Gift card and Chapter 7

March 10, 2008 4:08 PM

I have a nontrivial balance on a gift card for a local retailer that has gone out of business and is filing Chapter 7. What are my options?

I received a gift card for several hundred dollars to a local bike shop a few months ago and have been slowly using it -- too slowly as it turns out. Over the last few weeks I stopped by a few times trying to make a purchase but the shop was closed even though it was during normal business hours. I didn't think much about it because all the inventory was still there and I assumed it was probably a personal situation or something.

I finally tried calling and found that their phone was disconnected, and then I found their web site dead too. Through Google and archive.org I was able to find the owners' names and email addresses. I sent a polite inquiry about how to liquidate my balance and received no reply. After further research I found one owner's phone number and spoke to her this afternoon. She told me that they were going through Chapter 7 (it wasn't clear to me if they've filed yet) and that she had forwarded my email to their attorney.

I got their attorney's contact information and am waiting for him to return my call, but I would like to know what my prospects are for recovering the balance and if anyone can recommend a strategy to improve them.

This is in Sonoma County, California. Thanks!

posted by harmfulray to work & money (10 answers total)

Chapter

you = screwed ... sorry

Beg her to let you exchange the Gift cert for stock ... but she should tell you that is not possible

oh ... btw ... IAAL IANYL etc.
posted by jannw at 4:13 PM on March 10, 2008

According to the state of California ,

A gift certificate or gift card sold by a seller that seeks bankruptcy protection may have no value. However, the holder of the certificate or card may have a claim against the bankruptcy estate. ... If the seller files "Chapter 7" (liquidation) bankruptcy, holders of gift certificates or gift cards are creditors in the bankruptcy case. They have relatively high priority among unsecured creditors in a Chapter 7 case, and may receive some percentage of the certificates or card’s value, but only if the bankruptcy estate has enough assets to pay claims. For information on filing a claim, and other basic information on bankruptcy.

The key here is "unsecured" - all the "secured" creditors have priority over you, although you apparently have priority over other unsecured creditors.
posted by radioamy at 4:14 PM on March 10, 2008

Folks with Sharper Image (which recently filed for bankruptcy protection) gift cards are seeing some of these problems lately as well.

Though the clouds may be lifting for them, you could probably Google for Sharper Image gift card woes and get some juice on your situation.
posted by SlyBevel at 5:37 PM on March 10, 2008

Assuming it really is Chapter 7, as an unsecured creditor you are likely to get pennies on the dollar for your gift card (if that). You never know, though. To preserve your claim, you will likely have to file a "Proof of Claim" in the bankruptcy. The bankruptcy trustee should be able to point you in the right direction, and the clerk of courts where the bankruptcy was filed should be able to provide (some) assistance..

If I were in your situation I would locate and fill out the forms (because it's really not that complicated) -- but I wouldn't bank on any meaningful recovery. Also, it sounds like the amount of your claim isn't going to be large enough for it to be worthwhile to engage an attorney, so you're probably on your own.

If you do decide to slog through and learn about the process, remember the value of your own time. At some point you may reach the "screw this" threshhold ...

IAAL but IANYL.
posted by QuantumMeruit at 5:51 PM on March 10, 2008

Thanks for the replies. I found a reference to a relevant part of California Civil Code thanks to radioamy's comment, with this bit that looks promising:

1749.6. (a) A gift certificate constitutes value held in trust by the issuer of the gift certificate on behalf of the beneficiary of the gift certificate. The value represented by the gift certificate belongs to the beneficiary, or to the legal representative of the beneficiary to the extent provided by law, and not to the issuer.
(b) An issuer of a gift certificate who is in bankruptcy shall continue to honor a gift certificate issued prior to the date of the bankruptcy filing on the grounds that the value of the gift certificate constitutes trust property of the beneficiary.

Should I contact the owner directly with this information, go directly to Small Claims Court, or go through their attorney? Thanks again.
posted by harmfulray at 6:48 PM on March 10, 2008 [1 favorite]

Do NOT go to small claims court. Filing a lawsuit against them will be a violation of the automatic stay, which could lead to liability on your part.

