Sharper Image demonstrates perils of gift cards

Holders of Sharper Image gift cards have been getting a hard lesson in some of the downsides of gift cards.

Some three weeks after the specialty retailer filed Chapter 11 bankruptcy on Feb. 19, owners of gift cards and merchandise certificates are facing confusing options about what to do with those obligations, which the retailer initially said it wouldn't honor, at least for the time being.

On March 7, the U.S. Bankruptcy Court for the District of Delaware granted the retailer’s request to resume honoring its cards and certificates—but only for customers who make a purchase of at least twice the value of the card or certificate. So to use up a $50 gift card, a customer would have to buy at least $100 in merchandise.

Initially, the San Francisco-based retailer specifically told the court that it was not seeking interim authority to redeem its estimated $42.6 million in outstanding cards and certificates, including those cards it sold to Discover and American Express for use in those companies’ membership rewards programs. But that was before Feb. 27, when competing retailer Brookstone took advantage of the situation by offering to give anyone who surrenders a Sharper Image gift card, merchandise certificate, or similar obligation a 25 percent discount off their entire purchase at any of Brookstone’s 314 stores nationwide. (Brookstone’s offer does not apply to Web site purchases or to Sony, Celestron, Bose, Panasonic and Tempur-Pedic products.)

In its March 3 motion to the court, Sharper Image wrote:  “Brookstone is only one of undoubtedly many Sharper Image competitors that will attempt to capitalize on the fact that Sharper Image is currently prohibited from honoring its gift certificate and merchandise certificate programs by instituting promotional programs designed to draw customers away from the Sharper Image.”

The case is just one more reason why holders of gift cards, merchandise certificates, store credits and similar obligations should use them as quickly as possible and think twice about purchasing them in the first place. Last December, Consumer Reports Money Adviser reported on the problems with gift cards, including the risk of issuer bankruptcy. With growing problems in the economy, other retailers might also go under, leaving consumers with worthless obligations.

“It is not a surprise to us that people are having problems using these cards once [the store goes] into bankruptcy. The general advice is spend them quick. That advice is even better right now,” said Evan Johnson, administrator the Montgomery County, Md., Office of Consumer Protection. Johnson conducts an annual survey of gift cards to determine the fees and other conditions that card issuers impose.

The case could end up testing relatively recent state laws in California and Washington that prohibit retailers from using bankruptcy as a reason not to honor gift cards and certificates. In those states, the value of those obligations is deemed to be held in trust for consumers and not the property of the company. California last week tried unsuccessfully to get a state court to intervene. Attorneys general in both states say they are studying whether to raise the issue in the bankruptcy court.

YOUR CHOICES
If you have Sharper Image gift cards and merchandise certificates, what should you do? Here are your options:

• Redeem the card or certificate at Sharper Image. You can use it only if you spend twice its value. While that may seem unfair, especially if you received the card as a gift, it could be your easiest and least-costly option. The offer might not be valid at the 90 Sharper Image stores that the company plans to close as part of its reorganization plan, about half its outlets. Also, if Sharper Image fails, it won’t be there to honor its return policies or any other rights you may have if a products turns out to be defective.

• Redeem the card or certificate at Brookstone. In this case, you’d receive a 25 percent discount on your entire order if you surrender a Sharper Image gift card, rewards card, gift certificate, or merchandise credit. You won’t get the entire amount of the card or other obligation unless your purchase equals at least four times its value. For example, someone who has $50 on a Sharper Image Gift card would need to purchase $200 in Brookstone merchandise to receive the card’s full benefit. On the other hand, if your purchase exceeds $200, you would end up saving more than the value of your card. Brookstone spokesman Robert Padgett said a Brookstone store in Atlanta sold Sharper Image card holders three $4,500 massage chairs, giving a 25 percent discount on each.

• File a challenge. If the Sharper Image gift card or certificate was purchased recently using a credit card, the credit cardholder can try challenging the purchase with the credit card issuer. But this might not work. For one thing, you might already be past the time limit on such claims. Also, the credit card company might not agree with your claim.

• Wait out the bankruptcy. This is probably the least attractive option. For this to work for you, Sharper Image must reorganize successfully and resume honoring its gift cards and merchandise certificates without conditions. In its court filings, the company reported that as of Jan. 31, it had $251.5 million in assets and $199 million in debt. If Sharper Image goes out of business, card and certificate holders will have to line up behind the secured creditors for a piece of the liquidated assets. Typically, consumer creditors receive pennies on the dollar, if anything.

If you choose to roll the dice with this option, send a proof of claim form to Sharper Image Corp. Claims Processing, c/o Kurtzman Carson Consultants LLC, 2335 Alaska Ave., El Segundo, Ca 90245 (tel.# 866-381-9100). Be sure to designate yours as a priority claim. To do this, check the box next to “Up to $2,425 of deposits toward purchase, lease or rental of property,or services for personal, family, or household use,” and enter the entire amount on the line labeled  “Amount entitled to priority." This may place you ahead in the line of unsecured creditors.— Anthony Giorgianni

Comments

[Giftcardblogger]

Great post! This unfortunate development with The Sharper Image shows how important it is for consumers to be aware of what is going on with a company before purchasing a gift card from the company. It is equally important for people to use their gift cards sooner than holding on to them for extended periods since you never know what may happen to the company.

For more on this, check out my recent article on the same topic: http://www.giftcardblogger.com/gift-card-nightmare-when-the-gift-card-issuer-goes-bankrupt/

[Vic]

How is it possible that Sharper Image continues to offer merchandise receipts with purchases made on customers' Sharper Image credit cards?
They won't redeem my merchandise receipt, but they will try to hook other unsuspecting consumers with this sales pitch.

Can someone brighter than myself explain how the bankruptcy laws continue to discriminate against consumers in this country? It looks like the only recourse I have is to go to Brookstone and accept their offer of honoring Sharper Image gift cards and merchandise receipts.

[Austin]

Hi, I’m with a company called Leverage. I’m responding for several reasons. 1) I want to inform the consumers that we have a new bankruptcy policy that allows customers holding gift cards purchased via its LeverageCard.com destination from Sharper Image and other merchants filing for Chapter 11 bankruptcy protection to transfer remaining, unredeemable balances to gift cards from other retailers available on the Leverage site. 2) also to get the word out there so that people know there's a free service available to help them.