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Third Circuit Issues Opinion in New Jersey Abandoned Property Litigation

The Third Circuit issued a long-awaited decision in the New Jersey Abandoned Property litigation, NJ Retail Merchants Association v. Andrew Sidamon-Eristoff. The court affirmed the District Court’s decision in this important escheat case with broad implications for members of the prepaid industry.


In 2010 New Jersey passed a new abandoned property law that, if upheld, would have been devastating for gift card and prepaid card issuers doing business in New Jersey.

  • First, the new law shortened the dormancy period for prepaid cards and gift cards from being not even subject to escheat, to requiring escheat after 2 years of inactivity (a shorter period than other states, and far shorter than the required 5 years validity under the CARD Act).
  • Second, the new law also required prepaid card issuers to retroactively escheat all funds from inactive prepaid cards sold in the last 5 years.
  • Third, the new law required sellers of prepaid cards (both open and closed loop cards) to collect the name and address of the purchaser, or at the very least, the purchaser’s zip code. Later this requirement was modified so that only collection of the purchaser’s zip code was “mandatory.”
  • Fourth, if the purchasers name and address (or zip code) was not known or collected, the purchaser’s address would be deemed to be the address of the store where the card was purchased.

NOTE — The reason New Jersey wants sellers to collect purchasers’ name and address, or otherwise wants to “deem” the purchasers’ address to be in New Jersey, is because under the uniform abandoned property laws, unused funds from gift cards and other prepaid cards would be paid to the state of the last known address of the purchaser. But if the last known address of the purchaser is not known (which is the case for virtually ALL gift cards), then the unused funds are paid to the state where the card issuer is domiciled. New Jersey’s new law, deeming purchasers’ addresses to be in NJ, or otherwise requiring collection of zip code data from purchasers, was intended to make sure that more of the unused funds escheat to NJ rather than to other states where the card issuers are domiciled. Since many prepaid card issuers are domiciled in states that don’t require escheat, the imposition of NJ’s new law as initially passed, with retroactivity, could have had serious consequences for many prepaid card programs.


The Third Circuit’s Opinion represents both good news and bad news for the gift card and prepaid card industry. See details below.

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When All Appropriate Inquiry Isn’t Enough

Court Highlights the Significance of Other Factors in the Bona Fide Prospective Purchaser Defense

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Anyone who has been involved in a real estate transaction relating to commercial or industrial property has likely dealt with conducting “All Appropriate Inquiry” into the site, which generally includes the preparation of a Phase I Environmental Site Assessment and may include Phase II sampling work. All Appropriate Inquiry (“AAI”) is one necessary component of the “bona fide prospective purchaser” (“BFPP”) defense established under the 2002 Brownfields amendments to Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”). The BFPP defense is intended to protect property owners from liability for contamination that clearly occurred prior to their period of ownership. However, conducting AAI is not the only prerequisite to establishing a BFPP defense. The BFPP requirements beyond AAI are highlighted in Ashley II of Charleston, LLC v. PCS Nitrogen, et al., 2010 U.S. Dist. LEXIS 104772 (D.S.C. Sep. 30, 2010), one of the first cases to address in detail the BFPP defense.

In this case, Ashley purchased property that had a long history of industrial use. In conjunction with that purchase, Ashley’s environmental consultant performed Phase I and Phase II work. After the purchase, Ashley demolished many of the above-ground improvements on the property. When liability for contamination at the property was addressed, a significant battle between several potentially responsible parties arose. Ashley sought to take advantage of the BFPP defense to avoid liability. The elements of the BFPP defense are, in summary: (a) disposal of hazardous substance occurred prior to acquisition; (b) the purchaser conducted AAI; (c) the purchaser provided all required notices with respect to the discovery or release of any hazardous substance; (d) the purchaser exercises appropriate care with respect to hazardous substances found; (e) the purchaser cooperates with agencies; (f) the purchaser complies with institutional controls; (g) the purchaser complies with information requests or administrative subpoena; (h) the purchaser is not affiliated with a potentially responsible party. In the end, the court closely scrutinized each element of the test and determined that Ashley was not a BFPP.

All Appropriate Inquiry

Significantly, this is one of the first cases to address the proper conduct of AAI. The court found that although there were “inconsistencies” between the Phase I reports and the relevant ASTM standard, those inconsistencies lacked significance. The Court stated that “[w]hat is important is that Ashley acted reasonably; it hired an expert to conduct AAI and relied on that expert to perform its job properly.” Because the Court did not explain what the “inconsistencies” are, it is difficult to determine how strictly a Phase I must comply with ASTM. Interestingly, no federal agencies were involved in this case. EPA has stated that they will insist on very strict compliance with the ASTM standards in order to find that AAI was conducted. This case may (or may not) take some wind out of that sail. While strict compliance with the ASTM standards is still highly recommended, this case provides some potential relief for past transactions where the acquiring party is trying to mount a BFPP defense but the adequacy of its AAI is called into question due to the absence of strict compliance with the ASTM.

