Unused gift cards boosted Borders' revenue in final days
(This story has been corrected to reflect that gift cards were accepted after July 18 liquidation announcement.)
Defunct Ann Arbor-based book store chain Borders Group Inc. recorded a surge in revenue in the final month of its existence — but it wasn't because of a new wave of customers.
Borders reported only $3.3 million in sales during the period from Aug. 28 to Sept. 24, spanning the final liquidation of the chain's network of stores.
But it recorded $156.2 million in "other revenue" — which, according to a bankruptcy filing, included the "write-on of all unredeemed gift cards issued prior to" the company's Chapter 11 bankruptcy filing in February.
Many retailers don't treat gift card sales as revenue until they're spent — but in this case, all of Borders' stores are closed and competitor Barnes & Noble, which acquired Borders' intellectual property, isn't accepting Borders gift cards.
In effect, Borders gift cards are now useless, allowing the consultants who now run Borders' bankruptcy estate to record unused gift cards as revenue. Those funds will be distributed to the company's top creditors.
In 2008, the Michigan Legislature passed a law requiring newly issued gift cards to last at least 5 years before expiring. But that doesn't apply to gift cards issued by companies that have filed for bankruptcy, according to the Michigan Attorney General's Office.
Bankrupt companies are not obligated to accept gift cards — although Borders accepted them through the end of its liquidation.
Many retailers that file for bankruptcy transfer gift card funds "to their general funds, maintaining no reserve to make good on the cards, as home goods retailer Linens ’n Things acknowledged in its bankruptcy filing," according to Consumer Reports. "As a result, when a company seeks bankruptcy protection, gift-card proceeds become part of its assets, and claims by secured creditors come ahead of those filed by gift-card holders and other so-called unsecured creditors."