Fort Worth-based RadioShack won court approval Thursday of a settlement involving priority treatment of certain gift card holders in the company’s bankruptcy and has agreed to sweeten the deal for other cardholders.
Under the settlement approved by a Delaware bankruptcy judge, holders of roughly a third of the $46 million in gift cards will receive priority status and have claims paid in full.
But in a major deal reached shortly before the hearing, General Wireless — an affiliate of the hedge fund Standard General that acquired the RadioShack trademark and more than 1,740 of the electronics retailer’s stores — has agreed to honor all gift cards for 50 percent of merchandise purchases.
$46 millionThe amount in outstanding RadioShack gift cards
That means gift card holders who lack priority status under Thursday’s settlement have an alternative to being left with pennies on the dollar, if anything, as general unsecured creditors.
“They get the benefit they bargained for,” said Cathy Hershcopf, an attorney for RadioShack’s official committee of unsecured creditors. “We think the settlement is a very, very generous settlement.”
The update to the original deal is still subject to court approval at a hearing next week on whether to confirm RadioShack’s overall bankruptcy plan. But Judge Brendan Shannon described it as a “significant development and a positive one.”
Meanwhile, Shannon refused to grant class action status to a proposed class of individual cardholders who challenged the underlying settlement, which was negotiated with the attorneys general of several states, led by Texas.
The holder of a $20 card could use it to cover $5 of a $10 purchase but could redeem the full amount of the card for a purchase of $40 or more.
“Having approved the settlement, I’m not satisfied that class certification is necessary,” Shannon said, adding that the creditors committee and attorneys general can adequately represent cardholders.
Under the settlement approved Thursday, cardholders are divided into five categories based on the circumstances in which they obtained their cards.
People who bought cards for themselves or someone else have priority status for payment of claims, along with people who “reloaded” cards with more money. A small subset of people who hold cards that were issued from 2000 to 2004 and have been “deactivated” would also be allowed priority claims.
Holders of other cards, including promotional giveaways, and cards given in exchange for merchandise returns or in response to customer service complaints, are lumped in with general unsecured creditors.
But under the proposed add-on, all gift cards would be honored at RadioShack stores, good for half the purchase price of merchandise being bought. Thus, a holder of a $20 card could use it to cover $5 of a $10 purchase but could redeem the full amount for a purchase of $40 or more.
Attorneys said that’s a significant improvement for nonpriority cardholders, who as general unsecured creditors would at best recover pennies on the dollar for their gift card balances and would be subject to a $10 minimum recovery threshold.
That means they likely would receive nothing unless the balance was $500 to $1,000, said Clint Krislov, an attorney for the purported class of individual cardholders.
The judge noted that “there’s not a large amount of merchandise returns at that number.”
While Krislov said the proposed change is an improvement, he argued that it means little if RadioShack does not take adequate steps to ensure that as many gift card holders as possible receive proper notice of their rights.
RadioShack attorney Greg Gordon said the company has agreed to send email notices to all cardholders whose addresses are on file. Cardholders can also go to a website to learn about their rights. The creditors committee and attorneys general will oversee the notice process to ensure that consumers are adequately informed.