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Gift Cards and Bankruptcy

Bankruptcy Lawyer Bryan W. Stone answers the question: “Can I get credit after filing personal bankruptcy?”


Those following business headlines have likely seen news of how hard hit brick-and-mortar retailers have been in recent years. Though consumers haven’t stopped spending, it does appear that their habits have changed, with far more dollars flowing through the internet than through traditional retail stores. This has led to a string of bankruptcies in the industry, including Aeropostale, RadioShack and American Apparel (which recently filed for the second time). Analysts say that in the coming month and years other big companies are expected to follow suit.


Wrapped-present-Charlotte-Bankruptcy-Lawyer-300x289These retail bankruptcies raise an interesting question for bankruptcy courts. What priority is granted to those customers in possession of a now bankrupt store’s gift card? A previous decision out of Delaware was clear that that gift cards were akin to consumer deposits. This mean that those who held gift cards were given priority payment status during bankruptcy. The benefit of priority status is that they would be at the top of the heap when it came time for repayment, up there with secured creditors rather than down at the bottom with general unsecured creditors.


Though this case served as an important precedent in Delaware (an important state when it comes to business given the number of companies headquartered there), it now appears to have been contradicted, though not entirely overturned. The latest case, In re City Sports, now comes to an entirely different conclusion, that gift cards are not deposits and that consumers must get in line with everyone else.


By way of background, City Sports was a Boston company that sold athletic equipment and clothing. The company also sold gift cards that didn’t expire. At the time of its bankruptcy, it had a little less than $1.2 million in gift cards outstanding. Massachusetts filed a claim in bankruptcy court asking that the holders of the gift cards be given priority status. The Commonwealth argued that provisions of Section 507 of the Bankruptcy statutes applied as the gift cards should be deemed a kind of deposit, or “money in connection with the purchase, lease or rental of property.” City Sports, unsurprisingly, objected, arguing that the debt should not be deemed a deposit, but instead an unsecured debt.


The judge presiding over the case started by examining the meaning of the term “deposit”. Unfortunately, the statute doesn’t define the term, leaving judges to comb through previous cases for clues. According to the judge in this case, deposits only exist when another step is required to conclude a transaction. With City Sports, the judge decided that the transaction was complete at the time the gift cards were purchased and the judge specifically noted the lack of an expiration date. The judge mentioned that given the lack of expiration, the transaction could be delayed indefinitely, something that would stretch the definition of deposit to the point of breaking.


The problem with the recent decision, beyond the fact that it leaves consumers in a worse position than before, is the uncertainty it creates. The judges disregarded prior precedent from only 12 years before, but didn’t explicitly overrule the case. Now, as other retailers file bankruptcy, opposing sides will be able to point to cases supporting their position, leaving judges in a confusing position. Additionally, the ruling leaves an open question about what happens to gift cards with an expiration date? If it expires in five years, or two years or 6 months, does that make it a deposit? We’ll have to wait for another dispute to find out.


If you are contemplating bankruptcy in the Charlotte area, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with legally sound advice for your particular situation.






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