Sears to face round 2 in bout with courts

Discount Store News, June 23, 1997

BOSTON -- A Massachusetts bankruptcy judge has set an Oct. 28 hearing date to determine the fairness of the settlement Sears Roebuck & Co. has agreed to make with bankrupt customers for debts illegally collected and with the attorneys general of 39 states where those customers live.

In another consumer-related settlement, Sears has agreed to pay $580,000 to the state of Florida to settle complaints that it charged extra for a premium type of tire balancing that some customers never got.

In advance of the debt settlement hearing, Sears is taking a second quarter charge that will slash earnings by an estimated 25 to 40 cents a share for the second quarter from a previously expected 74 cents a share. In the second quarter last year, Sears earned 67 cents a share.

Last month, Sears agreed to refund $178 million to $275 million to consumers to eliminate what chairman Arthur Martinez called a "black eye."

"We were outside the law in the matter," Martinez told the press in announcing the settlement. "We were collecting money from people improperly and illegally."

Martinez declined to disclose how much of a charge Sears plans to take but said the amount would be "material."

Sears also settled with the Federal Trade Commission in the amount of $100 million, but the FTC said it would forgive the fine provided Sears reimburses customers as proposed.

The controversy broke out in April, when the Massachusetts bankruptcy court learned Sears was improperly collecting debts from as many as 200,000 bankrupt customers throughout the country--debts the bankruptcy courts said they no longer had to pay.

Creditors may continue to dun bankrupt customers, asking them to sign debt reaffirmation agreements. Sears persuaded many customers to continue to pay their debts by threatening to repossess the appliances and other big ticket items that secured the debt.

But if debtors do agree to continue to pay, their reaffirmation agreements must be submitted to the bankruptcy court for approval. And in hundreds of thousand of cases, Sears failed to comply with the law requiring it to submit the reaffirmation agreements for approval.

Under terms of the settlement, Sears is proposing to pay back the illegally collected principal and interest (as well as 10% interest on top of that) and to give each such debtor a $100 coupon good for additional purchases at Sears.

The actual amount Sears will pay hinges on determining exactly how many customers have been affected since 1992. Sears now is going back to 1992 to count the number.

In addition to consumer payments, the settlement would require Sears to pay $40 million to the attorneys general of the 39 states involved in the settlement. Moreover, Sears would set aside $25 million for possible judgments in the three class action suits that shareholders have filed.

Their suits charge that Sears improperly influenced stock purchases by failing to disclose that it was illegally collecting money from bankrupt customers.

Still to come would be any punitive damages that might be leveled against Sears, which could mean hundreds of millions more in costs.

In Massachusetts alone, some 2,700 bankrupt customers are involved, and the state law permits punitive damages of $5,000 for each. The damage awarded in one case already adjudicated, however, ran about $300.

Sears executives could also face criminal prosecution.

In 1992--for actions before Martinez came aboard--Sears got a previous public "black eye" over the issue of either making needless car repairs or overcharging for them in California and New Jersey. Sears paid a settlement of $47 million ($15 million after-tax) and got out of the overall car repair business, firing some 30,000 mechanics.

Its 780 auto service centers now handle just tire mounting and balancing, and battery installation.

Another automotive-related consumer problem, dating back to the period from 1989-1993, just caught up with Sears in Florida. On June 4, Sears settled complaints with the state of Florida that it had charged customers for a premium-price tire balancing service they may not have received. It agreed to pay a total of $580,000 to settle consumer complaints that it was continuing to charge for a premium tire balancing service called AccuBalance even after Sears had removed the balancing machines from its auto shops.

The AccuBalance process shaved minute bits of rubber off tires for what was supposedly a superior service than the usual spin balance by making them rounder and "matched" to the tire rim. Sears continued to charge $3 extra, even after it removed the AccuBalance machines from its auto shops, attorney general Bob Butterworth said in announcing the settlement.

Of the settlement money, $300,000 will go to the AG's Seniors vs. Crime Program, $180,000 to help fund a telemarketing fraud task force, and $100,000 to pay for the costs of the state investigation.