Unredeemed gift cards do not give rise to priority claims under Section 507(a)(7), according to a decision by Bankruptcy Judge Kevin Gross of Delaware in the liquidation of retailer City Sports Inc.
Judge Gross concluded in his Aug. 4 opinion that both the plain language of the statute and legislative history require denial of priority status. He disagreed with the conclusion in a 2004 Delaware case called WW Warehouse Inc., written by now-retired Bankruptcy Judge Joel Rosenthal of Massachusetts, who was a visiting judge.
Section 507(a)(7) allows a seventh-priority claim, now $2,850, “arising from the deposit” of money “in connection with the purchase” of “property, or the purchase of services, for personal, family or household use . . . that were not delivered or provided.”
In the prong of his decision focusing on statutory language, Judge Gross focused on the word “deposit,” which has a “temporal relationship” that “expressly applies to incomplete transactions, that is, transactions requiring additional steps to reach completion.”
In his view, transactions involving money orders, store credit or gift cards are transactions that were completed when they were issued. Judge Gross said he was “unwilling to apply a potentially unlimited transactional duration to gift card purchases.”
Although he believes the statute by itself is “clear and unambiguous,” Judge Gross acknowledged that some courts found the section ambiguous. He therefore studied legislative history and reached the same conclusion.
“At first sight,” Judge Gross admitted that legislative history might indicate priority status. “On closer examination,” he found “that Congress likely did not intend to protect gift card consumers.” He based his conclusion in part on the House Report that listed layaway plans and merchandise deposits as being covered but did not mention gift cards, which some scholars had urged to be covered by the then-proposed amendment.
Judge Gross said that the “reason Congress omitted gift card holders is not clear.”
The decision “may be purely academic,” Judge Gross said, because the case might be administratively insolvent, leaving nothing to pay gift card claims even if they qualified for priority status.