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02.15.17

Here’s Something New: A Retailer’s Gift Card Program Seeks Bankruptcy Protection

Teen apparel chain Wet Seal LLC has filed for bankruptcy protection for its gift card program, a move that a long-time bankruptcy attorney says he has never seen before. Earlier this month, the retailer filed for its second bankruptcy in two years.

The most recent bankruptcy filing, with the U.S. Bankruptcy Court for the District of Delaware, shows that the retailer has liabilities of between $50 million and $100 million, and that it owes $608,977 to FedEx Corp., Wet Seal’s largest creditor. Wet Seal last filed for bankruptcy protection in 2015.

The most recent filing contains no specific financial information about the Wet Seal Gift Card LLC, the separate gift card entity, nor did Wet Seal respond to a request for comment about why that entity was included. “It is my suspicion, and only a suspicion, that when Wet Seal emerged from Chapter 11 the first time it filed, its post-bankruptcy lenders insisted on a separate entity to handle the gift cards,” says Charles Tatelbaum, director of the Florida-based law firm Tripp Scott. Doing so, he continues, would help protect the retailer from consumer claims for unused gift card values. That said, “I also suspect that the separate gift card entity has no meaningful assets from which the consumers may recover.”

He adds that in his 50 years of bankruptcy work, this filing marks the first time he has seen “a separate entity for gift cards [seeking] bankruptcy court protection.” The Wet Seal filing serves to remind consumers the “uncertainty of obtaining the value of their gift cards” in bankruptcy proceedings, he wrote in a recent column for The Observer. “Gift cards with retailers and other businesses are nothing more than a credit with the issuer, and that credit is no different than any other obligation owed to creditors of the retailer.”

U.S. adults bought about $46 billion worth of gift cards in 2015—and a significant chunk of that total was comprised of gift cards for self-use, according to market research firm Packaged Facts.

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