Steven Resnicoff, DePaul University College of Law professor, said that the Massachusetts case questioning the collection practices of Sears, Roebuck and Co. in attempting to collect debts that were discharged in bankruptcy raises serious legal questions that could have a nationwide impact.

The case will be heard June 5 in bankruptcy court in Massachusetts.

Bankruptcy law permits creditors, such as Sears, to negotiate agreements with bankruptcy debtors which would prevent debts from being discharged, according to Resnicoff, a leading bankruptcy expert. Such agreements, reaffirmation agreements, must comply with specific statutory provisions and must be approved by the bankruptcy court prior to the granting of the bankruptcy discharge.

Sears negotiated agreements with more than 2,700 debtors in Massachusetts, but because Sears did not follow prescribed rules, the agreements were legally ineffective. Nonetheless, Sears wrongfully tried to enforce the agreements, apparently exploiting the debtors’ ignorance of the law, Resnicoff said.

Resnicoff said that sanctions may amount to more than $400 million in Massachusetts alone.

"Even more troubling for Sears is the fact that it may well have used the same collection practices nationwide, which could very substantially increase potential sanctions," said Resnicoff.

"The Sears experience renews serious questions regarding appropriate sanctions for repeated corporate misconduct," said Resnicoff. "Assuming Sears has violated for years the statutory injunction against efforts to collect discharged debts, should Sears be punished for all such violations - or should there be a limit as to how far back courts should look? If there ought to be a limit, what should it be?"

Resnicoff questions if there are punitive damages, should they be limited to Massachusetts only.

"If Sears is to pay punitive damages, to whom should the payment be made?," he said. "Should debtors in Massachusetts benefit simply because the particular bankruptcy judge imposing the penalty is located in that state or should the payment benefit victims of Sears' misdeeds nationally?"

Resnicoff said, "An underlying issue is whether the answers to these questions should be based on any unique bankruptcy law policies or, instead, should be equally applicable to any corporate violation of commercial law."

Resnicoff has outlined the points in the Sears case:

• Once a bankruptcy petition is filed, Section 362 of the Bankruptcy Code automatically stays virtually all creditor collection efforts, such as the commencement or continuation of lawsuits, the repossession of collateral, and communications (in writing, over the phone, or in person) to the debtor.
• Violation of this "automatic stay" renders the violator subject to sanctions.

• The Bankruptcy Code generally offers debtors an opportunity to be freed from personal liability for their prepetition debts. This is accomplished through the obtaining of a bankruptcy "discharge."

• Pursuant to Section 524(a) of the Bankruptcy Code, a bankruptcy discharge acts as an injunction against creditor action to collect a discharged debt from the debtor.

• Nevertheless, if a debt is supported by collateral--if the creditor has a voluntary security interest or a statutory or judicial lien in the debtor's property--the discharge of the debtor's personal liability with respect to the debt does not necessarily eliminate the creditor's rights to the collateral. In such a case, the bankruptcy discharge would not prevent the creditor from taking steps, after the discharge is granted, from enforcing its rights to the collateral.

• Sometimes a debtor is willing to "reaffirm" a debt such that his or her liability on the debt is not discharged. Usually this occurs because a debtor wants to keep possession of the collateral pledged with respect to the debt. The Bankruptcy Code permits such "reaffirmation agreements." Nevertheless, because of the potential for creditor abuse--as well as simply for imprudent or uninformed decisions by debtors--the Bankruptcy Code requires that any such reaffirmation agreements satisfy specified criteria and be filed with the appropriate Bankruptcy Court.

From 1992 through 1996, in apparently over 2,000 cases in Massachusetts alone, Sears consummated but failed to file such reaffirmation agreements. Its conduct in negotiating such agreements may thereby have violated the Bankruptcy Code’s automatic stay (Section 362). Because the reaffirmation agreements were not properly filed, the applicable debts were in fact discharged. Consequently, any post-discharge efforts by Sears to collect those debts violated the Section 524(a) injunction.

The status of this case, according to Resnicoff:

• A bankruptcy court in Massachusetts has threatened to impose heavy sanctions on Sears. Because of concerns regarding the impact its ruling may have on actions brought by other parties against Sears, the bankruptcy court has postponed its hearing on sanctions to June 5.

• A class action has been brought against Sears on behalf of those who were its debtors during the applicable time period.

• The U.S. Attorney's Office in Massachusetts has filed suit against Sears.

• Consumer Protection officials in about 25 states have reportedly begun investigating Sears.

• A class action has been filed on behalf of certain shareholders that reportedly alleges that certain top officials at Sears had engaged in a fraudulent scheme to artificially inflate Sears stock through its practice of failing to file reaffirmation agreements in the court.

To contact Resnicoff at DePaul call 312/362-8137.