March 16, 2017

Delaware Bankruptcy Court: Unredeemed Gift Cards Are Not Entitled to Priority Status

Zachary I. Shapiro – March 16, 2017

Prior to its bankruptcy filing in In re City Sports, Inc., No. 15-12054 (KG) (Bankr. D. Del. Aug. 4, 2016), City Sports, Inc., a Boston-based sporting goods retailer, sold prepaid gift cards for use at its retail locations. As of the petition date, gift cards with unredeemed balances totaled about $1.4 million. Pursuant to relief granted by the bankruptcy court, gift cards were honored at City Sports’ retail locations for the first 30 days of the bankruptcy case but not thereafter. At the time City Sports stopped honoring gift cards, unredeemed gift cards totaled about $1.1 million. The Commonwealth of Massachusetts 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) for that amount. City Sports objected to the claim, arguing that the entirety of the claim should be treated as a nonpriority, general unsecured claim. The bankruptcy court’s decision in City Sports addressed the merits of the objection.

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