Tuesday, March 4, 2008
Bankruptcy and Gift Cards
This AP article dated March 3, 2008, ”Bankruptcy Makes Gift Cards Worthless,” is one of several that I have seen along similar lines recently and serves as a good reminder that, notwithstanding a variety of attempts to protect consumers who use gift cards (including limits or outright bans on expiration dates, which about 70% of states now have in some form), consumers can still be vulnerable to total loss in the event of the issuer’s bankruptcy. The article also highlights some fairly ingenious efforts on the part of competitors to take advantage of the situation (and attract new customers) by honoring those otherwise worthless gift cards, at least in part.
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3 comments:
Here's a link to a 2007 paper by Stanley Seinkiewicz of the Philadelphia Fed on the use of gift cards as a vehicle for money laundering: http://www.philadelphiafed.org/pcc
/papers/2007/
D2007FebPrepaidCardsandMoney
Laundering.pdf
Thank you, Marie. To me, one of the most fascinating aspects of stored value cards is their myriad uses, from what are normally low-stakes uses such as gift cards to much higher-stakes uses such as payroll cards. You have raised a second aspect of stored value cards that adds to their complexity and interest: they are being used in ways that most players in the industry did not anticipate, from savings-account substitutes to money-laundering vehicles. Thank you for your comment and this very interesting link.
Stores including Sharper Image have relied on sales made using the SVCs for some time now as a marketing tool, especially at the holidays. Consumer confidence in SVCs as a reliable payment system will be undermined by putting buyers in an unsecured status if the company goes into bankruptcy. With $70+ million on the line with Sharper Image alone, this will be a damper for holiday spending. Many consumers who have become comfortable with purchasing and receiving these gift cards may now reconsider since the money can be completely lost. Under Article 9-320, buyers in the ordinary course of business take free of a security interest created by the seller. The problem here, of course, is that the buyer hasn't actually received anything (or has returned what was received). Since this rule would seem to protect the buyer who actually received goods from Sharper Image, I query whether a case can be made to extend this analysis to buyers who received the SVCs. As of now, though, it appears that the consumer stands is penalized by this new form of sales device and is left in the general pool of unsecured creditors.
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