Attention holiday shoppers. Not sure what to buy Aunt Matilda or cousin George? A gift card allows them to buy whatever they like? Maybe. Large retailers such as Sharper Image, Bombay Company and Linens ‘N Things have filed for bankruptcy or gone out of business, leaving behind millions of dollars in unused gift cards. In bankruptcy, money left on a gift card is treated as a debt, which the bankruptcy court can decide if it is to be repaid, and how. If the retailer stays in business, the court may allow it to continue to honor its cards, but even then consumers may not get the full value. Sharper Image, for example, was allowed to continue accepting gift cards, but only if the cardholder spent twice the value of the card in a single transaction. Bombay Company was allowed to pay its gift-card holders 25 cents on the dollar. If the retailer closes its doors, it is possible the consumer’s only recourse would be to file a claim and stand in line with the other unsecured creditors.  

Retail consumer gift cards are regulated by myriad state laws that typically deal with service fees, expiration dates and disclosure requirements, but most have no protections for consumers if a retailer goes bankrupt. Consumer groups are pressuring the FTC to require retailers to segregate gift card funds and hold them in trust. Thus far, the FTC has only issued an “FTC Consumer Alert,” advising consumers to consider the financial condition of the retailer before buying a gift card, warning about diminished value in bankruptcy.

Not unrelated, a recent General Counsel’s Opinion from the FDIC noted that some “gift” cards issued by banks (e.g., stored value cards) would be considered “deposits” covered by FDIC insurance, if the funds are held by an insured depository institution for the benefit of the cardholders. In contrast, gift cards issued by retailers—”closed loop” cards paid from funds held by the retailer—are not covered. While the issuer must follow requirements to qualify the monies as deposits, covered by FDIC insurance, retailers may increasingly turn to qualified institutions to operate gift card programs in order to allay consumer fears.