January–February 2011
State Law & State Taxation Corner
By John A. Biek
New Jersey Stored Value Card Case Shows the Limits of State
Unclaimed Property Jurisdiction
Introduction
John A. Biek is a Partner in the Tax Practice Group of Neal, Gerber & Eisenberg
LLP in Chicago, Illinois.
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It will surprise few readers to hear that states are
turning to their unclaimed property laws as a source
of much needed revenue. States continue to shorten
their statutory dormancy periods for various types of
unclaimed property so as to accelerate holder reporting of that property to the state.1 Of course, states
and their contract auditors also continue to step up
their examinations of holder compliance with state
unclaimed property laws.
However, recently enacted New Jersey unclaimed
property legislation regarding stored value cards—
and the litigation that has ensued—illustrate that there
are limits to how aggressively states can tinker with
their unclaimed property laws to rake in the cash.
In a November 13, 2010, order of the United States
District Court in New Jersey in American Express
Travel,2 Judge Freda Wolfson issued a preliminary
injunction against the New Jersey State Treasury
Department’s enforcement of the “place-of-purchase
presumption” in the unclaimed property stored value
card law that New Jersey enacted at the end of June
2010. Judge Wolfson further enjoined the Treasury
Department from enforcing the provisions of the
stored value card law retroactively with respect to
outstanding balances (referred to as “breakage”) on
stored value cards or gift cards that are redeemable
only for merchandise or services. The most significant
aspect of Judge Wolfson’s order, however, may be her
conclusion that the priority rules that the Supreme
Court adopted in 1965 in Texas3 preempt the Treasury
Department from applying its “transactional rule”
to claim custody of breakage on stored value cards
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State Law & State Taxation Corner
issued or sold at locations in New Jersey by issuers
incorporated in a state that exempts such breakage
under its unclaimed property laws.
The Treasury Department has appealed Judge
Wolfson’s preliminary injunction order to the United
States Court of Appeals for the Third Circuit, so the
litigation continues. Hopefully, the Third Circuit will
affirm Judge Wolfson’s well-reasoned analysis of these
priority rule issues, providing much needed guidance
to holders and state unclaimed property administrators on the jurisdictional limits of state unclaimed
property laws.
New Jersey’s History of
Not Escheating Gift Cards
them by paying the State what they would have
paid to the prior owners. ...
The issuers of gift certificates, however, frequently
do not bind themselves to pay money. The contractual terms of the Hilton gift certificates which
are the subject of this suit provide that they can
be redeemed only for services or merchandise.
We have denied the State the right to exact cash
by escheating obligations which do not bind the
obligors to pay money. Sperry & Hutchinson Co.,9
is such a case. ... Our Supreme Court has also
held that, by virtue of our State Constitution, debts
already barred by a statute of limitations are not
subject to escheat because the creditor would
not be entitled to payment.10
The historical backdrop to the New Jersey stored value card law is the 1998 holding of the Superior Court
The implication of these cases is that the Act canof New Jersey, Appellate Division, in Unclaimed
not, and therefore presumably was not intended
Property Office, that the New Jersey Unclaimed
to, impose an obligation different from the obProperty Law did not apply
ligation undertaken to
to unredeemed gift certifithe original owner of
4
The
Treasury
Department
cates and gift cards. The
the intangible property
which it covers. Since
Hilton at Short Hills had
has appealed Judge Wolfson’s
the Hilton gift certifirequested a ruling from
preliminary injunction order
cates are, by their terms,
the New Jersey Treasury
to
the
United
States
Court
of
redeemable only for
Department that expired
services and merchanone-year Hilton gift cerAppeals for the Third Circuit, so
dise and not for money,
tificates did not have to
the litigation continues.
we are confident that
be reported to the state
5
the Legislature did not
as unclaimed property.
intend to include them among the “intangible
When the Treasury Department ruled that these gift
personal property” which must be reported and
certificates were subject to the Unclaimed Property
transferred to the State to be converted to cash
Law, Hilton appealed that administrative decision.
