Category: cases

Oklahoma Supreme Court Affirms Dismissal of Suit Challenging State’s Unclaimed Property Program as “Ponzi Scheme”

Recently, the Supreme Court of Oklahoma issued a decision in Dani v. Miller, an attempted class action suit challenging Oklahoma’s Unclaimed Property Program as a “Ponzi Scheme.”  In that case, an Oklahoma resident filed a number of constitutional and common-law challenges to the Oklahoma Unclaimed Property Act and its administration.  In particular, the plaintiff was challenging Oklahoma’s practice (shared by nearly all the states) of only holding a portion of unclaimed property to pay out claims, while using the rest for state revenue.  As the Oklahoma Supreme Court explained:

“[T]he UUPA contemplates and accounts for the fact that not all owners of abandoned property will seek to recover it.  The UUPA therefore creates a system where a reserve is maintained in the Unclaimed Property Fund to pay approved claims and the remainder is deposited to the General Revenue Fund for use by the state.”

The plaintiffs contended that Oklahoma’s unclaimed property program was a “Ponzi scheme”* because “the reserve is not sufficient to pay all potential (including not-yet-established) claims and new abandoned property is to be used to pay any established claims exceeding the reserve.” The Court rejected this argument on two grounds.  First, the Court held that there was nothing fraudulent or deceptive about Oklahoma’s program as its procedures (including the deposit of funds into the states general revenue) were all disclosed (and in fact, mandated by) state law.  Second, the court explained that “[t]he State is not deceiving new investors to pay valid claims, but rather is paying those claims with abandoned property it would be taking in anyway, per the terms of the UPPA.  [The Act thus] operates in such a manner that even if they must wait, owners of abandoned property with valid claims will always be able to eventually recover their previously presumed-abandoned property.”  (emphasis added).

While the Court’s reasoning seems  sound insofar as it recounts how state unclaimed property programs actually work, notably implicit in the court’s decision — and, in fact, in the operation of the states’ programs themselves — is the idea that the influx of unclaimed property funds will continue forever.  While there may be nothing deceptive or fraudulent in how these programs work, the fact remains that, at least in the first instance, a claimant’s ability to recover his or her property is not a function of the state’s ability to serve as a custodian or caretaker of unclaimed property, but rather its ability to keep that property coming in.

*  A “Ponzi scheme” named after Charles Ponzi, is a fraudulent scheme wherein victims are generally promised a guaranteed return in exchange for an investment, and those investments are used by the fraudster to pay out returns to earlier investors.  Eventually, when the flow of new investments slows or stops, there is no money left to pay returns (or the initial investment) to any investors, and the fraudster has generally taken steps to disappear.  One of the most recent, and well-known, Ponzi schemes was the Madoff Investment Scandal.

Temple-Inland Court Renders Federal Preemption Decision – Case Will Continue

Last year, a company called Temple-Inland commenced a lawsuit against the State of Delaware, challenging the findings of a Kelmar-initiated unclaimed property audit, especially as to how estimated liabilities are calculated.  In particular, Temple-Inland alleged that Delaware made an audit demand in excess of $1 million for estimated historical unclaimed property liabilities after having identified only about $150 in actual liability.  Delaware promptly moved to dismiss that litigation (that is, that the court should not even hear the dispute) and Temple-Inland responded by asking the Court for summary judgment (an order that Plaintiff is entitled to judgment as a matter of law, without the need for a trial) on the grounds of federal preemption.

Wednesday afternoon, the trial court issued its decision on the dueling motions.  In sum, both parties’ attempts for a quick knockout were largely rejected, and the case will continue.  The one substantive decision that the Court made relates to federal preemption (i.e., the argument that federal law displaces contrary state law).  The Court expressly rejected T-I’s argument that federal preemption prevented Delaware from employing estimation to assess historical unclaimed property liabilities.

The Federal Preemption Decision

In numerous cases, the Supreme Court has held that a state’s jurisdiction to take custody of unclaimed property relates to the debtor-creditor relationship between the holder and owner of unclaimed property.  In Delaware v. New York, for example, the Court held that the determination of which state was entitled to escheat property started with a determination of the “precise debtor-creditor relationship” that gave rise to the property.   In the T-I case, Temple Inland argued that the use of estimation to calculate unclaimed property liabilities (where no exact debtor-creditor relationship is shown) was preempted (i.e., prohibited) by federal authority relying on the existence of this debtor-creditor relationship, and similar authority refusing to use statistical estimates to apportion unclaimed property among the states in lieu of the Texas v. New Jersey priority rules.  T-I also argued that, although the Texas v. New Jersey and Delaware v. New York holdings arose in the context of disputes between states, the Supreme Court’s holdings in those cases were nonetheless applicable to disputes between a state and a holder.

