Delaware Joins Escheat Suit against Retailers (April 29, 2014)
The State of Delaware has thrown its weight behind a civil lawsuit claiming nearly two dozen well-known retailers avoided escheating unused gift card balances to the state by forming special entity corporations based outside the state. The suit originally was filed with the Delaware Superior Court in June 2013 on behalf of a whistleblower but was sealed while the claims were reviewed by the Delaware Department of Justice. The state unsealed the suit after joining as a plaintiff last month.
Delaware law enables the state to collect unclaimed property, including gift card funds that have gone unused after five years, from thousands of companies incorporated in the state. Among the retailers named in the suit are Netflix, Shell Oil and Sony Electronics, along with a retailer trade association. The complaint accuses the defendants of conspiring to hide unused gift card balances owed to the state by holding the unredeemed balances in the coffers of an Ohio corporation.
The Delaware action highlights the continuing interest of states in capturing unredeemed gift card balances to address budget shortfalls. Among them:
- Most notably, New Jersey passed a law in 2010 requiring unused funds on prepaid cards to revert—or escheat—to the state after two years of inactivity. The law also required collection at the point of sale of prepaid card purchasers’ ZIP codes for maximizing funds escheated to the state and made requirements of the law retroactive. Ultimately, the period of inactivity was extended from two to five years, and the retroactive application to cards already sold was deemed unenforceable. The legislation still requires card issuers to collect purchasers’ ZIP codes, but the mandate’s effective date was pushed back to July 1, 2016.
- Last year, the CFPB upheld laws in Maine and Tennessee that require card issuers to honor cards presented by consumers for payment, even after unused funds have escheated to the states.
- Other states have made a public policy decision not to regulate unclaimed gift card balances but to regulate dormancy fees and expiration dates instead.
Delaware’s pursuit of legal action in this case doesn’t necessarily mean other states will follow the strategy of seeking court intervention, according to Margo Hirsch Strahlberg, an associate with Bryan Cave LLP and Pay Gov contributing editor. “The states will still continue to pursue legislation in their attempt to grab at unclaimed funds,” she tells Paybefore. “Delaware always has been known as an aggressive state with respect to unclaimed property, so its willingness to rely on the courts comes as no surprise.”
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