The Examiners: Assure Consumers That Gift Cards, Privacy Will be Pro...

Do shoppers suffer too much in bankruptcy, or should they be expected to share the pain?

Brick-and-mortar retailing is in upheaval. The Internet is changing the way people shop and buy, in case any brick-and-mortar retailer hasn’t yet noticed. Traditional retailers that can’t adjust quickly enough will end up in chapter 11. When one does, customers can face problems with their gift cards, warranty claims, return-if-not-satisfied privileges and assurances of privacy protection regarding their customer information.

RadioShack is one of the retailers in bankruptcy. The Texas attorney general sued RadioShack over unused gift cards and vowed to protect consumer privacy in RadioShack’s bid to sell consumer data.

How should these consumer claims be handled in bankruptcy? At base, they are unsecured claims, only some of which are entitled to any priority even among unsecured claims. For a nationwide retailer that closes some stores but restructures others with its basic business continuing, management typically will want to honor consumer claims and will want to announce that it is doing so right away so as to keep customers’ goodwill. Even if the consumers’ claims are technically debts that are subject to a haircut like other unsecured creditors’ debts, there’s good reason to think that the harm in goodwill to the organization from not honoring the consumer claims right away (irate customers, bad press, marketplace uncertainty) is a negative for the organization and even for the other creditors. Airlines in bankruptcy, for example, honor their tickets already written—which are no more than claims—and typically, so do retailers that expect to continue operating. It’s common for retailers to seek and obtain the judge’s approval to make good on their retail customers’ claims, as if the retailer wasn’t even in bankruptcy.

A case can be made to generalize this custom. While some retailers here or there may not want to honor consumers’ claims, particularly if they plan to fully shut down, the economy could be better off if we generalized the custom and thereby made consumers confident that they can use their gift cards, return merchandise and look for warranty support. Consumers do get a priority, but only up to a certain dollar limit, for deposits they’ve made for purchases from the debtor. This priority could be expanded to cover consumer basics and allow the claims to be paid early or, better yet, to allow the gift cards to be used and the merchandise returned if the warranty permits, without the consumer filing a claim—a stressful process for the uninformed—and without consumers having to wait to be paid at the end of the bankruptcy.

Privacy concerns are in a different category from typical consumer dollar and warranty claims. We value privacy as something different from being just money, and that preference for privacy supports a privacy exception to bankruptcy’s basic assignment, breach and sale rules, which allow the bankrupt debtor more leeway inside bankruptcy than outside it in complying with some obligations, like those to honor privacy promises. Just like bankrupt debtors have to comply with ongoing government regulation because it often represents a more substantial public obligation, privacy has a similar public, governmental quality for many Americans—one that should be respected by the bankruptcy process.

Mark Roe is a professor of law at Harvard Law School in Cambridge, Mass.