Unclaimed property reporting for corporate holders has been informed by, and is continually changed by, litigation, both in state and federal courts.
These cases have a variety of complex issues, including constitutional due process, federal preemption of state laws, contract law, debtor-creditor relationships, statutory interpretation, and administrative law.
Let’s take a look at the significant unclaimed property litigation that will impact corporate holders.
U.S. Supreme Court Cases
Unclaimed property may be state law, but the trilogy of Supreme Court cases established the priority rules that govern where corporations report unclaimed property.
- Texas v. New Jersey (1965) – First established the primary and secondary priority rules for reporting unclaimed property between the states.
- Pennsylvania v. New York (1972) – Court reaffirms the reporting priority rules, refusing to make an exception for money orders; Congress takes action to make specific exceptions for money orders, traveler’s checks, and similar written instruments.
- Delaware v. New York (1994) – Court once again reaffirms the reporting priority rules, refusing to make an exception this time for stock intermediaries located in New York. The Court provides a handy summary and framework for applying the unclaimed property priority rules.
Other Supreme Court cases that are often referenced in current unclaimed property litigation, but are outside the Texas trilogy include:
- Western Union Telegraph Co. v. Pennsylvania – a 1961 decision wherein the Court found that the Due Process Clause stops multiple states from claiming the same item of property from the holder.
- Standard Oil Co. v. New Jersey – a 1951 decision wherein the Court found states may use legislative powers, subject to constitutional limitations, to dispose of property of unknown owners within its reach. The property can then be “used for the general good, rather than for the chance enrichment of particular individuals or organizations.”
- Connecticut Mutual Life Insurance Co. v. Moore – a 1948 decision wherein the Court found that money owed on life insurance policies, by foreign insurance companies doing business in a state, are proper subjects to a state’s escheat laws. In other words, a state may audit, and require escheatment of unclaimed property found therein, an out-of-state corporate entity.
An additional case is now pending before the U.S. Supreme Court: a multi-state dispute over MoneyGram official checks.
Challenges to the Constitutionality of Unclaimed Property Statutes
California Abandoned Property Litigation
Ever wonder why California has such a unique reporting process, as compared to all the other states?
It is the result of almost two decades worth of litigation over the constitutionality of the unclaimed property program, and even ended up before the Supreme Court (denied cert).
Additional Challenges to Unclaimed Property Statutes
In addition to the California Taylor cases, legal challenges have been pursued and are currently being pursued against various states to challenge the constitutionality of the underlying unclaimed property statutes and schemes.
- Oklahoma: Dani v. Miller – The Plaintiffs called the Oklahoma unclaimed property program a “ponzi scheme.”
Additional challenges to the constitutionality of state unclaimed property programs have also been made as part of lawsuits concerning claims made against the state to recover unclaimed property. Those will be discussed later.
Constitutional challenges relating specifically to Delaware are included in the next section.
Delaware Unclaimed Property Court Cases
Delaware is uniquely positioned in unclaimed property due to its role as the state of incorporation for many large corporations. In fact, there are currently more than 1.3 million entities registered in Delaware, including 64% of Fortune 500 companies. This means a lot of potential unclaimed property, a lot of audits, and a lot of disputes.
- CA, Inc. v. Pfeiffer The holder participated in a Delaware Voluntary Disclosure Agreement (VDA) in 2004 that led to a significant documented liability and estimation, which Delaware rejected. Pursuant to negotiations, the prooffered settlement amounts rose to more than three times the initial estimate. Delaware responded with an assessment at three times the later settlement offer and added penalties and interest. In late 2009, the parties settled for $17.5 million, more than 25 times more than the initial offer.
- McKesson Corp. v. Cook an unclaimed property audit assessment included amounts for “goods received/invoices received” differences as unclaimed property; Delaware enacted Senate Bill 272 to exclude GRIR from the definition of unclaimed property.
- State ex. rel. Higgins v. SourceGas LLC Delaware case that sought to determine which state could claim abandoned property when the state of incorporation changed after a merger or acquisition (successor liability). While the case left open the issue as a matter of fact, the Court did indicate that there could be successor liability for previously unreported unclaimed property.
- Staples, Inc. v. Cook – Following a VDA where the holder admitted to $150,000 in liability, Delaware initiated an audit of the office supply retailer and assessed $3.9 million in liability. A lawsuit followed in 2010. In the summer of 2012, the parties announced a confidential settlement to resolve the claims between the parties. The AP challenged the confidentiality and ultimately revealed the settlement at $8.9 million.
- Select Medical v. Cook – In January 2014, the parties reached a confidential settlement to resolve litigation filed in 2013 between the holder and Delaware following a 2008 voluntary disclosure and subsequent audit by third-party contingent fee auditor Kelmar Associates.
