Gift Card Holders Paid Before Secured Creditors in Radio Shack Bankruptcy

The ethics of bankruptcy is an under-explored but fascinating business ethics subject. This story surrounding the recent Radio Shack bankruptcy is excellent discussion fodder. Attorneys General around the U.S. have sought to intervene in bankruptcy proceedings to alter the order of satisfaction of creditor claims in bankruptcy. (The Obama Administration’s Justice Department did so in a high-profile way during the bankruptcies of General Motors and Chrysler.) Although one often sympathizes viscerally with the creditors on behalf of whom the AGs intervene (gift card purchasers in the Radio Shack case; autoworker unions in the GM and Chrysler bankruptcies), it’s an open question whether upsetting, on an ad hoc basis, the priority ordering of creditors that is laid down in bankruptcy law is wise public policy and whether it may have unintended consequences. There are also interesting elements of disclosure and notice to discuss in the Radio Shack case. >>>

LINK: RadioShack Agrees To Pay Outstanding Gift Card Balances Before Paying Other Debts (by Laura Northrup in Consumerist)

AG Ken Paxton accused the Shack of knowingly selling gift cards when it was about to file for bankruptcy protection. What normally happens with gift card holders in a retail bankruptcy is that they have to get in line behind the company’s secured creditors if they know to file a claim at all, and receive a tiny fraction of their card’s value or nothing at all.

Today’s settlement means that RadioShack will have to pay out the entire $46 million or so before paying its other creditors. The bankruptcy court will appoint a claims agent company to pay, and customers will have 12 months after the former Radioshack finally liquidates to file their claims with that company.

What do you think?

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