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Why IFC Credit Corp. is in Trouble

by Christopher Menkin


Plaintiff, §
5 §
VS. § AT LAW NO. 3
6 §




In the trial before the Honorable Sally L. Montgomery, Dallas, Texas, IFC Credit Corporation Officer John Estok, CLP, divulges that his company has a $100 million asset portfolio with over $14 million in “up to 800” NorVergence leases with 550 in question: “…for the last 18 months, every month out the door is $300,000 in payments to the banks, and every month in the door is $100,000 or so of cash from settlements and customers who are still making their payments. “

The funds are borrowed, allegedly $9 million from a line of credit at PFF Bank (confirmed by the bank officer to Leasing News), $3 million from two investment groups (from three reliable sources), and $1 million in other bank lines (from court testimony.)

What the actual dollar potential loss is not know. In testimony, it is said there were “up to 800” NorVergence leases, but only 550 are in question. Are the 250 then making leasing payments and not considered in “default.” In addition to the reverse cash flow from the leases, the expenses involved in recovery from those not making monthly payments is not covered, or similar default situations such as Royal Links golf cart-advertising leases. It appears IFC

Credit has entered water filled with alligators.

Instead of the issue simply being the lessee signed the contract and must make the payments come “hell or high water,” IFC Credit appears to being held accountable for their process and substance as defined by Texas law.

There are issues regarding residual value, and what IFC Credit paid NorVergence for the lease contracts as it appears a series of “holdbacks” was required by IFC Credit to purchase NorVergence leases. Some of the hold backs come up to over 50% to 75% of the cost of equipment (not stream of payments.) One contention is the manner in which IFC Credit stated what it paid for the lease contract in prior testimony, where in reality it did not as it had a series of “hold backs,” but on its side, said the money was to be paid to NorVergence, based upon performance and other criteria. The other side states the reality it was “not paid” and at best was misleading, but claims it meets the legal definition of “perjury” in previous testimony.

In this specific law suit, the “Equipment Rental Agreement” is for 60 months at $543.67 or $32,620.20. After testimony, it is learned that IFC paid NorVergence $11,743 for a $28,000 original invoice figure that yielded lease payments of $32,620.20. The original lease factor was .0194, but in “reality” was .0463 on a sixty month term:)

The residual of the lease, which was booked as having no value, according to testimony. There was no further yield, but in Texas law this may also be viewed as a “capital lease” and not an “operating lease.” The lack of residual value, whether stated or in practice may have legal consequences regarding usury and/or “consumer” law.

It was also IFC Credit desire to have the venue in Illinois, where the laws are more “favorable” or politely put, the IFC Credit are drawn for this venue than elsewhere, plus their attorneys have more experience with Illinois law and success.

There also is the issue of the use of NorVergence “Equipment Rental Agreements,” the assigning FirstCorp, investors, and to other lines of credit the actual leases. These actions further defined the value of the residual and actual substance ( remember the recent ruling regarding substance being a determining factor in the nature of the transaction as being a “finance” or an “operating lease.”)

This specific lease being contested also reaches into Texas law regarding consumer and commercial law, usury, and “fraud,” as defined by the State of Texas.

All parties agree to a trial before a judge only, and the Honorable Sally L. Montgomery is hearing the case in her Dallas court.

Leasing News not only asked Rudoph Trebels,CLP, John Estok, CLP, and Brian Cascarano for a comment, but showed them an advance draft of this story, requesting a statement or reaction:

“We appreciate your inquiring. But we feel that it is neither fair nor appropriate to comment on pending litigation. As you are aware, these are very complex issues with serious ramifications for lessors, lenders and small business in general. Discussing only parts of individual testimony does not provide all of the facts necessary to make fair judgments on these issues. We expect that after looking at all of the facts, the courts will make a fair decision regarding these matters. “

Brian Cascarano

VP of Marketing

IFC Credit is in the process of filing their post trial briefing. The defense will have opportunity to respond, thus this trial will be going on for weeks, possibly months of more briefing before a judgment is handed down.

The issue regarding what is libel or not libel concerns statements of what IFC Credit or First Corp paid for the NorVergence leases. In a Florida case, and in the Texas case, the original number was utilized, not what was paid to NorVergence as they viewed the hold back and discount arrangement and cost of recovery as part of the price, according to the attorney representing the defendant (this involves the lease for 60 months at $543.67 or $32,620.20 that IFC paid NorVergence $11,743 for a $28,000 selling figure that yielded $32,620.20:)

Here is specific testimony, questions asked to Mr. Estok, CLP:

Q And you're pretty good with numbers; is that

10 right, sir?
11 A I can get around, yeah.
12 Q What percentage return on your $11,743 investment
13 are you trying to get out of this court?
14 A Oh, I don't know. I don't know how to answer
15 that.
16 Q Does it amount to about 170 percent return on
17 your original investment if the Court was to give you the
18 amount of money you're looking for? About 170 percent
19 return? Does that sound right, doing the math in your head?
20 A I can't -- I don't know the answer that question.
21 Q Well, you're certainly looking for more than a
22 hundred percent return, right?
23 A Of course, we're looking at the 28,000, not the
24 11,000. The 24,000. Of course, we talked about that
25 yesterday.


