A class action against Sears, Roebuck and Co. has opened a can of worms for other large retailers that may be collecting bad debts too aggressively.
Federated Department Stores Inc., the Cincinnati-based retail conglomerate that operates Macy's and Bloomingdale's, is being investigated by New York State Attorney General Dennis C. Vacco. At issue is whether Federated improperly collected debt from consumers who have filed for bankruptcy, said a spokeswoman for Mr. Vacco.
The Federated investigation is part of a domino effect started by the Sears case, experts said. At a time when consumer bankruptcy filings and bad debts are escalating, retailers are coming under increasing scrutiny for lending and collection practices.
"Collectors are trying to do whatever they can to recoup their losses," said Anita Boomstein, a partner at the New York law firm of Hughes, Hubbard & Reed.
Federated spokeswoman Carol Sanger said it would make repayments- including principal amount, late charges, and finance charges-totaling $4.3 million to 3,000 consumers by the end of this month. Some cases date to 1990.
Ms. Sanger said most collections were traced to its proprietary charge card holders, largely from Broadway Stores Inc., a Los Angeles-based chain acquired by Federated in 1995.
Ms. Sanger said Federated had conducted its own investigation into the improper collections, then notified the attorney general's office of its findings.
Mr. Vacco's office disagreed, saying it began the investigation, then notified Federated by letter.
"Our investigation stems from the 40-state settlement with Sears," said Jennifer Farina, a spokeswoman for Mr. Vacco's office. "Our office said, 'If Sears is involved, there is a good chance other retailers are involved as well.'"
The attorney general's office is not stopping there. Though not naming retailers, it said it is investigating a host of other national chains that may also be improperly collecting debt from consumers in bankruptcy protection.
"Sears is not the only one engaged in this," said David Medine, associate director of the Federal Trade Commission. "Aggressive collection has to stop, and creditors have to follow bankruptcy court rules to the letter, which are designed to protect vulnerable consumers from overly aggressive collection tactics."
The class action against Sears, which was filed in April, appears to be much larger in scope than any potential suit that Federated might face. Sears admitted it had collected $412 million in reaffirmed debt from more than 200,000 consumers.
The allegations against Sears came to light in December during a bankruptcy hearing in Boston. Testimony showed that the Hoffman Estates, Ill., retailer had failed to file or get court approval on debt reaffirmation agreements it had reached with consumers.
Sears has promised each wronged debtor reimbursement of principal, plus finance charges and accrued interest. It has also promised each debtor a $100 Sears gift certificate.
Sears reported a $320 million after-tax charge in its second-quarter earnings relating to the settlement. A fairness hearing is scheduled for Oct. 28., a Sears spokeswoman said.