The California statute you cited won't be much good if the shop is never open.

If the shop isn't operating, the owner doesn't have much power.

There are multiple attorneys involved. Make sure you understand which one you're talking to.

a. The attorney for the debtor (the company attorney).
b. The US Trustee / attorney for the trustee
c. Attorneys for various individual creditors
d. Attorneys for various creditor committees (which may or may not exist, depending on the size of the estate and the constituencies involved)

There may also be a separate "receiver".

The debtor's attorney may have information regarding ongoing operations, but I think that the receiver or the Trustee are more likely to give you a straight answer (since, as an unsecured creditor, they owe (some) duties to you. They will likely just tell you to file a proof of claim, though.
posted by QuantumMeruit at 8:31 PM on March 10, 2008

Assuming that the store is in Sonoma as well, the case is probably filed in the Santa Rosa Division of the Northern District of California. You can get case information on the phone through an automated phone system to find out. if it's there, go to the court's FAQ page, to the part for creditors, where you'll find the question "What is a proof of claim?" Never mind what it is, you need to file one. Click on the link for "proof of claim form" and it will take you to a fillable Acrobat form that you can fill in and print out to file. Information on the specifics of filing the proof of claim are also on that web page.

You may get nothing, or you may get a partial return of your money. The fewer people that file claims, the greater the chance there is that there will be something for you, since the trustee is going to sell off the store's assets and distribute the proceeds among the creditors who filed claims. Your claim is almost certainly a "general unsecured" claim, which is beneath secured claims and priority claims. The poster above may be right about you having priority over other unsecured claimants-- I practice bankruptcy law but gift cards are outside my knowledge. That said, I'd be surprised if you have a priority claim.
posted by missouri_lawyer at 8:51 PM on March 10, 2008 [1 favorite]

Before you start down the legal path, I'd talk to the owner again. Tell them that you'd rather avoid the headache of making things worse on them. Ask them if they have any stock they wouldn't mind parting with in exchange for the card... on the down low... A new set of race wheels, a fancy bike frame... keep any eye for something you can resell on Craig's List if you don't have an immediate need.

Of course, their stock at the store maybe untouchable this point and they maybe reluctant to open it up... so ask if they have anything laying around their home. Maybe a nice old road bike?

If they are unwilling to work with you then follow the legal recourse.

Good luck.
posted by wfrgms at 8:59 PM on March 10, 2008

radioamy is correct. To elaborate on your place in the queue, asset allocation in bankruptcy follows the Absolute Priority Rule, giving preference to:

1. Secured claims 2. Debtor-in-possession claims 3. Priority claims (legal fees, wages, etc ...) 4. General unsecured claims <> 5. Preferred stock 6. Common stock.

Claim-fulfilment only moves to the next level once the level above it has been unimpaired ($1 paid for $1 owed). You should probably not expect anything; what wfrgms describes, as I understand it, would probably qualify as a preferential and fraudulent transfer. Also note that Chapter 7 (liquidation) should not be confused with Chapter 11 (restructuring).

... based on the Restructuring coursework I have taken
posted by fourstar at 10:05 PM on March 10, 2008 [1 favorite]

If the case is currently in bankruptcy, do not contact the owner directly.

This is not a case where you can avoid some legal mumbo jumbo by working directly with the store or its owner. This is why you really, truly need to know if there is a bankruptcy case and what chapter it's been filed under (7, 11, or possibly 13).

If the case is a currently open chapter 7, file your proof of claim, using the proof of claim form I linked to above. If you try to do a deal with the store owner outside the bankruptcy, you're encouraging the owner to break the law forbidding preferential or post-petition transfers. I doubt that you'd be prosecuted, but you'd run the risk of spending some quality time with the U.S. Attorney's office and/or the FBI.
posted by missouri_lawyer at 12:01 PM on March 11, 2008