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Balboa Capital Sued in Federal Court for
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Balboa Capital Sued in Federal Court for
By Tom McCurnin
The “Now You See It, Now You Don’t” Purchase Option Does Wonders for Revenue, But Does It Really Make Sense?
Vital Pharmaceuticals v Balboa Capital Corporation CV-62469 (SD Fla. 2014)
This isn’t the first time I’ve seen this, but it might be the first time I’ve written about it, and that’s the “Now You See It, Now You Don’t” Purchase Option.
An equipment lessor makes a proposal to a lessee and as part of that proposal the lessor makes certain statements of fact as to what the lease terms will be. That proposal is accepted, but when the lease is finally executed, the proposed terms are nowhere to be found in the contract. So the question becomes can a party to a contract represent in writing what the contract terms will be, then disavow those representations when the signed contract omits the terms?
The facts follow and are gleaned from a complaint on file, and are merely allegations until proved, of course.
Lessee Vital Pharmaceutical, maker of muscle building supplements, was contacted in 2010 by one of Lessor Balboa Capital’s salesmen, a David White, for purposes of leasing $605,000 worth of pharmaceutical equipment.
The lease proposal clearly states that two of the schedules would be subject to a purchase option of 10% and $1 for two of these leases. It also calls for the first payment of the $1.00 out lease, in the amount of $11,837.52, to be sent in with the signed proposal.
By the way, who in his right mind would enter into a fully amortized lease for capital manufacturing equipment with a large residual value on a fair market value basis? By the end of the lease term, the equipment has been fully paid for and a tidy profit has been made by the lessor. Having a FMV deal for new manufacturing equipment makes no sense.
The lease was prepared in four different schedules, and while the Complaint is unclear, the Lessee’s principal signed the master lease and schedules, perhaps without looking them over carefully. Notwithstanding Mr. White’s written representations, the lease did not contain the purchase option. Must have been an oversight on Mr. White’s part. Or was he trying to slip one past the lessee? That is the crux of the case.
Also worth mentioning is the fact the deal is $605,000, and notwithstanding the alleged fraud of David White, why didn’t the lessee read the lease and figure out the bait and switch? Certainly the company is big enough to have a general counsel. Was he out of town when the deal was inked? The company’s CEO and founder, Jack Awoc is well known in the strength and supplement industry, and is also a bright guy. So I don’t understand this.
Four years goes by and the Lessee wants to exercise the end of lease options, and proudly displays his lease proposal bearing the signature of David White. Balboa and Mr. White quickly disavow the proposal and the email faster than the Mission Impossible team can disavow Ethan Hunt.
David L. White, a Vice President and Branch Manager, and a former banker, further represented in an email to the principal of the Lessee that “we assume a 10% residual.” OK, so far so good. The Lessee certainly believed Mr. White, as he is a branch manager a former banker. I mean if you can’t trust a banker, who can you trust?
To add insult to the fact, White wrote the Lessee an email incredulously stating that the Lessee “must be misinformed.” Misinformed by whom? It seems very true that Mr. White was correct—the Lessee was misinformed—by Mr. White. Hence, the “Now You See It, Now You Don’t” purchase option. It’s there when Balboa negotiates the deal, but disappears when you want to exercise it.
Is there a motive for salespeople to misrepresent the terms of the residual? I don’t know the inner-workings of Balboa, but it is common knowledge that salesmen at some shops share in the residual revenue stream. So, a bait and switch to the residual, an evergreen clause or even the quarterly payment scam can mean a nice bonus to a salesperson at some companies.
The dispute triggered an Evergreen clause, which the complaint says the payments were changed from being quarterly to monthly. I also bet there was a quarterly interim rent charged.
But the interesting legal question is when do sales proposals and emails made in writing become part of the contract? The answer is that the proposals may become part of the contract. The Restatement of Contracts, a uniform act generally applicable in all states, holds that proposals made and relied upon can form the basis of the contract if the proposal is made to fraudulently induce the other side or to explain ambiguous terms. Here the lease schedules had no purchase option whatsoever, and given that glaring hole, might be ambiguous or fraudulently induced. Moreover, the proposal had no admonition at the bottom that the proposal was merely an agreement to agree. So under the Florida case of Midtown Realty, Inc. v. Hussain, 712 So.2d 1249 (Fla. Ct. App.1998) [holding that proposal’s admonition that the proposal was merely an agreement to agree], the proposal may be admissible into evidence, especially in light of the contradictory emails of White.
The Lessee filed suit in the Southern District of Florida against Balboa for Declaratory Relief, Deceptive Trade Practices, and Fraud, among other things. I was actually surprised that White was not named individually, but the Lessee’s counsel must have been feeling generous. The complaint suffers from being over-pled (wordy) and counsel misunderstands important leasing terms. Counsel refers to the leases being as conditional sales agreements, not finance leases. Clearly, whatever the nature of the dispute, the schedules are finance leases. Not that either would make a difference to the case—either White intentionally lied or he didn’t.
