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State ex rel. French v. Card Compliant, LLC

Superior Court of Delaware

April 30, 2018

THE STATE OF DELAWARE, Plaintiff, ex rel. WILLIAM SEAN FRENCH, Plaintiff-Relator,
v.
CARD COMPLIANT, LLC, et al., Defendants.

          Submitted: January 16, 2018

          Withdrawn and Reissued with Clarifications: August 29, 2018

         Upon Defendants' Motion for Summary Judgment, DENIED.

          Thomas E. Brown, Esquire, Edward K. Black, Esquire (argued), Stephen G. MacDonald, Esquire, Deputy Attorneys General, Delaware Department of Justice, Wilmington, Delaware, Attorneys for the State of Delaware.

          Stuart M. Grant, Esquire, Mary S. Thomas, Esquire (argued), Laina M. Herbert, Esquire, Vivek Upadhya, Esquire, Grant & Eisenhofer P.A., Wilmington, Delaware, Attorneys for Plaintiff-Relator William Sean French.

          Kenneth J. Nachbar, Esquire, Michael Houghton, Esquire, Matthew R. Clark, Esquire, Barnaby Grzaslewicz, Esquire, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, DE, Ethan D. Millar, Esquire, Of Counsel (pro hac vice), J. Andrew Howard, Esquire, Of Counsel (pro hac vice), Alston & Bird LLP, Los Angeles, CA, William R. Mitchelson, Jr., Esquire, Of Counsel (pro hac vice)(argued), Jason D. Popp, Esquire, Of Counsel (pro hac vice), Alston & Bird LLP, Atlanta, GA, Attorneys for Defendants Apple American Group LLC, CBC Restaurant Corp., II Fornaio (America) Corporation, Noodles & Company, and Shutterfly, Inc.

          Stephen E. Jenkins, Esquire, Catherine A. Gaul, Esquire, Ashby & Geddes, Wilmington, Delaware, Richard M. Zuckerman, Esquire, Of Counsel (pro hac v/ce)(argued), Sean Cenawood, Esquire, Of Counsel (pro hac vice), Kiran Patel, Esquire, Of Counsel (pro hac vice), Catharine Luo, Esquire, Of Counsel (pro hac vice), Dentons U.S. LLP, New York, NY, Attorneys for Defendants Card Compliant, LLC, Cardfact II, Inc., Cardfact III, Inc., Cardfact IV, Inc., Cardfact V, Inc., Cardfact VII, Inc., Cardfact VIII, Inc., Cardfact IX, Inc., Cardfact XI, Inc., Cardfact XIV, Inc., Cardfact XV, Inc., Cardfact XVII, Inc., Cardfact XVIII, Inc., Cardfact XXX, Inc., CARDCO CXVI, Inc., and CARDCO CCCIII, Inc.

          Colm F. Connolly, Esquire, Jody C. Barillare, Esquire, Morgan, Lewis & Bockius LLP, Wilmington, Delaware, Gregory T. Parks, Esquire, Of Counsel (pro hac vice), Ezra D. Church, Esquire, Of Counsel (pro hac vice), Courtney McCormick, Esquire, Of Counsel (pro hac vice), Morgan Lewis & Bockius LLP, Philadelphia, PA, Attorneys for Defendants Hanna Anderson, LLC, Nash-Finch Company, Pamida Stores Operating Co., LLC and Shopko Stores Operating Co., LLC.

          David S. Eagle, Esquire, Michael W. Yurkewicz, Esquire, Klehr, Harrison Harvey Branzburg LLP, Wilmington, Delaware, Martin I. Einstein, Esquire, Of Counsel (pro hac vice), David Swetnam-Burland, Esquire, Of Counsel (pro hac vice), Stacy O. Stitham, Esquire, Of Counsel (pro hac vice), Brann & Isaacson, Lewiston, ME, Attorneys for Defendant Overstock.com, Inc.

          Brian M. Rostocki, Esquire, Benjamin P. Chappie, Esquire, Reed Smith LLP, Wilmington, Delaware, Michael J. Wynne, Esquire, Of Counsel (pro hac vice), David A. Rammelt, Esquire, Of Counsel (pro hac vice), Reed Smith LLP, Chicago, IL, Attorneys for Defendant Einstein Noah Restaurant Group, Inc.

