1. What is the Norvergence Litigation?
Norvergence, Inc., now in bankruptcy, sold drastically
reduced rate telecommunication services to small
businesses throughout the United States. In order to
obtain these telecommunication services, the customer
was required to enter into a long term (usually 36 or 60
month) Equipment Rental Agreement for a Matrix device
which was a necessary component of the provision of the
telecommunication services. Norvergence, as the “rentor”
on the standard form of Norvergence Equipment Rental
Agreement, sold and assigned the Equipment Rental
Agreements to approximately 40 secondary investors,
including banks and leasing companies (the “Holders”).
(We are aware that a small minority of Norvergence
customers may have signed equipment rental or lease
forms provided by their Holders. We will have to review
the terms of such Agreements and the circumstances under
which they were signed to determine if we can bring suit
on behalf of this minority group if customers.)
Ultimately, Norvergence ceased paying its creditors,
service providers and even its employees, but continued
to sell its telecommunication services and rent its
Matrix devices until it was forced into an involuntary
bankruptcy proceeding. Norvergence no longer provides
telecommunication services and the Matrix devices are no
longer operational. Nonetheless, the Holders are
insisting that Norvergence customers continue making
rental payments for the Matrix devices.
2. What is a Matrix device?
Good question. The Matrix device comes in two flavors.
One is an "off the shelf" IAD (integrated access device)
made by Adtran for Norvergence similar if not exactly
like the one you can view by
clicking here. As shipped by Adtran to
Norvergence it is estimated that the IAD unit had a
wholesale cost of under $2,000.00. It was suggested in
the Norvergence sales literature that the Matrix device
had proprietary software in it possibly designed by
Nortel that enabled the owner of the Matrix device to
access unlimited free calling over the T-1 line
installed by Qwest and the cell phones provided by
Norvergence to the customer. A post-mortem review of the
IAD Matrix device suggests that its only actual function
was to connect the Qwest T-1 line (if it was ever even
delivered) to the customer's phone system. This function
could have been accomplished using any of a dozen
generic IADs available on the market for under
$2,000.00.
Click here to see Adtran's official comment
regarding the IAD Matrix device. The second Matrix
device was the "Soho", which is an internet router that
has absolutely no telephony capabilities. No independent
network equipment consultant has been found that can
explain what the IAD or Soho Matrix devices could do
that any other IAD or internet router cannot do. There
is clearly no connection between the Matrix device and
the cell phones provided by Norvergence, as the cell
phones have absolutely no interaction with the Qwest T-1
line, the only network to which the IAD Matrix device
was connected. In many of the cases with Norvergence
customers, the Matrix device was either not connected to
anything or was providing nominal value at best.
3. Why did Norvergence customers have
to rent Matrix devices?
If, as we believe, the Matrix device was not necessary
to obtain reduced rate telecommunication services, then
its only real function was to enable Norvergence to
convert a stream of future monthly telecommunication
service charges (in the guise of Matrix device rental
payments) into immediate cash, by selling the Rental
Agreement and Matrix device to a Holder. For example, if
a small business was incurring $1,700.00 per month in
telecommunication service charges, Norvergence would
offer to reduce that monthly charge to less than
$200.00, provide cell phones, internet access, a T-1
line, toll free local and long distance calling, and the
like, on the condition that the customer rent a Matrix
device for 60 months at a monthly rental of
approximately $1,000.00. The customer would have to pay
only $1,200 a month in combined rental and service
charges, saving approximately $500 per month. But, the
total rental obligation alone would be $60,000.00 over
the term (60 x $1,000.00 = $60,000.00). Norvergence
would sell and assign the rental agreement, often within
a day or two, for approximately two thirds (2/3rds) of
the total rental obligation, in this case for about
$40,000.00, to a Holder, which is the person to whom the
rental payments are now owed by the customer. When
Norvergence ceased providing its services the Holders
demanded that the customers remained obligated to pay
the rental payments for the remainder of the term.
