It looks like Norvergence is back in the news, this time in regard to a Massachusetts settlement. Once again, lessors have given up contractual rights to receive payments on money they advanced for leased equipment. (The reasons vary, but doing so does not help the overall industry.) Norvergence, of course, was another business scam, this time not perpetrated by lessees or lessors, but just good old fashion con artists.
This scheme, which involved around 11,000 small businesses in more than 20 states, was perpetrated by a Newark-based company called NorVergence. In it, this phone-service reseller offered deeply discounted long distance and cell phone service to customers through a piece of leased equipment called ‘The Matrix.’ Touted as an ‘end all, beat all’ communications device, it was nothing more than a router. Norvergence would then sell these leases to banks, leasing companies, and other finance sources. The key to the scam was that the lease was based on a hugely inflated price for the Matrix box, which added virtually no value to the service package. Lessors were basically financing air. As Kit Menkin, editor of Leasing News, told The Record, of Bergen County, NJ, hebelieves the NorVergence case was "one of the biggest leasing scandals in the last 25 years."
You know my views on fraudsters and scam artists – although despicable, they do provide great fodder for my classrooms. Reading about this most recent settlement, however, got me thinking again about the ramifications of this case. On a micro level, lessors should have done more due diligence on the equipment and the vendor (After all, how can you trust someone that, as The Record reported, favored wearing “white leisure suits and colorful printed shirts.”?) Although the credits were supposed to be strong, there was no collateral.
On the other hand, what makes parties think that they don’t have an obligation to perform under a good faith contract? What is even more worrisome is the stance that various Attorneys General have taken regarding the enforceability of these contracts. These were business contracts, and to have the courts begin to apply consumer law concepts to business arrangements has, and does, send a chilling message to financing sources.
There are fundamental principals of law that are being turned upside down in this case, which is risky. If a similar challenge arises the next time there are contractual difficulties in a lease, for whatever reason, fewer and fewer financing sources will be willing to provide financing to the small business sector. Combine this with recent pressures on SBA loans reported by the ELA, and you may see a downturn in this key sector of the economy.
Shawn, I have no doubt that the lessors that settled or will settle the cases have weighed the costs and have chosen the best alternative for themselves. But, what does surprise me is how the lessors are not protected by the typical hell or high water clauses I see in lease agreements that state that the lessee, not the lessor, is responsible for selecting the equipment, the vendor, the service provider, and the fitness of the equipment. As well, most leases say that if the lessee is having trouble with the equipment or related service that remedies are solely between lessee and vendor and that payments to lessor are to continue. This to me has far reaching and scary ramifications to the leasing industry. I would have thought lessors would fight this to the end. Your thoughts?
Posted by: Jay Zeinfeld | February 22, 2006 4:31 PM | Permalink to Comment