Wednesday, January 18, 2012

U.S. Court of Appeals for the Third Circuit Affirms District Court of New Jersey's Orders

Regarding 2010 N.J. Amendments to its Unclaimed Property Law

by Kellie Lanford

On January 5, 2012, the U.S. Court of Appeals for the Third Circuit (“Third Circuit”) affirmed the District Court of New Jersey’s (“District Court”) grant of preliminary injunction with respect to the retroactive enforcement of Chapter 25 1 (as it relates to stored value cards) and the prospective enforcement of the place-of-purchase presumption and the accompanying Treasury Guidance. The Third Circuit also affirmed the District Court’s denial of preliminary injunction as to the data collection provision and the two-year abandonment period.

Keep in mind that this decision was issued in response to a preliminary injunction motion and that further litigation is likely.

Retroactive Enforcement of Chapter 25

Prior to the enactment of Chapter 25, New Jersey unclaimed property law did not provide for the escheatment of gift certificates. Chapter 25 now provides for the escheatment of stored value cards (“SVCs”) which include gift certificates, gift cards, rebate cards, and other similar instruments.

The Third Circuit held that SVC issuers “showed a reasonable likelihood of success on the merits of their Contract Clause claim with respect to SVCs that are redeemable for merchandise and services” for the following reasons:

(1) The change in New Jersey law substantially impaired the contractual relationship by requiring SVC issuers to submit the value of the SVC in cash at the end of the dormancy period (even though the SVCs are not redeemable for cash) as this expected profit was vital to the issuer’s contractual relationship. The retroactive obligations imposed by Chapter 25 also impaired the contractual relationship as this was an unexpected obligation since New Jersey had never before provided for the escheatment of SVCs.
(2) Although it was determined that the law change had a “legitimate and important public purpose” because its goal was to reunite abandoned property with its owners, the “adjustment of the rights of the parties to the contractual relationship was [not] reasonable and appropriate in light of that purpose,” given that it failed to allow SVC issuers to collect their expected profits.
Place-of-Purchase Presumption

Chapter 25 §5(c) provides that “[i]f the issuer of a stored value card does not have the name and address of the purchaser or owner of the stored value card, the address of the owner or purchaser of the stored value card shall assume the address of the place where the stored value card was purchased or issued and shall be reported to New Jersey if the place of business where the stored value card was sold or issued is located in New Jersey.”

The Third Circuit held that “SVC Issuers demonstrated a reasonable likelihood of success on their claim that Chapter 25’s place-of-purchase presumption as well as the Treasury Guidance are preempted under federal common law.” The Court stated that the place-of-purchase presumption language directly contradicts the second priority rule as provided in Texas v. New Jersey,2 and the presumption, if executed in accordance with the Treasury Guidance, allows New Jersey to infringe on the sovereign authority of other states.

Watch for our upcoming SALT To Taste for further information about this New Jersey development and discussion of “third” priority rules.

Data Collection Provision

Chapter 25 §5(c) further provides that SVC issuers “shall 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.”

The Third Circuit held that “the District Court did not abuse its discretion in denying a preliminary injunction of the data collection provision.” The Court stated that the data collection provision furthers the purpose of reuniting customers with their property by making it more likely that the State will be able to reunite the owner with the abandoned SVC funds. Additionally, the Court stated that the “State Legislature’s intent suggests that Chapter 25’s data collection provision is severable from the place-of-purchase presumption.”

Two-Year Abandonment Period

Chapter 25 presumes SVCs to be abandoned after two years of inactivity and requires issuer to transfer to the State the remaining value of the SVCs at the end of the two-year abandonment period.

The Third Circuit held that “SVC Issuers failed to show a reasonable likelihood of success on the merits of their claim that Chapter 25’s two-year abandonment period is expressly preempted by the federal Credit CARD Act of 2009.” In reaching this conclusion, the Court stated that “the CARD Act only requires the funds to be available for five years whereas Chapter 25 protects the funds in perpetuity. Second, even with respect to non-expiring gift cards, Chapter 25 still provides greater protection because the consumer is able to reclaim the full cash value of the SVC under Chapter 25 after two years, whereas he would have been able to redeem only merchandise or services using the SVC.”

1. 2010 N.J. Laws Chapter 25 which amended New Jersey's unclaimed property statute.
2.Texas v. New Jersey, 379 U.S. 674 (1965).

No comments:

Post a Comment