The Government Regulation of the Equipment Leasing Industry

by Christopher Menkin

“ The AGs are, in essence, seeking to change laws governing lease financing, not through elected representatives of the state legislatures, but by the threat of costly and protracted — even if unwarranted and legally unsupported — litigation.” Stan Goldberg and Steven Karlin of the New York law firm of Platzer, Swergold, Karlin, Levine, Goldberg & Jaslow,LLP, February,2005, “Monitor” Magazine

There is much more to be said about why the leasing companies will most likely not be able to enforce their alleged “hell and high water” contracts. Perhaps equally as important to the industry are the proposed regulations being explored by the staff of many state attorney generals who plan to seek legislation to protect citizens in their state from “unscrupulous” leasing companies.

One of the new realizations to come from this telecommunication scandal is how the defendants are reacting. In the past, many small equipment leasing customers have had little money to hire an attorney. When they do decide to “fight back,” in the past, it has been a local attorney with little “finance” on “commercial contract” experience.

In the past there was basically a “clique” of equipment leasing attorneys who knew the leasing law and almost always represented primarily the “creditor” and not the debtor.

They often relied on knowing the cost; the fact that protracted law suits often scares the customer into submission. Strong worded letters often worked. When the letter did not work, the “telephone attorneys” would attempt to scare the listener into “paying up” with the threat of a costly law suit in the lessor's far-away venue.

What has happened to “business as usual” in the leasing industry? For starters, there has been an expansion of experienced

attorneys in this field. These attorneys, as well as less experienced attorneys, have also taken advantage of the wealth of information available to them through the internet. Indeed, the internet has enabled customer/defendants to find and share information with each other and their attorneys, 24 hours a day, seven days a week. As a result, the “inexperienced” local attorney is now on equal footing with the large New York law firm. Even the cost of research has been greatly reduced.

“Business as usual” has also fallen victim to many recent joint actions such as Leasecomm. Joining the local district attorney's office, the states' attorneys general appear to be quite comfortable in using their broad base of power: the subpoena.

In the latest instance, they first start out in a friendly manner, asking for information, such as the names, copies of contracts, information, on all customers with NorVergence leases. If the leasing company does not cooperate, they issue subpoenas.

And then they share this information and pool their knowledge with each other, often being provided information from customers/defendants and the local, “inexperienced” attorneys every step of the way.

In certain states, this pooling of information provided a definite advantage. At a minimum, it gives more ammunition to other states without the costs associated with information gathering, plus the ability to educate states who have not already complained.

In this day and age where government agencies are being strapped for cash, the Norvergence scandal provides opportunities to not only protect their citizens, but to bring “money” to their states through fines and settlements. And if no direct financial reward is to be achieved, at least they justify their departmental budget.

In the various NorVergence settlements by nine state attorneys general, several have a 60 day to 90 day date for customers/defendants to opt in for settlements. It will likely be 90 days before the various attorneys general offices learn from the leasing companies how many customers/defendants have “accepted” and how many have not accepted the settlement made between the leasing companies and the attorneys general offices.

Let's get to the “myths” among various leasing companies' position on the NorVergence leases, as told to me by various government law enforcement agency attorneys and investigators, off the record for attribution:

Not all states differentiate between “commercial” and “consumer.”

Several states have no distinction, especially in telecommunication matters.

Facts regarding “2A” and other claims for “business purposes” will not work in several states. The issue of federal telecommunication and interstate law may also prevail in others. There are also questions regarding the most commonly used document called the Equipment Rental Agreement (“ERA”) from NorVergence:

Several courts have already ruled about the inadequacies of the wording, including “2A,” and non-specific forum selection clause provisions.

These NorVergence “ERA's” will not pass the Financial Accounting Standards Board accounting definitions, let alone the reality of an “operating lease” in their assignment to others. They are finance leases. The discounting, actual assignment, and profits give further evidence as to their true purpose. Such high profits may make them subject to usury laws, among other laws, particularly to the leasing companies not licensed in the state of origination of the lease.

For instance, in Florida, where Attorney General Charlie Crist took to task twelve leasing companies, settling with three so far, the state is seeking fines and damages against the remaining companies. An ex-employee who handled many of the transactions of these NorVergence “ERA” contracts for one of the leasing companies named told Leasing News the “yield” was over 25% to the lessor.

These high interest rate contracts and situations bring more problems than any claim about “hell or high water” legalese, including the following:

Personal Property Tax: Lessees should be reimbursed for being over charged, and legally can ask for records of the leasing companies reported to the county, what they charged, and as important, as suspected in most cases, the over inflating of the lease contract. In most states, software, service, sales tax, and other such items are exempt, so the correct “cost” is the equipment itself. At best, the lease contracts were “improperly” reported to the county agencies.

Ignorance of the law is no excuse to the lessor.

