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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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Office Depot case takes on federal priority rules

Posted By Administration, Thursday, June 1, 2017

On May 4, 2017, UPPO filed an amicus brief with the U.S. Court of Appeals for the Third Circuit in the case of Office Depot v. Cook. The amicus brief supports the arguments of the plaintiffs, retailer Office Depot and its gift card management company, North American Card and Coupon Services (NACCS). 

 

Like many retailers, Office Depot established and uses a special purpose entity for oversight and management of its gift cards and gift certificates. The gift card management company, 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 federal priority rules established in Texas v. New Jersey.

On March 3, 2017, the U.S. District Court of Delaware dismissed the case, saying that the priority rule cases cited by Office Depot apply only to interstate disputes, but not disputes between private entities and states. Office Depot appealed the ruling to the Third Circuit Court of Appeals.

 

“Delaware is arguing that holders can’t rely on the federal common law rules and that the state has the right to essentially demand any and every bit of documentation or information concerning how a retailer set up its gift card structure,” says Ethan Millar, partner with Alston & Bird. “If Office Depot prevails in this case, then Delaware will be significantly limited in its ability to challenge these structures.”

The priority rules permeate many aspects of unclaimed property compliance—beyond just the retail industry. On a larger scale, the Office Depot case takes aim at any holder’s ability to rely on the federal priority rules to determine the states to which they should escheat unclaimed property.

 

“If the court determines the federal common law rules do not apply to disputes between a holder and a single state, that will invite chaos as a matter of compliance because holders will have to try to anticipate claims by states that wouldn’t normally have a claim under those rules,” Millar says.

 

In addition, invalidating the priority rules in disputes between single holders and states could affect states’ use of estimation. Losing the weight of the priority rules would make it much more difficult for holders to argue that estimation is impermissible because the state is trying to escheat something other than the actual debt that’s owed. Also, because the priority rules are the foundation for the argument against having to escheat foreign-owned property to a state, this case’s decision could affect how holders deal with such property.

 

UPPO’s amicus brief raises several arguments in support of Office Depot and points to a previous Third Circuit Court of Appeals decision as one of the reasons Office Depot should prevail. The 2012 case of N.J. Retail Merchants v. Ass’n v. Sidamon-Eristoff case similarly involved a state’s attempts to escheat gift cards by taking a position different from what the federal common law rules required.

 

The Third Circuit held that the federal common law rules were intended to be rules of general application. Even though they were created under the U.S. Supreme Court’s jurisdiction to resolve disputes between states, that doesn’t mean they’re limited to interstate disputes.

 

The N.J. Retail Merchants case is not an outlier. The Tenth Circuit reached a similar conclusion in the 1986 American Petrofina Co. of Texas v. Nance case, and several lower federal court and state supreme court decisions concur.

 

UPPO will continue to monitor and report on this case as developments occur. UPPO’s amicus brief was written and submitted on behalf by Ethan Millar and John L. Coalson Jr. from Alston & Bird; James G. Ryan and Jameel S. Turner from Bailey Cavalieri; and Michael Rato from McElroy, Deutsch, Mulvaney & Carpenter.

 

 

Tags:  compliance  Delaware  Office Depot  priority rules  unclaimed property 

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