Borders’ Gift Card Holders Not Permitted Recovery in Bankruptcy

We’ve written about gift cards in this space in the past, and have covered escheat issues related to gift cards, as well. But, in a different wrinkle, last month, the Bankruptcy Court for the Southern District of New York addressed the impact of bankruptcy law on companies’ requirements to honor gift cards.

By way of background, in February 2011, Borders filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. In general, retailers are not obligated to honor gift cards in bankruptcy, despite any state requirements that gift cards be honored for a certain period of time. Instead, gift card holders are generally treated like all other creditors and are required to timely file proofs of claim prior to a bar date set by the court in order to receive the value (or a portion of the value) of the gift cards. Note though, that in California, at least, retailers in bankruptcy may be required to honor gift cards.

But, via a motion filed with the Bankruptcy Court, Borders indicated that it planned to honor gift cards issued prior to the petition date. That is, customers could continue to use Borders gift cards in Borders stores and on its website. Later, following the September 2011 liquidation of Borders’ retail stores and the end of its e-commerce operations, Borders no longer honored its gift cards since it no longer had any retail channels through which it could do so. In January 2012, after confirmation of the bankruptcy plan, several holders of gift cards who had not yet redeemed the cards filed a motion seeking to allow late proofs of claim so that they could recoup the value of their unused gift cards. They argued that because of data systems Borders had in place, Borders should have been required to provide each gift card holder actual, individual notice of the bar date to file claims, rather than the general notice provided via publication in the New York Times. Since they did not receive adequate notice, they argued, their failure to file proofs of claim was due to excusable neglect and late claims should have been permitted.

Last month, the Court denied the motion, saying that the holders were not known creditors entitled to individual notice, simply because of the very nature of gift cards. As the Court wrote, “even if the Debtors were able to identify the purchasers of the Gift Cards, they would have no way of tracing the ultimate recipients...” Since the gift card holders were not known creditors, the constructive notice they received via the notice published in the New York Times was adequate.

Moreover, there was no excusable neglect that would allow for late filed claims. First, the Court wrote that allowing the late claims “would have a disastrous effect on...the final distribution of the Plan” and would prejudice other debtors. In June 2011, there were 17.7 million outstanding gift cards with unredeemed balances totaling $210.5 million. By the time the Court issued its order, there was only $90 million remaining to pay various creditors who timely filed proofs of claim totaling over $800 million. The Court wrote that because of the amount of the gift card related claims, if such claims were allowed, they would “drastically change the estimated recovery” for creditors and “warrant a modification of the Plan and re-solicitation of votes” for the Plan. But modification could not be permitted for several reasons including that distributions had already begun. Second, the Court also noted that the gift card holders offered “no valid reason for their extended delay in filing proofs of claim” eight months after the bar date had passed.

In the end, the gift card holders were left holding nothing but souvenirs of Borders’ better times. And our readers would do well to draw two lessons from the Borders experience: first, there are a variety of important and often complex legal requirements concerning gift cards to which issuers must be attentive; and second, bankruptcy proceedings involve a host of different rules and procedures which can add complexity to already specialized areas of the law.

Retailers Beware of the new New Jersey Gift Card Law

In the wake of the 2011 decision of the Third Circuit Court of Appeals in New Jersey Retail Merchants Association v. Sidamon-Eristoff, 669 F.3d 374 (3rd Cir. 2012),  condemning a large portion of the New Jersey statute adopted in 2010 regarding gift cards, gift certificates, and other stored value cards, the New Jersey legislature amended the statute.  S.B. (1928), Laws 2012, effective June 29, 2012.  The statute removes some of the more objectionable provisions of the old law regarding stored value cards, which are defined broadly to include gift certificates, gift cards, and any other record (tangible or electronic) that reflects a promise, for money, by the issuer or seller that the owner of the record may obtain merchandise, services, and/or cash in the amount of the face value of the record.  The statute, however, does add some strict prohibitions regarding stored value cards, and gift cards and certificates in particular.  These prohibitions are such that a retailer that issues gift cards could be exposed to significant penalties unless it makes sure its practices conform to the requirements of this statute.  At the same time, the law reduces the potential escheat of unredeemed gift cards. It also protects small issuers of stored value cards.  A company that issues stored value cards of less than $250,000 per year is not subject to the escheat and consumer protection provisions of the New Jersey statute.  Now for the details:

The features of the new law that are beneficial to retailers are that:  (1) it repeals the provision of the old law that if the issuer does not maintain the address of the owner or purchaser of the stored value card, the value of the card must be escheated to New Jersey if the card was issued there; (2) it eliminates the requirement of the old law that the issuer obtain information about the gift card purchaser or owner, but instead requires that by July 1, 2016, the issuer maintain a record of the zip code of the owner or purchaser; (3) it extends the period of abandonment (i.e. an unredeemed gift card not claimed) from two years after issuance to five years; and (4) it requires escheat of only 60% (as opposed to 100%) of the proceeds of all stored value cards other than general purpose reloadable cards, which are cards issued by a bank or other financial institution.

Retailers are faced with three new provisions in the nature of “gotcha” clauses.  The first requires that, for a valid expiration period or dormancy fee for a gift certificate or gift card, the issuer must disclose in 10 point font on the gift certificate or gift card, or the sales receipt or package for the certificate or card:  (1) the expiration period or dormancy fee; and (2) a telephone number that the consumer may call for information regarding the expiration date or dormancy fee.   