Leasing News has requested comment from both the Lessee and Lessor but so far, no one has agreed to come forward and speak about the incident. Until then, I guess receiving an email from a senior officer and former banker doesn’t mean what it used to.
What are three takeaways here?
First, your employees are your biggest asset and your biggest liability. Senior, well trained, employees will generate more revenue for the lessor than any source. Conversely, if your employees are accused of not telling the truth, the negative publicity can ruin many existing and future relationships and land the lessor in court. Either Mr. White was confused and uninformed or he misrepresented the terms of the proposed lease. Either way, this is not good.
Second, assuming a lessor wants to use salesmen to misrepresent the terms of the deal (certainly not an uncommon occurrence), then the lessor should not use forms which “explain” the lease. The simple reason for this is that one cannot incorporate all the terms and admonitions on the proposal or quote. If the lessor is going to do this, then the lessor should have an admonition which says, “This is merely a proposal and the terms herein are not binding on the lessor and will be subject to final documentation in a formal signed lease.” Putting aside the incredulous emails by White, that admonition may have kept the lessor out of court.
Third, if you’re a lessee, read the actual lease. The lessor’s salesperson, even if he is a senior guy and former banker, is not your friend and may not tell you the truth. I’m not sure why a deal of this size had no scrutiny from the lessee’s general counsel.
The bottom line to this case is that salesmen can lie and lessees can be stupid and not read leases. Combine the two, and you have a lawyers’ full employment relief act.
Master Lease Contract
Complaint for Jury Trial
Tom McCurnin is a partner at Barton, Klugman & Oetting
Previous Tom McCurnin Articles:
Many Complaints—Similar to McCurnin Column Above
Leasing News Bulletin Complaints-Balboa Capital
This list does not include all the complaints that were resolved to the lessee's satisfaction, as part of the process, with no complaint to be posted as part of the resolution. In addition, there are complaints
Many of these complaints were directly re-checked in 2013 and verified that they wanted to keep the complaint active.
Number 12 explains how this basically works with the actual lease
It should be noted that the “numbers” on the complaints, do not correspond to all postings, which contain outside complaints, not
(Residual Was to be Zero)
(Delay in Funding/EFA Contract Lost)
Balboa Capital Settles Mass Fax Class Action Case
Balboa Tagged for Stealing Corporate Secrets
(Alleged "Bait and Switch")
(Lease Supposed to be $1.00, not FMV-made Evergreen payments)
(Lease supposed, 11 Evergreen Payments Made before discovery)
(Thought Lease was a $1.00--Evergreen)
(Residual and Evergreen Abuse Complaint)
Kropschot vs. Balboa Capital: Stiffed
(Supposed to be $1.00 Residual---Evergreen Clause abuse)
(Loses option to Purchase Because he Was Late)
(Doesn't Pay Vendor, Dispute over Pre-Funding)
(Has unsigned Purchase Option, Balboa Says Forgery,
(Told Computers Would be Nominal, originally wanted $1.00-- Evergreen payments)
(Wanted to return, but charged Evergreen payments)
(Supposed to be $1.00 Purchase Options, Evergreen, then see above)
Leasing News Complaint Bulletin Board
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Value of Term of Lease
I have written many times on allowing the lessee to determine the term of the lease. Many of you only think in lending terms such as 36, 48, 60, or on occasion 84 months. Then you try to use rate or 100% advance to claim you are better than lending. However, there are some things you could try to actually look better than a loan to the lessee.
The lease starts when the equipment is delivered and accepted, but the term is something that you can discuss with the lessee to determine how many months it would take to satisfy the lessee’s needs. Perhaps there is a month where business is slow and equipment needs can be better determined, so the lease should end in that month helping you to know when to look for a new lease. Perhaps they have an accountant that wants the lease to end at the end of the firm’s year. In addition, many firms have a budget that that limits them so if you ask what payment they need, determine the number of months the lease should run by calculating your rate need given the
In addition, revenue is usually not level in any business which requires the firm to have a line of credit with the bank to cover months of cash shortage. By creating a term with variable payments that follow the predicted cash flow of the lessee, it helps to prevent the need for the line of credit that makes your rate look cheaper than it would with level payments.
If you cannot reach the lessee, and must use the vendor’s sales staff to pitch your leases to the customer, it is best to have a rate chart with three or more options that have rate factors from 32 months up to 63 or more months. It gives the sales staff all the options discussed above. The three columns might be one for a $100 purchase option; one for a defined purchase option based on the proposed equipment; and on occasion, a column for a 10% prepaid purchase option. There are many other programs that can create other columns based on the terms and rates you want to offer.
Occasionally you can offer a lease with a skip option each year. This is only offered if the lessor has a bookkeeping system that allows for a monthly extension. You price the lease (60 months) is calculated on a computer-based lease pricing program by creating a term of 1 skip the first month followed by 11 months then a skip followed by 11 payments and so forth. The lease is booked as a 55 month lease and the lessee gets an invoice each month, but if needed, he can write “skip” on one payment each year and you then place that month on an extension.
