United States: CFPB Seeks Comment on Unused Gift Card Balances

Last Updated: November 4 2013
Article by Rebecca Howald and Derek W. Edwards

CFPB Seeks Comments on its Draft Strategic Plan

The CFPB is taking comments on its draft strategic plan for 2013-18. The draft strategic plan is available at http://www.consumerfinance.gov/strategic-plan/ and the CFPB would like the public to email comments to StrategyPlanComments@cfpb.gov by October 25, 2012. The strategic plan is a broad overview of the CFPB's goals in the coming years and does not contain specific regulations.  Nevertheless, Waller encourages its financial service clients to weigh in and comment on the plan. 

CFPB Seeks Comment on Unused Gift Card Balances

by: Christopher A. Wilson

The Consumer Financial Protection Bureau ("CFPB") is currently soliciting comments for consideration as to whether certain unclaimed property provisions in Maine and Tennessee regarding unused balances remaining on gift cards issued by merchants (a) are inconsistent with, and therefore preempted by, gift card expiration provisions in the federal Electronic Fund and Transfer Act ("EFTA"), as implemented by Regulation E, or (b) provide gift card holders with permissible additional protections.

The EFTA provides that, with limited exception, gift certificates (excluding those issued only in paper form), store gift cards, and general-use prepaid cards—all generally referred to herein as "gift cards"—issued by vendors to their consumers must not expire for a minimum of five years. However, many states have enacted unclaimed property statutes providing that gift card balances not utilized for a prescribed period of inactivity—typically between two to five years—are deemed abandoned and must be transferred to the state for safekeeping on behalf of the consumer to whom it belongs. Such statutes have been adopted in Tennessee and Maine, both of which deem gift card balances abandoned after a two-year period of inactivity.1 After transferring unused gift card balances to Tennessee or Maine, vendors are relieved from the obligation to honor the cards and, in such instances, gift card holders must file claims with the state holding the funds in order to receive the remaining gift card balance.  Until the submission of a claim, however, states utilize unclaimed property as part of the state operating budgets.

Because unclaimed property statutes in Maine and Tennessee provide for the "presumed abandonment" of unused gift card balances and further relieve gift card issuers from having to honor such gift cards prior to the expiration of the five-year minimum period of time set forth by the EFTA, the CFPB must determine whether the state statutes at issue permissibly provide greater consumer protections than those afforded under the EFTA or instead run afoul of EFTA mandates. 

Factors Supporting Claim that State Laws are Inconsistent with the EFTA

In its request for comments, the CFPB acknowledges difficulties that gift card holders might face in obtaining unclaimed property from states. While states generally maintain online databases where property owners can locate assets or funds held by a state as abandoned or unclaimed property, states have historically received low percentages of claims. This likely results in part from priority rules affirmed by the United States Supreme Court which provide (1) that abandoned property transfers first to the state of the owner's last known address, and (2) if the gift card holder's address is unknown, then abandoned property transfers to the gift card issuer's state of formation. Since it is not unusual for gift card holders to reside in states other than those where a gift card was purchased, and such parties likely have limited, if any, knowledge regarding the state of incorporation of a gift card issuer, these priority rules most certainly create confusion among gift card holders in trying to locate and pursue an abandoned property claim. 

The CFPB further recognizes that the unclaimed property laws at issue impose an additional burden upon gift card holders by requiring them to file claims with states in order to obtain outstanding gift card balances and that in many instances such attempts might be exacerbated as a result of gift card issuers' inability, due to lack of records, to report gift card holder names to states collecting abandoned balances, thus making it difficult or impossible for gift card holders to establish ownership of abandoned gift card balances.