for the State’s use pursuant to the Act.11
The Appellate Division found it significant that while
the New Jersey Unclaimed Property Law was based
on the 1981 Uniform Act,6 the New Jersey law had
The New Jersey Supreme Court unanimously affirmed
omitted certain terms and provisions of the 1981 Unithe Appellate Court’s decision in January 1999.12 For
form Act, including the reference to “gift certificates”
the next 11 years, the accepted wisdom within the unin the definition of “intangible property” reportable
claimed property community was that gift certificates,
to the state,7 as well as the provision presuming gift
gift cards and similar stored value card instruments
were not subject to reporting under the New Jersey
certificates abandoned after five years.8
Unclaimed Property Law, as is the case in roughly 30
It was just as significant in the eyes of the Appellate
other states, at least where the card does not have an
Division, that:
expiration period or more than a specified value.13
All the categories of intangible personal property
expressly covered by the New Jersey Act or the
The New Jersey Stored
1981 Model Act, are, as a practical matter, claims
Value Card Law
for the payment of money. ... When any of these
claims to the payment of money are transferred
This well-settled law went by the boards in the spring
to the State, the obligors can readily discharge
of 2010, when the New Jersey Legislature found
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January–February 2011
the state desperately short of revenue. At this point,
breakage on outstanding gift certificates and stored
value cards must have looked like the proverbial
honey pot. Introduced in the final week of the legislative session and quickly approved by the New Jersey
Governor on June 30, 2010, A.B. 300214 (Chapter 25)
added the term “stored value card” to the definition
of “property” in the New Jersey Unclaimed Property
Law and created a presumption that the breakage on
stored value cards is abandoned after two years.15
The term “stored value card” is broadly defined to
include, but not be limited to, paper gift certificates,
records that contain a microprocessor chip, magnetic
stripe or other means for the storage of information,
gift cards, electronic gift cards, rebate cards, stored
value cards or certificates, store cards and similar
records or cards.16
To allow New Jersey to escheat as much breakage
as possible under the Texas priority rules discussed
below, Chapter 25 requires issuers of stored value
cards to obtain the name and address—or at least
the ZIP code—of the purchaser or owner of the
stored value card. More controversially, Chapter
25 provides that if the issuer does not obtain and
maintain such last known address information, “the
address of the owner or purchaser of the stored
value card shall assume the address of the place
where the stored value card was purchased or issued and shall be reported to New Jersey if the place
of business where the stored value card was sold
or issued is located in New Jersey.”17 This statutory
presumption is referred to as the “place-of-purchase
priority rule.”
Chapter 25 provides exceptions to unclaimed
property reporting of breakage on stored value cards
distributed by the issuer (or “holder” in unclaimed
property nomenclature) to a person under a promotional or customer loyalty program or a charitable
program for which no monetary or other consideration has been tendered by the owner. An exception
also is provided for stored value cards issued by a
holder that issued $250,000 or less of stored value
cards in the previous year.18
Chapter 25 also seeks to maximize the amount of
stored value card breakage that has to be escheated
to New Jersey by prohibiting holders from imposing
dormancy service charges or fees on such cards.19
To raise still more revenue, Chapter 25 shortened
the statutory dormancy periods for travelers checks
and money orders to three years from 15 and seven
years, respectively.20
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One of the most unfortunate aspects of Chapter 25,
from a legislative drafting standpoint, was its ambiguous effective date provision:
This act shall take effect July 1, 2010 and apply
to travelers checks, money orders, stored value
cards, credit balances, customer overpayments,
security deposits, refunds, credit memoranda,
unused tickets, or similar instruments outstanding on and after July 1, 2010, including, but not
limited to, those outstanding instruments issued
before July 1, 2010.21
A straightforward reading of this effective date
provision would suggest that the provisions of
Chapter 25, including its legislative overruling of
the New Jersey Appellate Division’s 1998 decision
in the Unclaimed Property Office case, apply retroactively to any and all outstanding stored value
cards. The retroactivity of Chapter 25’s provisions
was a significant concern to holders as the November 1 deadline for their 2010 New Jersey annual
unclaimed property reports was only four months
away. The fact that the New Jersey Executive Branch
estimated that Chapter would raise $79,580,000 of
additional revenue for the state in its initial year did
nothing to allay holder concerns.22
The Treasury Department’s
Shifting Administrative
Implementation of Chapter 25
The New Jersey Treasury Department seemed to
struggle just as much with its implementation of the
new stored value card provisions. The early informal
indications were that holders would only be required
to include breakage on stored value cards issued
since July 1, 2003, on their November 1, 2001, annual reports. This administrative policy would still
have resulted in holders having to escheat as much
as five years of stored value card balances in 2010.
Moreover, the Treasury Department was advising
holders that it would require them to report breakage
on existing owner unknown stored value cards sold
in New Jersey, pursuant to the “place-of-purchase
priority rule” of Chapter 25.
On August 26, 2010, the Treasury Department
issued its first written guidance on Chapter 25, Treasury Announcement FY 2011-02, announcing that
because many retailer point-of-sale systems were
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State Law & State Taxation Corner
not yet capable of capturing names and addresses
or ZIP codes of stored value card purchasers or
owners, the Treasury Department was delaying the
implementation of that requirement until October 1,
2010. Announcement FY 2011-02 did not discuss
how retroactively the Department planned to apply
the provisions of Chapter 25.
