Creditors' Rights in Chapter 11: Use Them or Lose Them

The old adage “use it or lose it” applies at every stage of a Chapter 11 case. In the interest of finality, strict deadlines for filing claims, opposing motions, assuming leases, and performing myriad other tasks can impose onerous consequences on parties who fail to heed them. Nowhere is this seemingly harsh — but essential — reality more evident than in the ongoing saga of a group of three holders of gift cards, totaling $225.00 in value, issued by the now-defunct Borders bookstore chain. After nearly three years of litigation, the Second Circuit Court of Appeals recently affirmed a district court order dismissing as equitably moot the gift card holders’ appeals from an assortment of bankruptcy court orders, and expressly clarified for the first time that the doctrine of equitable mootness applies in liquidating Chapter 11 cases, not just reorganizations. In re BGI, Inc., f/k/a Borders Group, Inc., 772 F.3d 102 (2d Cir. 2014). As a result, the three gift card holders, who waited until seven months after the bar date to attempt to file proofs of claim and move to certify a class of other gift card holders, and who never opposed confirmation or sought to stay the effectiveness of Borders’ Chapter 11 plan, are simply too late.

Background

At its peak, Borders operated over 1,000 stores across the United States and Puerto Rico. Borders and several affiliates filed Chapter 11 petitions in February 2011, but were unable to locate a going-concern buyer and thereafter entered into an orderly liquidation. At the conclusion of Borders’ liquidation in September 2011, an estimated 17.7 million gift cards were outstanding, with unredeemed balances totaling approximately $210.5 million, for an average unused balance of $11.89. Although the amounts may seem large, Borders’ gift card program dated back to 1998, with several billion dollars of gift cards sold over time. A significant portion of Borders’ unused gift card balances reflected “breakage” — the unused portion of a gift card left over and often abandoned or not used after making a purchase for less than the full amount on the gift card.