1 Q That's more than a hundred percent return, right?
2 A Of the 24,000?
3 Q The 24,000 would be more than a hundred percent
4 return on the 11,000?
5 A Yes.
6 Q Okay. It actually works out to more like 160
7 percent return on your investment, what you're looking for,
8 right? Is that correct, sir?
9 A I don't know.

February 10th

23 Q (By Mr. Lownds) So do you recall claiming,
24 telling The Leasing News -- well, first of all, does that
25 refresh your recollection about having an interview with The 34

1 Leasing News?
2 A I didn't have an interview with The Leasing News.
3 Q You called The Leasing News?
4 A I called the -- I phoned the owner of The Leasing
5 News.
6 Q And did you tell him that information in the
7 headline is false? Did you tell him that?
8 A I probably did.
9 Q And did you also tell him, We did not lose one
10 thin dime as a result of the Novergence bankruptcy? Did you
11 tell him that?
12 A I had -- I phoned him in his car. He talked to
13 me on his cell phone. He mischaracterized a number of the
14 things that I said to him. That may have been one of them.
15 But the report that was published the next day was full of
16 inaccurate statements.
17 Q Did you tell him, We, meaning IFC, did not lose
18 one thin dime as a result of the NorVergence bankruptcy? Did
19 you make that statement, sir, or not?
20 A I don't think so.
21 Q Are you denying making that?
22 A I'm having trouble searching for the context of
23 this in my mind. I could probably take a look at that and
24 it might refresh my memory.
25 Q Sure. It was in response to your taking offense 35

1 at --
2 THE COURT: Let him look at it.
3 Q (By Mr. Lownds) Let me show you this and see if
4 it refreshes your recollection.
5 THE COURT: You realize this Court is well-
6 aware of inaccuracies by the news. So, since I've already
7 been grilled on it just this morning, and I'm innocent. So
8 this is a steep hill to climb, Mr. Lownds.
9 A Yeah, here's the context of this. Let me give
10 you the context of this whole issue as I recall it. The
11 headline was in connection with the fact that we had walked
12 away from all of the leases that were subject to that June
13 23rd agreement. That included the extra collateral. You
14 remember we talked a little bit earlier about the extra
15 collateral that was associated with the June 23rd, the June
16 14th document that we never concluded? This lawsuit was
17 filed by some of the customers that were in that pool of 18 leases.

THE WITNESS: Let me just -- here's my

7 understanding of it. The nature of this allegation from The
8 Leasing News was that we had lost our case as it relates to
9 the additional collateral that we took. And my position was
10 we didn't lose any money on that because we never purchased
11 those contracts. That's the position that I was taking with
12 him.
13 Q Okay.
14 A Now, we had -- he was on his cell phone driving
15 around somewhere in California. He missed half of the
16 points I tried to make. This is a pretty low-end -- this is
17 not exactly a professional journalistic endeavor here. And
18 because of the way I was mischaracterized, I did not go back
19 again and get into another debate with him on the subject.
20 But that's the context here.
21 Q Did IFC file a motion to lift stay in the
22 bankruptcy?
23 A I believe we did.

To refresh Mr. Estok, CLP's memory, I did reach Mr. Estok, CLP back on my car telephone asking him when it would be convenient to talk to him as I was driving at the time. The interview was not conducted on a car telephone. Mr. Estok, CLP gave me a time to reach him in his office. I called him back, and made notes of the conversation on a yellow pad on my desk as he was doing the great majority of the talking. I took notes as the conversation was “on the record” and I wanted to make sure I had the statements he was making as “accurate" as possible. I still have the yellow note pad with the notes I made.

Mr. Estok, CLP obviously did not think I was the "owner," but talked to me as a "writer" and that he was going to call the advisory board about my writing skills, my errors, and intimated he was going to get me fired. He didn't like the word in the headline, “Wallop,” and made that perfectly clear many times. He was quite angry, talking louder and faster, building up his temper. When finally slowed down enough for me to get a word in edgewise, I informed him it wasn't necessary to talk to the advisory board as they are not involved in any way in editorial decisions, plus I was also the publisher and sole stockholder of the corporation. I wasn't going to fire myself. After hearing that, he was no longer interested in talking to me.

