Did ClubCorp comply with state unclaimed property laws? That’s the question of a 20 state audit and now two separate lawsuits brought by Texas and California.
First, it was Texas that sued ClubCorp Holdings, Inc. and subsidiaries for unclaimed property practices. Texas said that ClubCorp refused to allow Texas to perform an audit of its books and records under the unclaimed property law and failed to return membership deposits.
More recently, California Attorney General Xavier Becerra filed a similar lawsuit against ClubCorp. The California lawsuit accuses the company of failing to return membership deposits after 30 years, as required by the membership contracts.
These are separate lawsuits brought at different times by each state, but stemming from the same audit.
Founded in 1957, ClubCorp Holdings, Inc. is currently a privately-held Delaware entity, with headquarters in Dallas, Texas. However, in 2017, it was a publicly traded entity with a Nevada incorporation.
ClubCorp claims to be the largest owner and operator of private golf and country clubs in the United States. The company has over 200 clubs worldwide, including more than 20 in California alone.
In addition to owning clubs, ClubCorp provides customers various membership options. To join, members would pay an initiation fee, which according to the membership agreement would be “unconditionally refunded to the member after thirty years,” according to the complaint filed by California.
California and Texas says that in the sixty plus years of operations, ClubCorp has collected over $717,100,000 in initiation fees or deposits. Further, the currently due to be returned amount was $178,086,000 as of June 13, 2017.
California says that more than $10 million is owed to more than 9,000 California members and former members. Texas estimated over $53 million due to Texas members and former members.
ClubCorp Unclaimed Property Reporting History
In the Texas complaint, the state said that ClubCorp, in its 2016 10-K, did not intend to remit initiation deposits as unclaimed property in any state. Texas said that ClubCorp had not reported membership deposits since at least 1990.
In its complaint, California says that ClubCorp reported unclaimed property. However, the company did not list membership initiation deposits due for return.
Under both California and Texas unclaimed property laws, the applicable dormancy period would be three years. Thus, ClubCorp should attempt to locate owners and refund their deposits within three years after the 30 year membership period.
Both states say that ClubCorp failed in these duties and is depriving the members of their money and depriving the State of the use of any money that would have been escheated. Meanwhile, the states say that the company is enjoying continued use of these funds.
ClubCorp’s Unclaimed Property Audit
Texas initiated a “non-voluntary audit and examination of the books and records of ClubCorp, Inc. and all related subsidiary entities,” to determine compliance with the state’s unclaimed property statutes, pursuant to a letter dated July 17, 2008.
California initiated their audit at substantially the same time, turning this into a multi-state unclaimed property audit.
According to an S-4 filed by ClubCorp in March 2011, a total of 20 separate states of the 25 states in which it operates hired an independent agent to conduct a multi-state unclaimed property exam. Could more lawsuits be forth coming?
Texas said that in response to the audit notice, ClubCorp merged 27 Texas-chartered entities into newly formed Oklahoma entities. This, according to Texas, did not extinguish the members’ or former members’ ownership rights in their property, nor the company’s liability for unclaimed property.
During the ensuing audit, ClubCorp produced only limited information concerning deposits, excluding information from the newly formed Oklahoma entities. This limited information included 13,131 Texas members with more than $5,835,005.02 in dormant deposits.
ClubCorp made claims during the audit that additional members were “known” and thus their deposits were not unclaimed property. Presumably, ClubCorp was relying on various exemptions and deferrals within the Texas unclaimed property laws. However, Texas said that ClubCorp refused to provide information during the audit which would verify that its members were known to the company.
Further, ClubCorp said that the deposits had transformed into forgivable loans by the members’ actions. In a bit of an unusual offer, Texas said that ClubCorp could send members letters, asking them to make an election of either having the deposits returned or to be treated as a forgivable loan.
ClubCorp, the parent entity, rejected the offer and refused to provide additional information. Texas estimated that the amounts due to be $53,425,800. If payment was made in full, the Comptroller would waive penalties of $5,342,580 and interest of $25,534,564.30.
ClubCorp responded by saying that it is not the holder; rather, each individual entity is the holder and such demand must be made to the individual entity, not the parent entity.
Texas Claims Against ClubCorp
According to Texas, “ClubCorp’s actions demonstrate why unclaimed property laws exist – they protect owners of property by ensuring their property is returned to them rather than being converted and remaining permanently with the indebted entity.”
Texas said that ClubCorp was in violation of the state unclaimed property law. That by not remitting, or at a minimum informing members that the company has unrefunded deposits, ClubCorp has enjoyed the use of this money against the terms of the “unconditional” refund in its membership contracts.
Texas asked the court to compel examination of the company’s books and records and for the company to report and remit unclaimed property.
In addition, the state requested interest at 10% and penalties at 5% of the property and an additional 5% for all property that wasn’t paid within 31 days. Texas also requested judgment of an additional penalty of $100 for each day that the holder failed to report, pay, or deliver property.
And finally, of course, the state requested attorney fees.
Procedural History of Texas Case
Texas filed their lawsuit in the District Court of Travis County, Texas, on January 7, 2019.
On February 21, 2019, ClubCorp removed the case from state court to federal court.
On March 25, 2019, Texas filed a motion to remand the case back to state court. A response was filed by ClubCorp on April 8, 2019.
It is currently pending before Judge Lee Yeakel in the Western District of Texas.
California Claims Against ClubCorp
California’s claims are more limited than Texas’s claims. California did not include any claims about a failure to permit an audit or examination, only a failure to report and remit the deposits.
Unfair Business Practices
In failing to return the initiation deposits or to escheat the unrefunded deposits, California says that ClubCorp is in violation of the unclaimed property laws.
