The decision issued by Delaware’s Chancery Court stems from a controversy that originated with a Voluntary Disclosure Agreement entered into by Staples with the State of Delaware (“the State”) over 11 years ago and a subsequent audit that was initiated in 2005. At issue was resolution over a series of claims whereby Staples challenged the State’s demand for payment of over $4 million and a counter suit by the State to enforce its audit assessment. Specifically, the facts in the case were as follows:
Many of Staples' business customers entered into supply contracts with Staples whereby Staples agreed to give the customers a reduction in price, or a “rebate” for purchases of a minimum volume of merchandise from Staples during a one-year period.
The rebates were issued in the form of a check or as a credit to use against future purchases.
The State through its third-party contract auditors asserted that the rebates, once they remained unclaimed for Delaware’s prescribed dormancy period (5 years), were subject to escheatment under Delaware’s unclaimed property provisions.
Staples through its counsel argued that the rebates did not constitute unclaimed property and
The statute of limitations under Delaware’s Uniform Commercial Code (“UCC”) as to the rebates had run against the rightful owners, and that the Escheat Statute does not allow the State to escheat property where a claim by the rightful owner is time-barred under Delaware’s UCC.1
The judge ruled in favor of the State of Delaware admonishing Staples counsel for not clearly setting forth its arguments why the rebates either in the form of credits or checks did not constitute unclaimed property.2 The court ruled that once it was determined the rebates in either form (check or credits) did constitute property under Delaware’s unclaimed property law, that the running of the “statute of limitations (under UCC provisions) against the owner is irrelevant when the property at issue is one of the specifically enumerated types set forth in § 1198(11)."3 The Court concluded that based on a literal reading of the unclaimed property provisions only if an item of property is one that is NOT the form of property enumerated as an item of unclaimed property would the statute of limitations come into effect preventing the State from including the item as unclaimed property after expiration of the statute of limitations.
This decision has broad implications that extend to retailers and companies in virtually all industries. For retailers and others who issue rebates in the form of checks or credits to be applied against future purchases, thus far the Courts are clear in holding such items are includible in the definition of property subject to escheat regardless of the manner or intent for issuing the rebates. Otherwise stated, the form of the rebate is what counts, not the underlying reason(s) why they were issued in the first place. Second, and probably most importantly, companies that wish to avert the unclaimed property provisions by stating in their contractual terms with customers that any claim for payment or settlement must be resolved before the expiration of a set period that is less than the five-year dormancy period will NOT be recognized.
After over six years of litigation with Delaware on this issue, surely this ruling comes as a disappointment to Staples and others issuing customer rebates. Uncertain is whether or not the ruling applies to any UCC provisions on Delaware’s unclaimed property statutes, but the implication from the decision is that holder will have an uphill battle arguing that a specific statute of limitations or contractual arrangement which limits the time to assert a claim trumps Delaware’s unclaimed property provisions.
1. Under Delaware’s UCC, claims and disputes regarding payments for goods must be "commenced within 4 years after the cause of action has accrued. By agreement the parties may agree to a shorter period, but not less than 1 year. § Del. Code Ann. tit. 6 § 2-725(1).
2. 'Property' means ... personal property ... of every kind or description, tangible or intangible, [including], but not by way of limitation, (i) money; (ii) bills of exchange; ... (iv) credits ... and (xiii) all other liquidated chooses in action of whatsoever kind or character.... The word `property' does not include ... any property, except the items specifically enumerated above in paragraph (11) of this section, the right to recover which in a proceeding brought by the owner would be barred by any statute of limitations ….(Delaware Escheat Statute §1198(11)).
3. The Court stated that the State correctly bases this argument on § 1202 of the Statute, which says: The expiration of any period of time specified by statute or court order, during which an action or proceeding may be commenced or enforced to obtain payment of a claim for money or recovery of property, shall not prevent the money or property from being deemed abandoned property nor affect any duty to file a report required by the subchapter or to pay or deliver abandoned property to the State Escheator.