United States: Unclaimed Property Litigation Update – Spring 2016

Litigation over unclaimed property rules and obligations continues to accelerate. The first quarter of 2016 brought developments in several cases, including a much-watched contest over merchandise credits and a new battle between the states over which state gets the money.

California Merchandise Credits Not Subject to Remittance as Unclaimed Property; Implicit Application of Derivative Rights Doctrine Prevails

On March 4, 2016, a California superior court held in Bed Bath & Beyond, Inc. v John Chiang that unredeemed merchandise return certificates (certificates) issued by Bed Bath & Beyond (BB&B) to tis California customers are exempt "gift certificates" under the California Unclaimed Property Law—and not "intangible personal property" under the California catch-all provision. Like many retail stores, BB&B provides the certificates as credits to customers who return items without a receipt. While the certificates may be redeemed for merchandise at BB&B or one of its affiliates, they cannot be redeemed for cash. BB&B took the position that it mistakenly reported and remitted the unclaimed certificates from 2004 to 2012 and filed a refund claim with the California State Controller's Office (Controller) in 2013 for the full amount remitted during that time period (amounting to over $1.8 million). The Controller denied the claim, and BB&B proceeded to sue John Chiang, both individually and in his official capacity as former California state controller. The relief sought by BB&B was the full refund request, plus interest.

The superior court agreed (in-part) with BB&B, granting their motion for summary judgment against John Chiang in his official capacity for the entire refund claim, but declined to find against him in his individual capacity or grant prejudgment interest. In ruling in favor of BB&B, the court first concluded that "because the [certificates] are not redeemable for cash, the Plaintiff does not 'owe' money to the owner of a certificate." The court further found that the Controller's interpretation of the Unclaimed Property Law conflicts with the state consumer protection statute concerning return and exchange policies. See Cal. Civ. Code § 1723 (authorizing the maintenance of a return policy where no cash is provided without a receipt, provided certain conditions are met). Finally, the court held that the Controller did not persuasively argue why the certificates should not qualify as exempt gift certificates under the Unclaimed Property Law. See Cal. Civ. Proc. Code § 1520.5. Specifically, the court pointed to the cross-referenced consumer protection statute's definition of "gift certificates" that is broader than the limited context of gifting suggested by the comptroller, and includes those distributed by the issuer to a consumer pursuant to an awards, loyalty or promotional program. See Cal. Civ. Code § 1749.5.

Practice Note: The superior court is still considering the subsequent response and objections to BB&B's proposed judgment raised by the Controller, with responsive pleadings filed by BB&B on April 14, 2016. Once the proposed judgment is finalized, the countdown will begin for the Controller to appeal the final judgment. Given that California's loss touches on several significant areas of the California Unclaimed Property Law (including the scope of the gift certificate exemption, relevance of consumer protection laws, and the application of the derivate rights doctrine), we expect the Controller to appeal. If California chooses not to appeal, this decision would represent a major victory for holders that have a history of remitting unclaimed merchandise and store credits to the state. Furthermore, the implicit acceptance of the derivative rights argument by the court transcends customer return credits and its application should be considered in the context of other property types.

The authors encourage holders to fully vet their potential refund and compliance options for any scenario in which the derivative rights doctrine or federal/state consumer protection laws may apply to prevent the item from being considered property and/or subject to remittance to the state as abandoned.

Pennsylvania Wages War on Delaware over MoneyGram "Official Checks"

On February 26, 2016, the Pennsylvania Treasury Department and the Treasurer of Pennsylvania filed a complaint in the U.S. District Court for the Middle District of Pennsylvania against Delaware State Escheator David Gregor and MoneyGram Payment Systems, Inc. (MoneyGram) to recover over $10 million escheated by MoneyGram to the state of Delaware reflecting abandoned "official checks" that are known to have been issued in Pennsylvania from 2000 to 2009. While MoneyGram already remitted the entire amount in dispute to Delaware and has been subject to multiple audits, the Pennsylvania is topping off their misery by seeking 12 percent interest, a penalty of $1,000.00 per day and attorneys' fees and costs for remitting to the wrong state.

The dispute hinges on whether MoneyGram's "official checks" are properly classified as third-party bank checks (as suggested by Delaware) or "money orders" (as alleged by the Pennsylvania). If mere third-party bank checks, the official checks would be subject to the general priority rules set forth in Texas v. New Jersey, 379 U.S. 674 (1965) and escheat to MoneyGram's state of incorporation (i.e., Delaware) since their books and records do not indicate the apparent owner's last known address under the first priority rule. However, if the official checks are classified as "money orders" under the Disposition of Abandoned Money Orders and Traveler's Checks Act of 1974, as alleged by Pennsylvania, they would be subject to the special priority rules enacted by US Congress in response the Supreme Court of the United States' Pennsylvania v. New York decision. See 12 U.S.C. § 2503(1) (providing that where any sum is payable on a money order on which a business association is directly liable, the state in which the money order was purchased shall be entitled exclusively to escheat or take custody of the sum payable on such instrument). Because it is not disputed that the official checks at issue were purchased in Pennsylvania, they would escheat to the Pennsylvania.

In support of its claim, the Pennsylvania points out that in 2015, Minnesota (the former MoneyGram state of incorporation) turned over $209,840.30 to the Pennsylvania upon their demand for amounts of MoneyGram official checks issued in Pennsylvania that had erroneously been remitted to Minnesota. Other states, such as Arkansas, Colorado and Texas have made similar demands to Delaware, demanding the Delaware turn over the amounts of official checks erroneously remitted by MoneyGram that it accepted. During the briefing, it has been made public that Treasury Services Group—a third-party auditor, TSG—examined MoneyGram for the official checks on behalf of 24 states, and Delaware initiated its own synonymous audit of MoneyGram regarding the official checks when it became aware of the other states' intent.

In late April, both MoneyGram and David Gregor filed motions to dismiss for lack of subject matter jurisdiction (Motions), citing to the fact that the Supreme Court of the United States' has "original and exclusive jurisdiction of all controversies between two or more states." See 28 U.S.C. § 1251(a). On April 29, the district court ordered discovery in this matter to be stayed pending the outcome of the two Motions. The parties are currently awaiting briefing on the Motions from Pennsylvania, who was granted their second filing extension on May 10, 2016.

Practice Note: This litigation is one to watch in the coming months as the district court decides the jurisdictional Motions. While we can all probably count the number of companies issuing money orders on one hand, this case paints a broader picture than the narrow substantive issue at hand. It is a classic example of Delaware taking hostile positions on certain issues and refusing to work with the opposing party (this time a fellow state) to resolve the issue amicably—resulting in litigation. Sadly, MoneyGram is put between a rock and hard place and may actually be pulling for Delaware here—with the alternative being potential interest and penalties in all 50 states for failure to comply (despite allegations that Delaware explicitly assured them that the official checks were being properly remitted upon their request).

Final words of wisdom for all holders: seriously consider methods to finalize audit results and compliance positions through closing agreements and written rulings. Many states balk at providing this assurance, but the MoneyGram problem highlights why holders should spend time pursuing such assurance and states should put their money where their mouth is by providing it.

Unclaimed Property Litigation Update – Spring 2016

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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