Equipment leasing and all things related

In the leasing situation with NorVergence, the lessees were signing NorVergence "Equipment Rental Agreements," thinking this was all
one package and they were dealing
with the provider of the service
and equipment. Many realized the contract was assigned, similar to mortgages or other situations, and they
believed the leasing companies were responsible for the situations; many
think several of the leasing companies
knew better, thus the "hold backs" or
"discounts" and that whether the service continued or equipment did not
work was then the responsbility of the
lessor.
In the bank situation, the debtor was aware the bank did not choose the equipment or service nor made any representation as to the service or product, but simply was granting a loan
or extending credit.
While this is an oversimplification,
the role of a lessor has more ramifications than the role of a "lender" from personal property tax,
insurance claims, and in the case of
a salesman or vendor receiving a commission, or becoming part of the sale or lease, this changes the responsibility as the seller and lessor
then have a relationship and that is
what ties them together---whereas the
bank does not have this type of relationship--it is distinct.
Many of the NorVergence transactions were not leases. Some happened exactly
as described in your description of
paying in advance, getting a discount
to do so. In none of these cases, to
my knowledge, was the bank brought in
as being "party" to the transactions.
When the lessor signed a "master lease
agreement," controlled the "delivery and acceptance" procedure, paid a "hold back," and in almost all the
cases a commission to the seller
of the invoice, they then became a party and therefore subject to claims
in a court of law.
There is a class action suit against IFC with testimony going on now. In
the recent IFC Credit cases the lessor
has lost in a court of law because it
was proven they had a "relationship"
with the seller of the invoice and had
knowledge ( the question is how much )
about the risk of the transaction.
To sum this up, if life were as simple
as the questions you asked, we would
not need attorneys and a legal system.

Thanks,Kit. Your insights are, as always, valued. Leaving the problems of Norvergence aside, when does the lessor become responsible for equipment choice and, more specifically to my questions, the service being provided? Should a lessor be held resonsible in any way if it finances a processing line and a fuel supply contract for that line if the supplier is unable to perform? And, does the answer differ between a large and small (creeping consumer)business?

Legal niceties aside, these become valid risk questions for lessors as they continue to differentiate the product through bundling services.

Article 2A specifically protects lessors from this type of liability unless the Lessor participates in the fraud with the vendor. In the Norvergence case, I see no evidence that lessors participated in the fraud. Furthermore, in your examples, the vendors simply fail absent fraud. In either case, it is ridiculous to seek redress from the lessor. In fact, it is detrimental to the availability of capital if the courts show an inclination to side with lessees and basically neuter the hell or high water clause.

To say that there is no evidence that the lessors participated in the fraud is laughable. While I don't think they conspired with the Norvergence masterminds at the inception, they were a willing participant in the scheme. If I were a used car dealer do you think I could find 40 leasing companies to finance a Yugo for $50,000 - $100,000 over 5 years? Norvergence did and all they had to do was guarantee in writing that their claims were true. Why perform due dilligence when lawyers can write up a deceptive rental agreements to fool the intended victims. How many of these schemes do the same leasing companies need to fall victim to before they clean up their industry? Why do these same deep pocketed leasing companies view the Norvergence lessees as the violators of the lease agreements when it was Norvergence that breached their Master Agreements with the leasing companies by supplying equipment that could not perform the functions that were promised and hence could not provide the savings that were the basis of the whole agreement. Instead of pulling the plug early on they continued to finance this fraudulent scheme and sided with Norvergence despite the hundreds of complaints they were receiving from the lessees. If they weren't part of the scheme then why are they trying to profit from it?

Most arm's length transactions don't include master agreements with buyback provisions in the case of default. It seems to me that all of the Norvergence leases that are in dispute have automatically defaulted back to Norvergence, and that the leasing companies have a beef with Norvergence. Their master agreements were signed first and should therefore stand first and foremost. So, If we figure out who owes what to whom, it would be that the lessee owes Norvergence on so-called defaulted leases (but the trustee has voided these so that balance is zero), and Norvergence owes the leasing companies (but they are bankrupt so that payment will be zero), so no one owes anyone. The leasing companies are free to pick up and sell THEIR collatteral (the infamous matrix equipment - the adtran router).