In September 2010, the New Jersey Unclaimed
Property Administration, a unit of the Treasury Department, issued written “Guidelines for Reporting
Stored Value Cards (SVCs) and Pay Cards.” This
document advised holders that there would be a
“five year reach-back period” for stored value cards
and that “SVCs with issue dates beginning July 1,
2003 that have a last activity date on or before June
30, 2008 should be included in the [November 1,
2010] report.” The Unclaimed Property Administration also somewhat inconsistently advised holders
to report stored value cards for which there was no
purchaser or owner name and address information
as “unknown” property, yet report the ZIP code of
the location where the stored value card had been
sold as the purchaser/owner address.
However, the Treasury Department charted a different course on September 23, 2010, in Treasury
Announcement FY 2011-03. Starting November 1,
2010, holders were required to obtain and maintain
record of, at a minimum, a ZIP code for the purchaser
of a stored value card. Holders were further required
to report stored value card breakage to New Jersey to
the extent that the holder had a New Jersey address
or ZIP code for the purchaser or owner of the stored
value card or, in the absence of such information, the
holder was incorporated in New Jersey. If the holder
was incorporated in another state, the holder should
report owner unknown stored value card breakage
to the state of incorporation “in accordance with
that state’s unclaimed property laws.” These provisions of the Treasury Announcement were consistent
with the Supreme Court’s two priority rules in Texas
discussed below.
Treasury Announcement FY 2011-03 went on to
state, though, that:
If the issuer is not domiciled in New Jersey and
the issuer’s state of domicile exempts this type
of property from its unclaimed property statute,
any unredeemed balances of stored value cards
issued prior to the date of this announcement
where the names and addresses or zip code of
the purchasers or owners were not recorded
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must be reported to New Jersey if the cards were
issued or sold in New Jersey. In these instances,
the issuer must maintain the address of the business where the stored value card was purchased
or issued. (Emphasis added.)
It appears that the Treasury Department was asserting jurisdiction to escheat this category of stored
value card breakage, not under the place-of-purchase
priority rule of Chapter 25, which would create a
statutory presumption that the unknown owner of the
stored value card was a resident of New Jersey based
on the stored value card having been purchased at a
location in New Jersey, thereby allowing New Jersey
to assert a first priority rule claim to the breakage
under Texas, but rather under the “transactional rule”
of Section 46:30B-10(f) of the New Jersey Unclaimed
Property Law.
Treasury Announcement FY 2011-03 also provided that “the amended Statute applies to stored
value cards with outstanding balances on or after
July 1, 2010 including, but not limited to, those
stored value cards issued before July 1, 2010.” This
was the effective date language of Chapter 25. The
Treasury Department appeared to be backtracking
on the five-year reachback to July 1, 2003, that it
had been discussing informally with the holder community and had announced earlier that month in the
Guidelines for Reporting Stored Value Cards (SVCs)
and Pay Cards.
The American Express Traveler
Related Services Litigation
In September 2010, American Express Travel Related Services Company (“Amex”), the New Jersey
Retail Merchants Association (“Retail Merchants”),
the New Jersey Food Council (“Food Council”)
and American Express Prepaid Card Management
Corporation (“AMEX Prepaid”) began filing actions
in the United States District Court for the District
of New Jersey to enjoin the Treasury Department
from enforcing the provisions of Chapter 25.23 The
plaintiffs claimed that, as applied to travelers checks,
money orders and stored value cards, Chapter 25
was preempted by federal law and violated the Due
Process Clause, Contract Clause, Takings Clause,
Commerce Clause and Full Faith and Credit Clause
of the United States Constitution. On November 13,
2010, Judge Freda Wolfson denied Amex’s request
for a preliminary injunction, but she did enjoin New
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January–February 2011
Jersey from enforcing the place-of-purchase priority
rule and from enforcing Chapter 25 retroactively
with respect to stored value cards redeemable only
for merchandise or services.24
Amex’s Arguments
and Takings Clause claims. Judge Wolfson found
that New Jersey’s “escheat laws do not relate to the
‘validity, construction, and enforcement’ of the sales
contract of travelers checks, nor do they impair the
obligations of pre-existing contracts” between Amex
and the owners of the travelers checks.33 Judge Wolfson further concluded that “Amex has not shown that
any profits made by investing the funds for any given
period of time would rise to a property interest under
the Constitution. Hence, the Court finds that Amex
has not shown that there is a likelihood that it can
establish it enjoys a property interest in investing the
proceeds of travelers checks—for any specified period
of time—and therefore, it would not likely succeed
on its takings claim.”34
Amex challenged the application of New Jersey’s
drastically reduced statutory dormancy period for
travelers checks, alleging that the company relies
on its income from investing the breakage on outstanding travelers checks to remain profitable in the
travelers check business.25 Because Amex travelers
checks do not expire, the company has an indefinite
contractual obligation to redeem these instruments.26
Amex had prevailed on this same dormancy period
issue in a federal court in Kentucky in 2009.27
The Stored Value Card
In order to obtain a preliminary injunction, Amex
Plaintiffs’ Arguments
had to demonstrate a reasonable probability of success on the merits of its constitutional claims, and
The three stored value card plaintiffs, the New JerJudge Wolfson found that Amex had not carried this
sey Retail Merchants Association, the New Jersey
burden. She explained that
Food Council and Amerito withstand a substantive
can Express Prepaid Card
due process challenge,
Chapter 25 also seeks to maximize Management, had much
New Jersey only had to
better success, however,
the amount of stored value card
identify a legitimate state
with their claims that the
breakage that has to be escheated to stored value card placeinterest that the legislature
could have rationally conof-purchase priority rule
New Jersey by prohibiting holders
cluded was served by the
of Chapter 25 and the
from imposing dormancy service
statute being challenged.28
transactional rule are uncharges or fees on such cards.