4. Where is that cash?
Obviously, Norvergence had to pay for the
telecommunication services it was passing through from
the actual providers (such as Qwest, Sprint, etc.) to
its customers. So, it had to apply at least some of the
monthly service fees and some of the cash it received on
sale of the Matrix device Rental Agreements to pay the
cost of the telecommunication services it "provided" to
its customers, as well as sales commissions, costs of
operations, and the like. But, it most likely siphoned
off much of the cash as the scheme progressed and all of
the cash just before it was forced into bankruptcy. As
the costs of the services it was purchasing to provide
to its customers were substantially more than it was
going to receive from the customers utilizing those
services, and it was contracting to purchase more and
more services as its customer base grew, it had to rely
on an ever growing base of new customers to keep its
unique pyramid scheme afloat. In sum, the Matrix device
lease may have been nothing more than the means by which
Norvergence was able to conduct what appears to have
been a pyramid scheme and, like all pyramid schemes, it
collapsed under its own weight when it could not attract
a sufficient and ever growing number of new customers to
generate sufficient cash to pay the ever increasing
charges for telecommunication services as well as the
funds that were being siphoned off.
5. Are the Holders of the Equipment
Rental Agreements entitled to continue to receive monthly rentals for the Matrix
device?
Your [the Norvergence customers] duty to make the rental
payments is unconditional despite equipment failure,
damage, loss or any other problem. If the equipment does
not work as represented by the vendor, or if the vendor
or any other person fails to provide any service, or if
the equipment is unsatisfactory for any other reason,
you will make such claim solely against the vendor or
other person and will make no claim against us.” This
type of clause is often referred to as a “hell or high
water” clause and seemingly would insulate the Holders
from any actions or inactions by Norvergence unless they
knowingly participated in such activity or had reason to
know that something was not right with these rental
agreements. We will attempt to prove that Norvergence,
by deliberately taking a loss on each Rental Agreement
transaction in order to generate immediate cash, never
intended to provide the promised telecommunications
services and, thus, was engaged in fraud. Because that
fraud would bar Norvergence from enforcing the Rental
Agreements, so also would it bar the Holders. In
essence, fraud permeates the Rental Agreement, even in
the hands of the Holders.
6. Am I entitled to any remedy, such as
voiding of the Equipment Rental Agreements, abatement of rental payments, or the
like?
These are hard questions. The Holders will claim that
they are just as innocent as the renters of the Matrix
devices. We will try to show that this is not true. In
order to prevail, we may have to prove that the Holders
knew, or from the various transactions they entered,
should have known that a Matrix device in the hands of
one renter should have had a substantially similar cost
as a similar Matrix device in the hands of other
renters. But, our preliminary research reveals Matrix
device rental obligations that are widely divergent,
from $200.00 to $1,000.00 or so a month for the Soho,
and from $400 to $3,000.00 or so for the IAD, all for
what appears to be the same two devices. To illustrate
why we believe the Holders may not be innocent parties,
when a car leasing company buys a lease it also acquires
title to the vehicle being leased and, at any time,
knows what it paid for the vehicle when it bought the
vehicle and has a very good idea of the liquidation
value of the vehicle in the event of the lessee’s
default. Its investment is tied not only to the stream
of rental payments but also to the liquidation value of
the leased vehicle. On the other hand, the Holders of
Equipment Rental Agreements appear to have been buying
nothing more than a stream of rental payments without
any regard whatsoever to the initial cost or liquidation
value of the leased Matrix devices. If this is the case,
we will attempt to prove that the core of the
transaction being financed was not the renting of a
Matrix device but to provide immediate cash to
Norvergence for the provision of future
telecommunication services and that Norvergence never
had the intention of providing such services for longer
than then time it took for its pyramid scheme to grow to
the point of collapse. Moreover, we may be able to prove
that the Rental Agreement was fraudulently obtained by
Norvergence, as it never had the intention of performing
its promised services. As a result, we may be able to
prove that that Rental Agreement is void, and that it is
no more enforceable in the hands of a Holder than in the
hands of Norvergence.