- Temple-Inland v. Cook – the Delaware unclaimed property program “shocks the conscious” and the audit likely violates the holder’s due process rights. The Court did not answer the question on how the violations were to be remedied. The holder and Delaware settled in August 2016.
- Plains All American Pipeline v. Cook – Served with an audit notice in 2014 and assigned to Kelmar Associates, this audit never really got going before the lawsuit was filed. The District Court dismissed the case in August 2016, as the dispute was not ripe for judicial intervention. Plains appealed to the Third Circuit Court of Appeals.
- Marathon Petroleum v. Cook and Office Depot v. Cook – Holders established special purpose entities to hold gift cards in states that exempted their reporting. Delaware audited the Delaware incorporated holders and attempted to pursue the gift card companies. Both holders filed lawsuit and were dismissed by the District Court because the Texas trilogy did not apply to disputes between a private party and a State. The Third Circuit disagreed and now applies the trilogy to such disputes. However, the Third Circuit said that the cases were not ripe because the State had not taken formal enforcement action.
- Delaware Department of Finance v. Blackhawk Engagement Solutions – One of the few actions in Delaware state court, the state sued to enforce subpoena issued to Blackhawk requesting documents pursuant to the ongoing audit. Blackhawk argued that the statute only authorized the state to issue summons for testimony and not subpoenas for documents.
- Osram Sylvania Inc. v. Cook – Another unclaimed property holder lawsuit that challenges Delaware’s estimation techniques in an audit when records are incomplete. Osram filed a notice of voluntary dismissal without prejudice.
- JLI Invest SA v. Cook – this case is brought by unclaimed property owners, challenging Delaware’s authority to claim foreign property. Two doctors sued Delaware for the lost value in their stock, approximately $12 million. Despite their continued professional relationship with the company, the transfer agent escheated the owners’ shares to Delaware who then liquidated the shares. The owners allege a variety of violations of federal, state, and even international law or treaties in this wrongful escheatment case.
- Univar Inc. v. Geisenberger – a Delaware audit, assigned to Kelmar Associates, began on December 11, 2015, before amendments to the Delaware unclaimed property law became effective on February 2, 2017. On October 30, 2018, Delaware issued a subpoena for records initially requested in 2015. Do the 2017 amendments apply retroactively to require record retention? Does the subpoena power apply retroactively? Is the same estimation method that shocked the conscious in Temple-Inland still shocking?
Non-Delaware State Unclaimed Property Litigation
- ex rel Raw Data Analytics LLC v. JP Morgan Chase The New York litigation that says holders must self-calculate and self-assess interest on late reported data brought by a whistleblower.
- Texas and California v. ClubCorp Separate lawsuits brought by Texas and California against ClubCorp for failing to report and remit unrefunded membership deposits and to comply with state audit procedures.
- New Jersey v. Chubb Corp – the priority rules from Texas v. New Jersey only apply to conflicts between the states and cannot be asserted by holders.
- National Freight Inc. v. Sidamon-Eristoff – a lawsuit brought by an unclaimed property holder in New Jersey that challenged audit methodology to assess penalties.
- Savings Bonds held by Federal Government A series of lawsuits brought by states against the federal government to obtain the cash value of unredeemed savings bonds held by the federal government. States have been most successful in obtaining the value of unredeemed savings bonds where they are in possession of the physical bonds from escheated safe deposit boxes.
Gift Card Litigation
There have also been issue specific litigation in Delaware and other states concerning prepaid, stored value and gift cards.
- New York ADA Accessibility Lawsuits A series of lawsuits brought in October 2019 that alleges that gift cards that do not contain braille are in violation of the Americans with Disabilities Act.
- Card Compliant a Delaware qui tam lawsuit against a variety of gift card issuers. Lawsuit alleged that issuers established and maintained out-of-state special purpose entities to fraudulently avoid Delaware unclaimed property liability.
- Marathon Petroleum v. Cook and Office Depot v. Cook challenge the right of Delaware to audit out-of-state entities established to hold gift cards. In these cases, the Third Circuit applied the Texas trilogy of cases to disputes between private parties and the States, instead of limiting the unclaimed property priority rules to disputes between the States.
- N.J. Retail Merchants Association v. Sidamon-Eristoff a challenge to the New Jersey statute that required merchants to collect data at the time of sale in order to invoke a place of purchase presumption in violation of Texas v. New Jersey. The Third Circuit ruled that only the states in the first two priority rules were permitted to escheat property and that a third state could not attempt to escheat if the first two were unable or unwilling to do so.
- American Express Prepaid Card Management Corp. v. Sidamon-Eristoff a companion case to the NJRMA case on the New Jersey place of purchase presumption wherein the Third Circuit acknowledged that raising revenue may be the primary purpose of the change in New Jersey unclaimed property law.
- In Re RadioShack Bankruptcy proceedings on the status of unredeemed gift cards for a bankrupt retailer.
