November 28, 2012, 1:34 PM
By Jacqueline Palank
A U.S. senator wants to require companies in bankruptcy to honor outstanding gift cards, something they’re not legally compelled to do.
Sen. Richard Blumenthal (D., Conn.) introduced the Gift Card Protection Act, which would also bar companies in bankruptcy from continuing to sell gift cards and ban such cards from carrying expiration dates (h/t Associated Press).
Those small pieces of plastic that shoppers are currently stocking up on for the approaching holidays pose a dilemma in Chapter 11. Not only can companies choose whether or not to continue honoring outstanding cards after they file for bankruptcy, but the Bankruptcy Code also caps claims for unredeemed gift cards.
Gift-card protections have been a pet issue for Blumenthal, who was elected to the Senate two years ago after serving 20 years as Connecticut’s attorney general. During his time as the state’s top lawyer, state laws banning gift card expiration dates and fees were restored. He also urged a bankruptcy judge to require local retailer Ski Market to honor about $200,000 gift cards after it told customers that the bankruptcy process didn’t allow it to do so. In what the former attorney general called a “partial victory,” the retailer eventually agreed to honor 50% of the cards’ values.
Bankruptcy Beat readers know that Ski Market is just one of many retailers that have had issues with gift cards upon filing for bankruptcy protection. For instance, Sharper Image initially required customers to spend twice the amount of their gift card in order to use the plastic and later banned the cards altogether. As a result, gift card holders had to file claims to recover the value of their cards but waited about three years for payment from the liquidated retailer.
Other companies include seeking permission to honor gift cards with the raft of so-called “first day” motions they file along with their bankruptcy petitions, pointing to the importance of maintaining customer relationships as they restructure. That’s what AMF Bowling Worldwide did upon in its Nov. 13 Chapter 11 filing.
And who could forget those Borders gift-card holders, who insisted they weren’t aware that they couldn’t use their gift cards last holiday season after the book retailer’s well-publicized liquidation? A judge later ruled that despite their claims otherwise, Borders did everything in its power to notify gift-card holders that they had better use their cards or file claims against the retailer for any unredeemed amounts.