Recent Legal Decisions Involving Unclaimed Property

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1 Recent Legal Decisions Involving Unclaimed Property Charles Hellman, Esq., Executive Vice President, Verus Financial LLC Lynden Lyman, Esq., Principal, The Unclaimed Advisor and NAUPA Special Consultant Brian J. Scanlon, JD/LLM, Vice President, Legal and Emerging Services, Kelmar Associates, LLC The Foremost Authority on Unclaimed Property

2 Recent Legal Decisions Involving Unclaimed Property Introduction Summary of Presentation Discussion of significant decisions Overview of other decisions Pending litigation

3 Perdue v. Nationwide Life Ins. Co. Procedural History: W.V. Treasurer files complaints against 69 insurance companies for alleged violations of W.V. Unclaimed Property Act for failing to turn over unclaimed death benefits. Insurance companies move to dismiss complaints, arguing that they do not have any obligation to search the Death Master File, and that death benefits are not unclaimed until a beneficiary has submitted a claim and provided proof of death. W.V. circuit court agrees with the insurance companies and grants their motions to dismiss. W.V. Supreme Court of Appeals reverses the circuit court, finding that it failed to give force and effect to the W.V. Unclaimed Property Act.

4 The W.V. Supreme Court of Appeal s Opinion: The Court rejected the argument that the obligation to pay the proceeds of a life insurance policy to the Treasurer cannot arise until a beneficiary perfects a claim thereupon. Instead, the Court held that three year dormancy period leading to the presumption of abandonment commences with the death of the insured. The Court concluded that there was no specific duty under the W.V. Unclaimed Property Act requiring insurers to search the Death Master File. Instead, the Court held that insurers were merely required to account for and turn over [unclaimed] property to the Treasurer. Complying with this obligation, however, requires insurers to investigate and discover whether its insureds are yet living. The Court stated that insurers were free to determine how to accomplish this task, but noted that an insurer could find reviewing the DMF as the best or most efficient way to perform its duties under the Act.

5 State of Delaware V. Card Compliant LLC A former officer of Card Compliant originally filed the lawsuit as a whistleblower action pursuant to the Delaware False Claims and Reporting Act. The Delaware Department of Justice (DOJ) joined the suit. The defendants include CardFact, Ltd and its many subsidiaries and over two dozen major U.S. retailers who are current or former clients of the CardFact defendants. The DOJ alleges that the defendants conspired to circumvent the Delaware Abandoned Property Law by establishing sham paper entities, creating a string of contracts devoid of any legal substance, providing kick-backs and utilizing offshore entities in an effort to keep millions of dollars in unredeemed gift cards/stored value cards.

6 In a Memorandum Opinion the Judge denied the defendants Motion to Dismiss and made several legal conclusions: (1) The retailers remained the debtors with respect to the gift card owners as to any gift card liability that was initially incurred by the retailers but purportedly transferred to the CardFact entities; (2) For defendants that were LLCs the second priority rule was to be applied based on the state of formation, not the principal place of business; and (3) Because one of the retailers had previously been audited by the State it could not be a defendant in the false claims action. The Judge dismissed the defendant even for claims that arose subsequent to the period covered by the audit.

7 In closing, an excerpt from the Memorandum Opinion that sums things up quite nicely reads as follows: The property at issue does not belong to the Retailers, much less CardFact. They do not even have a residual claim to it. The purpose of escheat is to put seemingly abandoned property in the safest place possible to protect if for owners, And, if the property is truly abandoned, then it can be put to public good, rather than become profit to a lucky business.

8 Taylor v. Yee U.S. Supreme Court declined to review the dismissal of a challenge to the constitutionality of California s unclaimed property law. Plaintiffs unsuccessfully argued that State must consult all publicly available databases to locate the owners of reported property, and that failure to do so violated the owners due process. Ninth Circuit Court of Appeals: California s unclaimed property law already meets minimum due process requirements (note, however, the State itself contacts owners before the remittance of property). Curious concurrence of Justice Alito (joined by Justice Thomas).

9 Bed, Bath & Beyond Inc., v. Chiang BB&B issued Merchandise Return Certificates (MRCs) to customers who returned merchandise at its stores but without providing a receipt evidencing the purchase. By their express terms, the MRCs were redeemable only for merchandise at BB&B and its affiliates and did not expire. BB&B claimed a refund of amounts equal to the full unredeemed balances of the MRCs it voluntary reported as unclaimed property and remitted to California. When the refund claims were denied BB&B filed suit in the California Superior Court.

10 BB&B Decision Because the MRCs were not redeemable for cash, the Court determined that BB&B did not owe money to the owner. Thus, BB&B s MRCs were not subject to escheat under the intangible property catchall provisions of the UPL. The Court indicated two reasons why the MRCs qualified as gift certificates under the UPL: (1) The MRCs bear the same characteristics as a more traditional gift certificate that is labeled as a gift certificate or gift card ; and (2) The UPL recognizes gift certificates in circumstances other than purchased as a gift. Examples include those distributed by an issuer to a consumer pursuant to an award, loyalty, or promotional program. The State s interpretation of the UPL conflicted with a consumer protection law which permits a retailer to maintain a return policy of no cash where there is no receipt. However, this provision does not address escheat.

11 Overview of Other Decisions of Note Dani v. Miller (upholding the constitutionality of the Oklahoma unclaimed property program) In re Apple iphone/ipad Warranty Litigation (most appropriate disposition of uncashed class action proceed checks is to report and deliver to state unclaimed property programs) Asset Acceptance LLC v. Utah State Treasurer (unclaimed property program not subject to writ of garnishment obtained by creditor) Vanacore & Assocs., Inc. v. Rosenfeld (state under exercise of its police power can impose reasonable restrictions on locators)

12 2017 Preview Some of the issues currently awaiting adjudication: The Due Process requirements of notice concerning state record retention requirements and use of estimations. The right of a state to challenge the legitimacy of a LLC organized under the laws of another state. Clarification of the scope of Congress law regarding traveler s checks, money orders, and similar written instruments other than third party bank checks. The ability of a state, as a holder s state of incorporation, to claim property with a foreign address. The authority of a state to examine life insurance company, and when death benefits should be considered unclaimed. The legitimacy of the U.S. Treasury s recently adopted rules concerning the treatment of matured unredeemed savings bonds to which states have escheated title under state law.