unclaimed property: 2016 litigation update · unclaimed property: 2016 litigation update presented...

Unclaimed Property: 2016 Litigation Update

Presented by:

Wilson G. Barmeyer, Eversheds Sutherland (US) LLP Derek L. Young, Baker Botts LLP

Richard M. Zuckerman, Dentons US LLP

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UPPO Presentation Disclaimer

Use of the Unclaimed Property Professionals Organization, Inc., (UPPO) name on copyrighted

materials in this presentation does not constitute an endorsement by UPPO of a member, vendor, product or service. The content represents the

opinions of the authors and not necessarily those of UPPO. This information is not intended as legal

advice and should not be used to replace the advice of legal counsel.

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Today’s Agenda

Key Issues in Litigation in 2016

• Texas v. NJ: The Priority Rules

• What Property is Subject to Escheat

• Enforcement

• Challenges to Unclaimed Property Audits

What to Look for in 2017

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2016 Litigation Update: Texas v NJ: The Priority Rules

Texas v. NJ, 379 U.S. 674 (1965) • Primary rule: “the right and power to escheat the

debt should be accorded to the State of the creditor’s last known address as shown by the debtor's books and records.”

• Secondary rule: “where there is no last known address” and “where the State of the last known address does not … provide for escheat of the property” the property may be subject to escheat by the State of domicile [incorporation] of the debtor.

• “[T]hese problems [are] likely to arise with comparative infrequency.”

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Texas v. NJ Priority Rules constitute federal common law. Illinois v. City of Milwaukee, Wis., 406 U.S. 91, 105-06 (1972) • “These rules arise from our ‘authority and duty to

determine for [ourselves] all questions that pertain’ to a controversy between States, and no State may supersede them by purporting to prescribe a different priority under state law.” Delaware v. NY, 507 U.S. 490, 500 (1993).

• “If the States are dissatisfied with the outcome of a particular case, they may air their grievances before Congress. That body may reallocate abandoned property among the States without regard to this Court's interstate escheat rules. ” Delaware v. NY, 507 U.S. 490, 510 (1993).

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Does Texas v. NJ apply to a Holder v. State dispute? • Marathon Petroleum v. Cook, 2016 WL 5348572 (U.S.D.C.,

D. Del., Sept. 23, 2016). Delaware audited special purpose gift card issuers domiciled in Ohio, even though, under Texas v. NJ, only Ohio would have jurisdiction to escheat unused gift cards for which the owner’s address is not known. Gift card issuers brought action against Delaware officials, alleging that Delaware's Unclaimed Property Law was preempted by federal common law.

• Federal district court in Delaware held: “[T]he Texas trilogy does not preempt [Delaware’s] audit, or any eventual escheatment, because the cases apply only to disputes between two states, rather than to disputes between a private entity and a state.”

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What about NJ Retail Merchants v. Sidamon-Eristoff, 669 F.3d 374, 392 (3d Cir. 2012), a Holder v. State dispute, which applied Texas v. NJ and held NJ’s gift card law unconstitutional, because it sought to change Texas v. NJ’s priority rules? • In Marathon, federal district court attempted to

distinguish NJ Retail Merchants, stating that, in Marathon, Delaware alleges that “Plaintiffs may be fraudulently using non-Delaware special purpose entities to remove from Delaware entities property that would otherwise be subject to escheat in Delaware.”

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On appeal in Marathon Petroleum v. Cook, Marathon argues: • “Every federal court to address the issue except the District

Court in Delaware has held that the federal common law applies to private party disputes with states and preempts state law.” Delaware state courts also apply Texas v. NJ to Holder v. State disputes. Brief, pp. 27-28, citing NJ Retail Merchants; American Petrofina v. Nance, 859 F.2d 840, 842 (10th Cir. 1988); Delaware v. Card Compliant, N13C-06-289 FSS, at 6, 21 (Del. Super. Ct. Nov. 23, 2015); Nellius v. Tampax, Inc., 394 A.2d 233, 237 (Del. Ch. 1978).

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On appeal in Marathon Petroleum v. Cook, Marathon argues: No exception based on alleged fraud. No fraud. “[N]either

Delaware nor the District Court explain why the incentive to domesticate in Delaware to benefit from Delaware’s Corporate Law is any less a “fraud” than a special purpose entity’s desire to domesticate in Ohio because of favorable escheat laws.” Brief, p. 41

The Court that will decide Marathon Petroleum: The United States Court of Appeals for the Third Circuit, the same court that decided NJ Retail Merchants.

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The next US Supreme Court case on the Priority Rules: Delaware v. Pennsylvania, No. 22O145; Arkansas v. Delaware, No. 22O146-Original (US Supreme Court). • In 1974,Congress changed Texas v. NJ Rules for

abandoned “money order, traveler’s check, and other similar written instrument (other than a third party bank check) on which a banking or financial organization or a business association is directly liable.” Disposition of Abandoned Money Orders and Traveler’s Checks Act, 12 U.S.C. §§ 2501 et seq.

• Under Federal Disposition Act, first priority is State of sale, and second priority is State of holder’s principal place of business.

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The facts in Delaware v. Pennsylvania. • MoneyGram sells “official checks,” has records of

place of sale, and does not have payees’ addresses.

• MoneyGram has been escheating unused “official checks” to Delaware, its State of incorporation under the Texas v. NJ Priority Rules

• 23 States sued Delaware, arguing that unused “official checks” should escheat to State of sale as “money orders” or “similar” to money orders under Federal Disposition Act.

