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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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S.B. 13 makes sweeping changes to Delaware’s unclaimed property statutes

Posted By Administration, Thursday, February 16, 2017

On Feb. 2, 2017, Gov. John Carney signed Delaware S.B. 13 into law, significantly updating the state’s unclaimed property statutes. Many of the changes mirror the 2016 Revised Uniform Unclaimed Property Act (RUUPA), and others appear to respond to issues raised by the Temple-Inland case. The new law is intended to “bring greater predictability, efficiency and fairness to the state’s unclaimed property reporting process and compliance initiatives.” Following is a summary of several of the law’s most noteworthy provisions.

 

Lookback, Record Retention and Statute of Limitations

S.B. 13 reduces the lookback period for both audits and voluntary disclosure agreements (VDAs) to 10 years plus dormancy. It also defines an express record retention period of 10 years from the date a holder submits a report. The statute of limitations is now 10 years from the date the duty arose, whether or not the holder reported the property. The previous statute of limitations, although shorter, began to run from the time the holder reported the property.

 

Estimation Methodology

The new law mandates that the secretaries of finance and state develop estimation regulations by July 1, 2017. They must include permissible base periods; items to be excluded from estimation calculation; aging criteria for outstanding and voided checks; and a definition of what constitutes “complete and researchable records.”

 

Audit Conversion

Under the new law, all holders currently under audit may convert to a two-year accelerated audit. Holders under audit as of July 22, 2015, may convert to a VDA program. Holders have until 60 days after the promulgation of the new estimation regulations to decide whether to convert to an accelerated audit or VDA program. Interest and penalties will be waived if conversion is made. Holders remaining in the audit will be subject to mandatory interest that is waivable only up to 50 percent.

 

Subpoena Authority

Provisions of the new law give the state escheator the power to issue an administrative subpoena and the ability to seek enforcement of an administrative subpoena in the Court of Chancery. These provisions appear to address issues raised by Delaware Department of Finance v. Blackhawk Engagement Solutions.

 

Judicial Review

Among the new provisions adopted in Delaware is a process for appeal by holders to the Delaware Court of Chancery, replacing the previous multi-step administrative review process. Under the new appeal process, holders have the ability to challenge the state escheator’s determination of liability. The court’s standard of review is deferential to the state escheator regarding factual determinations, but errors of law will be reviewed de novo. The judicial review provision also expressly gives the Court of Chancery the authority to review questions of state or constitutional law related to the examination. This provision appears to be a response to the Temple-Inland case.

 

Indications of Owner Interest

S.B. 13 adds a specific list of owner activities that prevent running of the dormancy period. Indications of the owner’s interest in property includes:

  • A written or oral communication by the owner to the holder or agent of the holder concerning the property or the account in which the property is held.
  • Presentment of a check or other instrument of payment of a dividend, interest payment or other distribution.
  • Accessing the account or information concerning the account, or a direction by the owner to increase, decrease or otherwise change the amount or type of property held in the account.
  • Payment of an insurance policy premium with some exceptions.

The new law also specifies that if an owner has more than one investment or account with a holder, an indication of interest in one investment or account is an indication of interest in all of those accounts.

 

Knowledge of Death

The new law adopts the “knowledge of death” concept as a dormancy trigger for life insurance proceeds. “Knowledge of death” may be identified through any source, such as declaration of death, a death certificate or the comparison of the holder’s records against the Social Security Administration’s Death Master File.

 

Priority Rules

For the first time, the Delaware unclaimed property law includes a codification of the U.S. Supreme Court’s priority rules. It expressly prohibits Delaware as the state of domicile under the second priority rule from taking property into custody that is exempted in the first priority rule state. It also allows the state of domicile to claim foreign-address property but excludes property claimed under foreign law.

 

Owner Address

S.B. 13 adopts portions of RUUPA’s definition of an owner’s “last-known address.” The last-known address of an owner is defined as “a description, code or other indication of the location of the owner on the holder’s books and records that identifies the state of the last known address of the owner.”

 

Disposal of Securities

The new law specifies that the state escheator shall sell or dispose of securities on any established stock exchange or by such other means as soon as the escheator deems it feasible after the delivery. The escheator may not sell a security listed on an established stock exchange for less than the price prevailing on the exchange at the time of sale. The escheator may sell a security not listed on an established exchange by any commercially reasonable method.

 

S.B. 13 provides for indemnification of security owners for 18 months. The escheator will provide either a replacement security or the market value of the security at the time the claim is filed if the owner comes forward with that 18-month period.

