Gift Card from Blockbuster? Fuhgetabboudit

Did you get a gift card to Blockbuster that you haven't used completely? If so, throw it away.

Blockbuster filed Chapter 11 bankruptcy last year, as was widely expected. Up until last week, it looked like Blockbuster might be destined to become one of those companies that just quietly fade away until one day you suddenly notice they aren't there anymore. But last week Dish Network offered $320 million for Blockbuster, a higher number than the liquidation value of the entire chain. So it looks like Blockbuster might live on.

If so, its gift cards are no longer accepted. Gift cards are a form of "executory contract" under the Bankruptcy Code. An executory contract is one that still has to be performed by one or both parties. In this case, Blockbuster still had to perform by renting movies to holders of the cards. In Chapter 11 a debtor can "reject" executory contracts, meaning the debtor simply says, "I'm not going to perform my obligation under the contract." And that's exactly what Blockbuster has done. Go into any of their retail outlets and you'll see signs posted that say that after April 6, 2011, gift cards are no longer accepted.

The other parties to rejected executory contracts, in this case holders of gift cards, become general unsecured creditors in the Chapter 11 case. General unsecured creditors are the lowest form of creditor life in a bankruptcy, entitled to be paid after virtually everyone else gets something, and then only if there is any money left. In reorganizations, general unsecured creditors sometimes get a few cents on the dollar. But in order to get paid, they have to file a proof of claim. In the case of Blockbuster gift cards, the potential return to holders probably isn't worth the price of a stamp to mail the claim in.

Blockbuster Headed to Bankruptcy?

The Los Angeles Times reports that Blockbuster, the movie rental giant for the last decade, will file a "pre-planned" Chapter 11 as early as next month.

A pre-planned bankruptcy is one in which most, if not all, of a debtor's creditors agree to the reorganization plan before filing. The debtor is in and out of bankruptcy relatively quickly. In Blockbuster's case, it hopes this will be about five months. The presumed major benefit to Blockbuster will be the ability to shed its most burdensome store leases, those where the retail outlets aren't performing but the company remains saddled with long term leases with landlords. In a Chapter 11, a debtor can reject any unexpired leases, meaning it simply cancels the remaining term. The landlord has an unsecured claim for unpaid and future rents, but since most unsecured creditors receive very little in a reorganization, this is small consoloation to the landlords affected.

Beaten down by changing consumer tastes, Blockbuster, which once the the undisputed leader in DVD rentals, has seen its stock delisted by the New York Stock Exchange. The stock now trades on the OTC (over the counter) market and recently traded at 11 cents/share.