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FTC urged to protect gift cardholders

CU calls on the Federal Trade Commission to protect consumers with gift cards when retailers go bankrupt

September 11, 2008

Consumer group letter to FTC about consumers losing retailer gift cards in bankruptcy

WASHINGTON, D.C. — Consumers Union, the nonprofit publisher of Consumer Reports, filed a petition today with the Federal Trade Commission (FTC) asking the agency to protect consumers from losing money on gift cards when retailers file for bankruptcy. The issue has come to light following recent retailer bankruptcies and millions in lost gift card dollars for consumers.

“Gift cards shouldn’t be the gift that stops giving when retailers go bankrupt,” said Michelle Jun, senior attorney for Consumers Union. “Unfortunately, there is no guarantee that consumers will be able to redeem the full value of their gift cards from struggling or bankrupt retailers.”

Consumers Union was joined by the Consumers Federation of America, National Consumer Law Center, and U.S. PIRG in filing the petition with the FTC. A copy of the petition can be found at: http://www.consumersunion.org/pdf/FTC-gift-cards-ltr.pdf

Bankruptcy courts treat unused gift card funds as a debt and determine whether or not the retailer must pay it. It’s up to the retailer to petition the court to allow it to continue to accept its gift cards. Consumers may lose the value of their gift card if the retailer doesn’t make such a request or if the court denies it. In these cases, the only remaining option for consumers is the cumbersome task of filing a claim as an unsecured creditor to the bankruptcy proceeding.

Earlier this year, consumers with Sharper Image gift cards were informed that they could no longer use them when the retailer filed for bankruptcy. At that time, an estimated $20 million remained unused on Sharper Image gift cards, and even more on related promotional cards. Sharper Image later petitioned the court to allow it to accept their own gift cards if consumers spent twice the value of the gift card on a single transaction.

Now that the retailer has shut its doors, consumers who want to redeem their gift cards must file as unsecured creditors in the bankruptcy proceeding. Attorneys representing gift card holders recently petitioned the court in the Sharper Image case to certify such consumers as a class to give them stronger bargaining position in the bankruptcy case. In either case, the process for getting any gift card funds back in bankruptcy court will be a lengthy one.

Although retailers may intend to accept gift cards to maintain customer loyalty and goodwill when under bankruptcy protection, they may not have the funds to cover the value of unredeemed gift cards. After Linens N’ Things filed for bankruptcy, for example, it won court approval to continue to operate its gift card program. However, filings in the bankruptcy case made clear that the company did not maintain a cash reserve amount to fund outstanding gift cards.

In its petition to the FTC, the consumer groups urged the agency to require retailers to segregate funds generated from gift card sales in a trust account and to honor a consumer’s gift card as long as the doors remain open unless a bankruptcy court orders otherwise. Consumers Union called on the FTC to declare the sale of gift cards without segregating funds and holding the funds in trust to be an unfair and deceptive practice.

While the FTC develops these new rules, the consumer groups urged the agency to:

  • Intervene in bankruptcy proceedings to petition the court to order the bankrupt company to accept its own gift cards at full value as long as the retailers’ doors remain open;
  • Develop and maintain a new FTC registry on bankrupt retailers’ gift card practices;
  • Require retailers to report to the new FTC registry within one day of filing for bankruptcy;
  • Require bankrupt companies to stop selling gift cards no later than the date of the bankruptcy filing;
  • Require retailers to inform third party vendors to stop selling any bankrupt retailers’ gift cards; and
  • Require third party vendors to immediately cease sale of bankrupt retailers’ gift cards.

“Gift cards have exploded in popularity in recent years, but consumer protections haven’t kept pace with the record sales,” said Jun. “With more retailer bankruptcies on the horizon, the FTC should make sure that consumers with gift cards are protected when companies go bust.”