Nashville lawyers want to protect gift card holders
Cards stripped of value in bankruptcy filings
When retailers file for bankruptcy, millions of dollars in yet-to-be used gift cards are often stripped of their value, leaving worthless plastic in the wallets, drawers, and center consoles of American consumers.
Two Nashville attorneys are hoping to change that.
Bankruptcy attorney Myles Macdonald and consumer attorney Thomas Burt launched a project Friday with plans to file class claims for a potential untold millions of consumers holding gift cards for a volley of retailers that filed bankruptcy during the COVID-19 pandemic.
The project — dubbed “Project Phoenix” — filed its first class proofs of claim Friday in the bankruptcy cases of Lord & Taylor and Sur La Table, Inc., retailers with stores spanning multiple states. Lord & Taylor initially reported at least $35.5 million in unused gift cards in its liabilities, according to court documents. Sur La Table reported about $17.5 million.
Macdonald and Burt have so far examined eight companies, including six that listed at least $170.7 million combined in outstanding value in gift cards that customers have yet to spend, according to the companies’ initial estimates. The attorneys suspect the actual total may be much higher; companies aren’t transparent about their calculations for these figures, which may include only the percentage of cards each company predicts consumers will actually use.
Other companies on Project Phoenix’s radar include Steinmart, Inc., Century 21 Department Stores, LLC, Destination Maternity and Modell’s Sporting Goods. Macdonald, founder of bankruptcy firm Sto Helit PLLC, and Burt, partner at Wolf Haldenstein Adler Freeman & Herz LLP, are searching for more class representatives in these cases and potentially others.
Pier 1 and Stage Stores also caught their attention, but Burt said they are pointing to those bankruptcies as “cautionary tales” that potentially wiped a combined $80 million from consumers’ wallets.
“Those are examples of a place where in the absence of somebody to stick up for the cardholders, the bankruptcy has gone very far without any provision made for cardholders to get any value at all,” he said. “Those ships have kind of sailed.”
Cardholding customers are generally left to figure out for themselves how to get their money’s worth when retailers file bankruptcy, either by spending gift cards before the company stops accepting them or filing their own proof of claim in the bankruptcy case before the deadline — both things most consumers aren’t aware of, Macdonald said.
The result? Consumers often lose money.
Macdonald and Burt filed class proofs of claim in the Lord & Taylor and Sur La Table cases, asking respective bankruptcy courts to recognize gift cardholders as a large group of customers with a shared claim and legal interest. They claim each card holder should have priority status and receive up to $3,025 per person. The bankruptcy courts must determine if the class meets legal requirements and a class claim is beneficial in each case.
Though they will be litigated, these claims aren’t lawsuits, Macdonald pointed out — gift card holders “are entitled to have a voice in what’s happening.”
The attorneys will then ask the U.S. Office of Trustees to allow the class of gift cardholders to operate as a committee, giving them more voice in bankruptcy proceedings and shifting any related legal fees to the company instead of the consumers.
“People work for that (money), and there are a lot of people in America, right now especially, for whom $10 here and $50 there matters a whole lot,” Burt said. “While it’s not alone going to throw the economy into a spiral to have those go to zero, the net effect is a net drain on American customers. It’s less money they have, less goods they can purchase.”
In retail bankruptcy, consumers come last
Companies that file for bankruptcy generally have two options: restructure or sell all of their assets, liquidating completely. In either case, if the bankruptcy goes through, any funds available are distributed to a hierarchy of creditors, the people and entities that hold a company’s debt.
Recent interpretations of bankruptcy law have pushed gift card-holding consumers to the bottom of this list, Macdonald said, leaving them unlikely to re
ceive money even if they file a claim.
Creditors that hold collateral (like a bank holds a home as collateral in a mortgage) are paid first. Once those creditors are paid in full, any leftover money goes to professionals who worked with the company through the bankruptcy process. Any leftover funds are then used to pay “priority” claims, and in the unlikely event that money remains after that, it then goes to “unsecured” creditors — creditors with no collateral.
Congress passed a statute in 1978 that elevated consumers with “deposits” on goods that have yet to be provided (layaways, for example) to the priority tier, increasing their odds of being paid.
“It was intentionally passed to protect consumers based on their perception because they just don’t ... understand the technicalities of the deals they’re making with retailers,” Macdonald explained. “...If a customer expects to have a protected deposit here, then the bankruptcy court will treat them as having a protected deposit and it gives them priority.”
But the legal definition of “deposit” has since been hotly contested in several bankruptcy cases.
A 2004 bankruptcy case in a Delaware court affirmed that gift cards are deposits because consumers expect that merchants will honor them as payment for an ultimate purchase.
