Unredeemed Gift Cards are Not Entitled to Priority Status Under Bankruptcy Code 507(a)(7)

In re City Sports, Inc., No. 15-12054 (KG), 2016 WL 4190090 (Bankr. D. Del. Aug. 4, 2016)

In what the Bankruptcy Court deemed a purely academic issue given the circumstances of the City Sports bankruptcy cases, Judge Gross held that unredeemed gift cards are not entitled to priority status, and instead, are properly classified as general unsecured claims.  In so doing, Judge Gross rejected and disagreed with a previous holding of the Delaware Bankruptcy Court wherein the court found that gift cards fall under the definition of “deposit” and accorded them priority status under the Bankruptcy Code.  See In re WW Warehouse, Inc., 313 B.R. 588, 592 (Bankr. D. Del. 2004) (Rosenthal, J.).  This lengthy Opinion dissects the plain meaning of Bankruptcy Code section 507(a)(7) and related case law before delving into the legislative history for further support.

City Sports, Inc. and its affiliated debtors (the “Debtors”) sold pre-paid gift cards to consumers with no expiration date (the “Gift Cards”).  As of the Debtors’ bankruptcy filing, the unredeemed Gift Cards totaled approximately $1.4 million.  Gift Cards were accepted during the first 30 days of the Debtors’ bankruptcy, and after going-out-of-business sales, the Debtors estimate that the Gift Cards total approximately $1.18 million.  The Commonwealth of Massachusetts (the “Commonwealth”) timely filed a claim of up to $1,182,668 on account of unredeemed Gift Cards, seeking priority status under Bankruptcy Code section 507(a)(7).  The Debtors objected to the claim, arguing that the claim should be afforded non-priority general unsecured status.

Bankruptcy Code section 507(a)(7) affords priority status to “allowed unsecured claims of individuals . . . arising from the deposit, before the commencement of the case, of money in connection with the purchase, lease, or rental of property, or the purchase of services, for the personal, family, or household use of such individuals, that were not delivered or provided.”  11 U.S.C. § 507(a)(7).  Although the Bankruptcy Code does not define “deposit”, the Court in City Sports looked to its ordinary meaning, highlighting that a deposit has a certain temporal relationship—that is, a transaction that requires additional steps to complete.  Op. at *10.  The court in WW Warehouse found that gift certificates satisfied the necessary temporal relationship because the purchase of a gift card requires an additional step—use of the card for an ultimate purchase.  Id. at *11.  However, Judge Gross disagreed, holding that the focus should be limited to the gift card purchase transaction itself (i.e., cash for the gift card), not the ultimate merchandise or services purchase, which would result in a potentially unlimited temporal extension.  The Court analogized the Gift Cards to money orders and store credits, which are more akin to the purchase of a transferable instrument for immediate delivery.  Op. at *13-14 (citing In re Northwest Fin. Express, Inc., 950 F.2d 561, 563 (8th Cir. 1991) (holding that money orders do not constitute “deposits”) and Utility Craft, Inc., 2008 WL 5429667, at *1 (Bankr. M.D.N.C. Dec. 29, 2008) (holding same with respect to store credits)).  The transaction is complete once those instruments are issued and therefore, they do not come within the definition of “deposit” or the priority status associated with section 507(a)(7).

The Court spent the balance of the Opinion analyzing the legislative history, albeit unnecessarily given the Court’s ruling as to section 507(a)(7)’s lack of ambiguity, and reached the same result—“Congress considered the plight of gift card holders in the context of retailer bankruptcy and decided not to afford such consumers priority status under 507(a)(7).”  Op. at *23.