If the lessee does not use each year’s skip, it piles up and can be used in the third year for three months to help the cash requirement for an overhaul or some other requirement to fix the equipment. If the lessee does not use any of the skips, the increase in the yield goes up by nearly 200 basis points. It is sold like payment insurance because 55 monthly payments are higher than 60 months.
Skip payments have been used in addition to a 90 day delay, before payments start, for a long time as additional methods to create different terms. Flexible terms are the hallmark of commercial equipment leasing, more than rate or 100% financing. Flexible terms usually create more income, even though the rate appears to be the same as a loan.
If you want to offer level terms of 36, 48, or 60 monthly payments, then rate is all you have to offer, and leasing will not look very attractive. Why not try to offer flexible terms and get into leasing?
Mr. Terry Winders, CLP, has been a teacher, consultant, expert witness for the leasing industry for thirty years and can be reached at email@example.com or 502-649-0448.
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Lease/Finance Calculators On Line
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For instance, on 60 months .025 was 18% or 10% add on ( in advance) and you could then multiply 1.05 ( if you wanted five points) times it and get the retail rate, the selling rate.
A reader asked us for a program that would calculate his commission based on a lease factor. Many founders and equipment leasing companies offer these programs on line, for free. Some allow you to download the program Excel can also do this easily.
Bob Teichman, CLP, sent us the correct formula for HP17BII :
"This is a very difficult formula to copy correctly, whether on paper or on the calculator.
"Thanks for printing the information about on-line calculators. I continually refer people to your list."
In the old days we would take the factor and multiply it by 1.00 with the commission the salesman was seeking. For instance, .0331 and the salesman wanted five points, multiply 1.05 times .0331 and it would be 034755.
Here are some personal financial portals and calculation tools we will be adding to the page:
CNN Money has also a financial calculator and other tools, and it's advantage, it is designed with currency converters, and may other programs at work all over the world:
Collection of free financial calculator, including stock spread calculator, rent vs. buy
It there is a calculator we have not mentioned on this page, please let us know as we will share with other readers.
Here is one sent in by reader, Emily Hill firstname.lastname@example.org . She says she uses
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Rosanne Wilson, CLP, sent in a company that will add a calculator to your web page for a fee.
Rosanne Wilson, CLP
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Top Ten Reasons Credit Card Applications Declined
People apply for a credit card for many different reasons. Some are new to the world of credit and just getting started, while others are hoping to expand their access to credit. Regardless of the reason, no one applies for a card hoping their application will be rejected.
“Each lender has different criteria for extending credit. Therefore, you should do their research in advance, and only apply for the cards that are likely to grant the credit they seek,” said Gail Cunningham, spokesperson for the National Foundation for Credit Counseling (NFCC).
The NFCC provides the following 10 reasons a credit card application could be declined, along with the steps consumers can take to correct the problem. The list is not inclusive, but will help borrowers better understand the review process and how to position themselves to increase the likelihood of credit being extended.
What to do – Judiciously build credit, perhaps starting with a secured credit card, but confirm in advance that the issuer reports activity to the credit bureaus. Also consider becoming an authorized user on another person’s card, as the activity of the primary cardholder as well as the authorized user is reported to the bureaus.
What to do --Identify any issues by obtaining the credit report for free at www.AnnualCreditReport.com. Next, start making payments on all accounts including those that are past due. This begins building a positive history and helps to establish creditworthiness.
What to do – Pay down credit card debt to equal no more than 30 percent of available credit. Credit utilization is the second highest weighted element of the scoring model, so lowering debt could also benefit the credit score.
What to do – Increase income or decrease debt. The important thing is to not appear that more is owed than can be responsibly managed.
What to do - Only apply for the number of cards that are necessary and are appropriate for your financial situation. If declined, do not continue applying. Instead, take steps to remedy the reason for the rejection. Wait a few months to reapply, as that will give the credit report time to update.
What to do - The further a person moves away from the date of the negative activity, the less impact it has on credit decisions. A person doesn’t need to wait until the activity rotates off the credit report, but putting distance between the harmful information and applying for new credit is helpful.
What to do – Research which cards are more likely to grant credit to people with low incomes. In the absence of other eliminating factors, getting a part-time job to supplement the primary source of income should enhance the likelihood of credit being extended.
What to do - Make steady employment a priority. Changing jobs within the same field may not weigh as heavily against a person, particularly if it is a promotion.
What to do – As a result of the Credit Card Accountability, Responsibility, and Disclosure Act, Americans must be 21-years-of-age to independently receive credit unless they can prove ability to pay or have a co-signer. It is not a bad idea for a young person to learn to manage money by living on a cash basis or using a debit card before applying for credit.
What to do – Avoid unintentional errors by filling out the application online, as these forms often do not allow a person to submit until all required fields are complete.
For help understanding the credit granting process and learning how to improve your credit picture, reach out to an NFCC member agency. Ask about the NFCC’s Sharpen Your Financial Focus™ program which offers solutions to many everyday financial issues. To be automatically connected to the agency closest to you, dial (800) 388-2227, or find an agency online by visiting www.NFCC.org.
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