Legal experts acknowledge that recognizing gift cards as deposits complicate the bankruptcy process and decreases the likelihood that unsecured creditors will receive substantial (or any) compensation. And because the number of gift card holders can be difficult to quantify, they represent a somewhat unknown risk in bankruptcies.
Companies contend that gift cards should not be considered deposits at all.
In 2016, a judge in a Delaware bankruptcy court agreed, stating that because a gift card requires only one payment and can be used immediately after purchase, it does not fit the “deposit” definition. The decision reduced cardholders to unsecured creditors, among the last to receive funds.
According to Macdonald, this means consumers are missing out on money they might have otherwise had a real possibility of receiving; in the recent onslaught of retail bankruptcies spawned by the COVID-19 pandemic, companies might have enough funds to pay priority creditors, he said.
“What we’re seeing now in this wave of retailer filings is that all of these retailers are treating the 2016 decision as the default,” Burt said. “They don’t have to honor gift cards ... and that’s a huge economic loss for consumers as a whole. Even if it’s (a) small (amount) per person, the net effect is hundreds of millions of dollars.”
Could bankruptcy losses erode trust in gift cards?
Companies’ plans for gift cards during bankruptcy vary wildly if they exist at all.
Sur La Table stated it will honor gift cards for one month after the closing date of the company’s sale to Marquee Brands. That closing date was listed on a bankruptcy court docket — not something consumers are prone to check or know about, especially since some Sur La Table stores will remain open with the same name, Macdonald said.
Similarly, Destination Maternity will honor gift cards for 30 days after its sale.
Steinmart stated it would honor gift cards for a limited time, and its plan treats gift cards as unsecured claims. Century 21 will stop honoring gift cards on Oct. 10 and will not issue cash refunds for remaining balances.
Lord & Taylor’s bankruptcy plan does not mention how it will address gift cards, leaving consumers to file claims on an individual basis. Modell’s Sporting Goods stopped honoring gift cards as of April 15, and its website reports it is not processing new orders.
Modell’s and Century 21 did not indicate their total outstanding value of unused gift cards in their bankruptcy filings.
“I spent a lot of my life suing over economic torts where it really seems like somebody is a villain, somebody did something fundamentally wrong and decided to hurt people,” Burt said. “The thing that bothers me about this is it’s just a mistake. You can’t really blame companies for not making the provision a priority with these cards, because they’ve got a decision that says we don’t do it that way.”
Macdonald and Burt are pushing for companies to give cardholders more notice to spend the cards and file claims, and hoping that their litigation in these cases will result in “black-letter” law cementing gift card holders as priority creditors.
Otherwise, the pair fear consumers will begin to lose trust in the value of gift cards.
“It’s bad for consumers and bad for the industry,” Macdonald said.
Gift cards make up around 3% of retail sales, likely totaling around $160 billion in sales in the United States each year, according to Dan Horne, an associate dean at Providence College who has researched gift cards for more than 20 years.
Horne said gift card sales may be more profitable than normal retail sales — a consumer with a gift card is likely to spend more than the gift card is worth, and might purchase more products or higher-priced products than they normally would.
Half of all adults in the U.S. had unused gift cards and store credits as of January 2020, amounting to about $167 per person, or $20 billion in total value, according to a Bankrate survey.
Those who wait to spend them typically say they’re “waiting on the right time” to make a specific purchase, Horne added. Horne said consumers who hold gift cards are “hurt pretty badly” when retailers go bankrupt, but uproars following the loss are uncommon. Those who purchase gift cards accomplish their goal as soon as they gift them to someone. Those who receive them are more likely to view the loss as a loss of the potential to spend the money instead of the loss of their own cash.
But if enough people begin to realize the magnitude of gift card loss to bankruptcies, they may stray away from them, cutting sales of one of the retailers’ most useful tools to manage cash flow. Large retailers like Walmart or Target may not feel this drop as keenly, but loss of interest in gift cards could hurt smallto medium-sized retailers. Eventually, Horne said, gift cards would be substituted for something else.
Their social and economic currency might be their saving grace, he said.
“Gift cards are not going away — they do provide some value above cash,” Horne explained. “From the standpoint of the merchant they’re very profitable, and from the standpoint of the giver they alleviate a lot of uncertainty and make it easier to give a gift. They’re not going away, but it really makes it important that the purchaser and the recipient of a gift card use (them) as soon as possible.”
More information about Project Phoenix is available at www.whafh.com/project-phoenix/ index.html.
Reach Cassandra Stephenson at ckstephenson@tennessean.com or at (731) 694-7261. Follow Cassandra on Twitter at @Cstephenson731.