Factors Supporting Claim that State Laws Offer Greater Protection than the EFTA

In its notice, the CFPB acknowledges that the transferal of unused gift card balances to a state presumably protects gift card holders from the imposition of fees for inactivity or management, provides gift card holders with infinite opportunity to file a claim and obtain card balances (in cash form) from the state, and also offers protection from the potential for loss should a gift card issuer become insolvent. Many of these factors were addressed by the United States Court of Appeals in N.J. Retail Merchants Assn v. Sidamon-Eristoff, 669 F.3d 374 (3d Cir. 2012), reh'g denied (3d Cir Feb. 24, 2012), which concluded that they supported a conclusion that New Jersey's unclaimed property statutes provide additional protections.2

Effect of CFPB's Determination

Should the CFPB determine that the two year abandonment presumption in Maine and Tennessee is inconsistent with the EFTA, such provisions will be pre-empted by federal law, resulting in the imposition of a minimum five-year period in order for a gift card to be presumed abandoned for purposes of state unclaimed property provisions. Such a holding with respect to Tennessee and Maine would also affect other states requiring custodial escheatment of gift card balances after periods of inactivity of less than five years. One suggested middle ground on which the CFPB seeks comment is the extent to which gift card issuers might comply with both state and federal law by honoring unclaimed gift cards, the balances of which have been deemed abandoned and transferred to a state, and then requesting reimbursement from Maine or Tennessee.

The deadline to submit comments addressing this preemption determination is October 22, 2012.

The Notice of Intent to Make Preemption Determination, as submitted to the Federal Register for publication, is available at:  http://files.consumerfinance.gov/f/201208_CFPB_Intent_to_make_preemption_determination.pdf

Absolute Assignment of Rents: Maybe Not in Tennessee

by: Ryan K. Cochran

An absolute assignment of rents conceptually, if not by its very name, provides a mortgagee on an income producing property with the "absolute" right to rental income generated by the mortgaged property in the event of a default by the borrower. However, Tennessee's Bankruptcy Courts have given disparate treatment to the absolute assignment of rents in mortgage loan transactions.  In order to create clear law and predictable outcomes, lenders should call upon the Tennessee legislature to craft a solution to the uncertainty caused by the conflicting court decisions. 

The economic incentives on which an assignment of rents is based is nicely summarized as follows:

When a loan is secured by a mortgage or deed of trust on an income-producing property, such as an office building, shopping center, or apartment complex, rents are a significant part of the security of the loan, in addition to the land and improvements. Rents provide the funds necessary to pay for operating and maintaining the mortgaged property, and to make payments on the mortgage loan. After a default on the mortgage loan, a borrower, facing the possibility of losing the property to foreclosure, may apply rents to purposes unrelated to the property or the mortgage loan. The lender, on the other hand, wants rents collected after a default to be applied to operation and maintenance of the property or to the mortgage debt. Therefore, a lender wants the ability to control rents from the mortgaged property in the event of a default, and to this end will require the borrower to execute an assignment of rents at the loan closing.3

Given the status of the law today, a lender can no longer be certain that an assignment of rents will provide it with the ability to control rents from the mortgaged property after an event of default.  Bankruptcy cases highlight this uncertainty.

When a borrower files bankruptcy the principal issue the lender faces is whether the post-petition rents generated by the debtor's business constitute "cash collateral" within the meaning of § 363 of the Bankruptcy Code. The lender expects that as a result having obtained an assignment of rents, the cash is not cash collateral because all rights to the rents generated by the debtor's business were "absolutely" assigned to the lender. The debtor, however, asserts that it retained some rights in the rents even after the assignment and thus the cash is simply cash collateral that the debtor can use in its bankruptcy case so long as the lender's interest is adequately protected. The determination of this issue depends on whether the assignment of rents at issue effectively transferred the rents absolutely to the lender or was merely a grant of a security interest in the rents. A lender with a separate loan document titled "Absolute Assignment of Rents" may believe this is a non-issue and that it will be permitted to control the rents. However, the Tennessee bankruptcy courts do not agree.

In 2010, the United States Bankruptcy Court for the Western District of Tennessee held that an assignment of rents was an absolute assignment rather than the grant of a security interest. The decision was affirmed by the District Court.4

However, in 2011, on the other side of the State, the United States Bankruptcy Court for the Eastern District of Tennessee found that: "an assignment of rents absolute on its face will nevertheless be viewed as a security interest."5 Exemplified by these decisions, Tennessee courts have for years ruled inconsistently as to whether an assignment of rents is absolute or for security. 