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The issue in Delaware v. Pennsylvania. • Issue is statutory construction, applied to

MoneyGram’s “official checks”. Case could be decided on narrow grounds. Are MoneyGram’s official checks “money orders” or “similar” to money orders.

• But anything Supreme Court says about Texas v. NJ Priority Rules is important.

• Question: What is the highest “court” on the MoneyGram issue?

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2016 Litigation Update: What Property is Subject to Escheat?

Bed Bath & Beyond v. Chiang, No. 37-2014-12491 (Super. Ct. San Diego, CA Mar. 4, 2016) • From 2004 to 2012, Bed Bath & Beyond (“BBB”)

escheated over $1.8 million in merchandise return certificates (“Certificates”)

• BBB filed a refund claim with the California Controller, claiming that the Certificates are not subject California’s unclaimed property laws

• The Controller denied BBB’s refund claim, and BBB sued

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Bed Bath & Beyond v. Chiang: The Superior Court ruled that the Certificates are not subject to escheat on two grounds:

1. The Certificates are exempt gift certificates under Cal. Code Civ. Proc. § 1520.5

2. The Certificates are not “intangible personal property” under Cal. Code Civ. Proc. § 1520

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Bed Bath & Beyond v. Chiang: The Certificates are exempt gift certificates under Cal. Code Civ. Proc. § 1520.5

• They bear the same characteristics as gift certificates

• California law recognizes gift certificates other than those purchased for gifts

• Cal. Civ. Code § 1749.5(d)(1) “awards, loyalty or promotional program”

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Bed Bath & Beyond v. Chiang: The Certificates are not “intangible personal property” under Cal. Code Civ. Proc. § 1520 • California requires escheat of intangible personal

property “held or owing in the ordinary course of the holder’s business” • Because the Certificates aren’t redeemable for cash, they

aren’t “owed” within the meaning of the statute

• California’s interpretation conflicts with Cal. Civ. Code § 1723, which allows retailers to implement a no receipt, no cash return policy Consumers not entitled to cash under the refund policy

would be entitled to cash under the unclaimed property laws

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Bad Bath and Beyond’s Implications

• Could support refund claims or filing positions for retailers in California or other states

• The court’s decision could support arguments that other forms of property are not escheatable under the derivative rights doctrine

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2016 Litigation Update: Enforcement

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Temple-Inland v. Cook, Civ. No. 14-654-GMS (Del. Dist. Ct. June 28, 2016) • Background

• The company sued Delaware to challenge a $1.4 million assessment in an audit conducted by Kelmar.

• The assessment was based on an estimated amount back to 1981, on a national basis, even though very little actual property had been identified as owing to Delaware.

• Court decision • Delaware “engaged in a game of ‘gotcha’ that shocks the

conscience” in administering its unclaimed property law • The audit estimation methods violated Temple-Inland’s

substantive due process rights


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Temple-Inland v. Cook

Alleged Violations of Substantive Due Process

1. Waited 22 years to audit

2. Exploited loopholes in the statute of limitations

3. No notice given of record retention requirements

4. Failed to articulate any legitimate state interest (other than revenue raising)


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Temple-Inland v. Cook

Alleged Violations of Substantive Due Process

5. Did not extrapolate address characteristics of the property in the base period

6. Subjected plaintiff to multiple liability (because base sample included Texas records that Texas used in its own sample for estimation)

But, “the court finds no need to determine if any of these actions on their own shock the conscience.”


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• Potential Implications of Temple-Inland v. Cook

Can a state conduct 50-state estimation?

⁻ Any extrapolation methodology must properly replicate the characteristics and qualifies of the liability (i.e., if property in the base years shows an address in another state, then that characteristic has to be extrapolated into the reach-back years)

⁻ Any extrapolation methodology should now be proportional by state, based on the error rate for the particular state

⁻ Holder’s state of domicile may no longer be the primary driver for use of estimation, since estimation may be used by states other than the holder’s state of domicile

Expect future disputes . . .


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• Potential Implications of Temple-Inland v. Cook

Can an estimated liability extend further back than the statutory record retention requirements?

⁻ Holders must be given notice of the need to retain records for the length of the lookback period. (Delaware’s statute does not contain a 22-year record retention requirement.)

⁻ Outer boundary of any estimation calculation should arguably be the shorter of a state’s (i) record retention period or (ii) statute of limitation, if any. State unclaimed property statutes vary significantly on both of these points

Expect further challenges . . .


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• Enforcement and Challenges to UP Audits

Audit Initiation

Information Requests - Subpoenas

Assessment Refund


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DE v. Blackhawk Engagement Solutions (Del. Chancery Ct.)

⁻ Delaware seeking to enforce subpoena

⁻ Issue: Appropriate scope of state audit authority

West Virginia ex rel. Perdue v. Life Insurers

⁻ Involves unclaimed life insurance benefits

⁻ Unusually aggressive penalty/interest claims by WV

2016 Litigation Update

What to look for in 2017

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2016 Litigation Update

Q&A

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Thank You!

Wilson G. Barmeyer Eversheds Sutherland (US) LLP 700 Sixth Street, NW, Suite 700 Washington, DC 20001 202.383.0824 [email protected]

Derek L. Young Baker Botts LLP 30 Rockefeller Plaza, New York, New York 10112 212.408.2555 [email protected]

Richard M. Zuckerman Dentons US LLP 1221 Avenue of the Americas, New York, NY 10020 212.398.5213 [email protected]

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