Insurance property coverage is for replacement cost of personal property or motor vehicles. It does not cover service or warranty, unless explicitly spelled out in the insurance policy. While the leasing companies may have been relying on “cost to lessor” in its insurance requirement, where does the responsibility lay for the proper coverage?

Does the lessor have responsibility here? Most likely yes, but certainly the lessee received a copy of the insurance binder, plus the agent most likely verified the original request with his client. In addition, does the insurance agent accept the description and dollar amount without question? The same with the county tax assessor's department. Do they accept “everything” reported to them? More than likely, they were relying on what the leasing company reported to them.

The leasing companies, thus in turn, passed it on following the description provided by NorVergence.

In my conversations with several key people in several states' attorney general's offices, they state, “We don't feel sorry for these leasing companies. They should have known better.”

The fault lies not with the president of the institution, although that is where the “buck stops,” it really is with department heads and all the way down to “sales people” who wanted to make quota's, commissions, and many may have relied on the leasing veterans at NorVergence. Others may have thought with corporate guarantees, personal guarantees, and with “recourse” to NorVergence, plus “representations and warranties,” they were protecting the transaction. Maybe the transactions were accepted

with less caution because one main representative of Norvergence was also the president of a leasing association and NorVergence had also hired others from the leasing field, such as the ex-credit manager of HP-Compaq Financial.

This is how the “Equipment Rental Agreement” contracts were funded:

“The ERA was funded when Norv got the D&A ( delivery and acceptance form ) signed.  This didn't mean service was connected though.  Norv then had something like 60 days to get the T1 dropped and everything connected on the back end, along with hooking the T1 to the MATRIX ( the NorVergence supplied equipment )and your PBX.”

Yahoo List Serve

Perhaps as many as over 100 “ERA” leasing customers repeated the same experience on the Yahoo list serve.

The lease documents called for the first payment in 60 days, which was tied up to when the Matrix unit was working, meaning connected to the telephone companies either DSL or T1 line.

NorVergence was trying to get ahead of the alleged Ponzi type scheme by funding leases where there were no connections. This has been testified to by dozens of NorVergence users on various list serves.

In addition, five days before the June 30 court action, NorVergence managed to wire more than $160,000 to two related companies, according to court papers. The key management evidently knew the end was near.

In addition to the master agreements, this is further evidence that “agency” relationships were established by many of the leasing companies and NorVergence in the acceptance of these documents, meaning NorVergence was doing the “due diligence,” often a commission was given to parties involved, and many leasing Companies' key employees knew of the service hook-up and what was involved.

Perhaps the most serious issue, which would certainly win over many signed leasing contracts here in the state of California, in my personal experience, is the NorVergence salesman's representation of what the leasing contract was covering, the reliance on the salesman's “deception” or ‘half-truths” or perhaps “out right lies.”

Their training manual is available, and is hard evidence as to
their role in this procedure:

http://leasingnews.org/PDF/SM_Training.pdf

In addition, according to several list serves, many ex-NorVergence salesmen are anxious to prove that they were following company instructions, as outlined above.

In the perhaps 500 cases reviewed by us, there were no leasing brokers involved, who might have been able to give advice or guidance to the lessees. Surely the leasing companies would have been more careful as brokers appear to be more suspect. In reality, in the last fifty years of equipment leasing, the overwhelming majority of serious problems have come from the sellers and dealers of equipment like Westinghouse, Ford Motor Credit, among the other companies, who have learned the hard way that there is a lot more than making a credit decision in evaluating whether the lease will pay out or not, and its cost of “enforcement.”

What is perhaps even more damning is not just the “ex-employees,” who's motivation may be questioned in a court of law, but what readers have expressed, many seriously questioning the procedure and knowledge of those caught with these types of contracts.

For example, the past president of the United Association of Equipment Leasing, Bob Rodi, CLP, of LeaseNow, states, “While I cannot totally excuse the individuals who bought this service, there is no way that I will ever believe that some of the major leasing companies who funded these transactions did not figure out that this was a total scam.”

As the various state attorneys general offices gain more knowledge they share it with each other's fraud or telecom division. They are learning about what went on and about equipment leasing procedures. They fully do not understand the true present value, although some offices do, nor various state licensing provisions regarding usury, or some other issues, but they certainly are learning. They do understand the age old lies and tricks by dishonest sales representation. In addition, they have the actual NorVergence sales manuals. Next is the testimony of an ex-salesman in how the reported deception was made to the NorVergence lessee.

The defense that if the car is not working, you still make payments on the vehicle, will not work here. The myth that these NorVergence “Equipment Rental Agreements” being “hell and high water contracts” may be like the Emperor and his fancy clothes. In reality, they were as naked as he was.

Coda: In the course of the conversations, often the table was turned on me. The question most often centered around who should regulate the leasing companies? My impression was they did not want the federal government to intervene. I got the impression they wanted to do it.