In a decision with potentially broad implications, a California Superior Court has held that merchandise credits not redeemable for cash are not subject to California's Unclaimed Property Law (UPL). The court also held that these credits qualified for exemption under the California unclaimed property exclusion for gift certificates that do not expire. In the decision, the court issued summary judgment for a national retail chain and against the California Controller on the retailer’s claim for a refund of $1.8 million in erroneously escheated property. Bed Bath & Beyond v. Chiang, No. 37-2014-12491 (Super. Ct. San Diego, CA Mar. 4, 2016). The state may appeal the decision.
The lawsuit arose after California denied the retailer’s refund claim for credits it had escheated between 2004 to 2012. The “Merchandise Return Credits” were issued by Bed Bath & Beyond when merchandise was returned without a receipt. The credits were redeemable only for merchandise, not for cash, and had no expiration date.
In denying the retailer’s refund claim, California’s primary argument was that the credits were escheatable as “intangible property” under the catchall provision of California’s UPL. Cal. Code Civ. Pro. § 1520. Like many states, California requires the escheat of “all intangible personal property,” not otherwise excluded, “held or owing in the ordinary course of the holder’s business” that “has remained unclaimed by the owner for more than three years after it became payable or distributable.” Id. The court, however, held that the credits fell outside of this definition, because the credits were not redeemable for cash and therefore were never “ow[ed]” within the meaning of the statute and were therefore not subject to escheat.
As a separate basis for the decision, the court also held that the credits fell under the UPL’s exemption for gift certificates. Although the court acknowledged that the credits were not intended for gifting, did not have all of the indicia of traditional gift certificates, and were not labeled “gift certificate” or “gift card,” the court nonetheless found that the credits were analogous to certificates provided under a loyalty or promotional program, which are treated under the UPL as gift certificates. On that basis, the court held that the gift certificate exemption also applied to the merchandise credits.
The possible ramifications of the decision are far-reaching, both in California and nationally. First, there is little authority on the appropriate treatment of merchandise credits under most state unclaimed property laws, and this decision provides multiple rationales for why these credits should fall outside the scope of escheat. Second, although the decision may not be final, companies that remitted merchandise or other credits not redeemable for cash could consider filing refund claims in California or other states with similar provisions governing intangible property or gift cards. Third, the court’s broad view of gift certificates suggests that other credits could qualify as exempt from UPL reporting as “gift certificates.” As new forms of payments, credits and digital currencies are developed, these and other similar issues are likely to result in ongoing disputes between holders and states desperate for revenue.