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State v. Sperry & Hutchinson Co.

Decided: July 20, 1959.


Goldmann, Freund and Haneman. The opinion of the court was delivered by Freund, J.A.D.


This is an appeal by the State of New Jersey from the dismissal by the Chancery Division of two complaints brought under the escheat laws. Both actions are against the same defendant and involve virtually the same questions of fact and of law. Consequently, they were consolidated for trial below and the appeals are also consolidated here.

Each suit seeks to obtain for the State the cash value of unredeemed trading stamps of the Sperry & Hutchinson Company (hereinafter "S & H"). The first appeal involves an action brought pursuant to N.J.S. 2 A:37-11 et seq. and seeks to escheat absolutely to the State of New Jersey the cash value of all trading stamps issued prior to January 26, 1941, which consumers had not redeemed before the expiration of the 14-year period ending on January 26, 1955, the date of commencement of these actions.

The second appeal involves an action brought pursuant to N.J.S. 2 A:37-29 et seq. for protective custody of the cash value of trading stamps issued on or before January 26, 1950, which holders had not redeemed before the expiration of the 5-year period ending on January 26, 1955.

Although the procedures for and immediate consequences of absolute escheat under N.J.S. 2 A:37-11 et seq. and protective custody under N.J.S. 2 A:37-29 et seq. differ to some extent, the word "escheat" will hereinafter be used generally to refer to the taking by the State under either statute.

The "cut-off" dates in the respective actions are, then, January 26, 1941 and January 26, 1950. Obviously the State does not know and cannot prove the identity of persons to whom stamps were issued prior to the cut-off dates. Much less can it prove which of such holders did not redeem their stamps. It contends, however, that a flat 5% of all the stamps issued prior to such dates is a conservative estimate of the number which in any year will not be redeemed. The value of the stamps represented by the 5% figure aggregates

$7,615,836.03 in the 5-year action and $5,472,665.91 in the 14-year action. The dollar value is computed by multiplying the number of unredeemed stamps (found by taking 5% of the total number of stamps issued prior to the cut-off dates) by $.00166, the estimated value per stamp. Anything recovered in the 14-year action would have to be credited against the amount recoverable in the 5-year action. Thus the amount the State claims to be escheatable, and hence owing from S & H, in this proceeding is $7,615,836.03.

Before either action came on for trial, S & H moved to dismiss the complaint in the 5-year action upon the ground that N.J.S. 2 A:37-29 and 30 applied only to moneys payable as dividends, interest and wages. The Chancery Division agreed and dismissed the action. The Supreme Court reversed, holding the Custodial Escheat Act to be applicable to all money claims generally. State by Richman v. Sperry & Hutchinson Co. , 23 N.J. 38 (1956).

Insofar as the escheatable property the State here seeks is the property right or chose in action which the owners of the unredeemed stamps have against the defendant, the determination of what the Supreme Court designated as "serious questions with respect to the provability and enforceability of the State's claim" (23 N.J. at page 41), turns to a significant extent upon the nature of the rights which are conferred upon members of the consuming public when they acquire the defendant's trading stamps.

S & H, a New Jersey corporation organized in 1900 as the successor to a partnership formed in 1896, is the oldest and largest trading stamp company in the country. See Comment , 6 Duke B.J. 71, 73 (1957). It provides retail merchants with a unique token or symbol, the S & H Cooperative Cash Discount Stamp, which enables the merchant to give a discount for cash payments and to promote their cash sales generally. The merchants issue the stamps to their customers at the rate of one stamp for each ten cents of purchase in cash. Customers accumulate these stamps, place them in books provided by the merchant or by

S & H, and, normally, when the books are filled, present them for exchange at one of the defendant's 450 redemption outlets. Sperry & Hutchinson Co. v. Margetts , 25 N.J. Super. 568, 572 (Ch. Div. 1953), affirmed 15 N.J. 203 (1954).

The merchant-licensee pays for the services provided by defendant at a rate measured by the number of stamps issued to him. The price he pays has always ranged from $2.50 to $3 per thousand stamps, depending upon volume.

Proceeds from the issuance of all stamps are added to and considered part of S & H's general funds, available for any purpose. Although its balance sheet reflects a liability for unredeemed stamps, this is merely a "bookkeeping estimate" of the dollar amount which will be required to redeem outstanding stamps. There are no actual assets or funds segregated for future redemptions, although a corporate officer once wrote in a 1948 article, offered as an exhibit, that there existed an earmarked redemption fund, constantly being replenished by receipts from sales of stamps.

S & H derives its profit largely from the difference between the price charged merchants for the stamps and the wholesale cost of redemption merchandise. In Sperry & Hutchinson Co. v. Kent Prosecuting Attorney (Searl) , 287 Mich. 555, 283 N.W. 686 (Sup. Ct. 1939), a company official testified that stamps that are "lost or not used" constitute another element in defendant's profits. The latter point is impliedly conceded in this litigation, for the defendant has argued escheat should be denied because it has treated amounts attributable to unredeemed stamps as part of its profits and has paid income taxes on such amounts. There is no dispute that prior to 1928 S & H paid taxes on the basis that 2% of issued stamps would never be redeemed. In 1928, following a dispute with the Internal Revenue Bureau, the conflicting guesses as to the taxable lapse rate were compromised at 5%, and S & H has filed its income tax on this basis ever since. As is stated in defendant's brief,

"* * * S & H has been obliged to pay income taxes for more than thirty-five years upon the basis that there is no liability for the claims which the State now purports to enforce."

There is no question but that the stamp collector has, under certain circumstances, contractual rights against S & H. He will rarely see the license agreement between S & H and the merchant, but defendant expects him to ascertain his rights from the endorsement printed on the stamps and from the notice printed in the stamp-collecting book. The stamps are issued in small oblongs of gummed paper, generally green in color. In general, it is impossible to tell in which state any particular stamp was issued. Throughout most of its history, S & H has printed a legend on the gummed side of each stamp. It contains the promise that "this stamp" will be redeemed in merchandise or cash, "subject to notice in stamp books."

The stamp books in evidence contain a "Notice" on the inside front cover. It reads in part:

"* * * The only right which you acquire in said stamps is to paste them in books like this and present them to us for redemption. * * * It is to your interest that you fill the book, * * *.

The stamps when received by you must be pasted in the book, as that is the method we have adopted for the purpose of preventing their further use. * * *"

To similar effect is a message printed on one of the pages where stamps are to be pasted:

"When this book is completely filled it is worth $2.00 in ...

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