The Consumer Financial Protection Bureau (CFPB) is a federal agency created in 2010 and is tasked with protecting consumers by carrying out federal consumer financial laws. On August 16, 2012, the CFPB issued a Notice of Intent to make a determination whether the unclaimed property laws of Maine and Tennessee are preempted by the federal Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “CARD Act”) and amendments to Regulation E (“Reg E”) previously issued by the Federal Reserve Board to implement the CARD Act. Those amendments, which became effective August 22, 2010, generally prohibit the issuance or sale of a gift card if the funds associated with the card expire in less than five years. At issue is the application of the amended Reg E to gift cards in situations where state unclaimed property laws would require issuers of gift cards that do not carry an expiration date (or that do not expire for more than five years) to report and remit unredeemed balances on such cards to the state as abandoned property in less than five years.
Maine requires that unused gift card balances be remitted as unclaimed property after two years of inactivity. See Me. Rev. Stat. Ann. tit. 33, § 1953(1)(G). Tennessee likewise requires the escheat of unredeemed gift card balances after two years, although Tennessee exempts from such requirement cards that do not have an expiration date or have an expiration date that is expressly not applicable in Tennessee. See Tenn. Code Ann. § 66-29-135. Both states’ unclaimed property laws expressly authorize an issuer who has remitted funds to the state for unredeemed gift card balances to either honor cards and seek to recover the escheated balances from the state or to decline to honor the cards (in which case the cardholder would be relegated to seeking to recover the balances from the states).
The issue of preemption of state unclaimed property laws was raised in comments to the Federal Reserve Board when it proposed the amendments to Reg E implementing the CARD Act. Industry commenters expressed concern that in some states, issuers might be required to turn over the funds associated with unredeemed gift card balances in less than five years, but be required under federal law to continue to honor the cards despite seemingly conflicting language in state unclaimed property laws that would expressly release them from any further obligation to cardholders. Notwithstanding this apparent conflict between the federal rule and state unclaimed property laws, the Federal Reserve Board staff declined to make a preemption determination at the time of issuance of the final Reg E. The staff commentary accompanying the final rule suggested that the conflict may be ameliorated by the ability of issuers faced with such seemingly conflicting provisions to comply with both by escheating the funds to the state when required by state law, but then continuing to honor the cards as required by federal law and seeking to recover any escheated funds on cards that are subsequently honored. This suggestion was set forth notwithstanding comments from the industry that this process is administratively burdensome and costly for the issuer.
In its Notice of Intent, the CFPB notes that because most gift cards are sold anonymously, they are generally escheated to the issuer’s state of incorporation and it may not be readily apparent to a consumer/cardholder to which state they would need to apply to recover escheated card balances. The CFPB also notes that procedural requirements imposed by state unclaimed property administrators may make it difficult, as a practical matter, for cardholders to recover their balances even if they are able to determine the appropriate state to which they should submit their claim. However, the CFPB also notes that a state’s taking of custody of unredeemed gift card balances may provide cardholders with additional protections they would not otherwise have, including protection against the insolvency or bankruptcy of the issuing company, protection against the possible imposition of fees if permitted by federal and state law, and the ability to recover the unused card balance in cash rather than only in merchandise or services. The CFPB also notes that the U.S. District Court for the District of in New Jersey refused to enjoin the enforcement of New Jersey’s gift card law prior to its recent amendment, concluding that the plaintiffs had failed to establish that they likely would prevail in their argument that the CARD Act pre-empted New Jersey’s previous two-year period of presumed abandonment for escheatment of unused stored value card balances. The Third Circuit Court of Appeals affirmed the district court’s preliminary finding of non-preemption. See N.J. Retail Merchants Ass’n v. Sidamon-Eristoff, 669 F.3d 374 (3d Cir. 2012), reh’g denied (3d Cir. Feb. 24, 2012).
Three Alternative Approaches: There are at least three possible approaches to the application of amended Reg E and state unclaimed property laws requiring escheatment of unredeemed balances in less than five years:
Alternative #1: Escheat is a state-mandated redemption of the unused card balance. Issuer complies with state unclaimed property laws, transfers unredeemed balances to the state, and “zeroes out” the card balances as if the funds had been redeemed. Thereafter, the issuer has no further obligation to the cardholder, just as the issuer would have no further obligation to any other cardholder once the funds associated with the card have been fully redeemed (regardless of whether the funds have been fully utilized by the cardholder—see Official Staff Interpretations of 12 CFR Part 205, paragraph 205.20(d)). There is no violation of Reg E since the issuer did not expire the card. The state holds the funds on behalf of the cardholders, who must look to the state to recover the value of the funds taken into custody by the state.
Alternative #2: Reg E requires the issuer of the card to honor the card for at least five years, and state unclaimed property laws are pre-empted during such five-year period. The issuer would report and remit unredeemed balances to states as required by state unclaimed property laws only after the five-year period contemplated by Reg E has ended.
Alternative #3: Reg E requires the issuer of the card to honor the card for at least five years, but does not preempt state unclaimed property laws (except perhaps to the extent that such unclaimed property laws would permit the issuer not to honor the card after remittance of the card balance to the state). Issuers must remit unredeemed balances to the states as required by state law, even if less than five years, and then seek a refund from the states for any card balances subsequently redeemed by the cardholders.
Is Alternative #3 Unconstitutional? As noted above, the Federal Reserve Board staff comments accompanying the amendments to Reg E suggested that the latter approach may be sufficient to avoid a conflict between Reg E and state unclaimed property laws; the CFPB Notice also references this possible outcome. However, in Western Union Telegraph Company v. Pennsylvania, 368 U.S. 71 (1961), the U.S. Supreme Court held that a state could not enforce a judgment requiring a company to escheat unredeemed money orders where the company was potentially subject to conflicting claims by other states. Would an issuer’s obligation to escheat funds associated with unredeemed card balances to a state and then continue to honor the cards by providing goods or services of a value equal to the funds already escheated present any less of a risk of multiple liability? Is the constitutional deficiency resolved by the (at least hypothetical) ability of the issuer to recover the escheated funds from the state after the card is honored? Or does the potential requirement that the issuer effectively “redeem” the card twice require a finding of preemption or an interpretation of Reg E to permit the card issuer to “zero out” the card balance following escheat of unredeemed funds?
The CFPB has solicited public comments on the preemption issue. Interested parties have 60 days within which to submit comments. A copy of the CFPB’s Notice of Intent can be found at http://files.consumerfinance. gov/f/201208_CFPB_Intent_to_make_preemption_determination.pdf.