In Mr. Halladay's world they would love that leases should be considered the same as loans and they love to point to the hell and highwater clause as a way to convince them that this is so. If leases were considered like loans then they would payable no matter what happens with the money or what the money buys. Unfortunately for Mr. Halladay the law does make a fine difference between a lease and a loan, beacause it does recognize an essential difference in the transaction, which is that a lease is entered into as part of acquiring some service or object. A loan is simply I give you money and you give it back later. The law recognizes because of this fundamental difference that a lease cannot simply be treated as a loan or else it would allow for frauds to occur very easily. Therefore there are limits written into the laws regarding leases. One is that for a finance lease to have a valid hell or highwater clause there must be clean hands in that the transaction is not occuring just to create a finance lease in order to effect a hell or highwater clause, rather that the transaction is occurring as part of a normal healthy business transaction. Secondly, the law requires that the lease be mostly for goods and nor for service in order for these clauses to be valid, because a promised service can disappear easily whereas goods do not.
Since most leases are legitimate the hell or highwater clause is normally not contestable as the leasing companies are not the ones who create the problem. However, in a case like Norvergence the leasing companies by their accepting the leases in order to try to make them into finance leases are creating the situation where the fraud was able to be carried out. The leasing companies can not simply claim that they had every reason to assume everything was clean here, as all these leases had widely different prices for the same piece of equipment, which should have at minimum led them to question what is going on here. Also as the leasing companies and Norvergence where closely connected, given the number of transactions that occured between them and given where applicable there where hold-backs and given master lease agreements and any other connections between them, there is a good case to say that they by definition can not have clean hands as they were not a truly independent party.
Anyways I think I will leave off here as all these points have been made already at one time or another, and really all that is left is to see how the remainder of the cases work their way through the legal system. In the meantime I will continue sending out a check every once in a while to the lawyer and comfort myself in that the legal fees have been a lot less then paying the lease.

In years past I did many leases that involved “pay it forward” service contracts. Because these contracts were written as leases and because the “Sold To” on the invoice was my company we considered it prudent to hold back the “undelivered” portion of the service contract. We would fund the first year of the service contract with the delivery of the equipment and then fund the second year of service on the anniversary of the second year of the lease and so on and so forth. From my earliest days in this industry I was taught that if you promised service with equipment you leased, and that service for whatever reason could not or would not be delivered, then you ran the risk of losing in court if you tried to enforce your “hell and high water” clause. This was especially true if the equipment was sold as a package and the “service” was needed for the equipment to work. I don’t see how a lessor can enforce a contract if something that was promised as part of the contract, i.e “Service” is never delivered. How can the customer accept something that they never received? You can’t fault the customer for trying to save money if something is presented to them as a “good deal”, from a supposedly legitimate vendor and the customer enters into that contract with the reasonable expectation of receiving an intangible, like “service”, for the next 48 months, can you?

As you might expect, the vendor would love to get their money for a 4 or 5 year service contract upfront. Paying a vendor upfront for a 48 month service contract is tantamount to funding a working capital loan for the vendor who may or may not deliver the subsequent year(s) service. In order to make the hold back palatable for the vendor we used the hold back portion, allocated to service, to provide the vendor with a unique selling proposition. This occurred by calculating the time value equivalent of each year’s service contract held back, and imputing that into the lease rate to “buy down” the customer’s monthly investment in the equipment and service “package”. The vendor could offer his customer a package deal at a great rate and the vendor knew that the payment for each subsequent year of service was built in to the contract. The lessor in this case is also protected because if the vendor goes out of business, the lessor can hopefully avoid a Norvergence situation and provide service to the customer by “purchasing” a service contract with the hold back. The lessor is really only at risk for the one year at a time that is paid in advance. This seems much less costly to me than running the risk of virtually every court in the land voiding your contract all together so that you get paid nothing.

As I recall from all you have published regarding IFC and Norvergence, there were significant hold backs but those were undisclosed and in no way inured to the benefit of the lessees involved. It seems like this may have been a “right church, wrong pew” scenario for IFC. Had those hold backs been used as described above I am guessing that the courts would have had a much more difficult time denying their motions.

By the way, like many others, we had the opportunity to do business with Norvergence. I proposed the program for them with the hold back giving the customer the benefit of the lower rate. As I recall, their answer was that they had to have all the money upfront or they were not interested in doing business with us. Since you have never seen my name, LeaseNOW or Mount Pleasant Capital Corp associated with Norvergence, you can pretty much guess what my response was to them. As always, most scenarios in this business really come down to common sense. If a vendor wants all their money, upfront, for something that they can’t deliver for 4 or 5 years and the lessor agrees to that, I would offer that the lessor has created a “risk” that has almost no potential mitigation strategy. I think that would best describe “Norvergence”.