          Brian E. Farnan, Esquire, Farnan LLP, Wilmington, Delaware, Shawn J. Organ, Esquire, Of Counsel (pro hac vice), Joshua M. Feasel, Esquire, Of Counsel (pro hac vice), Organ Cole LLP, Columbus, OH, Attorneys for Defendant Vacation Properties United Ltd.

          MEMORANDUM OPINION AND ORDER

          Paul R. Wallace, Judge.

         I. INTRODUCTION[1]

         Plaintiff-Relator William Sean French ("French") and the State of Delaware (the "State" or "Delaware," and together with French, the "Plaintiffs") brought this action pursuant to Delaware's False Claims and Reporting Act ("DFCRA") alleging that CardFact, Ltd. ("CardFact"), its successor-in-interest Card Compliant LLC ("Card Compliant"), and the Retailers[2] entered into a contractual scheme designed to deprive Delaware of hundreds of millions of dollars to which it was lawfully entitled under Delaware's Abandoned and Unclaimed Property Law ("DUPL" or the "Escheat Law").[3] The abandoned property at issue in this case are the unredeemed balances of gift cards issued by the Retailers to its customers for goods and services at their respective places of business.

         Under DUPl.'s Sections 1199 and 1201, "holders"[4] of abandoned property must file a report of such property with the State and must pay or deliver to the State Escheator all property specified in that report. Plaintiffs assert that Defendants knowingly and intentionally attempted to circumvent this requirement with respect to gift cards by creating "shell" companies in jurisdictions like Ohio and Florida where unredeemed balances on gift cards are not subject to state escheat. A Card Company and a Retailer would then "issue" gift cards from the non-Delaware entity or contractually assign the Retailer's existing obligations to its creditors (i.e., cardholding retail customers) to a "shell" company pursuant to a Card Services Agreement ("CSA") so that the Retailer "ceased" to be the "holder" of the obligation. Plaintiffs contend that such a CSA was a sham because the property was never in fact transferred to the "shell" company and the parties otherwise failed to adhere to the CSA's other terms.[5]

         Defendants argue that the assignments to the non-Delaware entities were valid and enforceable and therefore the Retailers had no obligation to pay the value of the unredeemed gift cards to Delaware under DUPL. Nor, they say, could their actions constitute fraud under the DFCRA since their view of their obligations was "objectively reasonable" as Delaware had issued no authoritative guidance to the contrary. Defendants further claim that the reasonableness of their position is bolstered by the fact that Delaware consistently approved such gift card structures in audits and voluntary disclosure agreement ("VDA") proceedings with the Delaware Department of Finance.

         At the conclusion of factual discovery, remaining Defendants collectively brought this Motion for Summary Judgment (the "Motion") seeking the dismissal of all claims. For the reasons set forth herein, that Motion is DENIED.

         II. PROCEDURAL HISTORY

         In June 2013, French filed a qui tarn complaint asserting claims against the Defendants under §§ 1201(a)(4) and (a)(7) of the DFCRA. Within a month, Delaware moved to intervene. The Court granted the State's motion and the complaint was unsealed. The case was then removed to federal court. There, Defendants moved to dismiss. But before that motion was addressed, the case was sent back to this Court. Defendants were granted leave to refile their motion to dismiss here. In 2015, Defendants' dismissal motion was granted, in part, and denied, in part, by a predecessor judge of this Court.[6]

         In 2016, five Defendants moved to dismiss or, in the alternative, for summary judgment alleging that the Court lacked subject matter jurisdiction due to the administrative proceedings bar found in 6 Del. C. § 1206(b).[7] After the voluntary dismissal of two of the moving Defendants, the Court, last year, granted summary judgment for the remaining three.[8]

         The now-remaining Defendants filed this joint Motion for Summary Judgment. The Court has heard argument and allowed supplemental briefing thereon.