 

Gift Cards

For the first time, Delaware’s statute defines “gift cards,” “stored value cards” and “loyalty cards.” Gift cards and stored value cards remain escheatable after five years of inactivity. The state retained its unique profit retention provision defining the amount unclaimed as “the amount representing the maximum cost to the issuer of the merchandise, goods, or services represented by the card.” S.B. 13 adds “Goods” and “Services” into the mix, as old statute only provided exemption for “maximum cost to issuer of merchandise represented by the card.” Loyalty cards are expressly exempt.

 

Holders are prohibited from transferring their unclaimed property liability or obligation, except to a parent, subsidiary or affiliate. This provision affects third-party, unrelated companies that issue gift cards on behalf of a business and appears to address some of the uncertainty resulting from the Card Compliant qui tam litigation.

 

Compliance Review

Another new provision in the law permits the state escheator to conduct a “compliance review” if the escheator believes a filed report was inaccurate, incomplete or false. The compliance review is limited to contents of report and all supporting documentation. The escheator is required to adopt rules governing the procedures and standards for compliance reviews, but no timeline was included in the statute.

 

Application of the New Law

S.B. 13 represents a major change in Delaware’s unclaimed property practices with many positive developments for holders. They include reduced lookback, clear record retention period, estimation regulations, statute of limitations regardless of prior reporting compliance, direct appeal to Court of Chancery, new definitions and new exemptions.

 

As with any new law, it remains to be seen how provisions will be interpreted and applied. Holders await the regulations still in development regarding audit conversions to fast-track audits and VDAs, and the new compliance review provision. Clarification from Delaware will help holders make informative judgments about whether to convert current audits into VDA or fast track audits, and whether other changes to their unclaimed property practices are warranted.

 

Tags:  audits  Delaware  estimation  gift cards  RUUPA  unclaimed property 

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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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Litigation update: Delaware remains in the litigation hot seat

Posted By Emily Lee, UPPO, Thursday, September 1, 2016
Updated: Tuesday, September 6, 2016

Litigation continues to take aim at Delaware’s controversial unclaimed property practices. In addition to the recently settled Temple-Inland lawsuit, three cases involving Delaware have recently taken the spotlight.

 

Office Depot v. Cook

Like many retailers, Office Depot established and continues to use a special purpose entity for oversight and management of its gift cards and gift certificates. The gift card management company, North American Card and Coupon Services (NACCS), was incorporated in 2002 in Virginia, which exempts gift cards from unclaimed property reporting. NACCS does not collect names and addresses of gift card or certificate purchasers.

 

As part of an audit that began in 2013, Delaware’s third-party auditor, Kelmar, requested information from Office Depot that included detailed records regarding NACCS transactions. Office Depot declined to provide this information, arguing that NACCS transactions fall outside of Delaware’s jurisdiction under the priority rules established by the U.S. Supreme Court in Texas v. New Jersey.

 

As a result of Office Depot’s refusal to turn over requested NACCS documentation, Kelmar subsequently referred the issue to Delaware’s attorney general for “enforcement action.”

 

On July 18, 2016, Office Depot and NACCS filed suit against Delaware unclaimed property officials, seeking a declaratory judgment that the state’s unclaimed property practices violate the Fourth Amendment and federal common law. The plaintiffs argue that:

  • The defendants’ information request amounts to unreasonable search and seizure.
  • Delaware’s unclaimed property laws violate the priority rules established in Texas v. New Jersey.

Marathon Petroleum v. Cook

Issues similar to the Office Depot case are at play in Marathon Petroleum v. Cook. Marathon uses a gift card management company incorporated in Ohio, another state that exempts such property from escheatment. After Marathon objected to an $8 million estimated liability for gift certificates for which the company said it had issuance and redemption records, Kelmar—on behalf of Delaware—requested records related to the gift card company’s creation and operations.

 

Among the information requested were contracts, meeting minutes, vendor agreements and accounting records. Marathon refused, arguing that such request is outside of Delaware’s jurisdiction. Again, Kelmar suggested it would turn over the issue to the attorney general for enforcement action.

 

In February, Marathon filed suit. Like in the Office Depot case, the plaintiffs argue violation of the federal priority rules and the Fourth Amendment. The Marathon case also takes issue with the state’s estimation practices.

