Two recent state court decisions – Fitzgerald v. Young America Corporation, et al. and Vondjidis v. Hewlett Packard Corporation – have raised the bar for companies seeking to comply with the unclaimed property laws of the various states and territories.
Fitzgerald v. Young America
Although Fitzgerald v. Young America involved an interpretation of Iowa’s unclaimed property law, the statutory provision at issue is virtually identical, or substantially similar, to comparable provisions of other state unclaimed property statutes. The Young America court held that the “holder” of unclaimed property is the company bearing the initial obligation – i.e., the company offering the rebate, issuing the gift card or declaring the dividend – not the rebate or gift card fulfillment company, transfer agent or other third party, even where the third party retains the unclaimed funds. Accordingly, any failure of the third party to report and remit unclaimed property is a contract issue with the company outsourcing the processing of the obligation; it does not relieve the company that offered the rebates, issued the gift cards or declared the dividends of liability to the states for reporting and remitting unclaimed property.
The facts of Young America are briefly as follows: Young America Company (“YAC”) is one of the largest rebate fulfillment companies in the United States. YAC contracted separately with Sprint and T-Mobile to administer rebate programs that those companies offered to consumers in connection with the purchase of products or services sold by Sprint and T-Mobile, respectively. YAC also contracted with Walgreens to administer its “Easy Saver Program,” through which Walgreens offered to consumers manufacturer coupons and rebates. Manufacturers paid Walgreens to include their coupons and rebates in the Easy Saver Program. With respect to each of the foregoing programs, consumers mailed applications for rebates to YAC’s P.O. Box, and YAC processed and validated the submissions. Sprint and T-Mobile transmitted funds to YAC for the validated rebate submissions; Walgreens obtained such funds from the manufacturers and transmitted them to YAC. YAC deposited the rebate funds in its own bank account and then issued checks to consumers for the rebates. YAC retained the amount of uncleared checks (referred to as “slippage”) and recognized it as revenue. (The parties disputed whether Sprint, T Mobile and Walgreens paid a lower service fee in exchange for YAC’s right to retain the slippage, presumably as a form of compensation.) YAC did not provide Sprint, T-Mobile or Walgreens with a detailed accounting of the names and addresses of the consumers who failed to cash rebate checks, and did not report the total amount of unclaimed rebates.
Iowa initially sued YAC to obtain its books and records to conduct an audit of, and to collect, unclaimed rebates, and later added the “Merchant Defendants” (Sprint, T-Mobile and Walgreens) as defendants. The Merchant Defendants filed motions for summary judgment asserting, inter alia, that they are not in possession of the unclaimed rebates and therefore they are not the “holders” of unclaimed property. The Iowa District Court rejected the Merchant Defendants’ assertions that “as a matter of law, [the] merchant Defendants are not subject to the Iowa Act because they do not possess the property at issue,” and denied their motions for summary judgment. Young America, No. CV 6030, Jan. 5, 2009 Order, at 14.
Although Young America involved an interpretation of Iowa law, Iowa’s unclaimed property statute is based on the 1966 version of the Uniform Unclaimed Property Law (as are the unclaimed property laws of Illinois, Minnesota, Mississippi, Missouri, Nebraska, Nevada, Oregon, Pennsylvania, Tennessee, and Virginia). More important, the provisions of the Iowa statute at issue are substantially similar, or virtually identical, to comparable provisions of the unclaimed property statutes of most of the states and the District of Columbia. Any company that outsources the processing of dividend payments, rebate or gift card programs, or any other company obligation, should be cognizant of the Young America decision, and should consider reviewing its outsourcing contracts and relationships to determine whether they face exposure to liability to the states for the payment of unclaimed property, and if so, how to minimize that exposure (i.e., by requiring verification of remittance of unclaimed property by the third party, providing a remedy in the event a state assesses a deficiency against the original obligor, and/or attorneys’ fees and costs in the event of litigation).
Vondjidis v. Hewett Packard Corporation
This case raises numerous questions regarding the amount of “due diligence” a holder of unclaimed property must perform, and whether a holder really obtains immunity from potential future claims of owners after property has been transferred to the state as unclaimed property.
In Vondjidis, Hewlett Packard (“HP”) had transferred to California as unclaimed property, shares of HP stock that had been owned through an employee stock purchase plan by a former employee, Vondjidis, who lived in Athens, Greece. During his employment, Vondjidis had received all communications relating to his stock at the HP office in Athens. After his employment terminated, HP continued to send those communications to the HP Athens office, which forwarded the checks to Vondjidis at his home. Although HP’s personnel records may have contained Vondjidis’ home address, HP’s stock records reflected the HP Athens office address. Notwithstanding HP’s subsequent request to Vondjidis that he provide his current home address, Vondjidis failed to do. Eventually, HP closed its Athens office, and thereafter 39 HP dividend checks for Vondjidis’s shares (totaling $265.86) were not cashed. HP utilized the services of an outside “escheatment vendor” to which HP provided last known addresses, including addresses in its personnel system, so that the escheatment vendor could send a final letter to lost shareholders before transmitting shares to the state as unclaimed property.
In 2001, Vondjidis learned that his stock had been transferred to the state. He recovered $22,000 from the state. Two years later, he sued HP alleging, inter alia, breach of contract, breach of fiduciary duty, and conversion, and seeking general and punitive damages and a reissuance of his shares. The superior court granted summary judgment in favor of HP, holding that HP was immune from liability because HP had transferred Vondjidis’s shares to California under its unclaimed property laws. (Cal. Civ. Code § 1321 provides that persons who have remitted property to the state “under the provisions of this title” [unclaimed property laws] are “relieved and held harmless by the State from all or any claim or claims” brought by owners to recover such property.) The appellate court reversed, holding that the immunity provided under the California law is not absolute.
The Vondjidis decision leaves open the question of whether there is any “safe harbor” for the extent of due diligence a holder must perform in order to benefit from the statutory immunity provided under state unclaimed property laws. The only clear message arising from Vondjidis is that holders of unclaimed property are well advised to review the adequacy of existing internal controls and procedures to ensure compliance with a holder’s due diligence obligations in order to minimize exposure to costly litigation and potential liability.