         III. FACTUAL BACKGROUND

         CardFact was formed in the State of Ohio in 2003. French is a resident of Columbus, Ohio, a former employee of CardFact and the brother-in-law of CardFact's founder, Ted Ziegler ("Ziegler"). CardFact's principle business was providing card services to companies incorporated in Delaware and other states that require that the unredeemed value of gift cards escheat to the state.[9] In order to entice the Retailers to enter into the CSAs with the Card Companies, CardFact and Card Compliant promised the Retailers in its marketing materials that they would not have to change anything about the way the Retailers were running their gift card programs. Under Defendants' giftco structure, the Retailers would continue to issue and redeem their gift cards and retain the possession, custody and control of the value of the unredeemed gift cards.[10]

         After Ziegler sold CardFact to its competitor Card Compliant in 2009, French took a job at Card Compliant, "providing customers with 'legislative updates' regarding escheat law as well as 'educating' Card Compliant clients about the company's 'product portfolio.'"[11] When French left Card Compliant, he provided his new employer with a list of Card Compliant's clients, including the Retailers named in this case.[12]

         At issue in this case are CSAs entered into between the non-Delaware Card Companies and the Delaware-incorporated and/or -organized Retailers.[13] Under the CSAs, the Card Companies began issuing gift cards for the Retailers and were assigned the unredeemed gift card balances that had not yet entered dormancy.[14]Although the terms of the CSAs were revised slightly over the years and modified to accommodate specific Retailers, the CSAs entered into between the Card Companies and the Retailers contain the same fundamental terms. Each CSA states, in relevant part:

• CardFact shall manufacture and deliver, or shall instruct, or may authorize [Client] to directly instruct applicable third-party manufacturers of the Cards to manufacture and deliver, the Cards pursuant to the Orders.
• [Client] agrees to permit CardFact to market the cards in [Client's] stores and otherwise related venues with the consent of the [Client] . . . and CardFact agrees to ... so market, the Cards . . .
• All cards shall clearly state that CardFact is the issuer of the Card ....
• During the terms of this Agreement, CardFact shall be liable to the Cardholders for all unredeemed Cards, and obligated to satisfy the debts presented by said Cards. It is the intention of the Parties that CardFact is the holder of any unclaimed property with respect to Cards issued during the Term of this Agreement and any now existing Cards issued prior to the date of this Agreement with respect to which no statutory dormancy period has run.

         A fair reading of the record could cause one to question whether the parties complied with any of these foregoing terms.[15]

         IV. STANDARD OF REVIEW

         This Court's Civil Rule 56 permits summary judgment upon a showing "that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law."[16] Summary judgment will not be granted if there is a material fact in dispute or if "it seems desirable to inquire thoroughly into [the facts] to clarify the application of the law to the circumstances."[17] In considering the motion, "[a]ll facts and reasonable inferences must be considered in a light most favorable to the non-moving party."[18] The moving party bears the burden of establishing the non-existence of any material issue of fact; upon such a showing the non-moving party must then establish that a genuine issue of material fact exists.[19]

         If the matter depends to any material extent upon a determination of credibility, summary judgment is inappropriate.[20] And generally, "trial courts should act. . . with caution in granting summary judgment. . . [and] the trial court may . . . deny summary judgment in a case where there is reason to believe that the better course would be to proceed to a full trial."[21]

         After the Court issued its initial summary judgment decision on these motions, Defendants sought "reargument" because, in their view, the Court failed to address certain of their legal arguments. But the Court considers Defendants' motion, instead, one asking the Court to clarify its disposition of their remaining mostly superficial and underdeveloped arguments. "A motion for clarification may be granted where the meaning of what the Court has written is unclear."[22] Procedurally, a motion for clarification is treated as a motion for reargument.[23] The Court's review is "limited to consideration of the record, "[24] meaning the Court may not consider issues raised for the first time in a motion for clarification or reargument.[25] Here, the Court clarifies-via integration with its original opinion-its disposition of the remaining Defendants' pendant arguments as they may affect the looming trial of this case.[26]

         V. DISCUSSION

         Defendants collectively assert a number of legal arguments in support of their Motion. In addition, certain Defendants assert individual grounds in support of their Motion. As an initial matter, the Court will address the arguments applicable to all Defendants, followed by one remaining Retailer Defendant's individual argument.[27]

         A. DFCRA's Scienter Requirement Does Not Readily Lend to the Grant of Summary Judgment

         Defendants argue that the undisputed facts demonstrate that the Retailers had no legal obligation to pay the unredeemed balances on gift cards issued by and assigned to the Card Companies and that Plaintiffs cannot, as a matter of law, establish a DFCRA fraud claim.