Appropriate Care

The court did find that Ashley failed to prove that it exercised appropriate care with respect to known contamination when it did its demolition work. In doing this work, Ashley did not clean out and fill in known underground sumps and concrete pads, which failure could have exacerbated known releases and contamination. Ashley also failed to prevent debris piles from accumulating, and failed to investigate and remove the debris piles on a timely basis. Ashley also failed to maintain run off controls.

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SEC Adopts Rules Allowing Shareholder Access to Company Proxy Materials

On August 25, 2010, the Securities and Exchange Commission voted to adopt new rules that will require companies to include in their proxy materials nominations for election as directors submitted by eligible shareholders, subject to certain conditions. The proposal was adopted by a divided 3-2 vote at an SEC open meeting. Commissioners Casey and Paredes dissented, viewing the rules as intruding on substantive corporate affairs traditionally regulated by state law.

The new rules will apply to all companies subject to SEC proxy rules, including investment companies and controlled companies, except:

  • Companies subject to such rules solely due to debt registered under Section 12 of the Securities Exchange Act of 1934; and
  • Where state or foreign law or governing documents prohibit shareholders from nominating a candidate for director.

Foreign private issuers are not covered, as they are exempt from SEC proxy rules.

The new rules will be effective 60 days after publication in the Federal Register, with shareholder access permitted no earlier than 150 days and no later than 120 days prior to the anniversary date of the mailing of prior year’s proxy materials. The rules will be available if the window remains open after their effective date. Accordingly, if the new rules were to become effective on November 1, 2010, they would apply to companies that mailed their 2010 proxy statements after March 1.

Effectiveness of the new rules will be delayed for three years for smaller reporting companies, to allow the SEC time to monitor implementation and make adjustments, if desired.

The text of the new rules is available online as is a print-friendly version of this client alert.

Executive Summary

Eligible shareholders can require a company to include one or more nominees in the company’s proxy materials, unless applicable laws or governing documents prohibit nominations by shareholders. Companies will only be required to include up to the greater of (i) 25% of the company’s directors or (ii) one nominee. The rule sets priorities in case of multiple nominations.

To be eligible, the nominating shareholder or group must, among other requirements, (i) own at least 3% of the total voting power (which may be aggregated among shareholders), (ii) have held such securities for at least three years, and continue to hold them through the shareholder meeting, (iii) not have intent to change control of the company or to gain more board seats than permitted by the rule, and (iv) not have any agreement with the company regarding the nomination.

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FinCEN Outreach to Community Banks

FinCEN has announced a new outreach effort targeted at depository institutions under $5 billion in total assets to determine how these institutions comply with the Bank Secrecy Act and the specific compliance hurdles they confront.   If your institution has assets under $5 billion, please see our client alert about FinCEN’s outreach proposal.

As part of its ongoing outreach efforts, FinCEN is now seeking to engage smaller to moderate size depository institutions who are working to implement the four pillars of the Bank Secrecy Act regulatory regime: (1) policies, procedures and internal controls; (2) designation of a compliance officer; (3) ongoing training; and (4) independent testing.

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The Buying and Selling of Distressed Notes

(Click here for a print version of this client alert.)

Loan Sale Tips

The volume of purchase and sale of performing and non-performing real estate loans has picked up dramatically over the past year as banks seek to shrink their balance sheets as their capital base falls and other banks and investors seek to take advantage of the sale of assets from failing banks. What are the typical features of such agreements and what are the interests of buyers and sellers in such transactions?


The bank which is selling a loan, whether it is performing or non-performing, seeks to cut itself off from the borrower and the collateral just as if it had never made the loan to begin with. To evidence such a transaction, the seller would essentially like to enter into the equivalent of a quit claim or limited warranty deed containing very few warranties and representations. The structure of such an agreement would typically provide for the following items:

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Executive Compensation Rules for TARP Capital

Under the Treasury Rules, new executive compensation rules will govern all financial institutions that participate in the TARP Capital program.  The provisions generally apply as long as the Treasury holds an equity or debt position, including warrants and the common stock underlying the warrants, in the institution.  To be eligible to participate in TARP Capital, financial institutions must meet the following standards:

  • certify that incentive compensation for senior executive officers (“SEO”) does not encourage unnecessary and excessive risks that would threaten the value of the institution;
  • require that SEO bonus and incentive compensation be subject to “clawback” if the payment was based on materially inaccurate financial statements or performance metrics;
  • prohibit any golden parachute payment to an SEO; and
  • agree to deduct no more than $500,000 for an SEO’s compensation.

Powell Goldstein’s preliminary analysis of these standards are included in our Client Alert, titled “Treasury Issues Executive Compensation Rules for the TARP Capital Purchase Program.”

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