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BankruptcyFeaturesCommercial LawThe Bankruptcy Strategist

Holders of Unredeemed Gift Cards Denied Bankpruptcy Priority

By Francis J. Lawall and Francis A. Weber

For some time now, the brick and mortar side of the retail industry has been in financial distress. In 2015 and 2016 alone, brand-name ­companies such as Sports Authority, RadioShack, Aéropostale, American Apparel, Eastern Mountain Sports and City Sports sought bankruptcy protection. A common question in these cases is how to treat holders of unredeemed gift cards. Are they near the back of the line with other general unsecured creditors, or are they entitled to “priority” payment status under the Bankruptcy Code? The Delaware Bankruptcy Court recently revisited this issue in In re City Sports, No. 15-12054, 2016 U.S. Dist. LEXIS 2884 (Bankr. D. Del. Aug. 4), and concluded that holders of unredeemed gift cards from now-defunct retailer City Sports were nothing more than general unsecured creditors.

The City Sports decision is significant not only because of its potential applicability to the wave of retail companies in or on the verge of bankruptcy, but also because it reaches a conclusion different from one issued in a 2004 decision from the same court, In re WW Warehouse, 313 B.R. 588, 592 (Bankr. D. Del. 2004).

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