The second new feature is even more onerous.  The issuer is required, for any stored value card that has a remaining balance of less than $5, to refund in cash the balance due upon request of the owner.  Although there is no requirement for the retailer to advertise the consumer’s right to refund, or to disclose the same on the gift card, if the issuer fails to honor a gift card owner’s request to redeem, the penalties are severe.  For each such instance, the retailer is liable for a penalty of $500 plus the remaining value on the certificate or card.  If there are 100 or more violations during any 12-month period, the penalty is trebled to $1,500 per violation.   The statute provides that the sole enforcement means for a violation of this section is a hearing before the Director of the Division of Consumer Affairs.

Finally, the new law prohibits the imposition of a fee in connection with stored value cards, except (1) activation or issuance fees of a card; (2) a replacement card fee with respect to lost or stolen cards; or (3) a dormancy fee of not more than $2.00 per month, but only for gift certificates or gift cards and only if the disclosure conditions described previously are satisfied.

In short, while the statute deletes some problematic features of the prior law and limits the escheat to 60% of the face value of the gift cards, it adds to the burden on direct marketers who issue gift cards, except for the small issuers of gift cards.  The potential penalties for the unwary direct marketer are significant, so a gift card program should include protocol to make sure that the company satisfies this new law.

Colorado Enacts Law on Gift Cards; Update on Other States’ Cash Redemption Rules

Amidst the hullaballoo over Colorado’s recently enacted affiliate nexus and out-of-state vendor reporting requirements and its recent economic nexus regulation, Colorado also passed a new law regarding gift cards.

Under the new law, signed by Governor Ritter on April 29, issuers of gift cards, including actual cards and electronic cards, must redeem the remaining value of a gift card for cash if there is $5 or less remaining on the card and the holder of the card so requests. Additionally, sellers may not sell gift cards which contain a service fee, dormancy fee, inactivity fee, maintenance fee, or any other type of fee. The new law does not apply to gift cards which are useable with multiple sellers, unless the multiple sellers are affiliated sellers. Violations of the new statute are deemed deceptive trade practices under Colorado law.

Other states have similar laws and/or pending legislation regarding cash refunds for low balances on gift cards and certificates:

California: Currently permits cash refunds for gift certificates with cash value less than $10. See Cal. Civ. Code § 1749.5(b)(2). California has legislation currently before its Senate that would raise the threshold amount to $20.

Maine: Requires cash refunds for gift and stored value cards with less than $5 remaining on request, except in the case of prepaid telephone cards, cards with an initial value of $5 or less, and cards that were not purchased but were provided as a promotion or as a refund where no receipt was provided. See Me. Rev. Stat. tit. 33, § 1953(1)(G).

Massachusetts: For gift certificates to which value may be added and which have been redeemed in part, the holder of the gift certificate may request the remaining balance be paid in cash once its value falls below $5. For gift certificates prohibiting the holder from adding additional value, the holder can request the balance be paid in cash once 90% of the face value has been redeemed. See Mass. Gen. Laws ch. 200A, § 5D.

Montana: Gift certificates with original values of greater than $5, with less than $5 remaining, must be redeemed for cash on request. See Mont. Code Ann. § 30-14-108(4).

Vermont: If the remaining value of a gift certificate is less than $1.00, the gift certificate is redeemable in cash for its remaining value on demand of the gift certificate’s holder. See Vt. Stat. Ann. tit. 8, § 2704.

Washington: If, after a purchase is made with a gift certificate, the remaining value is less than $5, the gift certificate must be redeemable in cash for its remaining value, on demand of the bearer.  See Wash. Rev. Code § 19.240.020(3).

Gift Cards: The Sleeping Dog

Many of you may have read about the federal Credit Card Accountability, Responsibility, And Disclosure Act of 2009 (the “CARD Act”). While the CARD Act largely regulates the terms and conditions for credit cards, it also provides certain protections for purchasers of gift cards that will go into effect on August 22, 2010. But many people may not be aware that the CARD Act does not preempt or otherwise supersede state laws on gift cards, either before August 22 or afterwards.

There are many states that have gift card laws that bar the use of expiration dates on purchased gift cards, prohibit or set restrictions on imposing inactivity fees or other charges with regard to gift cards, and/or require disclosures regarding fees and expiration dates. Some of these laws are enforceable by the attorneys general of the states and/or through suits brought by consumers.

Moreover, most of these laws are enforceable against online retailers, even if the online retailer doesn’t have nexus or a physical presence in the state. Constitutional “Due Process” standards permit suits against a company that might nevertheless be insulated from tax obligation under the Commerce Clause. As long as the online retailer sells to a customer in the state, the online retailer will be subject to the provisions of the state’s gift card statute.

Finally, there are several states that require the “escheat,” or payment over to the state, of the value gift certificates and gift cards that have not been redeemed within a prescribed period of time set by statute. These so-called “unclaimed property” statutes are designed to preclude a retailer from obtaining an advantage through such “breakage” and require the payment of all or a portion of the face value of the gift cards to the state.

The point is not to throw your hands up in defeat and either ignore the applicable statutes or take measures that do not make sense from a business standpoint. Rather, a prudent online retailer should review its gift card program in light of the various state statutes. This will be particularly important prior to the effective date of the CARD Act on August 22, 2010, so that the retailer can understand its obligations with respect to gift cards issued before and after the new requirements of the CARD Act take effect.