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Up to 3 million customers who bought Sharper Image Corp.’s allegedly defective air purifiers will now have to fight for refunds in bankruptcy court and will likely get little money back, according to bankruptcy experts and lawyers involved in a class action against the company. During hearings on a proposed settlement in a class action against Sharper Image last year, financial experts argued that the company would go bankrupt if the settlement was not approved. That’s exactly what happened. The San Francisco retailer filed for Chapter 11 bankruptcy protection late last month in Delaware, citing problems with the Ionic Breeze air purifier, which was the subject of at least two class actions in California and Florida. The 184-store chain also cited plummeting stock prices, negative publicity and a failed libel suit. Following the bankruptcy filing, stay orders were issued in the California and Florida class actions. Whether Sharper Image deliberately filed for bankruptcy to avoid paying settlements is a matter of disagreement. ‘It’s a shame’ Michael Tein of Lewis Tein in Coconut Grove, Fla., one of the plaintiffs’ lawyers in the litigation, believes that is the case. A settlement was in the works at the time of the filing. “It’s a shame for consumers that Sharper Image has manipulated the court process the way they have,” Tein said. “They wanted to stonewall every single court action. A bankruptcy proceeding is one more play in their bag of tricks.” Harvey Miller, a partner at Weil, Gotshal & Manges in New York who is representing Sharper Image in the bankruptcy, denied that the company filed for bankruptcy because of the litigation. Rather, a “liquidity crisis” caused by a sales decline and the faltering economy was the reason, he said. “Unfortunately, their products are not necessities,” Miller said. The air purifier’s “notoriety” did lead to the bankruptcy because it was one of their best-selling products, he added. Miller said it was too early to say how plaintiffs will fare in bankruptcy court, as unsecured creditors. “It depends on the value of collateral security,” he said. Robert Gilbert, a bankruptcy lawyer and partner in Tampa, Fla.-based Carlton Fields’ West Palm Beach, Fla., office who is not connected to the litigation, believes that Sharper Image likely filed for bankruptcy to avoid paying off the class action. “[I]t is not infrequent to see a debtor that files a bankruptcy that has lots and lots of litigation surrounding it,” Gilbert said. “All the asbestos companies have been sued over the last 30 years and quite a few have landed in bankruptcy court.” But both Gilbert and another Carlton Fields partner, Benjamine Reid in Miami, who specializes in class action law, said that plaintiffs will most likely get a small fraction of what they are owed. The good news for Sharper Image is that, unlike the asbestos companies, it most likely will not have to pay out any products liability claims for injuries or deaths associated with its product. “In the real world, I would surmise [the plaintiffs] are behind all the secure creditors [in getting paid],” Gilbert said. “They’re looking at pennies on the dollar.” Reid added that “there has been a raging debate between the plaintiff bar and defense bar on the use of bankruptcy as a litigation tactic. It’s like a game of chicken.” Two major class actions were filed against Sharper Image in recent years, following articles in Consumer Reports that, despite the company’s claims, the machines were ineffective at removing dust, pollen and other pollutants and in effect might cause some respiratory problems. A reported 3 million customers bought the $300 machines nationwide. In January 2007, a settlement was close in a case in Miami federal court that would have awarded customers coupons worth $19 to be used toward future purchases, plus an “ozone guard” attachment. Figueroa v. Sharper Image Corp., No. 1:05-cv-21251-CMA (S.D. Fla.). Tein, who represented plaintiffs in a parallel case in California state court, intervened in the Miami case. He strenuously objected to the coupons, saying they violated the spirit of the Class Action Fairness Act. Tein was seeking a full refund for all customers who desired them � a plan that could conceivably have cost the company $900 million. At a hearing in August, financial experts hired by Robert Parks, a Miami attorney representing plaintiffs in the Miami case, and his team argued that full refunds would bankrupt the company, which was already teetering financially. U.S. District Judge Cecilia Altonaga ultimately denied the coupon settlement as unfair to consumers in October. Since then, Tein, Parks and other attorneys joined forces and were working toward another coupon settlement that neither attorney will disclose. “We were in preliminary talks when the bankruptcy was filed,” Parks said. “It had become a race to the courthouse steps.” Of the bankruptcy filing, Parks said, “I told you so. You can only load so many sticks on a mule’s back before it collapses.” Parks said he has no hope of getting the $1.7 million attorney fees he and several colleagues were set to share under terms of the Miami settlement. “I’ll be lucky to get my costs back,” he said. Tein has not revealed how much his attorney fees were to be. Both Tein and Parks plan to continue their fight for plaintiffs in bankruptcy court. While Parks plans to register his plaintiffs as unsecured creditors, Tein plans to move for an adversary proceeding on behalf of his plaintiffs.

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