Sears to Repay Bankrupt Customers
Sears Roebuck and Co. said Thursday that it will repay customers who were pressured to continue paying off their Sears credit card debts even though they had filed for bankruptcy protection.
Sears stock fell nearly 8% after the nation’s second-largest retailer said the payments would affect 1997’s earnings.
Under threat of court action and a class-action lawsuit, the company said Thursday that “it exercised flawed legal judgment” in its handling of the debt collections.
Creditors often attempt to persuade people to agree to pay their debts after they file for Bankruptcy Court protection from creditors. Sears, though, did not report some of those agreements to judges--meaning that it was collecting on debts the courts had discharged. The affair opens a can of worms for the Illinois-based retailer, analysts said.
Two class-action complaints have been filed thus far, and Sears may be forced to pay penalties.
The affair also calls to mind the scandal involving unnecessary auto repairs. The company in 1992 paid $8 million to settle charges in California that it had made unneeded car repairs.
“It is an ill wind that will leave potential serious damage,” said Kurt Barnard, president of Barnard’s Retail Marketing Report.
Sears shares closed down $3.875 at $47 on the New York Stock Exchange.
The company told U.S. Bankruptcy Court Judge Carol Kenner in Boston that it will no longer contest allegations filed against it in a class-action suit.
At a hearing today, the judge could fine the company $500 for each case in which wrongdoing is found. In Massachusetts, there were 2,734 cases in 1995 and 1996.
Edward Weller, an analyst with Robertson Stephens & Co. in San Francisco, said the agreement could cost Sears as much as $75 million this year, given the vast size of the company’s customer base.
Sears launched a nationwide internal audit after it was alerted to the case of an unemployed Somerville, Mass., man, who was living off $500 monthly disability checks, Sears spokeswoman Jan Drummond said.
The man, Francis Latanowich, had $12,805 in debt discharged in Bankruptcy Court a year ago. But Latanowich agreed to continue paying off $1,161 he owed to Sears at $28 a month.
“Sears sent me a letter saying that I had to return the TV and stuff like that, and when I talked to them they told me that I could keep everything if I keep the credit card open,” he testified.
In November, however, he wrote to Kenner saying he was having trouble feeding his kids and asked the judge to dismiss the Sears debt. Kenner then opened an investigation into the matter and eventually discovered that the company had not been granted approval for the agreement.
Sears holds a secured interest in purchases made with its card, giving the company the right to reclaim purchased items if the buyer should default on his or her credit card debt or try to eliminate it by filing for bankruptcy. Sears can then say it will repossess the items to persuade debtors who file for bankruptcy protection to reaffirm their debts to the company.
The retailer said it is prepared to return, with interest, any money paid by customers whose so-called reaffirmation agreements were not filed with the court.
Chairman Arthur Martinez said customers across the U.S. had agreed to keep paying on $400 million in obligations dating to 1992. He said the retailer isn’t sure yet how many of the agreements were not cleared by the courts.
Martinez said he expects to report the amount of losses and the specific effect on earnings in a few weeks.
If Sears had to repay all of the $400 million, plus interest and penalties, earnings could be reduced by 82 cents a share, analysts said, although they said they expect the impact to be less.
Sears, which had net income of $1.27 billion, or $3.12 a share last year, had been expected to earn $3.62 a share for 1997.
The matter shouldn’t result in long-term damage to Sears, analysts and investors said, because the company is making the payments even though it isn’t required to, giving customers a $100 Sears gift certificate as an apology and responding quickly.
In 1992, Sears paid $8 million to Californians in an out-of-court settlement after customers accused employees of suggesting unneeded car repairs. The company’s 2,700 auto repair advisors were taken off a commission-based pay scale and put on hourly wages.
