Delaware’s Claim for Unredeemed Gift Cards Moves Forward as Court Denies Most of Defendants’ Motion to Dismiss False Claims Action

 
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State of Delaware ex. Rel. French v. CardCompliant, et. al., N13C-06-289 FSS (Del. Super. Ct. June 28, 2013)

On March 26, 2014, almost a year after it was originally filed, State of Delaware ex. Rel. French v. CardCompliant, et. al., a Delaware court unsealed the whistleblower lawsuit against Card Fact, LLC (“CardFact”). CardFact, which was later acquired by CardCompliant, LLC (“CardCompliant”), provides gift card issuance and management services to retailers. The allegations against it involved the failure to report and remit as unclaimed property the value of unredeemed gift cards to the state of Delaware. The action was initiated when William Sean French, a former CardFact employee, filed a false claims action in Delaware alleging that the company and its retailer clients concocted a scheme to avoid remitting unclaimed gift card funds to Delaware.

On November 23, 2015 the judge in the case issued a memorandum opinion granting some, but not all, of the defendants’ Motion to Dismiss. Although the court’s holding only allows Delaware to continue its claim against CardCompliant, it doesn’t necessarily indicate the ultimate outcome of the case. Currently, discovery is moving forward and the case is scheduled for trial in January 2018.

Facts
CardFact LLC was created in 2003 and purchased by CardCompliant, a competitor, in 2009. CardCompliant continued business as usual under the CardFact name while the original owners continued to do business under a new name, Vacation Properties United, Ltd. On June 28, 2013, French brought a qui tam action against CardCompliant, asserting two claims under Delaware’s False Claims and Reporting Act:

  • Claim 1, under § 1201(a)(7) alleges “Defendant knowingly made, used, or caused to be made or used, false statements and records to conceal, avoid, or decrease an obligation to pay or transmit money to the Government.”
  • Claim 2, under § 1201(a)(4) alleges “Defendant… intending to deceive the Government, or willingly conceal the property, delivered or caused to be delivered less property than the amount for which they have a receipt.”

The remaining 86 defendants in the case listed below (“Defendants”) fall into the following groups:

  • CardFact, including CardCompliant and 57 CardFact entities;
  • Retailers that signed the CSAs, including 17 corporations and 6 LLCs;
  • Vacation Properties Limited United, Ltd., formerly CardFact, Ltd.;
  • Three corporations whose non-Delaware affiliates entered into CSAs; and
  • The National Restaurant Association, which had a marketing agreement with CardFact.

Motions to Dismiss
On February 4, 2015, the Defendants were granted leave to file a motion to dismiss. t the outset, the court stated: “One overarching concept bears emphasis. The property at issue does not belong to the Retailers, much less CardFact. They do not even have a residual claim to it”. After reviewing the fact, the court granted and denied the following Motions to Dismiss:

Motions_to_Dismiss

In addition to the holdings on the various Motions to Dismiss, the judge’s analysis of the facts and application of law resulted in some legal conclusions that are worth noting:

  • Gift card liabilities initially incurred by one company but subsequently transferred to another remain the liability of the original issuing company unless the customers who purchased the gift cards consented to the transfer of the liability. The terms of the contracts between companies regarding the transfer of such a liability were not controlling for determining which entity has the liability.
  • Contrary to most states’ laws, in Delaware the second priority rule is applied based on the state of formation, not the principal place of business, of a limited liability company.
  • The judge dismissed a retailer that had previously been audited by Delaware, stating that as a result of the prior audit it could not be a defendant in this false claims action, even for claims that arose after to the conclusion of the audit.

What This Means to Your Company
The court’s opinion granting some, but not all, of the defendants’ Motion to Dismiss means that Delaware’s push to claim unredeemed gift cards can continue to move forward. As a result, all Delaware companies that issue gift cards should take this as a signal to review their gift card programs and be aware of the following:

  • In addition to challenging CardCompliant, Delaware has already begun scrutinizing Delaware retailers’ with wholly-owned non-Delaware gift card issuing entities. Companies using these or other planning strategies should review their operations and understanding of which entity may actually hold the liability.
  • The trend for whistleblower lawsuits, and the potential gain for whistleblowers, continues to present a growing risk for companies.
  • The court’s confirmation of Delaware’s long-held position that an LLC’s state of incorporation, not its principal place of business, is the relevant factor for determining application of the second priority rule means that holders with LLCs should review their reporting criteria for owner-unknown property held by non-incorporated entities.
  • The risk that a false claims action will be brought by Delaware may have been eliminated for companies that have already been audited by the state.

Our Expertise
The True Partners Consulting Unclaimed Property Management Solutions Team is comprised of a national group of professionals with diverse backgrounds, including industry and government. Based on our proven success record, we are one of the top five service providers in the country. We believe we possess the best combination of experience, expertise, and resources to address all of your unclaimed property needs across all industries. We encourage you to contact one of our professionals to discuss any questions or concerns that you may have regarding unclaimed property and what these recent developments may mean to your company.

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Cathleen Bucholtz, CPA
Managing Director & National Practice Leader
(213) 417-2501
Cathleen.Bucholtz@TPCtax.com
 
Jim Sadik
Managing Director
(508) 667-3408
Jim.Sadik@TPCtax.com
 
Robert Tucci
Managing Director
(972) 338-3673
Robert.Tucci@TPCtax.com
 
Matthew Chenowth, ESQ
Senior Manager
(213) 417-2527
Matthew.Chenowth@TPCtax.com
 

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