New NorVergence Settlement Numbers

by Christopher Menkin

NY Attorney General Elliot Spitzer

New York Attorney General Attorney General Eliot Spitzer and his staff were the first to obtain major settlements with funders of NorVergence leases. They lead the way for 28 other attorneys general offices and the District of Columbia to also obtain settlements, originally from the companies Spitzer was about to get from 100% to 85% of the money owed returned, including personal property tax and other fees, plus payments spread over a period of time at not interest, if requested.

Leasing News ran two editorials to support the "generous settlement" and was active on blogs and list serves with NorVergence lessees.

We got criticism from both sides. We thought it was a wise business decision for all the parties involved.

Popular, IFC Credit, Partner's Equity, and Sterling Bank, among others, did not reach a settlement, and several class action suits also were working on the lessees behalf.

Leasing News reported that in Illinois, only 48.2% accepted the 85% settlements Illinois Attorney General Lisa Madigan and her staff obtained.

Paul Larrabee, New York State Attorney General's Office, reports Attorney General Spitzer and his staff found the percentage to be 67% or 467 accepted from 14 leasing companies, ranging from 85% to 100%, totaling 737 complaints.

Excluding the one company who only had one complaint, there were three who received 100%: GE-92; USBancorp- 59, TCF- 43. Wells Fargo had 86, but 15 who declined. CIT had 103 who accepted, but 194 who declined. The figure is surprising as the settlement was 90% of the contract, fees, and terms on the 10% owed at no interest.

*Professional Collectors thought it outrageous the settlements of GE, CIT, US Bancorp, and Wells Fargo.
*Leasing attorneys also called it a “political decision.”
*Other leasing companies said these large financial institutions had so much cash, it was an easy write off for them.
* Others said it would be the end of the make payments come “hell or high water.”
*The great majority of the 11,000 NorVergence lessees said, “Never!”

Why were the percentages of those who took the settlements not higher? And why four 100%, the rest odds and end, but CIT finding 65% not accepting may be explained as group phenomena.

The guess seems to follow those on List Serve who are "hard liners" and expect penalties and fees from the lessors, not forgiveness on the lease contract. Those who are the most vocal are ones who had contracts with CIT, so it appears the followers of this group who also had CIT contracts, were influenced by the alpha vocal critics.

In the meantime, other leasing companies, such as Sterling, have offered 50%. as arranged by one class action group, and these clients are annoyed at the figure. Others such at Popular in Missouri, where the defense was unable to change the venue, 400 lessees appear to be going to court. In the IFC Credit case, where there are $14 million in leases, venue is where the lessee is located and there appear to be many individual lawsuits.

Not lease to forget is Federal Trade Commission Senior Attorney Randy Brook, who brought Leasecomm down, fined and returning over $24 million to Leasecomm lessees.

In the CID filings, particularly with asking leasing companies, for accounting records, was this to learn about "holdbacks," this has not been divulged in a Texas Court case (IFC Credit Vrs. Speciality Optical dba SOS) where IFC paid NorVergence $11,743 for a $28,000 original invoice figure that yielded lease payments of $32,620.20.

There was sparing about certain items the IFC Credit attorney said he provided, but in the letter to the editor of the Equipment Leasing Association newsletter, said, "In addition to IFC's two prior responses to requests for production of October, 2004, and January, 2005, (we have written confirmations of delivery), IFC has been cooperating with the FTC on another supplemental request from the FTC for additional information and IFC is in the process of obtaining and assembling such information from third-parties for forwarding to the FTC.

"That information and other materials requested by the FTC are expected to be delivered to the FTC very soon which should resolve the requests of the FTC's Civil Investigative Demand. "

Brook supposedly is personally familiar with Lease Plus, the software accounting program from LeaseTeam, who advertisers one of their accounts is IFC Credit Corporation.

John Estok of IFC Credit admitted in the SOS case that he estimated over $2 million in hold backs from NorVergence. How did they account for these, and was service separated from personal property; were all leases treated the same, meaning insurance and personal property tax based on the stream of payments of the lease and not the equipment cost, as it normally is calculated.

In the SOS case, particularly sensitive in the State of Texas, NorVergence was the manufacturer and supplier of the lease contracts to funding sources, actually signing a packet of papers regarding the telephone service. The lease contract was to contain the “equipment” when in fact it also contained the profit, less the cost, of the telephone service itself.

These may be important in defining section 2A and rendering the make payments come “hell or high water” subject to further Inspection.

According to James M. Johnson, PHD, recognized expert in equipment leasing:

“Operating and Capital lease terms, especially the latter, is a creation of the accounting profession. I find no reference to capital leases in the tax code. A capital lease for accounting purposes can be either a true lease or a conditional sale under the IRC. We have long known the reverse to be true as well--operating leases for accounting treatment may be either true leases or conditional sales for tax purposes.”

These may change the "substance" of the contracts to more like "conditional sales contracts? Is that what Brook is looking for in the various leasing companies?

Does he see similarities between the Leasecomm situation and NorVergence in reference to 2A? Meaning if you define "NorVergence as manufacturer and thus cannot claim to have a "finance lease" as defined by Article 2A. This view would then presumably permit the lessee to reject the lease as provided in Sections 508 and 509."

The hell or high water clause states that the lessee, not the lessor, is responsible for selecting the equipment, the vendor, the service provider, and the fitness of the equipment. Furthermore, if the lessee is having trouble with the equipment or related service, its remedies are solely between itself and the vendor and that payments to the lessor are to continue.

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.

As a side issue, it seems many local courts are ruling against the venue clause in the NorVergence ERA contracts there also appears to be similarities between Leasecomm and NorVergence in the venue clause of the NorVergence Equipment Rental Agreement. Most local courts have ruled that the venue location was not fairly presented and ruled in favor for the lessee location. There are exceptions for this, such as Popular Leasing in Missouri.

This was one of the issues in the Leasecomm suit that the FTC prevailed:

“...the contracts contained provisions purporting to waive consumers' defenses and allowing Leasecomm the right to sue consumers in Massachusetts, where it is based, rather than where consumers lived and purchased the business opportunity.” The FTC alleged that most consumers could not afford to travel to Massachusetts to contest Leasecomm's charges and had default judgments entered against them in the Massachusetts court. If they didn't pay, Leasecomm resorted to aggressive collection measures such as wage garnishment and property attachment to collect, even though Leasecomm knew or should have known that their vendors used deceptive practices to sell their business ventures and promote the financing”, according to the FTC's complaint.

Is there any intention to make the same arguments as in the Leasecomm situation as with NorVergence?

With the Federal Trade Commission investigation off to the side, and possible U.S. Attorney investigations, perhaps those that did not take the settlements from the 28 attorneys generals and District of Columbia, are waiting for the feds to step in.

The feds say they want to see the books and tax records before completing their opinion.