Bar News - July 16, 2014
Federal Practice & Bankruptcy: Three Colorful Characters Missing from Bankruptcy Practice
By: Douglas Beaton
The Sears Guy, the Filene’s Lady, and the Petition Bounty Hunters
Have you seen anyone lately who, while staring at a cell phone, almost walked into a post? Or been asked for directions by a frantic motorist, lost in her own home town, whose GPS device just won’t stop recalculating? You don’t have to look far to see how the accelerating pace of life is having all sorts of unintended consequences.
The same is true in legal practice of course, where lawyers constantly are told they need to adapt to a dizzying series of changes and platforms, or else get ready to find themselves economic dinosaurs. A peek at some of the changes in consumer bankruptcy practice over the last 20 years or so indicates there might be merit in this notion, as whole classes of folks who used to turn up regularly in the halls of the bankruptcy courts have simply disappeared.
Once a colorful collection of fringe players who tried to eke out a living on the underbelly of the insolvency system, they have slowly suffered a mass extinction. A triple-whammy of upheavals in technology, the economy, and even in the law itself sealed their fate, and they vanished, sometimes before we even took the time to pay attention.
The Sears Guy
First among the missing is a character I’ll call the Sears Guy. An employee of the giant retailer, the Sears Guy – and it was always a guy – belonged to a veritable army deployed at every bankruptcy court throughout the land.
His game was to attempt to attend every single meeting of creditors where the debtor held a Sears credit card. When the case was called, he would sidle up to the table and pose a series of questions designed to gently suggest that Sears still held a security interest in the goods that had been purchased there, based on fine print in the original contract or printed on a sales slip.
When the meeting concluded, he would follow his prospects out to the hall, where he would politely propose that the debtors sign a reaffirmation agreement (which he had already prepared, naturally), effectively placing the debtors back in debt to Sears.
Debtors’ attorneys bristled at these tactics for years, but for the most part were seldom able to do anything about it. Typically, they tried to attack the security agreements themselves, arguing something along the lines that the clause buried deep in mumbo-jumbo or on the back of a slip was insufficient to allow repossession of the debtor’s trinkets, and usually they got nowhere. (A typical example of a failed attempt can be read in In re Hance, 181 BR 184 (Bankr. MD Pa. 1993)).
But the Sears Guy’s days were numbered anyway. In 1997, Francis Latanowich, a security guard from suburban Boston, complained about his $28-per-month post-bankruptcy payments, and soon he had a lawyer willing to take the case. Latanowich shifted the argument subtly, claiming that Sears often failed to file its reaffirmation agreements with the court, meaning they didn’t receive judicial scrutiny, and that this was a violation of the Bankruptcy Code being repeated nationwide.
All of a sudden the Sears Guy was front page news, and in a peck of trouble (many of the details can be found at In re Latanowich, 207 B.R. 206, (Bankr. District of Mass. 1997)). Sears would soon reveal that it had improperly collected $400 million from more than 500,000 bankrupt customers over the prior five years. The scandal eventually cost the company $475 million in refunds paid to debtors, forgiveness of other bills, federal fines, settlement, discovery costs, shareholder suits, and a plea bargain to a criminal charge.
The Sears Guy was out of a job. The company, once America’s supreme retailer, spiraled downward, lost its independence, and was swallowed up in 2005 by K-Mart, which had recently emerged from bankruptcy itself. When bankruptcy reform passed in 2005, increased controls on reaffirmation agreements were part of the package.
The saddest part is that the whole episode was probably unnecessary. For some reason, debtors had a strong affection for their Sears cards (a thin white strip about half the size of a typical credit card), which often represented the first time any store let them charge a purchase. Many debtors irrationally begged to keep their Sears cards during and after the bankruptcy, even without the company’s heavy-handed tactics. Instead of capitalizing on this good will, Sears and the Sears Guy took the road to oblivion.
The Filene’s Lady
Also missing from the halls of the bankruptcy court is the Filene’s Lady. A representative of the classy department store chain founded in 1881 and almost synonymous with downtown Boston, the Filene’s Lady – and it was always a lady – had a strategy that was the exact opposite of the Sears Guy. She would stand outside the creditors’ meetings, and with a big smile sweetly offer the emerging newly bankrupts a brand-new Filene’s card with a zero balance.
Acceptance rates for this offer were high. Many debtors had encounters with the Sears Guy and Filene’s Lady in succession. Attorneys watching their clients willingly saddle themselves with two credit card bills less than five minutes after leaving the hearing felt like doctors chain-smoking with their lung patients.
The Filene’s Lady’s demise was economic. A 2005 merger of Federated and May department stores led to the conversion of all Filene’s stores into Macy’s, and the new bosses were less inclined to give easy credit. Then the crash in 2008 eliminated, for the time being, the very notion of easy credit.
But her brief existence underscores an anomaly in bankruptcy practice: For most creditors, there is nothing that prevents them from treating bankruptcy as the most venial of sins if they so choose (though quasi-federal mortgage agencies like Fannie Mae do face some administrative restrictions on lending after bankruptcy). The Filene’s Lady won’t be back, personally, but if the economy improves a bit, her tactic may return with her reincarnation.
The Petition Bounty Hunters
The other group that has vanished from the bankruptcy scene over the years might best be described as Petition Bounty Hunters, who prowled the lobby of the court clerk’s office in the Norris Cotton building looking for freshly-filed cases.
When attorneys dropped off the original and three copies of the petition, starting a new case, one of the copies was dropped in a series of alphabetical file folders hung in the lobby for public access.
The Bounty Hunters worked for the credit reporting agencies and would laboriously copy down, by hand, the pertinent information for each case, including the Social Security numbers, which were conveniently typed on the top page. This was slightly before the era of treating personal information as state secrets dawned, and also before most debtors had even heard of the concept of a FICO credit score.
The Bounty Hunters were done in by technology, of course, specifically by the Bankruptcy Court’s decision to become early converts to the idea of electronic case filing and notification in the early 2000s. Implemented in stages, first as an experiment, then as suggested procedure, and finally as a requirement for cases filed by counsel, ECF has proved wildly popular, even as it ushered in the quixotic notion of enforcing privacy rights in public records.
Even as we fret about the accelerating pace of change, most bar members probably wouldn’t willingly return to the days of carbon paper. But it is wise to look back once in a while and remember some of the characters we used to encounter, both for their own sake and to think about what their disappearance might hint about our future.
Douglas J. Beaton is a solo practictioner from North Andover, Mass. His practice includes consumer bankruptcy, fair debt collection practices, and student loan collection issues. He can be reached at email@example.com.