Bob Rodi, CLP

President

Mount Pleasant Capital Corp.

www.mountpleasantcapital.com

drlease@mountpleasantcapital.com

1-800-321-5327 x101

there appear to be several critical questions omitted. Let me suggest
some of those questions.

For example, how are the finance contracts written? Stated in more
direct, NorVergence or Leasecomm terminology, did the finance contract
(whatever it was called) state that services were being financed or
conceal that aspect of the transaction?

The Leasecomm "equipment leases" challenged by the FTC were actually
financing intangible business opportunities or investment schemes,
although they were styled as financing equipment. In NorVergence, the
company was primarily selling long term telecommuncation services, of
which the Matrix box was only a small, inexpensive component. The Rental
Agreements, purportedly just for the Matrix box, covered most of the
cost of the whole package. Was this ever stated in a NorVergence Rental
Agreement? Obviously not.

If the Rental Agreements had truthfully stated as consideration "five
years of services plus an incidental Matrix box," would any court
enforce those contracts today? If a finance company knew or should have
known that the Rental Agreements were really for services, should a
court allow the finance company to have the contracts enforced?

Randy Brook
Senior Attorney, Federal Trade Commission
My comments represent my personal views and not necessarily those of the
Commission

Shawn,

You very clearly formalized your original questions with
I would like to pose some hypothetical questions to the lessees.
The primary premise behind the questions is that,
"unlike the NorVergence situation",
the service provider was legitimate, and the equipment was valued properly and had actual utility –
basically, how business should be, and normally is, conducted. So, here we go.

1. Who do you blame for this mess?
2. Do you seek legal redress and, if so, from whom?

Well as usual Shawn, you certainly got a lot of attention.

As is often the case, a Post to an Open Forum asking for one thing actually elicits some very very interesting & informative responses even when those responses do NOT address the question or topic
that was posed in the 1st Place,i.e.UNLIKE NORVERGIENCE

I think we as Leasing & Business professionals, in particular those of us like you Shawn,(who are particularly proud of our strong adherence to highest ethics and moral values)become particularly emotional when we see criminals make our industry look bad.

So I have great admiration for Lessees and Lessors alike who make it clear that they feel such outrage when they hear the word NorVergence and feel compelled to lash out against injustice. We are all victims here.

But I really liked the premise of your initial post to this Blog because I had felt, for some time, that
the Commingling & Bundling of Equipment Leasing & financing with related Services is a Product that PRIOR to NORVERGENCE was increasing in demand and the value added convenience of CONSOLIDATED BILLING on Leases was also being discussed more frequently until NorVergence
brought all of this into a world of suspicion and ugliness.

So I had hoped to read feedback that perhaps gave us some hope that a Bundled Lease Product could have some chance for recovery. The Keys are COMPLETE DISCLOSURE, SETTING UP LEGITIMATE RESERVE HOLDBACK/ESCROW ACCOUNTS (Like Mr Rodi discusses so eloquently) and making sure that the SERVICE PROVIDING PARTNERS have reasonable financial strength & quality reputations.

We see that Captives can provide an effective Bundled Financial Service on their own products, and
clients really want that simplicity & convenience. In fact, they will "knowingly' pay more for it.

So when multiple related Products and Multiple related services are being sold as a BUNDLED Solution,
wouldn't it be great if the Leasing Industry could devise a way to deliver on such a product & process
(now that we know more about what went wrong and why it went wrong) ?

This Industry is in dire need of NEW PRODUCT DEVELOPMENT. Is it possible that from the burning ashes,
something of value might just emerge that would be helpful to future lessees & lessors.
In other words...CAN"T WE ALL JUST GET ALONG..Leasing people.

I know that my suggestion just might entail a Pooling of Industry Resources to create an Insurance fund or some oversight group should one of more of the parties become insolvent.

But it was this thought...this crazy idea... that some new and good idea would come
(from the travesty that was NorVergence).

It was this idea that jumped into my head when you posed this question Shawn.
I wonder, if YOU were thinking the same thing ?


Larry Greer
Executive V.P. & Principal
GPS Capital, Inc.
Pittsburgh Office

Well, the best thing is to know your vendors. This always has been sound advice and is now part of the law under the Patriot Act. Let’s look at a best practices example of how you can protect yourself involving First American Equipment Financing (FAEF). Cyberco, an affiliate of CyberNET, asked FAEF for roughly $1.1 million in lease funding for equipment that it had chosen from several of its vendors.