SEARS, ROEBUCK & CO. is about to pay an enormous penalty — as much as $265 million — for having dared to do something that US law increasingly frowns on: getting deadbeats to pay their bills. Thanks to the obtuseness of a US bankruptcy judge, Sears is going to be mailing Christmas bonuses this year to some of its worst credit-card customers — the ones who welsh on their debts.
The facts of this case take a bit of explaining. The equities are as clear as day.
Once upon a time, it was understood that customers paid for their purchases and borrowers honored their debts. If you couldn't afford something, you didn't buy it. If you took out a loan, you found a way to pay it back. To go bankrupt was a humiliation; unless you were the victim of a natural disaster or were wiped out in a depression, you shunned bankruptcy at all costs.
That was then, this is now. Today, under the Bankruptcy Reform Act of 1978, nearly anyone can walk away from his debts. The law makes it so easy to stiff creditors that nearly 1 million Americans do so annually. To be sure, some of those who take refuge in bankruptcy have suffered crushing personal calamities and would become destitute without legal protection. But for tens of thousands of others, declaring bankruptcy is simply a maneuver for cheating creditors.
Most bankruptcy filings go uncontested. Creditors know that the odds of ending up with more than a few pennies on the dollar of debts owed them are somewhere between slim and nil. But Sears, which believes in pursuing customers who don't pay their bills, takes a secured interest in purchases charged to a Sears credit card. That gives it the right to repossess an item if a customer defaults or declares bankruptcy. In truth, most of the time it wouldn't bother to reclaim a used mattress or washing machine. But by threatening repossession, Sears has often been able to convince supposedly bankrupt customers to keep paying what they owe.
Sears is guilty of nothing more than trying to get customers to settle their bills.
By law, Sears is supposed to record these promises — "reaffirmation agreements" in legalese — with the court. In many cases, perhaps as many as 331,000 over the past decade, it failed to do so. For that failure, it is now being thrashed.
By the terms of a settlement agreement proposed in US bankruptcy court in Boston, Sears must cancel all its reaffirmed debts and return every cent it collected on them. On top of that, it must pay interest to its debtors at 10 percent a year, then make extra payments totaling $25 million. As a further punishment, Sears is to set up a $40 million slush fund for the benefit of the state attorneys general. Bottom line: as much as $265 million in penalties, not counting any additional sanctions imposed by Carol Kenner, the bankruptcy judge presiding in the case.
Kenner has described Sears as a "predatory" victimizer of "vulnerable and powerless" debtors, which goes to show how twisted a judge's judgment can be. Apart from not filing its reaffirmation agreements in court, Sears is guilty of nothing more than trying to get customers to settle their bills. The offer it made them was more than reasonable: Pay for what you bought, or return it. For this "predatory" behavior, Sears must now forfeit a quarter of a billion dollars. The result will be lower earnings for Sears stockholders and higher prices for Sears customers.
And rewards, of course, for the deadbeats. All those Sears cardholders who declared bankruptcy so they could evade their creditors — and who would have stiffed Sears, too, if the company hadn't threatened to reclaim their purchases — will soon be getting nice, fat checks to which they have no moral claim of any kind. Sears estimates that the average payment to these noncreditworthy debtors will be $900.
And for what? Because Sears wasn't scrupulous about its paperwork? Well, shame on Sears. It should have known better. Maybe it ought to pay a fine to the Treasury. But by what deformed logic are Sears's debtors entitled to a windfall? These bankrupts, who bought merchandise and tried to avoid paying for it, will not only get to keep the goods they purchased, but will have their debts erased, their payments refunded — and get a cash bonus to boot. That is an outcome so ethically warped it belongs in a museum of the surreal.
This case originated in April 1996, when a customer named Frank Latanowich declared bankruptcy and got nearly $13,000 of debt discharged. Some of that debt was owed to Sears — $1,661 for a television and a car battery. Sears made him its customary offer: Return the merchandise or pay for it. Latanowich reaffirmed his debt and agreed to pay $28 a month.
Seven months later, he decided he'd rather pay nothing. Did he return the TV and battery? Of course not. He wrote to Judge Kenner, asking that the Sears debt be erased. "I have tried to meet the payment every month," he wrote, "but it is keeping food off the table for my kids." Kenner investigated and found that the reaffirmation agreement hadn't been properly filed. Neither, it turned out, had thousands of others — and suddenly Sears was in trouble.
But there is no mistaking the real villain in this tale: It is Latanowich, a parasite who cared more about his TV than about food for his family — and who cared least of all about keeping his word. For his dishonesty and his greed, he will now be richly rewarded.
(Jeff Jacoby is a columnist for The Boston Globe).
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