constitutional because
Giving great deference to
they are contrary to the
the state, Judge Wolfson
Supreme Court’s priority
determined that the New
rules in Texas.35 In Texas, the Supreme Court had to
Jersey legislature could have believed that shortening
the statutory dormancy period for travelers checks
decide which of several states was entitled to claim
from 15 years to three years established greater unicustody of items of unclaimed property from the
formity and consistency in the dormancy periods in
holder, Sun Oil Company. For “ease of administrathe New Jersey Unclaimed Property Law and afforded
tion,” the Supreme Court fashioned two priority rules
greater protection to owners of unredeemed travelers
that award custody of an item of unclaimed property,
29
checks. The crux of Amex’s due process argument
first, to the state of last known address of the owner of
the property, as shown in the holder’s records. With
was that New Jersey was arbitrarily truncating the
respect to items of unclaimed property for which the
dormancy period for the sole purpose of raising
holder does not have record of a last known address
revenue for the state. Unfortunately for Amex, this
of the owner, or the last known address is in a state
argument was undercut by evidence that approxithat does not provide for escheat of the property, the
mately 96 percent of travelers checks sold in New
secondary priority rule of Texas gives custody of the
Jersey are redeemed within three years, the length
property to the holder’s state of corporate domicile
of the new dormancy period.30 Citing the Supreme
31
(i.e., state of incorporation), subject to the right of
Court’s opinion in Standard Oil Co., Judge Wolfson
the state of last known address of the owner to claim
did not see anything wrong with the citizens of New
the property from the holder’s state of incorporation
Jersey benefiting from the state’s temporary use of the
if the state of last known address can prove that the
breakage on Amex’s outstanding travelers checks.32
owner resides within its borders. In Texas the SuAmex did not fare any better on its Contracts Clause
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State Law & State Taxation Corner
preme Court considered, but did not adopt Illinois’
suggestion that “the State in which the indebtedness
was created” that gave rise to the unclaimed property
should be given jurisdiction to claim the property
from the holder.36
The place-of-purchase priority rule of Chapter 25
is a clearly invalid attempt to bootstrap a first priority rule claim to breakage on stored value cards
purchased at locations in New Jersey by unidentified
purchasers/owners, by creating a statutory presumption that the unidentified owner resides at the location
where the stored value card was purchased. Actually,
this is nothing more than a variation on the place-ofpurchase priority rule that the Supreme Court rejected
in Pennsylvania.37 In that case, Pennsylvania asserted
a claim to custody of $100,000 of funds associated
with unredeemed money order instruments that had
been purchased at Western Union stores in Pennsylvania. Because Western Union did not maintain
records of the names and addresses of the sender
(i.e., purchaser) and recipient of uncashed money
orders, Pennsylvania argued that no state would be
able to claim custody of any of the uncashed money
order funds from Western Union under the primary
priority rule of Texas, thereby allowing New York, in
its capacity as Western Union’s state of incorporation, to claim custody of all of those funds pursuant
to the secondary priority rule. To prevent this alleged
“windfall” to New York, Pennsylvania urged the
Supreme Court to presume that the state where the
money order instrument was purchased was also the
state of residence of the sender.38
The Supreme Court admitted that “Pennsylvania’s
proposal has some surface appeal. Because Western
Union does not regularly record the addresses of its
money order creditors, it is likely that the corporate
domicile will receive a much larger share of the
unclaimed funds here than in the case of other obligations, like bills for services rendered, where such
records are kept as a matter of business practice.”39
The Supreme Court nevertheless rejected Pennsylvania’s proposed place-of-purchase priority rule,
explaining that:
We do not regard the likelihood of a “windfall”
for New York as a sufficient reason for carving
out this exception to the Texas rule. Texas was
not grounded on the assumption that all creditors’ addresses are known. Indeed, as to four of
the eight classes of debt involved in that case, the
Court expressly found that some of the creditors
54
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“had no last [known] address indicated.”40 Thus,
the only arguable basis for distinguishing money
orders is that they involve a higher percentage
of unknown addresses. But we are not told what
percentage is high enough to justify an exception
to the Texas rule, nor is it entirely clear that money
orders constitute the only form of transaction
where the percentage of unknown addresses may
run high. In other words, to vary the application
of the Texas rule according to the adequacy of the
debtor’s records would require this Court to do
precisely what we said should be avoided—that
is, “to decide each escheat case on the basis of its
particular facts or to devise new rules of law to apply to ever-developing new categories of facts.”41
In her American Express Travel opinion, Judge Wolfson took note of the Supreme Court’s rejection of the
place-of-purchase priority rule in Pennsylvania and
yet again in Delaware.42 Judge Wolfson concluded
that the place-of-purchase priority rule in Chapter
25 was just as invalid, because:
On its face, Chapter 25 provides that the place
of purchase will be substituted for the last known
address of all unknown addresses: “If the issuer of
a stored value card does not have the name and
address of the purchaser or owner ... , the address
of the owner or purchaser of the stored value card
shall assume the address of the place where the
stored value card was purchased …” The statute
makes no accommodation for the issuer’s domicile or State of incorporation in connection with
this place-of-purchase presumption.
