Are Your Gift Cards Safe?

by Elizabeth Rodgers March 24 2008, 10:24

I. Introduction

On February 19th, 2008 the specialty retailer Sharper Image filed for bankruptcy under Chapter 11 and announced that it would no longer be accepting its gift cards. This came as a shock to consumers, who suddenly found their holiday gift cards worthless. "'That is typical of businesses that reorganize under Chapter 11 bankruptcy, which treats gift cards as a loan to the company, not as cash.'" [1] Chapter 11 allows for an automatic stay of recovery for any claim against the debtor that arose before the filing of the bankruptcy claim. [2] In response to this announcement, C. Britt Beemer, chairman of America's Research Group, projected that this would greatly affect Sharper Image's future. "'You will see a lot of frustration among customers. You basically stole [money] out of the customers' pocket. They will never forgive you.'" [3]

Just two and a half weeks later, on March 7, 2008, Sharper Image announced it would resume its gift card program, but with certain conditions. Sharper Image's website explains that the program is purely voluntary, applying to all gift cards issued prior to its filing Chapter 11. [4] A person choosing to redeem his gift card must spend the entire balance of the card and the purchase total must be at least twice the amount on the gift card. [5] For example, if a person has a $100 gift card the total purchase must be at least $200, using the full balance of the card. If a person chooses not to redeem according to the new policy, he may have a claim in the bankruptcy action, which would be classified as a priority unsecured claim. [6] This is high up in the unsecured food chain, but would not be paid until all secured claims, those backed by assets, were paid out. Sharper Image Chief Executive Robert Conway explained, "'while not a complete solution, it does provide satisfaction to customers on a voluntary basis.'" [7] The website goes on to say that Sharper Image hopes it can honor gift cards without condition in the future, but it cannot be guaranteed. [8] Most Sharper Image retail stores are accepting gift cards, but the website can no longer honor them.

II. The Rise of Gift Cards

The trend of giving gift cards as presents has gained popularity in recent years. This past holiday season $26.3 billion dollars were spent on gift cards alone, up from $24.8 billion in 2006 and $24.48 billion in 2005. [9] Some fear that the country's recent economic woes combined with Chapter 11's treatment of gift cards as a loan, instead of cash, put the actual worth of gift cards in limbo. It is estimated that shoppers could lose as much as $75 million from store and restaurant closings in 2008, not including mom-and-pop stores which are more vulnerable to economic downturns. [10]

III. How May Consumers Be Protected?

Recently, more than twenty states passed regulations lowering the restrictions on gift card use. [11] These states responded to consumer-advocacy groups drawing attention to gift card traps such as expiration dates and hidden fees which often catch consumers unaware. [12] One internet company has gone so far as to institute a bankruptcy insurance policy on its gift cards.

On February 25, 2008 Leverage, Inc announced that it would offer consumers who purchased Sharper Image gift cards from its website, LeverageCard.com, and other retailers filing for Chapter 11, protection by transferring the remaining, unredeemable balance to gift cards for other participating LeverageCard.com retailers. [13] For gift cards not purchased through the site, Leverage will allow Sharper Image gift card holders to register their cards and "receive periodic updates as well as applicable assistance during bankruptcy proceedings." [14] Mark Roberts, CEO of Leverage, explained the rationale behind the policy, saying, "'during difficult economic times, consumers may suffer when retailer policy changes leave them with unused gift cards, store credit, and faulty products, among other things. We believe people shouldn't have to pay, both literally and figuratively, when a retailer suffers the misfortune of having to file for bankruptcy and are extending this bankruptcy policy to provide some peace of mind for users of our service.'" [15]

IV. Conclusion

The protection that Leverage offers on its gift cards is rare. The majority of gift cards are purchased directly from retailers, who do not usually offer gift card protection. The effects of Sharper Image's initial rejection of its gift cards and subsequent conditional gift card policy are unclear. It is unlikely that the strong surge in holiday gift card purchases will drop off significantly, but the publicity that Sharper Image's conditional gift card policy has gotten may make consumers more aware of the dangers and pitfalls inherent with gift cards.

Sources:

[1] Anne D'Innocenzio, Bankruptcy Makes Gift Cards Worthless, Newsday, Mar. 3, 2008,  http://www.newsday.com/news/nationworld/ny-uscards0303,0,6788242.story.

[2] 11 U.S.C. § 362(a)(6) (2006).

[3] D'Innocenzio, supra note 1.

[4] Sharper Image, Gift Certificates & Gift Cards, http://www.sharperimage.com/us/en/cust_help/cserv_giftservices_giftcertificates.jthtml (last visited Mar. 23, 2008).

[5] Id.

[6] Id.

[7] Sharper Image Accepts Gift Cards AgainUSA Today, Mar. 7, 2008, available at http://www.usatoday.com/tech/products/2008-03-07-sharper-image-gift-cards_N.htm?csp=34.

[8] Sharper Image, supra note 4.

 

[9] D'Innocenzio, supra note 1.

[10] Id.

[11] Id.

[12] Id.

[13] Press Release, Leverage Inc, Leverage, Inc. Announces Bankruptcy Insurance Policy, Offers Complementary Balance Transfers to Holders of Gift Cards Purchased from Sharper Image and Bankrupt Merchants (Feb. 25, 2008) http://www.leveragecard.com/press/insuranceBankruptcy.gsp.

[14] Id.

[15] Id.

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