Howard Kleinberg Quoted in AP, "Bankruptcy Makes Gift Cards Worthless"

Media Source: Associated Press

NEW YORK (AP) — You know that Sharper Image gift card you got for Christmas? Right now, it's worthless. And other gift cards in your wallet could lose their value, too.

As more retailers file for bankruptcy or go out of business, more than $75 million in gift cards are at risk of becoming worthless pieces of plastic this year.

'If I knew this was going to happen, I would have used them right away,' said Jon Tapper, a public relations executive from Boston who received two Sharper Image cards as business gifts just a few weeks ago. Their total face value is $50.

'I love gift cards, but now this makes me think twice.'

The Sharper Image announced late last month that it was suspending the acceptance of gift cards, at least temporarily. It urged shoppers to check the company Web site later this month for an update. That is typical of businesses that reorganize under Chapter 11 bankruptcy, which treats gift cards as a loan to the company, not as cash.

For many shoppers, it's a harsh lesson about the risks of gift cards. Consumers spent an estimated $26.3 billion in gift cards at retailers alone last holiday season, compared with $24.8 billion in 2006 and $18.48 billion in 2005, according to the National Retail Federation.

C. Britt Beemer, chairman of America's Research Group, says 'you will see a lot of frustration among customers. You basically stole (money) out of the customers' pocket. They will never forgive you.'

The number of retail bankruptcies or liquidations this year is expected to reach the highest levels since the 1991 recession.

Brian Riley, senior analyst at The TowerGroup, estimates that shoppers could lose more than $75 million just from stores and restaurant closings in 2008.

TowerGroup's figure doesn't include mom-and-pop services like the local nail salon. Riley said such small operations, which are most vulnerable to economic downturns, pose the biggest risks to gift card holders.

The gift-card problem provides more ammunition to consumer-advocacy groups that have lashed out against expiration dates and burdensome fees imposed if cards are not used within a certain time frame. More than 20 states have passed regulations loosening restrictions on the use of gift cards.

'Consumers need to buy gift cards with their eyes wide open,' said Jack Gillis, a spokesman for the Consumer Federation of America.

Bankrupt businesses also face the risk that card holders left in the cold could defect to other stores just when struggling merchants need their customers the most.

Even if bankrupt retailers want to honor the gift cards, they may not be able to, according to Howard Kleinberg, director of the bankruptcy practice at Meyer, Suozzi, English & Klein.

Either they can't afford it or their creditors' committee or the bankruptcy court may not allow it. Gift cards amount to debt, and therefore holders are not necessarily going to get paid, Kleinberg said.

Sharper Image officials did not immediately return phone calls but a customer-service representative told a reporter that shoppers would eventually be able to use the gift cards. She declined to say when.

Gift card holders fall in the class of unsecured creditors, which is 'low in the pecking order,' Kleinberg said. Those at the top of the list are secured creditors — with debts backed by assets such as real estate or accounts receivable.

Of course, if a company is purchased through a Chapter 11 bankruptcy process, the new buyer could honor gift cards.

That appears to be the case with Fortunoff, the jewelry and home furnishings chain that agreed last month to sell to an affiliate of NRDC Equity Partners LLC, which owns Lord & Taylor department stores and plans to expand the Fortunoff chain. A Fortunoff spokeswoman said the company is honoring gift cards.

Riley, of The TowerGroup, estimated that the retailer did about $32 million in business last year from gift cards.

Sharper Image's rival, Merrimack, N.H.-based Brookstone Inc., is capitalizing on the situation. It announced last week that it would exchange Sharper Image gift cards for 25 percent off any purchase, no matter the amount of the gift card or the cost of the item.

'We thought it would be a great way of acquiring new customers,' said Brookstone spokesman Robert Padgett. 'We are here for the long haul, and thought it would be good to let them know.'

Ricki Gard, a manager of the Saks Fifth Avenue's Premier salon in New York, said it has been able to attract new clients from high-end spa Georgette Klinger, which abruptly closed its locations around the country a week before Christmas, leaving gift card holders in a lurch.

The Saks salon, leased to an outside company, has been offering 30 percent discounts on first-time services for Georgette Klinger gift card holders, though that was little comfort to many who had thousands of dollars stored on their prepaid cards.

Carol Ann Razza, a Long Beach, N.Y., resident and Georgette Klinger customer for 18 years, lost several hundred dollars when the salon closed its doors.

'You really feel like you were robbed,' said Razza, who had a prepaid credit stored on the spa's computer.

Experts say shoppers should never assume that if a retailer files for bankruptcy but remains in business, that their gift cards will be redeemable. Sharper Image, for example, plans to close 90 of its 184 stores soon after selling their inventory.

On the other hand, aggressive store closings can give some consumers the impression that the company is gone for good, and their gift cards are worthless.

Lonnie Miller thought her $50 gift card from KB Toys Inc. wasn't valid. The Wayne, N.J., resident thought the toy retailer went out of business after watching a few stores in her area shut down. Upon learning that KB toys is in still business, she said she will use her card online.

As for her $25 Fortunoff card — a gift from her aunt — she went out Friday to spend it immediately.

'With the uncertainty today, I didn't want my aunt's gift to be only a card,' Miller said.