An important California state court unclaimed property decision has just been rendered, yielding good news for issuers of merchandise or store credits. By way of factual background, Bed, Bath & Beyond Inc. (“BB&B”) issued Merchandise Return Certificates (MRCs) as a courtesy to customers who attempted to return merchandise at its stores but who had no receipt evidencing the actual purchase. BB&B was not obligated in such instances to accept these returns or to give cash back to the customer. The MRCs, by their express terms, were redeemable only for merchandise at BB&B and its affiliates, were not redeemable for cash, and were not subject to any expiration date. Specifically, for an MRC recipient to redeem the certificate, the recipient must have purchased merchandise at BB&B and presented the certificate. BB&B reported and remitted to California as unclaimed property between 2004 and 2012 the cash value equal to the full unredeemed balances of the MRCs that were issued to California customers who returned merchandise to BB&B without a receipt, and for which the three-year dormancy period had passed. The total amount of MRCs remitted to California for such years was $1,834,477.62.
BB&B filed a claim with the California State Controller’s Office in 2013, requesting a refund for amounts erroneously paid to California with respect to such MRCs. The refund claim was subsequently denied. Plaintiff BB&B then sued Defendant John Chiang, both individually and in his capacity as California State Controller, alleging that it had mistakenly remitted sums attributable to the unredeemed MRCs, and sought a refund of such amounts. In its first and second causes of action of its First Amended Complaint, the Plaintiff argued it was entitled to a refund under California law [i.e., CCP Section 1540 and/or CCP Section 1561(b)]. Plaintiff filed a Motion for Summary Judgment, and a recent hearing was held before Judge Lewis, Superior Court of California, County of San Diego. Highlights of the Judge’s March 4, 2016, Minute Order (“Order”) are as follows:
- No Money is Owing to Owners of MRCs - Defendant alleged that the property was properly escheated and contended that the MRCs were a type of “intangible personal property” that were escheatable under CCP Sec. 1520. The Court disagreed, stating that only intangible property that is actually “owing” to an owner is escheatable. Significantly, the Order stated that “[t]he Court concludes that because the MRCs are not redeemable for cash, the Plaintiff does not owe money to the owner of an MRC.”
- MRCs Are a Type of Gift Certificate - Plaintiff argued that the MRCs are a type of gift certificate and noted CCP Sec. 1520.5 provides in pertinent part that “Section 1520 does not apply to gift certificates….” Defendant argued the MRCs did not qualify as a type of gift certificate under California’s Unclaimed Property Law (UPL). The Court agreed with Plaintiffs, noting that Defendant had not persuasively argued why the MRCs should not qualify as gift certificates. The Order indicated two reasons why the MRCs did qualify as gift certificates. First, it was stated: “They bear the same characteristics as a more traditional gift certificate that is labeled as a ‘gift certificate’ or a card that reads ‘gift card.’” Second, although the MRCs were perhaps not obtained for the purposes of gifting to another, the Order stated that “…the law recognizes gift certificates in circumstances other than purchase as a gift.” Thus, the Order stated that the law recognizes gift certificates such as those distributed by the issuer to a consumer pursuant to an awards, loyalty, or promotional program. Significantly, the Order ruled that the Court therefore found that the UPL does not apply to BB&B’s store credits because they are essentially a gift certificate.
- Plaintiff Awarded Judgment - The Order granted Plaintiff’s Motion for Summary Judgment as to its first and second causes of action for a refund under CCP Section 1540 and/or CCP Section 1561(b) and concluded that Plaintiff is entitled to judgment against Defendant in the amount of $1,834,477.62. The Court declined to find against John Chiang individually and denied Plaintiff’s request for prejudgment interest.
- Comment - Although this is an important case, it is possible that the state of California will seek to file an appeal or otherwise endeavor to keep the case open for further review. If California chooses not to appeal, it would be a big win for the holder and any others who have historically filed merchandise credits as unclaimed property to California.
This decision is important for several reasons. First, given the relative lack of published authorities pertinent to whether merchandise credits are escheatable by the states, it provides helpful authority for the position that store or merchandise credits (structured so they are not redeemable for cash and do not expire) should not be escheatable in California. Second, for holders who might have erroneously paid similar store or merchandise credits to the state of California, it may provide a window of opportunity for pursuing and obtaining a refund from the state, as was done in this case. It is unlikely the state would remotely consider any claims to refund before the decision to appeal (or accept) this decision has been made. Holders seeking additional clarification on how these matters relate to their specific factual situations may contact their designated Abandoned and Unclaimed Property (AUP) representative or one of the Ryan contacts below.
TECHNICAL INFORMATION CONTACTS:
Mark A. Paolillo
Principal
Ryan
857.288.1976
mark.paolillo@ryan.com
Susan Han
Principal
Ryan
442.244.2447
susan.han@ryan.com