Office Depot, Inc. (“Office Depot”) and North American Card and Coupon Services, LLC (“NACCS”), hereinafter collectively referred to as “Plaintiffs,” filed a Complaint in Delaware U.S. District Court on July 18, 2016. Plaintiffs seek a declaratory judgment and preliminary and permanent injunctions against Thomas Cook, in his capacity as Delaware Secretary of Finance; David Gregor, in his capacity as Delaware State Escheator; and Michelle Whitaker, in her capacity as Delaware State Audit Manager, hereinafter collectively referred to as “Defendants.” Highlights of the Complaint are as follows.
Background Information Pertinent to Parties
Plaintiff Office Depot is a corporation organized under Delaware law, with its principal place of business in Florida. It functions as an office supplies retail organization, with approximately 2,000 stores and e-commerce sites. Plaintiff NACCS is an LLC organized under Virginia law, with its principal place of business in Florida. Office Depot is the sole member of NACCS. NACCS issues stored value gift cards (“SVC”). Per the Complaint, the Limited Liability Agreement of NACCS provides in pertinent part as follows: “By virtue of its actions as the Member, the Member shall not be personally liable for the debts, obligations, or liabilities of the Company, including, but not limited to a judgment, decree or order of a court.” Prior to 2002, Office Depot issued its own gift certificates and gift cards. In its unclaimed property reports due March 1, 2001 and March 1, 2002, Office Depot reported and remitted property to Delaware, including unredeemed gift certificates issued by Office Depot where addresses of purchasers and recipients were not obtained. In 2001, Office Depot and Delaware entered into a voluntary disclosure agreement (VDA) whereby Delaware released Office Depot from any unclaimed property claims for property for report years due before March 1, 2000. NACCS was formed on May 10, 2002, and it issues gift cards, gift certificates, and merchandise credits. NACCS and Office Depot entered into an agreement effective August 1, 2002, pursuant to which NACCS appointed Office Depot to promote and sell NACCS’s gift cards and gift certificates and issue merchandise credits in exchange for a commission. NACCS acquired the assets and assumed the liabilities of Office Depot’s gift card and gift certificate business per agreement dated December 30, 2002.
Background of Delaware Audit
Plaintiffs allege that Delaware, through its contract auditor Kelmar Associates LLC (“Kelmar”), commenced an audit of Office Depot’s compliance with the Delaware Escheats Law (“DUPL”) in February 2013. Kelmar allegedly requested voluminous records for periods back to 1995, including documents concerning property under the jurisdiction of other states. In an April 2014 letter, Kelmar notified Office Depot that Office Depot and The Office Club, Inc. would be the primary focus of the examination. However, in June 2014, Kelmar issued an “SVC Initial Request,” which asked questions about NACCS, and Plaintiffs indicated they provided a complete response. Subsequently, Kelmar issued additional document requests, seeking considerable information about NACCS’s activities, even though, per the Complaint, NACCS was not within the scope of the audit and was a Virginia LLC that did not obtain names or addresses of purchasers or recipients of gift cards or gift certificates. Plaintiffs communicated numerous objections to Delaware, including (i) producing copies of unclaimed property reports filed in states not participating in the audit, and (ii) pointing out that in New Jersey federal court litigation, the Third Circuit Court of Appeals upheld a preliminary injunction against New Jersey enjoining it from enforcing an amendment to its unclaimed property law that purported to authorize New Jersey to claim by escheat unredeemed gift cards that were issued by special purpose entities organized in other states. Plaintiffs allege the documents they produced showed that they have no outstanding liability for unredeemed gift cards/certificates to Delaware. In a March 7, 2016 letter to Defendant Whitaker, Plaintiffs’ legal counsel objected to the voluminous requests, asserting it sought irrelevant information. On June 24, 2016, Kelmar sent Plaintiffs an email stating that the matter had been referred to the Delaware Attorney General’s Office for consideration of enforcement action. Plaintiffs further allege that the DUPL does not provide for pre-compliance review of a document request, and that Defendants have admitted that their only other alternative is to file a lawsuit under the Delaware False Claims Act, which authorizes treble damages and recovery of attorneys’ fees. Thereafter, Plaintiffs filed the Complaint.
Relief Sought by Plaintiffs
Plaintiffs request that the District Court enter an Order declaring that the DUPL violates, and is preempted by, the federal common law established in the Texas v. New Jersey line of cases. Plaintiffs seek a declaration that the DUPL violates the unreasonable search and seizure provision of the Fourth Amendment to the U.S. Constitution. Plaintiffs also seek an order enjoining each Defendant, preliminarily and permanently, from enforcing the document requests against Plaintiffs. Finally, Plaintiffs seek an order enjoining each Defendant from assessing penalties or interest, as well as an award of such further relief as the court deems just and equitable.
Plaintiffs allege, among other things, the gift cards and gift certificates issued by NACCS were issued by a Virginia LLC, which does not obtain names and addresses of purchasers or recipients of their gift cards/certificates. Note: Gift cards/certificates, which are redeemable in merchandise or services or through future purchases, generally are exempted under Virginia law from being reported as unclaimed property. As such, Plaintiffs contend that Delaware lacks standing to claim any unredeemed gift card and gift certificates issued by NACCS, pursuant to the federal common law rules, which preempt state escheat laws. In support of this assertion, Plaintiffs state the Third Circuit Court of Appeals ruled in pertinent part in 2012 in the N.J. Retail Merchants Ass’n. v. Sidamon-Eristoff case that “…the ability to escheat necessarily entails the ability not to escheat…When fashioning the priority rules, the Supreme Court did not intend to…give states the right to override other states’ sovereign decisions regarding the exercise of custodial escheat…and such conflict…would stand as an obstacle to executing the purpose of the federal law.” Plaintiffs assert that the DUPL violates the Texas v. New Jersey line of cases by permitting Delaware to claim property lacking an address held by a Virginia LLC. Thus, Plaintiffs state Defendants take the position that the DUPL authorizes Delaware to claim unredeemed gift cards/certificates issued by NACCS, even though Delaware lacks standing to claim unredeemed gift cards/certificates issued by NACCS under federal law. Plaintiffs argue the DUPL violates and is preempted by federal law. Furthermore, Plaintiffs state that the Defendants’ practice, of including property where it lacks standing to claim under the priority rules to estimate a liability to Delaware, was one aspect of Defendants’ overall conduct that the recent decision in the Temple-Inland case stated “shocks the conscience.” Other arguments raised by Plaintiffs, such as the allegation that the DUPL is unconstitutional because there is no procedure for pre-compliance independent administrative or court review, are outside the scope of this news alert.
It remains to be seen what response will be forthcoming from Defendants. In addition, it is not clear if this case will ultimately be heard by the federal court, or whether the Defendants will seek to have this matter resolved in Delaware state court. The Complaint is another illustration of the increasing tendency for holders aggrieved by a state’s audit actions to seek redress through litigation. Holders seeking additional clarification on how these matters relate to their specific factual situations may contact their designated Ryan Abandoned and Unclaimed Property (AUP) representative or one of their Ryan contacts below. In particular, holders in the process of any unclaimed property audits that involve detailed and substantial gift card documentation requests should consider reaching out to discuss the possible implications of this case, as well as related and ongoing litigation in this area.