Published by Mark

Bankruptcy Booted Out Gift Cards For KB Toys

January 20, 2009 at 11:16 am

Back before Thanksgiving, I had a feeling this was going to happen.  As a bankruptcy attorney, every year I urge folks to be cautious in their holiday spending, but this past November I found myself urging people to spend any retailer gift cards they’d received, and cautioning them against buying cards for others. My reasoning? With corporate bankruptcies on the rise, I knew some card holders would end up in the same boat as airline ticket holders when their airlines went bankrupt. A gift card holder is an unsecured creditor, and that means if the retailer that issued the gift card goes bankrupt, the court can declare that any assets must be sold and the proceed used to pay secured creditors first. Card holders might find themselves at the back of the line. (See In Bankruptcy, Gift Card Holders In Line Along With Airline Ticket Holders As Unsecured Creditors.)

Two weeks later, I repeated my warning in Got A Gift Card From A Bankrupt Retailer? Get In Line!, explaining that, while I hated playing Scrooge, and while, under normal circumstances, gift cards represent a great idea for merchants, buyers, and recipients, I had a very bad feeling about the cards during the current economic crunch.

Well, it’s happened, at least to one of my blog readers.  A. has a gift card issued by a retailer called KBToys; KBToys is not honoring it. What A. has to say about the situation is this: “Allowing a company like KBToys to continue to sell merchandise during bankruptcy but at the same time not honoring gift cards is theft…I hope consumers will wake up after this and refuse these cards.  I will.”

After A.’s comment was posted on my blog, I did a little bit of research.  According to the December 11, 2008 Wall Street Journal, KB Toys has returned to Chapter 11 bankruptcy, and will be liquidated by its parent company, Prentice Capital Management.  “Going Out Of Business Sales” are going on at the all retail stores, and WSJ points out that sales of gifts cards have been suspended. At the Indiana Attorney General’s office, I was informed that this consumer could, in fact, file a claim, and could contact their office to get the proper claim forms.  A call to the KBToys Customer Relations Department yielded no further information, other than to confirm no gift cards were being honored.  (A., believe me, this is one instance where I hate having been right!)

Unfortunately, this won’t be the last toy story involving gift card holders. Two weeks ago, the parent company of BabyUniverse filed bankruptcy in Delaware, along with nine affiliates, one of which is eToys Direct. Meanwhile, in clothing retail, 15 Indiana Goody’s stores are liquidating, including stores in Martinsville, Shelbyville, Crawfordsville, and New Castle, and Franklin. Couture designer Bill Blass has filed bankruptcy, and a Dow Jones report quoted turnaround advisory firm AllixPartners as predicting many more filings by retailers in the year to come.

I wish my bad feelings would go away.  Meanwhile, get out those gift cards and redeem them quickly – if it’s not too late!

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