- Newell v. REI A 2019 class action lawsuit alleging that retailer REI is not compliant with CARD Act and Washington unclaimed property laws pertaining to expiration dates.
While not strictly a gift card, merchandise credits, a result of unreceipted returns to stores, are similar in nature.
Bed Bath and Beyond has won cases in New Jersey and California for refunds of previously erroneously escheated merchandise credits.
Unclaimed Rebate Litigation
The original rebate litigation was Fitzgerald v. Young America, when 36 states sued the rebate fulfillment house in 2006. In the Young America litigation, the client rebate companies, including Sprint, T-Mobile, and Walgreens, were impleaded into the case and eventually settled.
In 2011, Costco sued Washington state to contest whether it had to turn over approximately $3 million in rebates to the state because their rebate program was administered by a third-party provider.
Challenges to Life Insurance Regulations and Audits
The life insurance industry has its own section of unclaimed property litigation due to the shear number of cases as well as the overlapping issues presented in many of the cases.
Most of the litigation is the result of multi-state audits conducted on behalf of the states by Verus Financial. The audits resulted in a new methodology for determining unclaimed life insurance policies held by life insurers, using the Social Security Death Master File (“SSDMF”) as a rebuttable presumption of death and a trigger for unclaimed property dormancy. Verus used a process called “fuzzy” matching to match insurer records to the SSDMF when only portions of names, addresses, and dates of birth were available or matched.
The largest insurers, including AIG, Forethought, John Hancock, MetLife, Nationwide, and Prudential, all agreed to settlements as a result of the audits. These settlements also included provisions on reviewing the SSDMF going forward as a regular part of the companies’ unclaimed property procedures.
After these settlements, many states enacted changes to their statutes to reflect the new required procedures. Some life insurers filed suit to challenge those new statutes, the audits, and the matching process.
- California: Thrivent Financial for Lutherans v. Yee
- California: Chiang v. American National Insurance Company – California sued the insurer to force compliance with audit requests for currently in-force policies to allow the State to determine, on its own, whether the policies were potentially escheatable property.
- Florida: Total Asset Recovery Services, LLC v. MetLife Inc
- Florida: Thrivent v. Florida Department of Financial Services Thrivent sued to reverse a 2013 administrative policy that insurers must search the SSDMF and that dormancy begins on the date of death. The Court reversed the Department.
- Illinois: Kemper v. Frerichs Kemper challenged the Illinois requirements that insurers search the SSDMF and standard that the insurer pay benefits upon an insured’s appearance in the file rather than upon the filing of a claim.
- Kentucky: Kemper Kemper challenged the Kentucky NCOIL statute in 2014 that would apply SSDMF on a prospective basis only.
- Massachusetts: Feingold v. John Hancock Life Insurance Co – As a result of the 2008 audit and June 2011 settlement thereof, John Hancock was hit with a putative class action lawsuit for damages from their delay by one of the beneficiaries on January 30, 2013. John Hancock moved for dismissal which was granted on August 19, 2013. The First Circuit affirmed the dismissal in Feingold v. John Hancock Life Insurance Company on May 27, 2014.
- West Virginia: Perdue v. Nationwide Life Ins. Co. A series of lawsuits against 69 insurance companies for failing to turn over unclaimed death benefits. The West Virginia Supreme Court determined that the obligation to pay life insurance was triggered by the death of the insured, not the filing of a claim.
Bitcoin and Cryptocurrency Litigation
- Faassee v. Coinbase a California class action case alleging that the exchange kept cryptocurrencies instead of reporting them to the state as unclaimed property; plaintiffs amended their complaint after Coinbase filed a motion arguing that only the state could bring such a case.
Litigation From Unclaimed Property Claimants
- Asset Acceptance LLC v. Utah
- Vanacore & Associates, Inc. v. Rosenfeld permits state to impose reasonable restrictions on locators or unclaimed property finders
- Cerajeski v. Zoeller Indiana must pay claimants interest if the original property was held in an interest-bearing account.
- Hall v. Minnesota Following the lead of Indiana, Minnesota must pay interest on proceeds from an interest-bearing account claimed from the unclaimed property fund, the Minnesota Supreme Court ruled in March 2018. The remaining claims questioning the sufficiency of owner notice prior to escheatment (a la California’s Taylor v. Yee) were dismissed; Minnesota’s due diligence requirements and other owner notification processes are sufficient.
- Goldberg v. Frerichs On January 2, 2019, the Seventh Circuit said that Illinois now must pay interest to claimants.
A Note About Unclaimed Property Litigation
All information used in the description and discussion of these cases has been collected from court documents, media reports, and other publicly available information. No confidential information is disclosed herein.
When available, external links have been provided for the reader’s convenience. However, some media reports, previously available online, may no longer be available online and such links have been removed for the reader’s convenience and continued website operation.
If you have any questions, please contact Kimberly DeCarrera.
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