Here is more regarding testimony on what IFC Credit declared they paid for leases, but later “hold backs” and other agreements came forward:

MR. TRUSEVICH: No, when I asked the Court as 23 far as the gentleman who swore that they paid $24,000 needs 24 to come down here, they said, if they want to file a 25 motion. We will be doing that, Judge. We believe the Court 51

1 needs to hear why he said that. If they've got 550 of these
2 around the country, you can't have affidavits sworn under
3 oath saying we paid $24,000 when we all know it's just a
4 game here, that they paid $11,500. $11,500 is the only
5 amount of money that ever left IFC property. The hold back
6 account is under IFC's control. We'd like that gentleman to
7 come down here, explain to the Court why he did that under
8 oath at the summary judgment stage when we didn't have any
9 documents to refute that. They have 550 of these around the
10 country. Judge, he ought to come down here, explain it.
11 And we believe -- this gentleman right here
12 said, well, it depends what the definition of paid is. Your
13 Honor, paid is paid. If I say I paid $10 for this, and I
14 really only paid five and put five in a secret holding
15 account, that's disingenuous. What we believe is he needs
16 to come down here, explain why he swore. And then we're
17 going to be asking -- we believe a penalty of one percent of
18 what their asset holding is is correct. But if Your Honor
19 hears it and says, all right, the definition of paid is this
20 floating definition -- but, Your Honor, you need to hear
21 that.
22 The only way this system works is by people
23 telling the truth. And I make no holds about it, what that
24 man did is he lied; he committed perjury; and his buddy here
25 is going to protect him, Mr. Estok, (CLP,) with all due respect to 52

THE WITNESS: We advanced $14 million in

5 leases to NorVergence customers. Of that, we may have had a
6 million to two million dollars of these various holdbacks
7 that had not been paid to them yet and would not be paid to
8 them because of their bankruptcy. We owed, however, $14
9 million to the banks. We borrowed $14 million from the
10 banks. So the banks are not putting us in default on those
11 obligations despite the fact that the underlying contracts
12 have defaulted, on the basis that we continue to pay them
13 their interest and principal every month. So for the last
14 18 months, every month out the door is $300,000 in payments
15 to the banks, and every month in the door is $100,000 or so
16 of cash from settlements and customers who are still making 17 their payments.

22 Q So if it's a true statement that IFC paid
23 $11,743.67, then you would agree with me, just as a basic
24 principle of logic, that it is a false statement to say that
25 IFC paid $24,723.51, right? That would be a false

8 Q (By Mr. Lownds) Sure. Is it a false statement
9 that IFC took the assignment of the agreement by paying the
10 purchase price of $24,723.51, because that amount was never
11 paid?
12 A I don't think it's a false statement, because I
13 think we intended to pay the entire $24,723.51.
14 Q I won't bicker with you, sir, but it doesn't say
15 intended to pay. It says by paying, doesn't it?
16 A That's what it says.
17 Q And that would be perjury, in other words,
18 correct?
19 A I wouldn't say that, no.
11 Q Now, your company, I think you said, was a $100
12 million company?
13 A What I said was that our assets, the amount of
14 assets on our own books is around $100 million. That would
15 be the aggregate value of the portfolio that we hold in our
16 books.
17 Q And with NorVergence, you had loaned as of June
18 of 2004, you had bought up to $13 to $14 million worth of
19 leases?
20 A Fourteen.
21 Q $14 million. And you stopped doing business with
22 NorVergence on June 15th, 2004, correct?
23 A Approximately, yes.
24 Q And that was prior to the bankruptcy?
He speaks of a meeting with NorVergence with 25 or more leasing companies involved, forming a steering committee, hiring "turn around" person, and then: You were saying they hired
18 Mr. Mane. Then what happened?
19 A Shortly thereafter, the steering committee and
20 Mr. Mane spoke to Quest, and they made it pretty clear that
21 they were not --
22 Q Who is Quest?
23 A Quest was the primary supplier of T-1 services to
24 NorVergence customers.
25 Q Okay. And what was their position vis-a-vis


1 NorVergence, if you know, how much money were they owed?
2 A Four or $5 million. And they made it pretty well
3 known that they were not willing to sit back and wait. If
4 the account wasn't brought up to date immediately, they were
5 going to shut off the service, which would have shut off
6 service for all the customers, all 11,000 customers.
7 Because of that, four of the lenders who had direct exposure
8 to them filed an involuntary Chapter 11 filing. I believe
9 that's around the end of June some time.
There were some expenses that just had
21 to be taken care of. I mean he had missed one payroll. He
22 was about to miss a second payroll. People were going to
23 start leaving immediately. Rent was past due. The landlord
24 was making noises. Obviously Quest was very unhappy. So to
25 buy some time, we collectively raised $2 million.


1 Q You say we collectively?
2 A The 22 leasing companies involved in this, of
3 which IFC contributed $200,000. To simply buy enough time
4 to see if there could be a strategy emerge that would allow
5 this company to reorganize under bankruptcy and get back out
6 there and handle their business. About -- within about a
7 week, Keith was back to us to say that the hole was pretty
8 deep, that they needed $10 million in immediate financing to
9 get out of the hole. And based on that, no one had any
10 interest in continuing to support the company. They could
11 not arrange any dip financing to help them through the
12 bankruptcy. So by middle of July, the bankruptcy was
13 converted to a Chapter 7 liquidation and a trustee was then

•  appointed.

Here is a 21 page "excerpt" synopsis of the transcript:

The full transcript includes information about the hearing in Texas versus Illinois, the judge stating that if fraud is involved, it would not be to IFC Credit favor in Texas. This is a hearing by a judge, not a trial by jury.

Here is the full 150 page transcript ( Exhibit's were not available to us:)