THE STATE OF DELAWARE, Plaintiff, ex rel. WILLIAM SEAN FRENCH, Plaintiff-Relator,
CARD COMPLIANT, LLC, et al., Defendants.
Submitted: January 16, 2018
Withdrawn and Reissued with Clarifications: August 29, 2018
Defendants' Motion for Summary Judgment,
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.
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.
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.
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
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.
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
MEMORANDUM OPINION AND ORDER
R. Wallace, Judge.
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 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"). 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.
DUPl.'s Sections 1199 and 1201,
"holders" 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.
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.
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.
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.
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). After the voluntary dismissal of two of
the moving Defendants, the Court, last year, granted summary
judgment for the remaining three.
now-remaining Defendants filed this joint Motion for Summary
Judgment. The Court has heard argument and allowed
supplemental briefing thereon.
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. 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.
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.'" When French left Card Compliant, he
provided his new employer with a list of Card Compliant's
clients, including the Retailers named in this
issue in this case are CSAs entered into between the
non-Delaware Card Companies and the Delaware-incorporated
and/or -organized Retailers. 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.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.
reading of the record could cause one to question whether the
parties complied with any of these foregoing
STANDARD OF REVIEW
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." 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." In considering the motion, "[a]ll
facts and reasonable inferences must be considered in a light
most favorable to the non-moving party." 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.
matter depends to any material extent upon a determination of
credibility, summary judgment is inappropriate. 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
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." Procedurally, a motion
for clarification is treated as a motion for
reargument. The Court's review is "limited
to consideration of the record, " meaning the
Court may not consider issues raised for the first time in a
motion for clarification or reargument. 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
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.
DFCRA's Scienter Requirement Does Not Readily Lend to the
Grant of Summary Judgment
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.
DFCRA's Section 1201(a)(7) imposes liability upon anyone
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. . .
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." It further provides that "no
proof of specific intent to defraud is
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. 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.
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. 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." 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." 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.
The Texas Trilogy and The Law of this Case
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. 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
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.
asserts that this ruling should stand, because "[s]uch a
situation is guided by the doctrine of the law of the
case." 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. 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. 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.
courts consistently "take a dim view of a successor
judge in a single case overruling a decision of his
predecessor." Such a rule of law promotes
"fundamental fairness and . . . judicial
efficiency" and ensures that parties are not
"entrapped by varying philosophies of different judges
of the same Court in the case." 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." The doctrine only applies
"provided the facts underlying the ruling do not
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. 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. ...