01.31.2012
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Updates
On January 5, 2012, the U.S. Court of Appeals for the Third Circuit affirmed the decision of the U.S. District Court of the District of New Jersey ("District Court") with respect to 2010 N.J. Laws Chapter 25 ("Chapter 25"), which amended New Jersey's unclaimed property statute. The decision affirmed the current priority rules for remitting unclaimed property, but upheld New Jersey's requirement that issuers of stored value cards ("SVC") collect address information from purchasers.
The decision expressed the likelihood that the enactment of a "third priority rule" – requiring issuers to remit unclaimed property in the state where a transaction occurs if the issuer does not have the address of the owner and the issuer's state of domicile does not escheat the particular type of property – is preempted by federal common law.
Issuers of SVC, however, will be required to comply with Chapter 25's requirement that issuer's collect address information from purchasers (and maintain zip codes). The data collection requirements will, in New Jersey, eliminate the common practice by issuers of not collecting purchaser address information in order to simplify their unclaimed property reporting obligations and only remitting to the issuer's place of domicile. By requiring an issuer to collect data information, issuers will be required to report and remit unused balances on SVC to the state of the owner's last known address that was collected at the time of purchase if the issuer has no other address for the owner.
Background
On June 29, 2010, New Jersey enacted Assembly Bill 3002 – Chapter 25, which substantially revised the state’s unclaimed property laws.[1] Three of the revisions, in particular, directly impact issuers of “stored value cards,” a category that broadly includes paper gift certificates, gift cards, rebate cards and other products.[2] First, Chapter 25 requires issuers of SVCs to "obtain the name and address of the purchaser or owner of each stored value card issued or sold and shall, at a minimum maintain a record of the zip code of the owner or purchaser."[3] Second, Chapter 25 creates the presumption that "the address of the place where the stored value card was purchased or issued"[4] is the address of the owner if an issuer does not have the name and address of the purchaser or owner. Third, Chapter 25 requires issuers to report and remit to the state of New Jersey the value on a SVC for which there has been no activity for two years.[5] An issuer of SVC is the issuer or seller of the SVC who has the obligation to accept and redeem the SVC and has the obligation to report and remit unclaimed funds.[6]
Shortly after enactment of Chapter 25, retailers sued New Jersey claiming, among other things, that the place of purchase presumption was preempted by federal common law, which determines the priority of states to escheat unclaimed property from holders. The U.S. Supreme Court has established two jurisdictional rules (called “priority rules”) that define which states may have jurisdiction to escheat unclaimed property, and in what order the states may do so. In Texas v. New Jersey, the Supreme Court held that unclaimed or abandoned intangible property “is subject to escheat only by the state of the last known address of the creditor, as shown by the debtor’s books and records.”[7] The court went on to create the second priority for escheat of abandoned intangible property, granting jurisdiction to the state of corporate domicile of the debtor in such instances where (i) there “is no record of any address at all” and (ii) where the creditor’s state does not at such time provide for the escheat of such property.[8] Chapter 25 purports to create a third priority, granting jurisdiction to New Jersey if the transaction occurred in New Jersey in instances where the second priority for escheat would apply, except that the debtor's state of corporate domicile does not at such time provide for the escheat of SVC.
On November 13, 2010, the District Court in American Express Travel Related Services. Co. v. Sidamon-Eristoff preliminarily enjoined the retroactive application of Chapter 25 to SVC that was issued before the enactment of Chapter 25 and the prospective enforcement of Chapter 25 as to the place of purchase presumption, and later clarified that the injunction did not enjoin the data collection requirements of Chapter 25.[9] Before enforcement of Chapter 25, the U.S. Court of Appeals for the Third Circuit issued a temporary injunction with respect to the data collection requirements.[10] The Third Circuit issued the opinion, summarized below, on January 5, 2012.