A September 2012 hearing in the United States Bankruptcy Court for the Middle District of Tennessee was the impetus for writing on this topic. The Middle District found that an absolute assignment of rents was a grant of security and found the rents constituted property of the estate.6 As a result, the post-petition rents generated by the debtor's business were determined to be cash collateral, and the debtor was permitted to use the rents after providing the lender adequate protection. After announcing his decision from the bench, the bankruptcy judge noted the existence of conflicting decisions interpreting absolute assignment of rents. The judge also acknowledged the difficulty lawyers faced in advising their clients on how an assignment of rents would be interpreted by the Bankruptcy Court. The judge further suggested that a legislative fix might be needed to give stakeholders more clarity and certainty on what rights parties have when they enter into an absolute assignment of rents. 

As it exists today, the law interpreting absolute assignment of rents is uncertain and inconsistent. This will result in further litigation and expense for all parties.  Eventually a trend will develop from court decisions that answers this question, but a judicial solution may result in a determination that an absolute assignment of rents is merely a security interest. A legislative fix will be more certain and can establish the parties' rights under an assignment of rents. A legislative fix could also save the parties and the court's expense and time by limiting future litigation on this issue. If lenders want certainty that they will be able to control a debtor's rents in a bankruptcy proceeding by virtue of obtaining an absolute assignment of rents then it is time to seek a legislative fix.

Highlights of the Eighth Annual Southeastern Banking Seminar

On August 17th, nearly 90 banking executives and industry leaders gathered for Waller's Eighth Annual Southeastern Banking Seminar. The 2012 program was held at the Waller Conference Center in downtown Nashville and featured an impressive faculty who discussed recent developments and emerging issues within the financial services industry.

The 2012 Southeastern Banking Seminar included the following presentations:

  • Commissioner Greg Gonzales, Tennessee Department of Financial Institutions, opened with a discussion of recent and ongoing activities and efforts by the Department;
  • Brian Branson, Director of Sterne Agee & Leach, Inc., provided a summary of recent capital raising efforts and M&A activity, as well as an outlook in these areas for the future;
  • Larry Childs and Bill Athanas, partners in Waller's financial services group, presented an overview of D&O liability and practical tips for mitigating risk;
  • Jim DeMasi, Managing Director of Stifel, Nicolaus & Company, provided a detailed economic and interest rate outlook; and
  • John Buchanan, Senior Vice President and General Counsel of the Federal Reserve Bank of Dallas, concluded with a discussion of challenges facing the banking industry from both a regulatory and insider perspective.

Footnotes

1 Under Maine's unclaimed property statutes, gift card balances are presumed abandoned two years from December 31 of the year when the obligation arises or from when the last transaction involving the gift card occurred. Under Tennessee law, gift cards balances are presumed abandoned at the earlier of (1) the date of expiration of the card, or (2) two years from the date the gift card was issued.

2 New Jersey presumed gift card balances to be abandoned after a two year period. However, New Jersey's unclaimed property statutes were subsequently amended to impose a presumption of abandonment after five years—thus obviating the question whether the EFTA preempted the statute.

3 Still Crazy After All These Years: The Absolute Assignment of Rents In Mortgage Loan Transactions, 59 Fla. L. Rev. 487, 488-89 (July, 2007) (This article relies heavily on this law review article and its in depth discussion of this issue. A reader interested in a more in depth discussion of this issue will find this article informative.)

4 460 Tennessee Street, LLC v. Telesis Community Credit Union, 437 B.R. 306 (W.D. Tenn 2010).

5 In re Senior Housing Alternatives, Inc., 444 B.R. 386, 396 (Bankr. E.D. Tenn. 2011). (Noting at footnote 7, the existence of differing decisions).

6 In re Shreibman (Protective Life Ins. Co. v. Shreibman), Case No.: 12-05272 pending in the United States District Court for the Middle District of Tennessee.

For further information visit Waller's Banking Law Blog

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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