Oops. Sears Says It May Have Collected $412M by Mistake

Sears, Roebuck and Co. admitted last week that it was on the wrong side of the law, having illegally collected as much as $412 million from consumers whose debts had been erased in bankruptcy court.

The big retailer has agreed to reimburse all principal payments in addition to finance charges and accrued interest. The cases date to 1992.

Each wronged debtor will also receive a $100 gift certificate.

The error came to light during a bankruptcy hearing in Boston in December, said a lawyer close to the case. But Paula Davis, a Sears spokeswoman, said the retailer did not become aware of the problem until March 31.

The hearing revealed that in certain cases Sears had failed to file or have approved by the court so-called debt reaffirmation agreements. In those agreements, people who declared bankruptcy agreed to pay their Sears bills.

"We don't know how much this is going to cost," said Ms. Davis. "We are conducting audits right now, and we wouldn't venture to give any kind of dollar figure."

Sears said it could have a material effect on 1997 earnings.

After the announcement last week, Fitch an A rating for Sears' $13.4 billion of senior debt and an F-1 rating on $5 billion of commercial paper. Other credit agencies followed suit.

"There is no fundamental problem with Sears' underlying business," said Pam Stubing, research director at Fitch Investors Service. "This is an administrative problem at this point."

Ms. Stubing added that Sears was large enough to withstand the refunds. "If the cost is higher than $412 million, we would have to look at it again."

Despite Sears' rush to action, the lawsuits have been piling up.

Two attorneys, John Roddy in Boston and Christopher Lefebvre in Rhode Island, have initiated class actions on behalf of debtors.

On Tuesday, another complaint was filed-in the United States District Court for the Northern District of Illinois-on behalf of shareholders who purchased or acquired Sears common stock between Oct. 4 and April 10. The suit contends that in this period Sears knowingly misled shareholders about its collection practices, thereby artificially inflating the stock price.

"Until our lawyers have reviewed the suits we have no comment," said Ms. Davis.

"The way Sears is handling the situation could have a positive effect," said Anita Boomstein, partner at Hughes, Hubbard & Reed in New York. "They are saying they made a mistake and are fixing it, as opposed to trying to cover it up."

Judge Carol Kenner of U.S. Bankruptcy Court in Boston has scheduled a hearing June 5 to consider the proposed settlement.

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