Third Circuit Opinion
The Third Circuit decision affirms the (i) preliminary injunction of Chapter 25's retroactive application to SVC issued prior to the enactment of Assembly Bill 3002; (ii) preliminary injunction of the prospective application of the place of purchase presumption outlined in Chapter 25 and the accompanying Treasury Guidance clarifying the effect of Chapter 25 on the priority rules[11] ("Treasury Guidance"); and (iii) District Court's refusal to enjoin Chapter 25's data collection requirements.[12]
1. Contract Clause
The Third Circuit determined that Chapter 25 "operates a substantial impairment on the contractual relationships of SVC Issuers."[13] According to the Third Circuit, prior to the enactment of Chapter 25, issuers and purchasers of SVC expected that the balance of a SVC could be redeemed only for merchandise or services, not cash. The Third Circuit concluded that, by requiring issuers to submit the value of SVC in cash to New Jersey at the end of the two-year abandonment period, Chapter 25 substantially impaired SVC issuers whose expected profits were vital to the contractual relationship.[14] While recognizing that custodial escheat of abandoned property is a significant and legitimate state purpose, the Third Circuit held that "Chapter 25 does not reasonably accommodate the rights of the contracting parties in light of the State's public purpose because it fails to allow SVC issuers to collect their bargained-for expected profits or merchant fees."[15] Accordingly, the Third Circuit held that the District Court did not abuse its discretion in enjoining New Jersey from retroactively enforcing Chapter 25.[16]
2. Federal Preemption
The Third Circuit found that the federal Credit CARD Act of 2009 (the "CARD Act") did not preempt enforcement of Chapter 25's two-year abandonment period,[17] but that federal common law relating to the priority of states to escheat unclaimed property likely did preempt the place of purchase presumption.[18]
Statutory Preemption
The CARD Act requires that SVC issuers do not expire the value on a SVC until at least five years after its issuance.[19] The CARD Act specifically indicates that state law is not inconsistent if it affords a consumer with greater protections than afforded by the CARD Act.[20] Consequently, the Third Circuit found that the CARD Act did not preempt the requirement that a SVC issuer remit unused value after two years, a period shorter than the CARD Act expiration period of five years, because the remitted value will be available to the owner in perpetuity, and therefore the requirement provides greater protection to consumers.[21]
Common Law Preemption
While not finding that the CARD Act preempted Chapter 25, the Third Circuit did find that the priority rules set forth in Texas[22] likely preempt the place of purchase presumption set forth in Chapter 25 and the Treasury Guidance.[23] The Third Circuit reasoned that the statutory place of purchase presumption "directly contradicts" the priority rules set forth in Texas because it substitutes escheat to the state in which the debtor is incorporated (the second priority rule) with escheat where the transaction occurred – New Jersey.[24] Because of this direct contradiction, the Third Circuit found that Texas preempts Chapter 25’s place of purchase presumption.
The Treasury Guidance explained that the place of purchase presumption was not intended to allow New Jersey to escheat ahead of the state with second priority, but rather to act as a third priority rule. According to the Treasury Guidance, Texas would apply to allow, first, the state of the owner's last known address to escheat and, second, the state of domicile of the debtor to escheat. However, in instances where (1) there is no record of the owner's address and (2) the state of domicile of the debtor exempts gift certificates from its unclaimed property statute, then unused balances on SVC must be reported and remitted in New Jersey if the SVC was issued or sold in New Jersey.[25]
The Third Circuit held that this creation of a third priority rule, suggested by the Treasury Guidance, is also likely preempted by Texas, as expanded upon in Pennsylvania v. New York[26] and Delaware v. New York.[27] The Third Circuit explained that the primary concern in Texas was to "unambiguously and definitively resolve disputes among states regarding the right to escheat abandoned property,"[28] and allowing states to impose additional priority rules would defeat this primary purpose by creating the possibility of competing state claims.[29] By creating ambiguity in the priority that Texas and it progeny specifically intended to eliminate, the place of purchase presumption conflicted with the federal common law.
The Third Circuit further noted that in Pennsylvania the Supreme Court expressly rejected Pennsylvania's request, which is similar to New Jersey's Chapter 25, to have the state of the place of purchase, rather than the state of the debtor's domicile, be the place of escheat.[30] New Jersey, like Pennsylvania, does not have a sufficient connection to either the owner or the debtor.[31] The Third Circuit found that New Jersey's claim to escheat based on the location of the transaction was in conflict with federal common law because it "lacked a clear connection to the owner or issuer" of the SVC.[32]
Additionally, the Third Circuit dismissed New Jersey's claim that SVC issuers incorporated in states that do not escheat would receive a windfall. The Third Circuit reasoned that, like the windfall received by the debtor's state of domicile, this was not a sufficient reason to depart from the priority rules in Texas[33]: the right to escheat is derived from the principal right of sovereignty, and with such right to escheat, each state similarly has the sovereign right not to escheat.[34] The place of purchase presumption, as articulated by the Treasury Guidance, infringes on the sovereign right of the debtor's state of domicile not to escheat certain types of unclaimed property.[35] For all of these reasons, the Third Circuit held that federal common law on priority of escheat likely preempts the place of purchase presumption, even as articulated in the Treasury Guidance.
3. Severability of Data Collection
While the Third Circuit previously enjoined the data collection requirements of Chapter 25 pending this decision, it ultimately found that the data collection requirements were severable from the point of sale presumption, and therefore affirmed the District Court's decision not to enjoin such provisions. The Third Circuit explained that the data collection provisions make it more likely that New Jersey will be able to unite the owner with his or her abandoned SVC funds in accordance with the priority scheme set forth in Texas.[36] The Third Circuit did not shed light on how the data collection requirements apply to online sales of SVC. SVC issuers will need to update their systems to begin compliance with the data collection requirements and should monitor updates from the New Jersey Department of Treasury regarding enforcement of the data collection requirements.
