Sean M. Diamond, Unwrapping Escheat: Unclaimed Property Laws and Gift Cards

• Publication year: 2011

UNWRAPPING ESCHEAT: UNCLAIMED PROPERTY LAWS AND GIFT CARDS

INTRODUCTION 973

1. BACKGROUND 975

   1. Gift Cards 975

   2. Escheat and Unclaimed Property Laws 977

      1. Common Law Roots and Subsequent Departure 978

      2. Uniform Unclaimed Property Acts 980

2. WHY UNCLAIMED PROPERTY LAWS SHOULD NOT APPLY TO GIFT CARDS 982

   1. Traditional Justifications Fall Flat 983

   2. Converting a Right to Merchandise into a Right to Cash Violates the Derivative Rights Doctrine 985

   3. Practical Problems of Compliance 987

   4. Summary 989

3. CONFLICTING INTERSTATE CLAIMS 989

   1. The Race of Diligence 990

   2. Dual-Pronged Priority Structure (Texas v. New Jersey and

      Its Progeny) 992

      1. Texas v. New Jersey 993

      2. Pennsylvania v. New York 995

      3. Disposition of Abandoned Money Orders and Traveler’s Checks Act 996

      4. Delaware v. New York 997

   3. Summary 999

4. THE NEED FOR CONGRESSIONAL ACTION: WHY THE DUAL- PRIORITY STRUCTURE IS UNSUITABLE FOR GIFT CARDS 999

   1. And Then There Was One: The Collapse of the Dual-Priority

      Rule 1000

   2. Preemption of States’ Attempts to Carve in Additional Priority Rules 1001

      1. The 1981 and 1995 Uniform Acts 1001

      2. A Split in the Caselaw Increases the Risk of Compliance .. 1002

   3. Congressional Action Is Appropriate 1004

5. WHY CONGRESS SHOULD CREATE A BLANKET EXEMPTION FOR

   GIFT CARDS 1005

   1. Resolution of Intrastate Conflicts 1006

   2. Resolution of Interstate Conflicts 1007

   3. Incentives for Innovation 1008

CONCLUSION 1008

INTRODUCTION

In the wake of the economic crisis, state budgets have been devastated by substantial decreases in revenue.1 A traditional source for raising revenue is increased taxes, but raising taxes carries a political stigma legislators prefer to avoid.2 Instead of (or in addition to) raising taxes, states often seek alternative sources of revenue through their unclaimed property laws.3 Unclaimed property laws incorporate the doctrine of escheat, which entitles a state to take custody of property that has remained unclaimed by its owner for a designated period of time.4 In the past twenty years, states have expanded their escheat laws and increased collection efforts to capture more unclaimed property as an alternative source of revenue.5 An example of this trend are states’ attempts to capture the remaining value on gift cards, which independently are often small amounts but, in the aggregate, constitute a substantial sum ripe for the taking.

For the past four years, gift cards have been the most requested winter holiday item.6 A 2010 survey shows that consumers planned to spend an average of over $145 per person on gift cards during the winter holiday season alone, for an estimated total of $24.78 billion.7 Figures for yearly gift card

1. See Leslie Eaton, More States Look to Raise Taxes, WALL ST. J., Apr. 9, 2009, at A4 (“A free fall in tax revenue is driving more state lawmakers to turn to broad-based tax increases in a bid to close widening budget gaps.”).

2. See id. (“Raising taxes is a perilous proposition for lawmakers . . . .”).

3. Suellen M. Wolfe, Escheat and the Concept of Apportionment: A Bright Line Test to Slice a Shadow, 27 ARIZ. ST. L.J. 173, 173 (1995); see also, e.g., Keith M. Phaneuf, Unclaimed Properties Give State Budget a Holiday Boost, CONN. MIRROR (Dec. 17, 2010), http://www.ctmirror.org/story/8738/unclaimed-properties- give-state-budget-holiday-boost (projecting $92 million in revenue from unclaimed property for 2010, likely turning Connecticut’s projected $18 million deficit into a surplus).

4. True escheat laws are limited in application to real and tangible personal property. These laws transfer an absolute title to the state when the owner dies without heirs. However, this Comment uses the term escheat in the context of unclaimed property laws, which entitle the state to take custody of intangible personal property that has remained unclaimed for a designated period of time. The phrases escheat laws and unclaimed property laws are used interchangeably unless otherwise noted.

5. See Diann L. Smith & Matthew P. Hedstrom, Will Unclaimed Property Prove an Irresistible Well?,

   SUTHERLAND, 1 (June 4, 2009), http://www.sutherland.com/files/News/9508e3c1-a85a-433c-b0cb- 0bfd8d13f054/Presentation/NewsAttachment/ded2153e-872a-4b88-9101-11dd0925870a/Article6.4.09.pdf (“The reality, however, is that if states change unclaimed property laws with the purpose of obtaining more property or obtaining the property faster, the raison d’être of those laws also becomes abandoned.”).