 

According to Delaware Law Weekly, Delaware argued on Aug. 10, 2016, that the Texas v. New Jersey applies only to disputes between states, not audits of private entities. The defendants also reportedly argued that Marathon’s claims are premature, as they would have their chance to make their case in state court if they continued to resist turning over requested documents. Attorneys for Marathon took issue with the state’s interpretation of federal law and compared the nine-year audit of the company to a “fishing expedition.”

 

Plains All American v. Cook

A limited partnership incorporated in Delaware, Plains All American Pipeline, received notification in 2014 that Kelmar would be conducting an audit of the company on behalf of Delaware. Plains objected to the initial information request, claiming, in part, that the company was being audited not because of any suspicion of wrongdoing, but rather because of its profitability. When Delaware dismissed the company’s objections, Plains filed suit.

 

Among the complaint’s allegations, Plains argues that Kelmar’s request for information about subsidiaries organized outside of Delaware constitutes illegal search and seizure under the Fourth Amendment. The company argued that the state and its agent have no right to that information and, if they did, they would need to have reasonable grounds to search for it. The complaint also directly challenged Delaware’s right to use estimation.

 

On Aug. 16, 2016, the U.S. District Court for the District of Delaware dismissed the lawsuit. In part, the court said the plaintiffs brought their suit based on potential threats and not actual threats. For example, Plains challenged the state’s right to use estimation before it had done so, as the lawsuit was brought immediately following Kelmar’s initial information request. Regarding the Fourth Amendment claim, the court said the state’s decision to examine businesses based on their profitability was legitimate, as those companies are logically more likely than others to hold large amounts of unclaimed property.

 

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:  audits  Delaware  gift cards  litigation  unclaimed property 

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RadioShack settlements address bankruptcy, gift card and rebate issues

Posted By Administration, Thursday, May 26, 2016

On Feb. 5, 2015, RadioShack filed for Chapter 11 bankruptcy protection. The electronics retailer’s case raised questions about the treatment of unredeemed gift cards and rebates as unclaimed property. Multiple states sued RadioShack in an attempt to ensure outstanding gift cards were given priority during bankruptcy, maximizing their value and escheating to the states on behalf of consumers.

 

In a separate lawsuit, the state of Illinois battled RadioShack and its third-party rebate fulfillment partner, Global Fulfillment Services, over $140,000 in uncashed customer rebates owed to more than 5,000 Illinois residents. 

 

Gift Cards

The U.S. Bankruptcy Code doesn’t address how unused gift cards should be treated under Chapter 11 reorganizations. How companies in bankruptcy handle gift cards varies, often depending on whether a company remains in business or liquidates.

 

Often, companies that go through bankruptcy will still honor their gift cards, to the extent that they are still operating. However, in some cases, retail stores have continued operating under the pre-bankruptcy name but under new owners who purchased only the company’s assets. This can leave customers confused when they attempt to redeem a gift card at a store carrying the same name and logo, only to be told it is no longer valid.

 

In June 2015, the Texas attorney general filed suit against RadioShack, requesting that the balance of outstanding gift cards be turned over to the appropriate state. Texas argued that RadioShack sold gift cards under the premise that they would not expire. As part of the company’s bankruptcy filing, RadioShack obtained an order of the court setting a deadline by which gift cards needed to be redeemed.

 

“While it is not all that unusual to see a state attorney general appear in a retail bankruptcy case to advocate positions for the benefit of consumers, what is unique here is that the states sought standing to file proofs of claim on behalf of the owners of unredeemed gift cards and to take custody of those funds on their behalf,” says Donna Culver of Morris, Nichols, Arsht & Tunnell, LLP.  

 

According to the suit, consumers weren’t given notice of the deadline and, thus, didn’t have a reasonable opportunity to redeem their gift cards before the expiration deadline. The suit also claimed that RadioShack continued to sell gift cards while knowing it would soon be filing for bankruptcy protection.

 

Several other states joined the Texas lawsuit.

 

The bankruptcy judge approved a settlement between the states and RadioShack in September 2015. Rather than turning over funds, estimated at $46 million, to the states, the agreement gave consumers in all 50 states a full year to file claims for the full value of gift cards they purchased. Gift cards distributed as part of store promotions and for merchandise returns, however, were not covered as part of the agreement. Owners of those gift cards would be considered unsecured creditors without a priority claim, so they would likely receive little, if any, compensation.

 

Rebates

On April 26, 2016, Illinois Treasurer Michael Frerichs announced a settlement with RadioShack, which agreed to turn over $140,000 to the state as unclaimed property. The amount represented dormant, uncashed rebates earned by consumers between 2002 and 2008.