This in turn, is an unfair business practice and a violation of of the Business and Professions Code.
Further, because the company filed unclaimed property reports without the unrefunded deposits, California says that the company violated the state false claims act. ClubCorp “knowingly submitted, or caused to be submitted to the [State Controller’s Office] unclaimed property holder reports” that excluded the applicable property type.
Proof of specific intent to defraud is not required, according to the complaint.
California is requesting that a court order ClubCorp to refund the membership deposit to each member that is owed a refund, along with interest.
In addition, the state is requesting additional penalties to be assessed:
- Civil penalty of $2,500 per violation of the unfair business practice laws
- Enjoined from continuing such actions
- Three times the damages, plus interest, pursuant to the False Claims Act
- Additional civil penalties permitted under the law
- Legal fees and costs incurred by the state
Prior California Qui Tam Lawsuit
If you’ve been around unclaimed property for awhile, you might remember an earlier qui tam lawsuit filed in California against ClubCorp.
Barlett sued ClubCorp in September 2011 for breach of contract. In March 2012, Bartlett filed an amended complaint to add a qui tam claim against the company for knowingly concealing and avoided its escheat duties.
The interesting twist here is that California actually moved to dismiss the qui tam claims. The district court said that the disclosures in the company’s SEC filings were public disclosures that barred qui tam claims.
However, a California Court of Appeals ruled, in January 2016, that SEC filings are not one of the public disclosures that bar a qui tam action.
Upon remand to the Superior Court, California declined to intervene in the qui tam case in July 2016. ClubCorp and Bartlett settled in March 2017 and the case was then dismissed with prejudice.
Implications of Bartlett for Unclaimed Property Holders
As a result, companies operating in California must be aware that whistleblowers can be individuals that are not often considered insiders. Any individual, even an outsider, which sufficient knowledge can be a whistleblower and make claims under the state’s false claims act.
Most importantly, this means that companies can be on the hook for triple damages for failing to report unclaimed property to California.
Similar false claims acts and treble damages are common across states. Federal law also contains a similar provision.
Procedural History of the California ClubCorp Litigation
The Controller filed a lawsuit against ClubCorp in May 2019 for not complying with the abandoned property law. A month later, in June 2019, the People of the State of California filed a lawsuit based on the same facts but alleged violations of the Unfair Competition Law and the California False Claims Act.
Since both cases are based on similar facts against the same defendant, the Court has granted a motion to relate the cases – the two cases will be decided as one. Collectively, the plaintiffs will be referred to as the State or California in this discussion.
After the cases were filed in state court, ClubCorp removed them to federal court, based on the federal-question jurisdiction. ClubCorp said that the resolving the allegations of “substantial questions of federal common law.” California disagreed and filed a motion to remand the cases back to state court.
On October 3, 2019, the U.S. District Court for the Northern District of California granted California’s motion to remand. However, the Court did clarify that:
“Because these decisions impact what property a state may escheat, and may not be superseded by states, they naturally affect every state’s escheatment laws. In order to adjudicate escheatment claims, then, all states necessarily have to apply federal common law.” (emphasis added)
Texas Updates Unclaimed Property Laws
Whether in response to the ClubCorp audit or general concerns arising out of the multitude of audits and compliance scenarios, Texas has passed HB 3598, to update some of the issues brought forth in this audit and subsequent litigation.
The changes to the Texas unclaimed property laws include:
- Removed language in the presumption of abandonment. The bill removed “existence and” from “personal property is presumed abandoned if, for longer than three years the
existence andlocation of the owner of the property is unknown to the holder.” This affects one of the ClubCorp arguments that the deposits are not unclaimed property because it knows who the property belongs to.
- Changes Application from Holder to Property In a detail only lawyers can really love, the legislature changed the wording so that the law applies to the property instead of the holder who has the property.
- New Combined Reporting Requirement One of ClubCorp’s arguments is that Texas sent the demand notice to the parent company when the demand should have been sent to the individual entities that contracted with the members.
- Changed Examination Procedures The new law says that the state may compel any person, instead of holder, to permit examination of their records, to deliver property, or file a property report.
- New Provisions Relating to Subpoenas There are new sections that allow for testimony and administrative subpoenas. Enforcement of such subpoenas may be brought in Travis County. This would provide new ammunition against a holder, such as ClubCorp, that may not be complying with audit requests. And would prevent removal to federal court.
The new Texas law on examinations only applies to new audits or exams and not ongoing or previously conducted audits. Thus, the law’s provisions will not apply directly to ClubCorp, although the changes may be referenced in the proceedings to show the validity of ClubCorp’s positions during the course of its audit.
Stay tuned for more updates to the ClubCorp unclaimed property saga!
Lessons for Multi-State Audits
There are definitely lessons to be learned from the ClubCorp unclaimed property audit and litigation.
First, recognize that the states work together with their third-party audit firm to decide where to file litigation against non-cooperative holders during an audit. California has been very active in this recently, but other states, including Texas, will jump in, if necessary.
Second, it’s a changing landscape. States, as well as holders, learn from each iteration of audit and litigation. In this case, Texas has already made changes to their statutes that will affect future audits and positions that holders may take.
Are you keeping up with all the changes to unclaimed property laws? Kimberly DeCarrera does! Because unclaimed property is my specialty, letting you focus on your core business practices and not maintaining knowledge of the matrix of unclaimed property laws.
Third, there are some real archaic points of law that are buried in these cases. What’s the definition of a holder? When can states compel companies to provide documents and cooperate with an audit? What does “known” mean?
Are there unique solutions that don’t present themselves at first glance?
Has your company been contacted about a multi-state audit? Let’s talk about how DeCarrera Law can guide your company through the audit process.
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