This presumption, on its face, clearly violates
the secondary priority rule by ignoring the right
of the debtor’s state of incorporation to escheat
in the event that the owner’s last known address
was not retained.43
Indeed, Delaware, the state of incorporation of
many major issuers of stored value cards, had already
publicly announced that it believes New Jersey’s
place-of-purchase priority rule is unconstitutional and
that Delaware-incorporated holders should be wary of
reporting stored value card breakage to New Jersey.
The more interesting question in the American Express Travel case was whether the Treasury Department
had fixed this constitutional problem with respect to
the retroactive period by relying on the transactional
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January–February 2011
priority rule scheme for unclaimed mineral interrule instead of the place-of-purchase priority rule. In
est payments by construing the Oklahoma statute
its Treasury Announcement FY 2011-03, the Treasury
to give Oklahoma custody of the unclaimed funds
Department recognized the right of the holder’s state of
only if the owner of the mineral interest had a last
incorporation to claim custody of breakage on stored
known address in Oklahoma, the owner’s address
value cards in situations where the holder did not have
was unknown but the holder was domiciled in
record of the last known address of the purchaser or
Oklahoma, or the owner was located in a state
owner of the stored value card and the holder’s state of
with no custodial taking or escheat law proviincorporation treated gift certificates and stored value
sions and the holder’s domicile was, once again,
cards as unclaimed property. However, if the holder’s
in Oklahoma.50 This clever bit of judicial statutory
state of incorporation exempts this type of property (as
is the case in some 30 states), and the holder does not
construction led Judge Wolfson to remark, “[i]
have record of the last known address of the purchaser
mportant here is the TXO Court’s recognition that
or owner of the stored value card, Treasury Announcea state may serve as a ‘temporary custodian’ only
ment FY 2011-03 directs the holder to report the stored
where the holder is incorporated in that state. In
value card breakage to New Jersey if the stored value
other words, there is no room for a third priority pocard was issued or sold in New Jersey.44 This latter
sition. If the secondary-rule state does not escheat,
the buck stops there.”51
scenario was an articulation of the transactional rule
that has long been part of
Unlike the Oklahoma
New Jersey’s Unclaimed
statute involved in TXO
Property Law, but not acProduction Corp., Judge
The crux of Amex’s due process
tively enforced.45
argument was that New Jersey was Wolfson did not see any
way to reconcile the plain
The Treasury Departarbitrarily
truncating
the
dormancy
language of Chapter 25’s
ment argued that it was
period for the sole purpose of
place-of-purchase priority
honoring the two priority
rule and the third-priority
rules of Texas, as it must,
raising revenue for the state.
rule that the Department
but that “[b]ecause Texas
had crafted in Treasury Andoes not address the cirnouncement FY 2011-03 with the Texas priority rules.
cumstance in which the debtor’s state of incorporation
As a result, Judge Wolfson forcefully concluded that:
does not escheat the intangible personal property
owned by the creditor, ... New Jersey may create a
[W]hen current state laws do not provide for
‘third priority rule’ under which it temporarily holds
escheat in the primary and secondary-rule
the property until the creditor’s address becomes apstates, there is no indication in Texas that the
parent and the creditor’s state asserts its superior right
state of purchase—“a forum having no conto escheat.”46 Judge Wolfson disagreed, noting that in
47
tinuing relationship to any of the parties to the
American Petrofina Co., the United States District
proceedings”—has the right to retain the property.
