Mercator Blog

Bankruptcy Court Is a Good Sport, Allows Sports Authority Gift Card Redemptions
Date: March 8, 2016
Ben Jackson
Director, Prepaid Advisory Service
Sporting goods retailer Sports Authority announced in a press release on March 2 that it had filed for Chapter 11 Bankruptcy “to streamline and strengthen” its business. In that release, the retailer said that it would continue to honor its gift cards both in-store and online.

The company has about $93 million in gift cards outstanding, according to its court filings. The company notes in its filings that maintaining the goodwill of customers is an important part of trying to emerge from Chapter 11.

Every time a major retailer goes out of business, the question of what happens to its gift card holders comes up. The benefits of honoring the cards outweigh the drawbacks, but every bankruptcy raises the specter of further government regulations that could hurt the viability of gift card programs.

The most recent case of a retailer bankruptcy was Radio Shack in 2015. In that instance, gift card holders were made whole by getting cash back for unredeemed balances. At the time, the Associated Press reported that about $46 million worth of cards would be repaid, but anyone holding promotional cards, cards given for returns, and those given for customer service complaints would need to get in line with the rest of the creditors hoping to recover funds.

Bankruptcy law does not require that retailers honor cards. A bankruptcy court could require gift card holders to get in line with the rest of the creditors and try to recover funds. However, when a company is entering bankruptcy, or even considering it, it should make honoring gift cards, certificates, and vouchers a part of its plan for reorganization for three reasons. First, allowing redemption of the cards will bring in customers who want to make sure they do not lose the value of their cards and who will likely spend more than the face value of the card in hunting for deals. Second, allowing those gift cards to be redeemed will help if liquidation becomes necessary because it will simultaneously reduce liabilities and inventory. Third, if the company survives bankruptcy, then those customers who were able to redeem cards are much more likely to keep shopping with the store than if they felt like they were robbed of their money.

Other bankruptcies have not gone so smoothly for gift card holders. Sharper Image filed for bankruptcy in February 2008 and stopped accepting gift cards. In March, the bankruptcy court granted the company’s request to honor its gift cards and certificates, but the company required that customers spend more than the face value of the cards in redemption. Customers who wanted to use gift cards needed to buy enough merchandise that the total bill was twice the value of the gift card. Then, on May 30, the company sold itself to a venture finance firm, closed all its stores, and stopped honoring its cards again. Consumer Reports estimated that there was $42.6 million worth of outstanding cards at that point in time. In an attempt to turn a bad situation to its advantage, Sharper Image rival Brookstone Inc. announced in February 2008 that it would give a 25 percent discount to customers who brought in a Sharper Image gift card.

In 2011, when Borders Books declared bankruptcy, it got permission to continue honoring its gift cards and encouraged gift card holders to redeem them. That didn’t stop people from holding onto their cards and then suing in 2013 to try to recover money from unredeemed cards. Fortunately a judge ruled that there was plenty of time to redeem cards and no one was entitled to a refund.

Still, as Borders wound down operations around the world, the gift card issue continued to cause tensions. The company that operated bookstores under the Borders name in Australia and New Zealand, REDGroup Retail, entered a voluntary version of bankruptcy. In that case, however, the company chose to honor gift vouchers only if the cardholder spent twice the face value of the voucher.

That led to enough consternation among cardholders that the company added more security at its stores. According to The New Zealand Herald website, at least one staffer at a store in New Zealand was threatened with a steel pipe in a dispute over redemption, and in another store, a publisher's representative was caught trying to steal back books. We have seen a similar requirement in bankruptcies in the United States, and while, to my knowledge, no one got knocked over the head, the proposal did go over like a lead balloon.