Chancery Court Rules Against Staples in Escheat Dispute
Targeting possible sources of additional revenue, states are looking to unclaimed property. Delaware is one of the states that is taking very aggressive measures to identify unclaimed property that may be subject to escheat.
Perhaps trying to control its exposure, the property holder in the matter described below entered into a voluntary disclosure agreement with Delaware. But the holder was forced to open its records to a contingency fee auditor with an incentive to maximize the amount of escheatable property. Litigation ensued.
In Staples v. Cook, the Delaware Court of Chancery held on Feb. 2 that rebates issued by Delaware retailers in connection with the sale of inventory but unclaimed by customers are escheatable as abandoned property under Delaware unclaimed property law (the escheats statute) after a dormancy period of five years has run. This is true without regard to any other statute of limitations on claims to the property that may otherwise be applicable.
Plaintiff Staples Inc., a Delaware corporation, had sued the state of Delaware challenging the state's demand for payment of unclaimed rebates. Staples issued the rebates essentially as volume discount credits to business customers. The opinion of Chancellor Leo E. Strine Jr. was based on an analysis of whether the rebates were within the specifically enumerated items in the definition of "property" in the escheats statute, in which case the rebates would be subject to escheatment after a five-year dormancy period. Otherwise, the rebates might not be escheatable if an otherwise applicable statute of limitations governing the customer's claim elapses before the running of the full five-year dormancy period. After finding that the rebates were "bills of exchange" or "credits" and therefore within the specifically enumerated items in the escheats statute and not subject to consideration of other statutes of limitations, Strine concluded that the rebates were escheatable property.
Staples had argued that rebates and refunds related to the sales of goods cannot become unclaimed property under the escheats statute. Staples' analysis in its complaint apparently rested on the theory that if a statute of limitations applicable to the property owner's claim to that property is shorter than the dormancy period in the escheats statute, the property will not count as escheatable property within the meaning of the escheats statute and the holder of the property will not be required to deliver it to the state.
Staples' position was that an applicable statute of limitations had run against the rightful owners of the rebates and that the owners' rights to claim the rebates were time-barred. According to Staples, if a rebate owner's claim becomes time-barred prior to the running of the five-year dormancy period, then the rebate becomes property of the holder, namely Staples, and no longer has the character of being "abandoned." In its complaint, Staples argued that the customers' claims to the rebates were subject to a statute of limitations under the Delaware Uniform Commercial Code that elapsed prior to the five-year dormancy period. Staples would have it, therefore, that the rebates are not abandoned property and not escheatable to the state.
Strine noted in his opinion that Staples' reasoning was not clearly spelled out in its complaint and, unlike the position that Staples took in its complaint, Staples subsequently acknowledged that its analysis applied only if the rebates were not one of the specifically enumerated items in the escheats statute. As Strine stated in his opinion, the language of the escheats statute "render[s] the running of the statute of limitations against the owner irrelevant when the property at issue is one of the specifically enumerated types set forth in § 1198(11)." Property would fall outside the scope of the escheats statute if it is "any property, except the items specifically enumerated ... the right to recover which in a proceeding brought by the owner would be barred by any statute of limitations."
At oral argument, Staples attempted to characterize the rebates as something other than one of the enumerated items of property in the escheats statute. However, Strine found that, whatever form Staples' rebate payments took, they were obviously credits or bills of exchange, both of which were enumerated items of "property." Because the rebates were enumerated items in the escheats statute, Strine did not need to reach the question of whether the rebates were subject to the Delaware Uniform Commercial Code and its shorter statute of limitations period.
Some businesses holding unclaimed property may believe that the running of an applicable statute of limitations under the Uniform Commercial Code will cause the holder to become the rightful owner of the property. If that were the case, such property, no longer being "abandoned," would not be subject to escheat. For the Delaware business owner, however, the practical takeaway from this Chancery Court decision is that any item of property specifically enumerated in the escheats statute, such as money, bills of exchange, credits, wages and other allowances for services, money orders, traveler's checks, amounts received for gift certificates, security or customer deposits, and utility services refunds, becomes escheatable if not claimed by the rightful owner within the dormancy period. This result is not affected by any statute of limitations otherwise applicable under the Delaware Uniform Commercial Code.
Reprinted with permission from 3/28/2012 issue of the Delaware Business Court Insider© 2012 ALM Media Properties LLC. Further duplication without permission is prohibited. All rights reserved.