7. Can I obtain damages?
The Complaint filed on September 24, 2004, seeks damages
under the Consumer Fraud Act of New Jersey (the “CFA”)
and the New Jersey Racketeer Influenced and Corrupt
Organizations Act ("NJRICO"). The CFA, for example,
permits consumers, including businesses, to sue for
damages for unfair, fraudulent and/or deceptive acts and
practices. Any damages that the court or jury determines
have been suffered are tripled and the victims of the
practice are also entitled to recover their attorney’s
fees. NJRICO also provides for damages and attorneys’
fees, but NJRICO claims are more difficult to prove. Any
damages awarded by the court would be paid to our
clients who are then party to the suit. This means that,
if you settle the claim with your Holder, you will no
longer be part of the suit and will not have any further
interest in damages or awards.
8. So, why settle?
Because litigation is not predictable and, ultimately,
given receipt of a settlement offer that you could live
with, may not ultimately be in your best interests, we
are required to advise you of any settlement offer we
receive, which you can then approve or reject. We may
advise you whether we believe the offer is fair or if we
think you can do better. We have to assume that not all
Holders will be willing to settle on any terms we think
are reasonable and not all customers who become our
clients would be willing to settle on terms we advise
are reasonable. Thus, we anticipate litigating this
matter to judgment on behalf of some Norvergence
customers against some Holders. Whether we win or lose
there will be appeals, and appeals of appeals. The
prepaid fees we have received are intended to cover all
of our costs. If the money in the fee pool runs out, we
will proceed in litigating this matter in accordance
with the highest ethics of the profession, and do so out
of our own pockets. You will not be assessed for
additional fees or costs. If all of our clients settle
with all of the Holders, we will earn all of the
prefunded fees paid to us and will not make any refunds.
9. What if I do
not pay the monthly rentals for the Matrix device and I
am sued while the Norvergence Litigation is pending?
Unless and until we advise
you to stop making payments on your Rental Agreements,
you should continue to make your monthly rental
payments. Otherwise, you can still be sued by the Holder
and you will have to retain counsel to assure that a
default judgment is not entered against you. Please note
that the Holder may assert your default as a
counterclaim to our suit or may bring suit in the state
where the Holder does business, unless enjoined from
doing so by a state or federal enforcement authority. We
ask that no attempt be made, at least for the present,
to consolidate any individual collection action brought
against you by your Holder with the broader Norvergence
Litigation we instituted in New Jersey, as the
individual issues could overwhelm our request for
broader relief.
10. How can I
rely on your good faith to represent me in this matter?
After all, I already got stung once?
Ouch! But a
reasonable concern. We were brought into this matter at
the suggestion of the Norvergence Legal Co-Op, when the
Co-Op found that we were the first law firm to appear on
behalf of a Norvergence customer in the bankruptcy
proceeding. We have since provided legal advice to the
Co-Op with regard to the Norvergence Equipment Rental
Agreement and the obligation of its members on that
agreement. In fact, ultimately, whether you should place
any reliance on a law firm depends on the reputation of
the firm.
11. Why should
I join the suit? Won’t I benefit if I just sit on the
sidelines?
You certainly would if we were to bring a class action.
But, we are bringing individual actions on behalf of
each client and will seek to have them consolidated. In
such a consolidated action, only the parties to the suit
can directly benefit from the judgment or be encompassed
within a settlement agreement. A class action can be
cumbersome and, once a class is certified, any
settlement negotiations are conducted between class
counsel and the defendants (you are not a party to any
such negotiations) and become subject to the court’s
approval. If you do not like the terms of the
settlement, you can "opt out" and bring suit on your own
behalf. Because this is a commercial rather than
consumer dispute and we believe our clients are rather
more sophisticated, especially with regard to settlement
negotiations, and each may desire more or less from a
settlement (which means that only one holdout would
force us to litigate), we have decided that the
preferred form is a consolidated action in which our
clients have the final say. Sitting on the sidelines
leaves you free to negotiate with the Holder of your
Equipment Rental Agreement on your own, with whatever
economic power the Holder of your Rental Agreement
perceives that you bring to the table. We will be
perceived as ready, willing, able and eager to litigate
on behalf of a large, well funded litigation group. We
would note that a class action lawsuit has already been
instituted in New Jersey against the assignees of the
Norvergence Rental Agreements by another law firm. If
you do nothing you are automatically a member of that
class and, unless you opt out, will receive a portion of
any award or settlement obtained in that action, if any.
