There’s never a dull moment in Delaware when it comes to unclaimed property. The latest salvo comes by way of a lawsuit filed by the Delaware Department of Finance against Blackhawk Engagement Solutions (DE), Inc. (formerly known as Parago, Inc.), a provider of rebate, reward and incentive programs to retailers and other client companies. As part of an unclaimed property audit being conducted by Kelmar Associates, the Department is seeking to enforce a summons and obtain access to client contracts, uncashed rebate check amounts returned to clients, and the particulars of the rebate checks and payees. The complaint alleges that more than 300 retailers use Parago for rebate fulfillment assistance.

Background

According to the complaint, Parago, a Delaware corporation, has been under a Delaware unclaimed property audit since February 2011. After Parago declined to respond to an audit request from Kelmar, the Department issued a formal administrative summons in February 2015 to compel Parago to provide the information. Administrative summonses are authorized by statute, do not require judicial oversight, and the Department is authorized under Delaware’s escheats law to issue summonses to determine escheat law compliance. Parago purportedly advised the Department that it would not comply with the summons without a court order. Parago’s approach is not unprecedented. Almost 10 years ago, when Young America Corporation (YA), another rebate service provider, was pursued by Affiliated Computer Services, Inc. (ACS), a contract auditor acting on behalf of 41 states, including Delaware, YA sought to enjoin ACS from auditing its records. YA challenged the audit in Minnesota federal court, but a Minnesota district court dismissed YA’s action for lack of standing, and the decision was affirmed by the U.S. Court of Appeals for the Eighth Circuit.1 In related litigation, Iowa’s Treasurer sought an order requiring YA to cooperate with an unclaimed property audit being conducted by ACS (which, like Kelmar, performs unclaimed property audits on behalf of states). Forty-two states, including Delaware, and the District of Columbia and Puerto Rico tried to join Iowa’s litigation, but were dismissed from the case. Iowa amended its complaint to add certain retail clients of YA, and after the Iowa district court ruled that the retailers could still be considered “holders” of unclaimed property even if they were not in possession of the property, the case was settled.2

The Blackhawk Litigation

The summons asks for copies of all of the contracts between Parago and its clients where Parago remitted or credited uncashed rebate payments (a.k.a. “slippage”), as well as for information regarding the total amounts of slippage returned to each client and information regarding the bank and payee specifics related to the returned slippage. This information could lead to an expansion of the audit to Parago’s retail clients and to additional states. The Blackhawk litigation is in the early stages and uncashed rebate checks (a.k.a. “slippage”) may yet be found not to constitute unclaimed property. At this juncture, if the slippage is deemed to constitute property subject to escheat, it is unclear whether the holders of the property are the retailers or Blackhawk. The answers to these questions will turn at least in part on the specific terms and conditions of the rebates and the agreements between Blackhawk and its clients.

Conclusion

The Blackhawk litigation is yet another example of Delaware’s aggressive pursuit of unclaimed property from holders and purported holders, particularly retailers. In 2012, Delaware also directly pursued a retailer, Staples, Inc., for rebate slippage.3Staples argued that its uncashed rebate checks did not constitute unclaimed property, but the Chancery Court disagreed and held that the rebate slippage “comfortably” constituted property under 12 Del. Code § 1198(11) as “bills of exchange” and “credits.” Staples ultimately settled with Delaware. Delaware is also currently embroiled in several other high-profile cases involving unclaimed property issues, including a pending challenge to Kelmar’s method of estimation4 and a qui tam action, joined by the State, involving unused balances on gift cards usable at more than two dozen retailers and restaurants.5   Retailers or other companies with rebate, reward or other incentive programs should review the terms of these programs and their contracts with any service providers to ensure that any potential escheat exposure is being managed proactively.