Penalties
Failing to collect names, addresses or ZIP codes or perform other duties imposed by the unclaimed property statute is subject to a penalty of $200 per day, up to a maximum of
$100,000.[37]
[1] Published as P.L. 2010, ch. 25. AB 3002 is codified at N.J. Rev. Stat. § 46:30B-6 et seq.
[2] Certain smaller stored value card programs ($250,000 or less per year) and promotional or charitable programs can be exempt from the unclaimed property statute. N.J. Rev. Stat. § 46:30B-42.1(e).
[3] Id.. § 46:30B-42.1(c); The New Jersey Treasurer has limited the broader information collection requirement specified in the statute. Treasury Announcement FY 2011-03 (Sept. 23, 2010).
[4] N.J. Rev. Stat. § 46:30B-42.1(c)
[5] Id. § 46.30B-42.1(a).
[6] N.J. Rev. Stat. § 46:30B-42.1(h).
[7] 379 U.S. 674, 682 (1965).
[8] Id.
[9] 755 F. Supp. 2d 556 (D.N.J. 2010), order clarified, (D.N.J. Jan. 14, 2011).
[10] Am. Express Prepaid Card v. Sidamon-Eristoff, No. 11-1141 (3d Cir. 2011) (granting Temporary Stay); Am. Express Travel Related Servs. Co. v. Sidamon-Eristoff, No. 10-4328 ( 3d Cir. Feb 8, 2011) (granting emergency motion for injunctive relief); Am. Express Prepaid Card v. Sidamon-Eristoff, No. 11-1141 (3d Cir. Feb. 8, 2011) (same); N.J. Food Council v. Sidamon-Eristoff, No. 11-1164 (3d Cir. Feb. 8, 2011) (same); N.J. Retail Merchs. Ass’n v. Sidamon-Eristoff, No. 11-1170 (3d Cir. Feb. 8, 2011) (same).
[11] Treasury Announcement FY 2011-03 (Sept. 23, 2010).
[12] The Third Circuit also rejected retailer claims that Chapter 25 violated substantive due process. The Third Circuit explained that taking custody of abandoned property promotes the legitimate state interest of protecting consumers, even if the enactment of Chapter 25 had another primary purpose of raising revenue. Additionally, the Third Circuit found that retailer claims that the two-year abandonment period, the exemption for businesses selling low values of SVC, and the data collection provisions were not rationally related to a legitimate state interest were merely expressions of policy differences. The Third Circuit explained that New Jersey could articulate that the abandonment period, exemption and the data collection requirements, respectively, were rationally related to protecting consumers, limiting the burden on businesses that do not derive substantial revenue from gift cards, and determining which state had the right to escheat. Given these rational relationships, the Third Circuit did not find that the requirements of Chapter 25 violated substantive due process.
[13] N.J. Retail Merchs. Ass’n v. Sidamon-Eristoff, 2012 WL 19385, at *4 (3d Cir. Jan. 5, 2012) (citing Gen. Motors Corp. v. Romein, 503 U.S. 181, 186 (1992) (describing the standard for ascertaining a contracts clause violation)).
[14] Id. at *5.
[15] Id.
[16] Id. at *6.
[17] Id. at *9.
[18] Id. at *12.
[19] 15 U.S.C. § 1693.
[20] Id. § 1693q.
[21] N.J. Retail Merchs. Ass’n, 2012 WL 19385, at *7. The Third Circuit additionally explained that the preemption argument was inconsistent with the Federal Reserve Board's commentary suggesting that state escheat laws vary, but that the state laws will not be preempted if they are ultimately more protective of consumers. Id. (citing Board of Governors of the Federal Reserve System, Final Rule, Regulation E (12 C.F.R. 205), Docket No. R-1377, at 69 (Aug. 22, 2010)).
[22] 379 U.S. 674, 682 (1965).
[23] N.J. Retail Merchs. Ass'n, 2012 WL 19385, at *9.
[24] Id. at *10 ("[W]hen the SVC Issuer is not incorporated in New Jersey, it would be impossible for the Issuer to comply with both Chapter 25's place-of-purchase presumption and federal common law under Texas because two states cannot both escheat the same abandoned property.")
[25] Office of the State Treasurer, State of New Jersey, Treasury Announcement FY 2011-03, Guidance on Implementation and Notice of Exemption from Certain Provisions of L. 2010, ch. 25, at 3 (Sept. 23, 2010).
[26] 407 U.S. 206 (1972).
[27] 507 U.S. 490 (1993).
[28] N.J. Retail Merchs. Ass'n, 2012 WL 19385, at *11.
[29] Id. at 12.
[30] Id. at *11.
[31] Id. (citing Pennsylvania, 407 U.S. at 213, and Delaware, 507 U.S. at 504).
[32] Id. at *11.
[33] Id.
[34] Id. at *12.
[35] Id.
[36] Id. at *13.
[37] N.J.Rev. Stat. § 46:30B-104.
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