it had invalidated the law on due process grounds.