California Attorney General alleges corporate fraud in unclaimed property lawsuit

Eversheds Sutherland (US) LLP“Corporate evasion is corporate fraud,” the California Attorney General declares in a March 22, 2022 press release accompanying an unclaimed property complaint the State has filed alleging systemic failure to report and remit unclaimed funds by a healthcare provider. The complaint alleges that the company, a chain of occupational and urgent care clinics, violated the California Unclaimed Property Law and the California False Claims Act when it failed to remit millions of dollars in unclaimed overpayments, refund checks, and other monies due to the State as unclaimed property.1 The complaint alleges these funds were deliberately concealed from the State rather than just negligently unreported.

The entry of the California Attorney General into an unclaimed property enforcement role raises the stakes for companies that have failed to comply with state escheat law. In this new litigation, the complaint suggests that ongoing failure to comply was a key factor in the Attorney General’s decision to pursue this matter as a false claims lawsuit, rather than as an audit by the State Controller’s office. According to the complaint, the company’s auditors had identified non-compliance with unclaimed property laws as early as 2004, along with failures to process timely refunds and the ongoing accumulation of customer credit balances. The company allegedly knew of its state filing obligations for many years, and management was advised of the issue multiple times between 2004 and 2018. But although the company took some internal steps to identify and segregate unclaimed funds, management allegedly instructed employees not to file reports for fear of triggering a state audit. The State further alleges that when the company began filing unclaimed property reports in 2018 in California, the reported amounts were incomplete. The State now alleges that the company owes millions in unclaimed property, plus treble damages under the state false claims act.

Although unclaimed property laws in California are administered by the State Controller, this new litigation is not the only unclaimed property enforcement effort by the California Attorney General’s Office using the state’s false claims act. The Attorney General’s entry into this case is similar to other unclaimed property litigation being pursued against an operator of golf and country clubs. In that case, initially filed in 2019, the complaint alleges that the company failed to repay more than $10 million owed to more than 9,000 California residents and then falsely omitted those amounts from unclaimed property reports filed with the state.2

In California and elsewhere, state false claims act lawsuits, also known as qui tam cases, involving unclaimed property legal requirements have become an area of concern for companies holding unclaimed property (“holders”). Often brought initially by private parties (“relators”), and sometimes joined by state attorneys general, false claims act lawsuits typically allege that a company has knowingly and willfully underreported amounts owed to the state. While the state may bring a false claims action on its own, state laws generally permit “any person” to bring a civil claim for a violation.3 An action brought under such provision is known as a qui tam action. The qui tam provision is intended to encourage insiders to disclose fraudulent practices, resulting in qui tam plaintiffs being referred to as whistleblowers. If the state’s action is successful, the defendant may be penalized with treble damages, plus costs and attorney fees.

False claims act lawsuits involving unclaimed property have targeted a variety of industries and a range of issues. In one prominent case, a private relator and the State of Delaware pursued false claims act litigation against more than two dozen retailers, alleging a scheme to avoid escheatment of gift cards by entering into “sham” contracts with third-parties who could issue the gift cards from other states. After more than five years of litigation, many of the retailers settled, a few were dismissed from the case, and a $7 million jury verdict against Overstock.com was ultimately reversed on appeal.4 Other false claims act litigation remains pending against major life insurers (involving the reporting of unclaimed death benefits) and banks (involving the reporting of cashier’s checks).

Key takeaways
The California Attorney General appears to have increased its level of focus on unclaimed property as an area for enforcement. The potential for false claims act litigation, with its high damages and penalties, raises the stakes for robust unclaimed property compliance and risk management.

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[2] People of the State of California v. ClubCorp Holdings, Inc. et al., CGC-19-576620 (Super. Ct. Cal., San Francisco filed Jun. 11, 2019).

[3] E.g., 6 Del. Code Ann. § 1203(b)(1).

[4] Delaware ex rel. French v. Card Compliant et al., No. N13C-06-289-FSS (Del. Super. Ct. New Castle County, filed 2013).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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