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70 Chapter 3 . Communication Ethics

delinquent cr8dit card holders who had filed for-and had been granted-bankruptcy protection. The newspapers and cable television nervs channels didn't havc the story yet. but it rvould onll'be a-matter of hours before they would. The company'thr. Martinez. a former Saks Fifth Avenue executive. had struggled to tum around would quickly be mired in the lvorst legal and ethics scandal in its I I I-year history.

The United States f)epartment of Justice rvas alreadl, considering not only civil penalties, but also criminal prosecution. Worse, this wasn't simply a rogue operation or an honest misinterpretation of the larv: Sears appeared to have been violating the rights of many of its customers systematically and intentionally. The company, the lawyers were suggesting. may even have put the illegal practice into its procedures manual.

How could such wrongdoing have gone unchecked for years? Martinez wanted to know. "Not one phone call about this? Ever'?" he demanded. According to at least one participant in the meeting, it was a "sickening moment.'"

A "Half-Billion Dollar" Handwritten Letter

As an extensive investigation would later reveal. Sears struggled-first to understand and then to deal with criminal charges and an ethical lapse that rvould cost the company nearly $500 million. According Io Sears' senior vice president Ron Culp, the collection scheme began to unravel in November 1996, when Francis Latanorvich, a disabled security guard. hand wrote a letter on a yellorv legal pad, begging the Boston Bankruptcy Court to reopen his case. Although Judge Carol Kenner had wiped out his debts, Sears later asked

Latanowich to repay the $l.16l he owed for a'l'V. an auto ba1tery, and some other merchandise. But the monthly payment, he wrote. "is keeping food o1T the table for my kids.''

Sears. it tumed out. had mailed Latanowich an offer. ln return for $28 a month on his account, the compan) wouldn't repossess the goods he had bought rvith a Sears charge card befbre he went bankrupt. The practice of urging debtors to sign such deals, called reaffirmations. is legal and relatively widespread in the retail credit business. but many judges view them as unethical practices that keep people from getting a fresh

starl. Moreover. ever)' signed reaflirmation must be

filed with the court so a judge can review rvhether the debtor can handle the new payment. Sears, Roebuck & Company hadn't filed this one with the court and Judge Kenner tvanted to know why not.

At January 29, 1997, hearing, a Boston attomey rvorking for Sears offered a convoluted technical excuse fbr not filing. Kenner's response: '"Baloney." According lo Newsweek magazine, there were hints from prior cases that Sears, both praised and feared nationwide as the most aggressive pursuer of reaffirmations. wasn't filing many o1' them with the court. If true, the company rvas using unenforceable agreements to collect debts that legally no longer existed. Judge Kenner pushed Sears for a list of such cases. Sears' response. delivered reluctantly in mid- March by a credit manager, was shocking: The company had apparently ignored the law nearly 2,800 times in Massachusetts alone. Martinez and his senior team could only imagine what the company was up to in the other 49 states.

Soaring Personal Bankruptcies

Between 1994 and 1998. personal bankruptcies in the United States rose l'rom 780.000 to more than L3 million, leaving many retailers and credit card issuers awash in bad debt. Sears, as the nation's second-largest retailer. was in a particularly vulnerable position. That year. the company eamed 50 percent of its operating income from credit. including charge cards held by more than 63 million households with Sears credit cards.

The problem, as Martinez rvould come to discover. [was] that too many ofthose new cardholders barely qualified for credit. In its zeal to attract new business. Sears becime a lender to its riskiest customers. As the number of bankuptcies rose nationwide. so did the number of unpaid accounts at Sears. By 1997, more than onc-third of all personal bankuptcies in the United'states included Sears as a creditor. Companies heavily dependent on income from their credit cards chose to aggressively pursue bad debts, and Sears wasjust one ofmany to do so. The list included such prominent creditors as Federated Department Stores, the May Company. C. E. Capital, Discover Card, and AT&T.

As Martinez rvould also come to discovet the problem was neither isolated nor small. During the

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