         The DFCRA's Section 1201(a)(7) imposes liability upon anyone who

knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government. . .[28]

         The statute defines "knowingly" as having "actual knowledge of the information; ... [acting] in deliberate ignorance of the truth or falsity of the information; or . . . [acting] in reckless disregard of the truth or falsity of the information."[29] It further provides that "no proof of specific intent to defraud is required."[30]

         Defendants try to convert the typically "fact-intensive inquiry" required to prove scienter in a false claims action into a legal question capable of resolution at the summary judgment stage.[31] The Court can't do so here. Defendants' subjective beliefs on the validity of the giftco structure remain at issue and the record contains numerous disputed factual issues that preclude resolution of Defendants' scienter on summary judgment.[32]

         As this Court has observed earlier, case law on the federal False Claims Act, the DFCRA's federal analogue, is informative when interpreting our state false claims statute.[33] And under that federal case law generally, "[t]he issue of whether [a] Defendant[']s[] interpretation . . . negates scienter c[an] not be determined as a pure issue of law" so, instead, a "Relator is entitled to develop evidence of scienter at trial."[34] Courts have been "lenient in allowing scienter issues to withstand summary judgment based on fairly tenuous inferences because such issues are appropriate for resolution by the trier of fact."[35] This Court must decline to supplant this case's ultimate trier of fact and must deny summary judgment. The Plaintiffs must be given the opportunity to present to a jury evidence of Defendants' actual knowledge, subjective belief, and purported bad faith.

         B. The Texas Trilogy and The Law of this Case

         The rules governing the priority to escheat unclaimed intangible property where there are conflicting claims between states were established under federal common law by a series of cases known as the Texas trilogy.[36] Under these rules, the Court applies a three-step analysis to these disputes: first, "determin[ing] the precise debtor-creditor relationship as defined by the law that creates the property at issue"; second, identifying whether or not the creditor's address is recorded; and third, "if... the debtor's records disclose no address for a creditor . . . award[ing] the right to escheat to the State in which the debtor is incorporated."[37]

         Applying these rules in Card Compliant I, a predecessor judge in this case determined:

With respect to Count One, under (a)(7), even if the CSAs were not shams, the court must determine the relevant debtor [for escheat purposes].
* * *
CardFact and the Retailers cannot contract amongst themselves to avoid the obligations to their customers (or Delaware). The only relationship involving the creditor (the customer) is the one between the creditor and the Retailers, in contrast to the Retailers relationship with CardFact. Because the creditor-Retailer relationship is the relevant relationship, the Delaware-based Retailers are the relevant debtors for escheat purposes. Again, that is true if the Retailers and CardFact have their CSAs.[38]

         Plaintiffs asserts that this ruling should stand, because "[s]uch a situation is guided by the doctrine of the law of the case."[39] In turn, Plaintiffs say, the Court should not revisit the predecessor judge's ruling absent the extraordinary circumstances that allow for reconsideration only of decisions that are clearly wrong.[40] Defendants argue that the prior ruling of this Court was based on an incomplete record and the judge assigned to the case at that time did not have the benefit of any of the documents and testimonial evidence from confidential audits and VDAs in which Delaware consistently took the position that when a gift card is assigned before dormancy the Card Company/Non-Delaware Subsidiary is the relevant debtor for escheat purposes.[41] Plaintiffs are correct; the law of the case applies because Defendants have failed to establish that the prior ruling was clearly wrong and that extraordinary circumstances exist so as to permit this Court to second-guess the earlier decision.

         Delaware courts consistently "take a dim view of a successor judge in a single case overruling a decision of his predecessor."[42] Such a rule of law promotes "fundamental fairness and . . . judicial efficiency"[43] and ensures that parties are not "entrapped by varying philosophies of different judges of the same Court in the case."[44] But the law of the case doctrine is "not an absolute bar to reconsideration of a prior decision that is clearly wrong, produces an injustice or should be revisited because of changed circumstances."[45] The doctrine only applies "provided the facts underlying the ruling do not change."[46]

         Here, the facts underlying the ruling in Card Compliant I have not changed. Defendants continue to assert that the CSAs constitute valid assignments of the Retailers' obligations to the Card Companies and argue that the Retailers were not the relevant "debtors" and consequently were not subject to DUPL.[47] The only "change in circumstance" Defendants point to is the fact that the evidence in the record after discovery shows that in certain nonpublic audits and VDAs Delaware took the position that gift cards assigned before dormancy to a non-Delaware giftco were not subject to DUPL. ...


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