Court in Oklahoma had struck down an Oklahoma
Delaware, 507 U.S. at 504 (citing Pennsylvania,
unclaimed property statute that authorized the state
supra, at 213). “Texas and Pennsylvania ... [manto claim custody of unclaimed payments on owner
date] that only a State with a clear connection to
unknown mineral interests located in Oklahoma,
the creditor or the debtor may escheat,” Id., and
even though the holder was incorporated in another
“no State may supersede them by purporting to
state. The American Petrofina Co. opinion concluded
prescribe a different priority under state law.” Id.
that “[t]he Supreme Court’s decision in Texas, may
at 500. In addition, I find it telling that, in fashionbe relied upon to prevent state officials from enforcing the Texas rules, the Supreme Court expressly
ing a state law in conflict with the Texas scheme for
stated that the secondary rule applied when the
escheat or custodial taking of unclaimed property,
law of the primary rule state “do[es] not provide
because the decision was rendered as a result of the
for escheat.” Delaware, 507 U.S. at 500. That it
Supreme Court exercising its original jurisdiction and
made no similar concession in connection with
to ensure uniformity.”48
the secondary rule further suggests that no third
Judge Wolfson further observed that in TXO Propriority was envisioned by the Court. That is not
duction Corp.,49 the Oklahoma Supreme Court had
to say that the Supreme Court may not create a
upheld the constitutionality of a similar Oklahoma
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State Law & State Taxation Corner
third priority rule at some future date. My point
here is that is not the province of New Jersey to
create that rule.52
transfer the entire face value of the gift card to the
state for custody upon abandonment even though
gift cards are not redeemable for cash. ... Chapter
25 impairs that contractual relationship by requiring the gift card issuers to transfer their profit to state
custody; and this impairment is substantial because
the issuers will permanently lose their profits if the
gift card owner never claims or redeems the card
post-abandonment.“56
Judge Wolfson distinguished case law holding that
the Contract Clause was not violated by states taking
custody of inactive bank account funds and unclaimed cash payments, pursuant to their unclaimed
property laws, because those:
Indeed, one of the strongest arguments against the
constitutionality of the transactional rule is that it effectively overrules the unclaimed property exemption
of the holder’s state of incorporation (and perhaps
an exemption of the state of the owner’s last known
address as well). Since every state has now enacted
custodial unclaimed property laws, the legislature
of the holder’s state of incorporation would have to
have enacted an exemption for the type of unclaimed
property in order for the transactional rule to be able
to come into play. But why should the transactional
rule state be allowed to opportunistically claim cuscases involve cash whereas, here, the card issutody of property that the legislature of the holder’s
ers are obligated to provide only merchandise
state of incorporation—
or services. The gift
the state with the higher
card issuers have, thus,
The debate will now move
priority position—has
demonstrated that their
determined should not
right to earn and retain
to the Third Circuit Court of
be treated as unclaimed
their profit is substanAppeals,
which
is
hearing
the
property? Judge Wolfson
tially impaired by the
Treasury Department’s appeal
perceptively picked up on
statute. Accordingly, I
this point, declaring:
conclude that the gift
of Judge Wolfson’s preliminary
card issuing SVC Plaininjunction
order.
In describing the secondtiffs have demonstrated
ary rule, the [Supreme]
a likelihood of success
Court expressed that “the secondary rule protects
on their Contract Clause claim and hereby
the interests of the debtor’s State as sovereign over
enter a preliminary injunction enjoining the apthe remaining party to the underlying transacplication of Chapter 25 to issuers of gift cards,
tion.” Id. at 504 (emphasis added). In my view,
retroactively, to the extent that the legislation
inherent in the State’s sovereignty is its choice
affects existing contracts between gift card isnot to exercise custodial escheat over SVCs. To
suers and purchasers/owners.”57
rule otherwise, would permit other states, such
as New Jersey, to supplant their choice for that
There was no Contracts Clause violation with
of the debtor’s state of incorporation.53
regard to gift cards issued prospectively, however,
because issuers were now on notice that they would
be deprived of their anticipated profits to the extent
Finding that the New Jersey place-of-purchase
that they had to escheat breakage on such gift cards
priority rule and transactional rule are federally
to New Jersey.58
preempted by the Texas priority rule scheme, Judge
Wolfson preliminarily enjoined the Department from
applying those rules to stored value cards.54
Conclusion
Judge Wolfson went on to determine that the stored
value plaintiffs also had demonstrated a probability
Judge Wolfson’s analysis of the priority rule issues in
of success on their Contracts Clause and Takings
American Express Travel is quite perceptive. As disClause arguments with regard to gift cards that are
cussed earlier, the place-of-purchase priority rule of
redeemable only for merchandise or services.55 AcChapter 25 is flatly unconstitutional because it ignores
the secondary priority rule of Texas and attempts to
cording to Judge Wolfson’s opinion, “[t]he effect of
fashion a primary priority rule claim to breakage on
Chapter 25 on these plaintiffs is unique because, by
owner unknown stored value cards by presuming
operation of the statute, the issuers are required to
56
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January–February 2011
that the purchaser of the stored value card resides in
the same state where the card was purchased. The
Supreme Court’s holding in Pennsylvania clearly
required that the New Jersey place-of-purchase rule
be struck down.
