CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2002 No.21 November 6, 2002

Vol 2002 No. 21 November 6, 2002

New Law Protects Value of Gift Certificates

AB 2473 is a new state bill that attempts to protect the value of gift certificates even after the issuer goes into bankruptcy. The bill adds Section 1749.6 to the Civil Code, and provides that if the issuer of a gift certificate has filed for bankruptcy, it must continue to honor any gift certificate that had been issued prior to the petition. Also, the issuer may not make redemption or use of a gift certificate invalid in the event of a bankruptcy.

CBA worked closely with the bill author to address creditor concerns about how the residual liabilities that these certificates represent affect proceedings in bankruptcy. As drafted, the bill appears to create a liability that sits ahead of other creditors' rights, a result that, because it conflicts with federal bankruptcy law that restricts payment of pre-petition obligations, may not be enforceable. As a result of CBA efforts, the bill provides that an issuer is not required to redeem a gift certificate for cash, nor does a certificate owner hold an interest in any specific property of the issuer. These provisions further diminish the chances of creating a new class of bankruptcy creditors. But how a bankruptcy court, whose proceedings are governed primarily by the Federal Bankruptcy Code, will handle these new state law obligations remains to be seen.

The bill specifies that a gift certificate represents value held "in trust" by the issuer on behalf of the "beneficiary" of the certificate, and that the value belongs to the beneficiary and not to the issuer. However, the bill, as amended, states specifically that it does not create a fiduciary or quasi-fiduciary relationship between the owner of a gift certificate and the issuer.

The bill also provides that it creates no obligation to replace a gift certificate that has been lost or stolen, or to maintain a separate account for the funds used to purchase the gift certificates. The bill creates no obligation to pay interest on the value of a gift certificate.

SB 2473 is effective on January 1, 2003. If you have any questions, you may contact Pat Zenzola, the lead lobbyist on this bill, at 916-441-7377 x210.