6. Press Release, Nat’l Retail Fed’n, Gift Givers Listening to Recipients as Gift Card Spending Expected

   to Rise (Nov. 17, 2010), available at http://www.nrf.com/modules.php?name=News&op=viewlive&sp_id= 1033.

7. NAT’L RETAIL FED’N, CONSUMER INTENTIONS AND ACTIONS SURVEY 3 (2010), available at http://

   www.nrf.com/modules.php?name=Documents&op=showlivedoc&sp_id=5703.

   spending are upwards of $65 billion, approximately 10% of which goes unredeemed.8

   
   

   This Comment argues that state escheat laws should not apply to gift cards because the traditional justifications for escheat are inappropriate, and because current ambiguous and antiquated legislation deters innovation that would otherwise benefit consumers and retailers alike. Gift cards also serve as an ideal example of the inadequacy of the current standard for identifying when a state has the exclusive right to escheat property. There are perplexingly wide variations among state unclaimed property laws, but the gift card market is national and consequently requires at least some national uniform doctrine, as provided by federal law. The United States Supreme Court has had multiple opportunities to provide a federal solution but has strictly adhered to a bright- line general rule rather than considering the significant nuances of unclaimed property laws. Instead, a federal resolution will depend on congressional action, as it has in the past.

   
   

   Part I of this Comment provides a background discussion of gift cards’ rise to prominence and their distinguishable features. It continues by tracing the roots of escheat and unclaimed property laws from feudal England to modern American Uniform Acts. Part II argues that unclaimed property laws should not apply to gift cards for at least three reasons. First, traditional justifications for unclaimed property laws do not support escheat of gift cards. Second, escheat of gift cards violates the derivative rights doctrine, which limits the rights of the state to those rights the owner was entitled to. And third, current escheat laws inadequately account for recent developments in gift cards that yield substantive, unanticipated consequences.

   
   

   Part III follows the historical development of Supreme Court jurisprudence concerning conflicting claims to unclaimed property by multiple states, culminating in the current dual-priority structure, as declared in Texas v. New Jersey.9 Under Texas, the state of the owner’s last known address has primary priority to the unclaimed property.10 However, if that state does not have legislation addressing the property in question, or if the owner’s last address is unknown, then a second-priority rule takes effect.11 The second-priority rule

   
   

8. See Erica Alini, Governments Grab Unused Gift Cards, WALL ST. J., June 30, 2009, at A3.

9 379 U.S. 674 (1965).

10 Id. at 681–82.

1. Id. at 682.

   
   

   asserts that the holder’s12 state of incorporation has the authority to claim the property, subject to satisfaction of the first-priority rule at some later time.13

   
   

   Part IV argues that the dual-priority structure is ill suited for the specific issues concerning gift cards because the first-priority rule will never apply when the owner’s identity is necessarily unknown. Strict adherence to the dual-priority structure creates an inequitable windfall to a minority of states, such as New York and Delaware, where a disproportionate majority of businesses are incorporated. At the outset, there appear to be three possible avenues for refining the dual-priority structure: the states, the Supreme Court, or Congress. However, Congress is the only real option because the states would be preempted from resolving this problem, and the Supreme Court is unwilling to tailor its holding on a case-by-case basis. Therefore, Part V argues that Congress should pass specific legislation exempting gift cards from unclaimed property laws. This blanket exemption represents the best possible solution for a rapidly developing industry that was never intended to be included under unclaimed property laws.

   
   

   1. BACKGROUND

      
      

      This Part lays out the background of gift cards and escheat laws. Section A focuses on those unique characteristics of gift cards that present difficulties for unclaimed property laws. It distinguishes gift cards from other types of stored- value cards and gift certificates. Finally, this section highlights the benefits that gift cards offer consumers and retailers. Section B traces the development of escheat laws from their common law roots to the development of the modern American Uniform Acts.

      
      

      1. Gift Cards

         
         

         Gift cards have become incredibly popular since their inception in the mid- 1990s.14 Consumers spend about $65 billion on gift cards each year, of which

         $6.8 billion goes unredeemed.15 The unredeemed value is commonly referred

         
         

2. The holder is the person or entity in possession of the property that is obligated to hold the property for the benefit of the owner. See UNIF. UNCLAIMED PROP. ACT § 1(6), 8C U.L.A. 97 (2001) [hereinafter 1995 UNIF. ACT].

3. Texas, 379 U.S. at 682.

4. See Julia S. Cheney & Sherrie L.W. Rhine, Prepaid Cards: An Important Innovation in Financial Services, 52 CONSUMER INT. ANN. 370, 370 (2006).

5. Alini, supra note 8.

   
   

   to as breakage.16 Gift cards are just one form of prepaid cards. A prepaid card, also known as a stored-value card (SVC), is a piece of plastic resembling a credit card that represents value already paid to the holder and that may be redeemed at a later time by the owner.17 Unlike other SVCs, gift cards are

   generally redeemable for merchandise only, and the holder is rarely aware of the recipient’s identity.18

   
   

   Further, there is an array of gift cards with varying features.19 Generally...