Gift-card holders filed proposed class-action claims on Friday in the bankruptcy cases of Lord & Taylor and Sur La Table Inc., seeking priority status for those stuck holding potentially unusable gift cards. At the same time, the law firms representing them are planning to request that the U.S. Trustee, the U.S. government’s bankruptcy watchdog, appoint official consumer committees in the same bankruptcy cases.
“As retailers are lining up to file bankruptcy because of circumstances that really are beyond their control, ordinary Americans are being left in the cold,” said Thomas Burt, a partner at the law firm filing the claims, Wolf Haldenstein Adler Freeman & Herz LLP. “Their values have gone poof, because somebody messed up.”
The litigation firm, along with bankruptcy law firm Sto Helit PLLC, is also seeking class representatives who have unredeemed and unexpired gift cards and gift certificates from Stein Mart Inc. and Century 21 Department Stores LLC, also bankrupt. Each individual holding gift-card claims should get up to $3,025 per person in priority payments, according to the firm.
Bankrupt retailers that are permanently closing their stores could collect a windfall if prepaid gift cards are never redeemed. Roughly $2 billion to $4 billion, or up to 4%, of gift cards typically go unused every year in the U.S., according to research from Mercator Advisory Group Inc.
“We have a process where people have gone unrepresented. No one’s sticking up for them and the bankruptcy will erase the value,” Mr. Burt said.
Retailers that filed for bankruptcy and are shutting down stores usually give gift-card owners about a month to use them. But consumer advocates and lawyers argue that retailers often fail to give proper notice to customers that they might be entitled to a claim just by having a gift card.
Companies in bankruptcy aren’t legally required to honor gift cards, but many, even those that are liquidating, do it as a gesture of goodwill. Others might be selling their assets to purchasers that don’t assume gift-card liabilities.
Home-goods retailer Pier 1 Imports Inc. estimated when it filed for bankruptcy in February that it had about $59 million in gift cards and merchandise credit outstanding. Department-store operator Stage Stores Inc., the owner of department-store chains including Gordmans and Bealls, had $21 million in gift cards outstanding when it filed for bankruptcy in May, according to court records.
“Both of those cases recently confirmed plans that effectively gave gift-card holders nothing,” said Myles MacDonald, founder and managing member at Sto Helit.
Consumers who don’t redeem their gift cards before a retailer goes out of business can try to turn their unspent balances into cash by filing a claim in bankruptcy court. There is no guarantee of payment since gift-card holders are unsecured creditors, near the back of the payment line under bankruptcy law.
Last month, Sur La Table sold itself out of bankruptcy for nearly $89 million to a joint venture between e-commerce business CSC Generation and brand owner Marquee Brands LLC. While the deal saved about 50 of about 120 stores from closure, the new owners aren’t obligated to accept gift cards more than 30 days after the sale, court papers show.
Luxury department store chain Lord & Taylor had about $35.5 million in gift cards outstanding when it filed for bankruptcy in August, saying it would liquidate all 38 of its stores if it couldn’t find a buyer.
Off-price retailer Stein Mart had about $35 million in gift cards outstanding as of early July, court records show. Stein Mart, which filed for bankruptcy in August, said it would permanently close and sell all 279 of its stores.
The deadline for using gift cards at off-price retailer Century 21 is Oct. 10, after which the company said in court papers they “will be deemed to have no value.”
The claims filed Friday will test whether bankruptcy courts believe gift card claims should be protected.
They haven’t been, due in part to a 2016 ruling in the bankruptcy of athletic-gear retailer City Sports Inc. that gift-card balances can’t be classified as priority unsecured claims but instead must be treated as general unsecured claims, placing them far back in the line of creditors.
“We’re going to reverse” that interpretation, Mr. Burt said. “They got it wrong.”