 

The state’s auditors discovered that rebates had not been escheated to the state as unclaimed property if they were not claimed within five years, as required under state law. Rather, RadioShack allowed its third-party rebate processor, Global Fulfillment Services, to keep unclaimed funds as revenue, under their contractual agreement. Illinois argued that keeping the funds violated the Illinois Uniform Disposition of Unclaimed Property Act.

 

Upon RadioShack’s bankruptcy filing, Illinois filed a proof of claim on behalf of Illinois residents with dormant, uncashed rebates, notifying the court it wished to assert its right to receive payment from the bankruptcy estate.

 

“The state apparently had fairly detailed information as to the identities and amounts owed to Illinois residents,” Culver says. “In many cases, states do not have that kind of detailed information and do not pursue debtors for unclaimed property liabilities, perhaps fearing that they will quickly get bogged down in the claims litigation process where distributions may be only pennies on the dollar.” 

 

The April settlement allows Illinois consumers to claim their rebates—typically valued between $20 and $100—through the state’s unclaimed property website.

 

For additional information about noteworthy unclaimed property cases, check out UPPO’s govWATCH website.

 

Tags:  bankruptcy  gift cards  litigation  rebates  unclaimed property 

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The Gift That Keeps on Giving: Understanding Gift Card Reporting and Compliance

Posted By Susan Han, principal, Abandoned and Unclaimed Property Practice – Ryan, Tuesday, September 3, 2013
Updated: Tuesday, September 3, 2013
Navigating the complex field of unclaimed property can be difficult for holders. The issue of reporting various forms of stored value – better known as gift cards or gift certificates, but also potentially encompassing other more cutting edge forms of stored value – can be particularly problematic due to the grey area surrounding these unique and highly popular instruments.

 

Unlike other forms of intangible personal property, such as uncashed checks or credit balances, which are more straight-forward from an unclaimed property compliance and reporting perspective, gift cards compliance often requires a more in depth analysis to determine reporting obligations under the jurisdictional (or "priority”) rules. In fact, more than 30 states have specific exemptions for gift cards under their unclaimed property statutes, but it’s important for holders to know the limitations of each exemption to ensure they are reporting gift card balances correctly.

In states without exemptions, gift cards and other forms of stored value are generally considered escheatable property and must be reported to the states under the priority rules established by the U.S. Supreme Court in Texas v. New Jersey – first priority being the state of the owner’s last known address as reflected on the holder’s books and records and the second priority being the state where the issuing company is incorporated or organized (assuming owner unknown property). With a large majority of gift card transactions (issued at the point of sale directly or through a third party), names and addresses are rarely collected as part of the transaction because they are purchased by cash or credit card. As a result, for such gift card transactions where names and addresses are not collected and retained, reporting generally reverts to the second priority, which is the state of incorporation of the gift card issuing entity.

Many gift card issuers are either already organized in one of the 30-plus states that have statutory gift card exemptions or choose to organize a wholly owned special purpose entity in one of the gift card friendly states. But in states without gift card exemptions, holders who may retain name/address information on a certain population of gift cards (i.e. potentially certain online gift cards) often incorrectly report gift cards or perhaps even over-report unredeemed gift cards to states that already have statutory exemptions. There are other complexities to reporting gift cards that should also be considered in conjunction with a consultant or legal counsel, such as states that allow holders to retain their "profit margin” and how this profit margin should be calculated or measured.

Many retailers are now working with third-party companies to handle all aspects of gift card issuances, redemptions, escheatment issues, and accounting processes. These companies are typically organized in states with broad statutory gift card exemptions.

Holders that do not already have gift card planning in place (i.e. gift card special purpose entities) and do actually retain name/address information need to consider the best course of action and have a plan in place to properly report gift cards to the appropriate state(s) and take advantage of statutory exemptions where they are applicable.

UPPO has multiple resources online for holders to learn more about unclaimed property compliance and reporting. Please view the member resources or unclaimed property links for additional information. UPPO also addresses this topic at its regional and annual events, and provides regular updates about state legislative changes related to gift cards and other property types in its weekly govWATCH briefing, available exclusively to UPPO members. Not a member of UPPO? Join and start receiving valuable resources today!

Susan Han is a principal with the Abandoned and Unclaimed Property practice group at Ryan, offering global tax services in North America. Ryan is a member of UPPO and Susan is also a member of UPPO’s Government Relations and Advocacy Committee.

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Tags:  Gift Cards  intangible personal property  retail  unclaimed property 

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