A Delaware Superior Court judge on Wednesday allowed two lawyers to testify on behalf of a company accused of orchestrating a scheme to circumvent Delaware’s unclaimed property laws, saying that a lack of guidance from state officials had led experts to rely on each other to advise clients.
The ruling from Delaware Superior Court Judge Paul Wallace nixed an attempt by government attorneys to exclude the expert opinions of Jennifer Borden and James Ryan, who have each spent more than two decades representing firms in state-initiated unclaimed property audits.
According to court documents, Borden, a former partner with Holland & Knight, and Ryan, who practices with the Ohio-based firm Bailey Cavalieri, are expected to testify during an expected trial that Card Compliant, a Delaware limited liability company headquartered in Missouri, had made reasonable efforts to comply with Delaware laws for reporting unused gift card balances.
Attorneys for the state, however, have accused Card Compliant of creating shell companies and conspiring with retailers to evade its obligation report and return the funds to Delaware, which relies on unclaimed property for its third-largest source of revenue. In court papers, they argued that Borden and Ryan had based their opinions on hearsay and thus were not sufficiently technical to be submitted into evidence.
In a 26-page memorandum opinion, Wallace sided Wednesday with Card Compliant, ruling that a “dearth of information” from the state had rendered discussion among professionals a reliable basis for expert testimony. While the expert opinions were not scientific, Wallace said, they were based on “specialized knowledge” gained from “extensive work in the field of unclaimed property.”
“Because of the lack of formal guidance from the state regarding Delaware’s stance on unused gift card balances, unclaimed property experts relied on each other’s experienced to advise clients,” Wallace said. “This court has previously held that where sharing such information is industry standard, it is reasonable for an expert to rely on communications from others to form an opinion.”
Attorneys from both sides were not immediately available to comment on Thursday.
The ruling also approved the testimony of the state’s expert, Brian Duffy, who is expected to provide testimony regarding Card Compliant’s accounting entries.
The lawsuit, captioned Delaware v. Card Compliant, was initially filed in March 2014 by William Sean French, a whistleblower who had previously worked for Card Complaint. Attorneys from the Delaware Department of Justice quickly moved to intervene on behalf of the state, alleging that Card Compliant had worked with retail companies to deprive the state of hundreds of millions of dollars in unclaimed gift card balances, in a “scheme” dating back to 2005.
According to the 116-page filing, the defendants attempted to circumvent reporting requirements by forming shell companies in Ohio and Florida, where unredeemed gift card balances are not subject to escheat by the state. Card Compliant and the retailers would then issue gift cards or contractually assign the retailer’s existing obligation to cardholding customers to the alleged shell companies and terminate the retailers’ obligations, state attorneys said.
Card Compliant and the retailers moved for summary judgment, seeking dismissal of all claims last year. In court documents, the defendants said the assignments to non-Delaware entities were valid because the retailers had no duty to pay the value of the gift cards under the state’s unclaimed property laws. Their actions, they argued, were “objectively reasonable” because Delaware had issued no definitive guidance to the contrary.
Wallace denied the motion in April, paving the way for a likely trial, though a date has not yet been set, according to an online search of the case docket. The remaining retail defendants include Hanna Andersson, Nash-Finch Co., Pamida Stores Operating Co., Shopko Stores Operating Co., Overstock.com Inc., Noah Restaurant Group Inc. and Vacation Properties United Ltd.
Delaware’s system for collecting unclaimed property has come under attack in recent years, after a 2016 district court ruling in the case Temple-Inland v. Cook blasted the state’s escheat laws for allowing overly aggressive audits.
Delaware has since amended its statute to address constitutional concerns, and lawmakers have said that additional changes may be needed in the future. A federal appeals court, meanwhile, has affirmed the standing of companies to challenge the state’s authority to conduct an audit and escheat abandoned property.