The Delaware District Court rejected this argument and dismissed T-I’s federal preemption claim.  In so doing, the court reasoned that the since the “stated purpose” of the Texas v. New Jersey priority rules was to “apply to disputes among States, not to disputes between private parties and States” there was no relevant federal law to preempt Delaware’s enforcement of its unclaimed property act.  Accordingly, the District Court avoided the need to determine whether estimation itself was preempted via federal law by finding, in effect, that there was no applicable federal law at all.  The court’s holding regarding federal preemption necessarily resulted in the denial of T-I’s motion for summary judgment.

The Case Will Continue

As to the remainder of T-I’s claims, the court held that the complaint stated a set of facts that, if proven, might entitled T-I to relief, and thus denied the remainder of Delaware’s motion to dismiss.  The case will now continue.

Two Different Traveler’s Check Stories, Same Ending

Two long-running judicial disputes over traveler’s checks ended recently, both with the same result: shortened dormancy periods.

Travelers’ checks have always been something of an outlier in the context of unclaimed property laws, as they generally have a relatively long dormancy period (about 15 years, as opposed to 3 or 5 years for most items) before they are eligible for reporting and delivery to state custodians.  These longer periods are arguably justified by the fact that travelers’ checks are usually purchased by travelers for future use (hence, the name “traveler’s check”).  In recent years, states have begun to question the necessity for these longer dormancy periods, and have been amending their unclaimed property laws to bring the dormancy periods for traveler’s check in line with those of other property types.  Two states where this was done recently are Kentucky and New Jersey.

In both instances, traveler’s check issuers did not take the change lightly.  In both states, lawsuits were filed challenging the states’ decision to shorten the dormancy period.  The suits originally garnered mixed results:  in New Jersey, a trial court upheld the state’s amendments, but a trial court in Kentucky ruled in favor of check issuers and ordered that the dormancy period remain 15 years.  The issuers’ success was fleeting, however, as a federal appellate court reversed that ruling last year.  In the New Jersey case, a federal appeals court affirmed the district court’s decision upholding the New Jersey legislation.

Both of those stories are now (probably) concluded.  In Kentucky, after reversing the trial court’s ruling, the U.S. Court of Appeals for the Sixth Circuit sent the case back to the trial court for further proceedings.  On September 12, the trial court issued an opinion granting Kentucky summary judgment  regarding the issuer’s remaining claims, and dismissed the case.  Thus, absent further proceedings the Kentucky law will stand.

Separately, the Supreme Court of the United States denied American Express’s request that the court review the New Jersey law.  Thus, the district court’s decision upholding the shortened dormancy period will be allowed to stand.

The Upcoming Conflict Between Unclaimed Property Law and Consumer Privacy

This week, the Louisiana state legislature will begin to consider House Bill 128, which is a consumer protection proposal that would prohibit merchants from requesting name, address, telephone, or zip code information from any consumer in connection with a cash, gift card or credit card payment.  The Louisiana legislation comes only a few months after the California Supreme Court ruled that a retailer’s request for zip code information in connection with a retail purchase violated state privacy laws. 

Why is this a big deal?  Because some other states, most notably New Jersey, are going in precisely the opposite direction, and trying to require merchants to obtain address (or at least zip code) information in connection with the sales of gift cards.  As more and more gift card issuers seek to capitalize on favorable unclaimed property laws in their states of incorporation, other states – like New Jersey – are pushing back by trying to require gift card sellers to obtain (and retain) name and address information.  While this is generally pitched as a consumer friendly requirement (in that it makes it somewhat more likely* that a gift card owner can reclaim his or her funds), consumer protection laws come in many varieties.  For every citizen who is glad to be able to reclaim a gift card from the state, there are just as many who are annoyed at having to provide personal information at the time of sale, or who are afraid that information isn’t safe when retained by the merchants.

Unless the states reach some sort of consensus on this issues, merchants will be faced with the very real possibility of a patchwork of laws throughout the various states with different (and often conflicting) requirements.

*  Requiring consumer address information makes the property more likely to be claimed from the state if it is ever escheated only if the retailer is required to get complete name and address information.  In New Jersey’s case – where a merchant is only required to obtain zip code information – there is no information for the state to honor reclaims.  Whether requiring zip code only is an accommodation to busy merchants, or a revenue generating measure for the state is an open question for another day.

New Zealand Supreme Court Upholds Unclaimed Money Act

It is becoming more and more common that countries outside of the United States are enacting or implementing unclaimed property laws, or are enforcing pre-existing unclaimed property laws with new zeal (forshadowing pun intended).  Of course, along with such enforcement also comes controversies regarding the validity or scope of unclaimed property acts (generally, brought by the holder as a defense to a government’s claim).  Last week saw the end of one such controversy in New Zealand.

