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The Green Sheet Online Edition

February 13, 2012 • Issue 12:02:01

N.J. unclaimed property ruling favors prepaid, sort of

sellingprepaidA Jan. 5, 2012, ruling by the U.S. Court of Appeals for the Third Circuit upheld an injunction that blocks New Jersey from enforcing all of the controversial gift card provisions contained in its updated abandoned property laws. The law firm Ballard Spahr LLP called the ruling "a victory for gift card issuers." However, it apparently wasn't a total victory, as aspects of the law that gift card issuers wanted eliminated were deemed legal and enforceable.

In a Jan. 19, 2012, editorial titled Third Circuit Upholds Challenge to NJ Gift Card Escheat Law, Ballard Spahr lawyers Alan S. Kaplinsky and Jeremy T. Rosenblum said the court found that gift card issuers behind the November 2011 injunction successfully argued that New Jersey's new escheatment rules, which passed into state law in June 2011, posed such significant threat to issuers (retailers that issue closed-loop gift cards and payment entities that issue open-loop, network-branded gift cards) that parts of the law could not go forward.

Ballard Spahr said the court of appeals agreed that part of the law which addresses gift card regulations (contained in Chapter 25 of New Jersey's unclaimed property regulations), "imposed unanticipated, retroactive obligations on the issuers" and would "substantially impair their contractual relationships." Additionally, the court found issuers would "suffer irreparable harm without the injunction," the law firm noted.

Ballard Spahr said, "According to the issuers, if New Jersey could enforce Chapter 25, they would either face prosecution and fines for noncompliance or, if they turned over funds, be precluded by state sovereign immunity from getting the funds back should Chapter 25 subsequently be invalidated."

Place of purchase

A chief mandate of New Jersey State Assembly Bill NJ A3002 was that retailers collect names and addresses of gift card purchasers to establish the legal basis for New Jersey to seize funds that lay dormant on gift cards. The "unanticipated, retroactive obligations" involved these new data collection and reporting policies.

In a Jan. 6, 2012, blog post, unclaimed property specialist Keane said gift card transactions did not have to be reported to the state of New Jersey prior to enactment of NJ A3002. The new law obliges retailers to record the ZIP codes of gift card buyers when gift cards are purchased and, if such information is unknown (as was the case prior to implementation of the law when no card purchaser information was collected), retailers have to report those cards to the state on the basis of a "place of purchase" presumption, Keane said.

But, according to Keane, that presumption was deemed unenforceable because it violated a U.S. Supreme Court ruling that outlined three priority rules designed to resolve ownership to unclaimed property, such as unused gift card balances.

The first priority rule is that if the owner of the property cannot be located, the property falls to the state of the owner's last known address. The second priority rule is that if an address cannot be established, the property reverts to the state where the card issuer's business is incorporated. If requirements of the first two rules cannot be satisfied, the third and final priority rule is invoked and the state where the card was purchased becomes the beneficiary of the funds.

Plaintiffs in the New Jersey case argued that the new law renders the Supreme Court's second priority rule meaningless in some cases, Keane said. The court of appeals agreed. But the plaintiffs argued that if the "place of purchase" presumption was found invalid, then the entire data collection mandate was unenforceable – an argument the court ruled against.

Keane said the court held that the ZIP code collection requirement was "severable" from the "place of purchase" presumption; therefore, New Jersey can enforce the data collection provision. But the provision cannot be administered retroactively as it infringes on issuers' contractual relationships, Keane noted.

However, the court left vague whether the ZIP code requirement represented sufficient data to establish addresses for the purposes of reporting unclaimed property under the first priority rule, Keane said.

Gift cards into perpetuity

An additional outcome from the circuit court's ruling involved the time it takes for unused gift card funds to be deemed abandoned and subject to seizure by the state. Ballard Spahr said the court rejected the issuers' argument that Chapter 25's two-year abandonment period was preempted by The Credit Card Accountability, Responsibility and Disclosure Act of 2009 (the Credit CARD Act), which requires that gift card funds remain available for at least five years after the date a card is issued or the date on which funds are last loaded onto a card.

Barbara S. Mishkin, Counsel at Ballard Spahr, told SellingPrepaid that the court determined that the escheatment of funds to New Jersey after two years had no effect on the consumer's right to recover those funds. "The Third Circuit held that it was reasonable for the district court to find that Chapter 25 provided greater protection to consumers than the Credit CARD Act because Chapter 25 would allow consumers to recover escheated card funds in perpetuity, whereas the Credit CARD Act only requires the funds to be available for five years." end of article

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