The New Jersey Treasury Department must have
come to the same conclusion because it decided
to rely instead on the transactional rule in Treasury
Announcement FY 2011-03 to assert a claim to
breakage on owner unknown stored value cards
sold in New Jersey during periods prior to the effective date of Chapter 25 by holders incorporated
in states that exempt such breakage under their unclaimed property laws. It was gratifying, then, to see
Judge Wolfson carefully examine the key unclaimed
property priority rule cases and correctly conclude
that the transactional rule, too, is preempted by the
Texas priority rules. This author has long argued that
if the holder’s state of incorporation has enacted
an exemption for the type of unclaimed property
in question, that should be the end of the matter,
and the state where the stored value card was sold
should not be allowed to deprive the holder of the
benefit of the state of incorporation’s exemption
by opportunistically asserting a transactional rule
claim to custody of the property. Judge Wolfson
made this same observation in her opinion in
American Express Travel.
The debate will now move to the Third Circuit
Court of Appeals, which is hearing the Treasury
Department’s appeal of Judge Wolfson’s preliminary
injunction order. Hopefully, the Third Circuit will
affirm Judge Wolfson’s analysis of these two priority rule issues, discouraging other states from going
down the same misguided path that New Jersey has
trod with Chapter 25.
ENDNOTES
1
2
3
4
5
6
7
8
9
10
See, e.g., Ariz. S.B. 1003 (2010) (shortening
most statutory dormancy periods from five
years to three years and from three years to
two years); Ind. H.B. 1083 (2010) (effective
July 1, 2010, five-year statutory dormancy
periods were reduced to three years).
American Express Travel, 2010 US Dist.
LEXIS 120153 (D.N.J. Nov. 13, 2010).
Texas, SCt, 379 US 674, 71 SCt 822
(1965).
Unclaimed Property Office, N.J. Super. Ct.,
309 N.J. Super. 272, 706 A2d 1177 (Mar.
10, 1998), aff’d per curiam, 156 N.J. 599,
722 A2d 536 (Jan. 28, 1999).
Id. at 1178.
Uniform Unclaimed Property Act, 8B U.L.A.
567 (1981) (hereinafter “1981 Uniform
Act”).
Supra note 4 at 1178–79 (comparing 1981
Uniform Act §1(10)(ii) and N.J. REV. STAT.
§46:30B-6(i)(2)).
Id. at 1179 (comparing 1981 Uniform Act
§14 and N.J. REV. STAT. §§46:30B-42 and
-43). The Appellate Division further noted
that earlier drafts of the Assembly and Senate bills that became the New Jersey Unclaimed Property Law had initially included
the 1981 Uniform Act references to gift
certificates; then provided that only gift certificates issued after July 1, 1986, would be
subject to escheat; and ultimately deleted
references to gift certificates altogether from
the Unclaimed Property Law. Id.
Sperry & Hutchinson Co., N.J. Super. Ct.,
56 N.J. Super. 589, 153 A2d 691 (July 20,
1959), aff’d o.b., 31 N.J. 385, 157 A2d 505
(Jan. 25, 1960).
Western Union Tel. Co., N.J. SCt, 17 N.J.
149, 151, 158, 110 A2d 115 (July 20,
1954); Standard Oil Co., N.J. SCt, 5 N.J.
11
12
13
14
JOURNAL OF PASSTHROUGH ENTITIES
281, 296–97, 74 A2d 565, aff’d, 341 US
428, 71 SCt 822 (May 28, 1950).
Supra note 4 at 1179–80.
Id.
See, e.g., ALA. CODE §35-12-73(b)(1); Ariz.
Rev. Stat. §44-301(15); ARK. STAT. §18-28201(13)(B); CAL. CIV. PROC. CODE §1520.5;
COLO. REV. STAT. §38-13-108.4; CONN. GEN.
STAT. §3-73a(e); FLA. STAT. §§717.1045 and
717.102; IDAHO CODE §14-502(2)(b) and
(e) (gift certificates valued at $50 or less
or having expiration dates are exempt);
765 ILCS 1025/10.6; IND. CODE §32-34-11(f); Kan. L. 1999, ch. 100; MD. COM. LAW
CODE §17-10(m)(1); MASS. GEN. LAWS, ch.
200A, §5D; MICH. COMP. LAWS §567.235;
MINN. STAT. §345.39, subd. 1; 2007 Mont.
H.B. 755 (Montana does not escheat gift
certificates if the holder sold no more than
$200,000 of gift certificates the past fiscal
year); NEB. REV. STAT. §69-1305.03; NEV. REV.
STAT. §120A.520; N.H. REV. STAT. §471-C:16
(gift certificates valued at $100 or less are
exempt); N.C. GEN. STAT. §§116B-53(c)(8)
and 116B-54(b); 1997 N.D. Laws 393;
OHIO REV. CODE §169.01(B)(2)(d); 1997 Ore.