Last week, the Supreme Court of New Zealand upheld the validity of the 1971 Unclaimed Money Act, and ruled that the Act applied to certain foreign currency drafts issued by 3 New Zealand banks.  (See accompanying article about the lawsuit published on  Specifically, the banks argued that since the currency drafts were “presentment” items — that is, the banks’ liability to pay moneys under the drafts was conditional on the instruments being presented for payment — they had no obligation to pay until the condition was fulfilled, and hence no obligation to turn the underlying monies for unpresented drafts to the government as “unclaimed.”  The Suoreme Court rejected that argument.

In so doing, the Court followed precedent set in the 2004 case of Thomas Cook v. Inland Revenue, wherein the Privy Council (formerly the court of last resort for New Zealand and many other Commonwealth countries) upheld the validity of the 1971 Unclaimed Money Act against a similar challenge regarding presentment, noting that it was “nonsense” to argue, as the banks seemed to, that “money can only become unclaimed money once it has in fact been claimed.”

Breaking News: New Jersey Gift Card Rules Further Postponed Until 1/18

A quick update on the continuing New Jersey gift card law litigation.  As you probably know, a variety of New Jersey gift card issuers filed a lawsuit in federal court, seeking to have parts of New Jersey’s new gift card law overturned.  Last month, the a federal court in New Jersey issued a preliminary injunction prohibiting the state from enforcing at least two provisions of the new law: (1) the law’s presumption that all cards sold in New Jersey are escheatable to New Jersey; and (2) the law’s requirement that merchandise-only gift cards issued prior to the act be escheatable in cash.

We say “at least” two provisions of the law have been enjoined because the parties to the lawsuit are currently disputing the scope of the federal court’s injunction.  In particular, the parties disagree as to whether the new law’s requirement that gift card issuers obtain purchaser or owner zip code information is enforceable.  New Jersey takes the position that the zip code requirement is unaffected, the issuers take the position that the provision can’t be enforced.  An application has been made to the court to settle the dispute, but no decision has been made.

As you may have noticed, this happens to be a busy time for gift card issuers.  In light of the uncertainty, the New Jersey Attorney General’s Office filed a letter with the federal court yesterday, which informs the court that “the Treasurer has extended the date for issuers to implement a system or process capable of recording and maintaining the purchaser’s zip code until no earlier than January 18, 2011.”

A formal announcement should be forthcoming from the Treasury Department

Breaking News: Federal Court Enjoins Parts of NJ Gift Card Law

A few weeks ago, we reported on the NJ Retail Merchants Association’s lawsuit against New Jersey in response to that state’s new unclaimed property laws relating to gift cards.  As we covered earlier, the NJRMA challenged various provisions of the NJ legislation (the “Bill,” discussed here) including the provisions presuming NJ reportability for cards sold in NJ locations or in NJ zip codes (the “Location Presumption”) and the requirement that issuers turn over the full face value of cards inactive for 2 years (the “Face Value Requirement”).  The NJRMA also challenged the retroactivity of the bill (i.e., the law’s application to cards that were issued years before the bill was enacted). 

Similar lawsuits were filed against the state by the New Jersey Food Council and American Express Prepaid Management as to the gift card provisions.  Lawsuits have also been filed by American Express (challenging new laws relating to travelers’ checks) and Memo Money Order Company (challenging the shortened dormancy period for money orders).  These plaintiffs all sought a preliminary injunction — that is, an order preventing NJ from enforcing the Bill — until the court can issue a final ruling.  The State opposed these requests, and asked the court to dismiss the case.

On November 12, the federal district court issued an opinion and order in connection with the plaintiffs’ request for a preliminary injunction.  The court has enjoined the state from enforcing the Location Presumption, and from applying the Face Value Requirement to cards issued prior to the effective date of the Bill.  The court declined, however, to stop the state from enforcing the new 2 year dormancy period for stored value cards, or from shortening the dormancy period for travelers’ checks.  This does not represent a final ruling on any of these issues.  Instead, it is a preliminary determination that prevents NJ from enforcing the Location Presumption or the Face Value Requirement (retroactively) until a final decision is made.

We will continue to follow the case.

New Hampshire Court Dismisses Lawsuit Challenging State Reuinification Efforts

A New Hampshire court has dismissed a lawsuit challenging the methods for giving notice.  Pursuant to the New Hampshire unclaimed property act, the state attempts to contact owners of unclaimed property via mailings, an online database, and by publishing owner names in the New Hampshire Union Leader

Two plaintiffs, Kimberly Blain and Joe King’s Shoe Shop, claimed that the state’s efforts to notify owners was insufficient and argued that the state had an interest in not locating owners: namely, the approximately $4.4 million that winds up as state revenue as a result of the abandoned property program. 

The court ruled that while the state’s efforts might not be optimal, they did not rise to the level of a deprivation of the owners’ constitutional rights. 

