Don’t wait to spend those gift cards sitting in your junk drawer. The Second Circuit Court of Appeals held in an October 29, 2014 decision that gift card holders may be out of luck trying to file claims for unused gift cards if they wait too long, even if the card holder had no idea the company issuing the gift card had entered a bankruptcy proceeding.

In Beeman et al., v. BGI Creditors Liquidating Trust, Curtis R. Smith as Liquidating Trustee (In re BGI, Inc. f/k/a Borders Group, Inc.), the Second Circuit Court of Appeals upheld Southern District of New York Bankruptcy Judge Glenn’s ruling, and the subsequent District Court decision that an appeal of the bankruptcy court ruling was equitably moot, denying three gift card holders the right to file late proofs of claim.  The three gift card holders claimed they did not know Borders (the now-defunct book store chain) had filed a bankruptcy case. The Second Circuit also upheld the denial, as moot, of the gift card holders’ motion to certify a class.  By using the doctrine of “equitable mootness” the Second Circuit upheld the findings of the lower courts that allowing the gift card holders’ late claims would unravel the series of intricate transactions which resulted in an almost fully consummated liquidation plan under chapter 11.

Borders filed a voluntary petition for chapter 11 protections in the Bankruptcy Court of the Southern District of New York in February, 2011. The bar date order stated that prepetition creditors must file their claims by June 1, 2011. A notice of the bar date was published in the national edition of the New York Times.  The bar date order allowing for notice by publication to unknown creditors was never appealed.

On July 1, 2011, the Bankruptcy Court authorized Borders to close its stores and liquidate substantially all of its assets. On September 20, 2011, the last bricks and mortar Borders store was closed and, a week later, all online sales ceased. Many holders of unredeemed gift cards who were presumably aware of the chain’s closure took steps to ensure they were able to take advantage of the full value of the cards.  In fact, the Second Circuit noted that “[g]ift card redemptions constituted nearly one hundred percent of Borders’ net sales in the last month of the chain’s operations.”  A notice of the plan confirmation hearing was also published in the New York Times on November 16, 2011. The confirmation hearing was held December 20, 2011, with no objections filed or appearances made by the late claimants.

Two weeks later, however, two of the gift card holders moved for authorization to file an untimely proof of claim, saying the New York Times notice was insufficient and they did not have actual notice of the deadline to file a claim. A third gift card holder simply filed a late claim without prior authorization.

The gift card holders claimed that they were entitled to actual notice and that the constructive notice of the New York Times publication was insufficient. Judge Glenn held that gift card holders are unknown creditors to a debtor and therefore actual notice is not necessary. The constructive notice of the New York Times publication, as permitted by the Bankruptcy Rules and the Order setting the bar date, was sufficient. 

On appeal, the Court of Appeals in the Second Circuit held that the theory of “equitable mootness” applied to the gift card holders’ appeals of the denial of their requests to file late claims. The court applied a five factor test from Frito‐Lay, Inc. v. LTV Steel Co. (In re Chateaugay Corp.), 107 F.3d 944 (2d Cir. 1993), analyzing: (1) whether the court can still order effective relief; (2) whether such relief will affect the re-emergence of the debtor as a revitalized corporation; (3) whether such relief will unravel intricate transactions so as to knock the props out from under the authorization for every transaction that has taken place and create an unimaginable, uncontrollable situation for the bankruptcy court; (4) whether the adversely affected parties would have notice and an opportunity to participate in the proceedings; and (5) whether the appellant pursued with diligence all available remedies to obtain a stay of the execution of the objectionable order and, if the failure to do so creates a situation rendering it inequitable to reverse the orders on appeal.

The Court of Appeals stated that by applying these factors to the case at hand, “we have little difficulty in concluding that the District Court (which upheld the Bankruptcy Court’s ruling) did not abuse its discretion in dismissing the gift card holders’ appeals as equitably moot.” The plan had been substantially consummated, having distributed approximately half of the administrative and priority tax claims thus far, with approximately $90 million held to be distributed to over $800 million in priority and general unsecured claims. The court held that the gift card holders did not meet the Chateaugay 5-part test, in particular because they could not ensure adequate process for the parties that would be adversely affected by allowing late claims and could not demonstrate their diligence by obtaining a stay of execution.

As a result, the Court of Appeals affirmed the lower courts’ equitable mootness findings, and also held that certifying the class would subsequently be moot as well.

The Chateaugay 5-part test confirms that Bankruptcy Courts may take into account the significant work that goes into confirming a chapter 11 case in order to prevent creating an “unimaginable, uncontrollable situation” for the court to administer.  Ultimately, the gift card holders were left with gift certificates so worthless that, ironically, they could not even be used to buy a copy of the New York Times. And so, with the holidays fast approaching, it is time to open that junk drawer and dust off those old gift cards – spend them now before you miss the chance.