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Sears Fraud

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Sears Bankruptcy Recovery Management Services, Inc., has been charged with one count of bankruptcy fraud in a scheme involving reaffirmation practices that began in 1985 and continued until early 1997.
In a suit brought by the United States Attorney, the wholly-owned subsidiary of Sears, Roebuck and Company has agreed to plead guilty and pay a record $60 million in criminal fines. Sears has already paid over $180 million in restitution to about 188,000 debtors and $40 million in civil fines to 50 state attorneys general. The criminal fine agreed to in this case is the largest fine ever to be paid in a bankruptcy fraud case. Due to the substantial criminal fine, the United States agreed to forego its claim for civil penalties.

According to the U.S. Attorneys suit, Sears engaged in the following practices to mislead debtors about the effect of reaffirmation agreements:

1) It used a reaffirmation agreement form that represented that it would be filed with a bankruptcy court;

2) It did not tell debtors that the agreement was not to be filed or that it was not a legally binding document and was unenforceable;

3) It misled debtors into believing that the agreement was in fact a legally binding contractual obligation;

4) It sent regular monthly bills to debtors, misrepresenting that they were obligated to pay;

5) It called debtors who stopped paying; and

6) In some cases it sued to recover on the unenforceable debt, believing that the debtor would not know the reaffirmation agreement had not been filed and was unenforceable.

This case was first brought to light by a letter sent to a judge of the U.S. Bankruptcy Court of Massachusetts. A series of court hearings revealed that Sears had failed to file the reaffirmation agreements of many debtors, including more than 3,000 in Massachusetts and over 188,000 nationwide. Also announced was the settlement of a civil action which the United States initially filed against Sears in April 1997, seeking an injunction, restitution and civil penalties. The United States then obtained a nationwide injunction against Sears in which Sears agreed to halt its reaffirmation practices, identify all debtors throughout the country affected by the illegal practice, and stop collection activities from these debtors. The settlement recently reached permanently enjoins Sears from ever again repeating its illegal practices, and recognizes that Sears has made full and complete restitution to the debtors. The plea agreement must still be accepted by the U.S. District Court.

The U.S. Attorneys office praised Sears for its extraordinary cooperation, beginning in April 1997, when senior management and the Board of Directors became aware of the criminal conduct. This level of cooperation was a determining factor in the amount of the fine. The $60 million will be deposited into the Crime Victims Fund, a major funding source for victim services throughout the country. In addition to state crime compensation programs, over 3,000 local victim service agencies will benefit from these funds.

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