More on the New Jersey Litigation – Money Order Issuers Join The Act

Regular readers of Escheatable have already heard plenty (perhaps too much) about New Jersey’s new unclaimed property legislation this summer and the resulting lawsuits.  As you may recall, New Jersey shortened the dormancy period for both travelers’ checks and money orders to 3 years (down from 15 years, and 7 years, respectively) and created a 2 year dormancy period for stored-value cards.  Thereafter, New Jersey was promptly sued by travlers’ check and gift card issuers to prevent the new law from going into effect.

Not to be outdone, at least one money order issuer is joining the fray.  On October 21, Memo Money Order Company, Inc. (“Memo”) — a Pennsylvania issuer of money orders — sued New Jersey in federal court seeking an injunction to prevent application of the new law (Case No. 3:10-cv-05460).  As have others, Memo alleges that the New Jersey law, and its retroactive application, violates Memo’s 14th Amendment due process rights, constitutes an unlawful taking of property, violates the federal and state Contract Clauses, and is invalid under the New Jersey Constitution.

The Memo lawsuit is on a slightly different track than the travelers’ check and gift card cases.  A decision on the latters’ request for a preliminary injunction is expected by mid-November and will likely go a long way toward deciding this case as well.

NJRMA v. New Jersey – Overview of the New Jersey Gift Card Litigation

As promised, we now have some additional information relating to the NJ Retail Merchants Association’s lawsuit against New Jersey in response to that state’s new unclaimed property laws relating to gift cards.  As we covered earlier, the new legislation (the “Bill”) requires gift card issuers to obtain at least the zip code of all gift card purchasers (the “Zip Code Requirement”) and requires that issuers turn over the full face value of cards inactive for 2 years (the “Face Value Requirement”).  In addition, the legislation was expressly deemed to be retroactive – meaning that the new laws applied to cards that were issued years before the bill was enacted.

The full complaint, filed last Thursday, is worth a read for gift card issuers (or those otherwise interested), but a few of the allegations jump out. 

In challenging the Zip Code Requirement, the NJRMA notes that “[b]ecause Gift Cards are given away by the purchaser, there is no way for the issuer to know, or keep a record of, who the bearer, or rightful owner of a Gift Card is.”  (Compl. at 15 – footnote omitted).  In other words, the NJRMA is challenging the utility of requiring issuers to obtain the zip code of a purchaser (as a purported proxy for the owners last known address), where experience shows that the owner and the purchaser of a gift cards are not necessarily (or even usually) the same.

In setting up their challenge to the Face Value Requirement, the NJRMA notes that their members’ gift cards “generally do not expire and there is no fee associated with purchasing a gift card.”  (Compl. at 19).  Accordingly, the NJRMA alleges, most retailers do not recognize any profit until the time that the gift card is actually used, but that it has a property right to the profit it would eventually receive if the gift card is used.

Taking a page from the Hollenbach litigation (in which American Express successfully challenged Kentucky’s shorening of the dormancy period for travelers’ checks), the NJRMA also alleges that, despite the stated purposes of the legislation (to protect the funds of gift card owners) ,”there was a clear revenue objective” to the legislation.  (Compl. at 36).  Specifically, the NJRMA noted a report by the Office of Legislative Services stating that the “fiscal impact” of  the legislation to be nearly $80 million in FY 2011.  In Hollenbach, a federal court ruled that “[s]hortening the presumptive abandonment period [for traveler’s checks] . . . is not rationally related to raising revenue for the state, even if revenue raising were a legitimate state purpose or objective.” 

As to the specific claims, NJRMA alleges that the Zip Code Requirement is preempted by the Supreme Court’s decision in Texas v. New Jersey, in which the Supreme Court held that unclaimed property owed to owners with unknown addresses are escheatable to the holder’s state of incorporation.

The second count of NJRMA’s complaint alleges that the Bill violates the “due process” rights of the gift card issuer.  In particular, NJRMA alleges that although the gift card issuer makes no profit at the time of sale, it nonetheless “receive[s] a vested interest in the money tendered by the purchaser” at that time, and the State’s taking of that property violates those property rights. 

The third count of the complaint alleges that the Bill violates the Contract Clause of the federal and New Jersey constitutions because of its retroactive application to gift cards sold prior to enactment of the Bill.

The final count of the complaint alleges that the Bill violates the Constitution’s takings clause by requiring retailers to turn over the full dollar value of an unused gift card without accounting for the lost profits of the retailer. 

In light of these arguments, the Complaint asks the court to deem the Zip Code Requirement, the Face Value Requirement, and the Bill’s retroactivity as “void, unconstitutional and unenforceable as a matter of law.”

Tomorrow, we will review the allegations of the American Express lawsuit against New Jersey regarding the changes to the travelers’ check dormancy period.