Laws 416; H.B. 2591; 72 PA. CONS. STAT.
§1301.6(1); R.I. GEN. LAWS §§33-21.1-1(10)
(ii), 33-21.1-14; 2001 S.C. H.B. 3657; S.D.
S.B. 81 (adding an exemption for owner
unknown open-loop prepaid cards without
expiration periods); TENN. CODE §66-29-135;
TEX. PROP. CODE §72.1016; UTAH CODE §674a-211 (gift certificates valued at $25 or less
are exempt); VA. CODE §55-210.8:1; WASH.
REV. CODE §63.29.140; Wis. Act 109 (2001);
WYO. STAT. §34-24-114 (gift certificates
valued at $100 or less are exempt).
(Enacted as 2010 N.J. Laws Chapter 25 and
referred to hereinafter as “Chapter 25”)
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
N.J. A.B. 3002, 2010 N.J. Laws Ch. 25,
§1 (amending N.J. REV. STAT. §46:30B-6(r))
and §5 (adding undesignated “stored value
card” section of N.J. REV. STAT. §46:30B).
N.J. Rev. Stat. §46:30B-6(t).
N.J. Ch. 25, §5(c).
N.J. Ch. 25, §5(e).
N.J. Ch. 25, §5 (amending N.J. REV. STAT.
§46:30B-43.1).
N.J. Ch. 25, §2 (amending N.J. REV. STAT.
§46:30B-11) and §3 (amending N.J. REV.
STAT. §4630B-12).
N.J. A3002 §9 (emphasis added).
Fiscal Note to A3002, New Jersey Office of
Legislative Services (July 28, 2010), available at www.njleg.state.nj.us/2010/Bills/
A3500/3002_F1.pdf.
Supra note 2.
Id. slip op. at 4–5.
Id. slip op. at 6.
Id.
American Express Travel II, DC-KY, 597
FSupp2d 717 (Jan. 26, 2009).
Supra note 2, slip op. at 37.
Id. slip op. at 51–52.
Id. slip op. at 53.
See Standard Oil Co., supra note 10.
Supra note 2, slip op. at 59–60.
Id. slip op. at 72.
Id. slip op. at 77.
Supra note 3.
Id. at 677 n.6.
Pennsylvania, SCt, 407 US 206 (June 19,
1972).
Id. at 212.
Id. at 214.
Supra note 3 at 675–676, n.4.
Id. at 679, 85 SCt, at 629. Id. at 214–15.
Supra note 2, slip op. at 105 (citing Delaware, SCt, 507 US 490, 509, 113 SCt 1550
57
State Law & State Taxation Corner
ENDNOTES
43
44
45
46
47
48
49
50
51
(Mar. 30, 1993)).
See supra note 37 at 214–15 (rejecting a
secondary rule based on place of purchase).
Id. slip op. at 114–15. (Emphasis added.)
Supra note 2, slip op. at 115–17.
N.J. Rev. Stat. § 46:30B-10(f).
Supra note 2, slip op. at 127–28.
American Petrofina Co., DC-OK, 697 FSupp
1183 (Apr. 24, 1986), aff’d, CA-8, 859 F2d
840 ( 1988).
Supra note 2, slip op. at 133 (quoting American Petrofina Co., 697 FSupp at 1187).
TXO Production Corp., Okla. SCt, 829 P2d
964, 1992 OK 39 (Mar. 22, 1992).
Id. at 970–71.
Supra note 2, slip op. at 133 (emphasis
added).
52
53
54
Id. at 134–35 (emphasis added).
Id. at 137 (bold face emphasis added).
Id. at 142. The stored value card plaintiffs
were not able to demonstrate a likelihood
of success on their argument that the federal
Credit Card Accountability, Responsibility
and Disclosure Act of 2009 (the “CARD
Act”) implicitly preempted Chapter 25’s
two-year dormancy period on stored value
cards because the CARD Act required issuers to honor such cards for at least five
years. Judge Wolfson determined that “it is
theoretically possible for an issuer subject
to New Jersey’s escheat law to comply with
both the escheat law and the CARD Act by
honoring the gift card [escheated to the state
after two years] and then seeking reimburse-
55
56
57
58
ment from the State.” Id. slip op. at 88 (citing
N.J. REV. STAT. §46:30B-42.1(d) (“Nothing in
this section shall be construed to prevent an
issuer from honoring a stored value card,
the unredeemed value of which has been
reported to the State Treasurer pursuant to
R.S. 46:30B-1 et seq., and then seeking reimbursement from the State Treasurer pursuant
to R.S. 46:30B-62”).
However, Judge Wolfson rejected the stored
value card plaintiffs’ substantive due process
and Commerce Clause claims.
Supra note 2. slip op. at 143–145.
Id. slip op. at 147.
Id. slip op. at 148.
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