The Examiners: Existing Safeguards Protect Shoppers

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

With the recent increase in retail bankruptcies, more shoppers understand that they share the pain that lenders, suppliers and even employees and retirees now expect when they hear of a bankruptcy filing. While this heightened sensitivity is not without good reason, shoppers actually fare pretty well in comparison to other creditors, since as customers they are not just creditors but also an important asset! Several of the most prevalent consumer concerns include the redemption of unused gift cards, the recovery of deposits if goods aren’t shipped and the protection of personally identifiable information to avoid identity theft and new, perhaps unwanted, solicitations.

Although the issue of honoring gift cards gained some notoriety in recent retail bankruptcies, consumer apprehension toward these retail programs seemed to exceed the real risk. On filing, it is actually quite common for large retailers to seek court approval for the continuation of gift-card programs. RadioShack, Borders, Linens ‘n Things, Circuit City and Delia’s are just a few recent examples of debtor retailers that obtained court approval to honor consumers’ unused gift cards. So the easiest way for consumers to protect themselves is to use the gift card quickly. Alternatively, a competitor may honor a bankrupt retailer’s gift cards to attract new customers.

In cases like Sharper Image, Borders and RadioShack , class or group actions were filed to protect the higher priority status permitted for gift-card claims under the bankruptcy code and to protect these individual creditors from getting lost in the often complex claim-filing and claim-administration process.

Consumers who put down a large deposit with a retailer for programs like pre-sales, financing agreements or layaway are creditors, but certain states actually require retailers to hold consumer deposits in separate protected trust account. Further, even unsegregated customer deposits receive a priority claim status under the bankruptcy code to allow them to be paid before the claims of other unsecured creditors.

With the increased use of credit cards, email solicitations and internet shopping, retailers maintain and access sensitive and confidential shopper information. In virtually every retail bankruptcy case where debtors seek to sell their assets, the sale typically includes valuable customer lists compiled from years of retail data mining and consumer profiling. Customers, however, actually receive several levels of protection. The retailer’s privacy policy, often described clearly on its website, continues to apply in the bankruptcy context. The bankruptcy code itself provides for a privacy ombudsman charged with protecting the consumers’ private information in the context of a bankruptcy sale. Additionally, state attorneys general and the Federal Trade Commission often appear in these retail cases to oversee transactions involving consumer data.

While consumers’ private information can be sold in a bankruptcy case, the seller and buyer must abide by the seller’s privacy policy or other safeguards required by the privacy ombudsman, federal and local regulations and the bankruptcy courts. Gift cards, cash deposits and pre-sale financing agreements leave consumers in very distressed retail cases in the same situation as most other creditors, that is with little, if any distributions. However, given the generally small amount of the individual gift card or deposit claims as compared to other losses suffered by larger creditors, employees, and retirees—perhaps calling this suffering “too much” is an overstatement except to the extent that any creditor suffering is “too much.”

Sharon Levine is vice chair of Lowenstein Sandler LLP’s national bankruptcy, financial reorganization and creditors’ rights practice. Follow her on Twitter at @LevineSharon