In fact, should the class ever be certified in that
class action, our clients may be required at some point
in time to "opt out" of the class, as they cannot get
relief in two parallel and, insofar as the causes of
action are concerned, substantially similar lawsuits.
12. Are you
taking this matter on only to obtain quick settlements
or do you really intend to litigate in order to obtain
injunctive or monetary relief?
We would love to obtain quick settlements that are
attractive to all of our clients so that we earn
the prefunded fees without incurring anywhere near our
anticipated costs. And, so would you! This is because
you could soon forget this Norvergence nightmare. But,
we reasonably anticipate that we will not be able to
obtain quick settlements. Since we are charging a fixed
fee in advance, we will not be able to go back to our
clients to pay our fees as they are incurred. In our
experience you cannot obtain a good settlement unless
the other side perceives that not only are you ready,
willing and able to go to court, but that you are very
eager to get there. For this reason, we approach each
matter on behalf of our clients with the intention and
expectation that it will be litigated. But, we are aware
that it is not always in the best interests of our
clients to litigate the claims. This is because
litigation takes time, costs a lot of money, requires
our clients to focus on the lawsuit and not on their
businesses, and can lose. Because you will be
paying our fee in advance, you will have less of
an economic incentive to settle once you pay our fee.
Thus, as you have less to risk by litigating than would
normally be the case, we perceive a very strong
likelihood that we will be litigating in this matter, on
behalf of some (if not all) of our clients, no matter
how good the settlement offers we might receive. But,
even then, no matter how strong the desire to “put it to
the other party”, litigation never presents a certain
conclusion. Parties settle, even in "air tight" cases,
because there is always the off chance that they could
lose. A settlement fixes the loss at a fixed and
sustainable amount. Moreover, rescission or voiding of
the Equipment Rental Agreement is less likely if you
received at least some of the reduced rate services for
which you contracted. In that case, equity would call
for some sort of mitigation of damages on your part. In
the final analysis, we are required by law to
communicate every firm settlement offer we receive. If
we believe the offer is attractive, we may tell you so,
and why. If we believe the Holder can do better, we may
likewise tell you so, and why. But, it will be up to you
to decide to settle or not. If you do not agree to
settle on any terms, we will be required to litigate.
And, because we believe that the likelihood of
litigation is so strong, we have prefunded our legal
fee.
13. I do
business in Texas (or California or some other state).
Will it matter to me that you brought suit in New
Jersey? Does the state where my leasing company does
business come into play?
The standard form of Norvergence Equipment Rental
Agreement provides, in relevant part, “This agreement
shall be governed by, construed and enforced in
accordance with the laws of the State in which Lessor’s
[i.e., Norvergence] principal offices are located [New
Jersey] or, if this Lease is assigned by Lessor, the
State in which the assignee’s principal offices are
located, without regard to such State’s choice of law
considerations and all legal actions relating to this
Lease shall be venued exclusively in a state or federal
court located within that State.” Because the initial
state of jurisdiction that applied pursuant to the terms
of the Equipment Rental Agreement at the time it was
signed by you was New Jersey, we brought suit in New
Jersey and will seek to have the above clause declared
void in the courts of New Jersey. We cannot represent
that we will be successful although there is controlling
legal authority in support of our position. New Jersey
is a consumer friendly state and has consumer protection
laws that cover businesses. Those laws have real teeth
in them. The Consumer Fraud Act of New Jersey, for
example, covers corporations within the ambit of
protected “consumers” and provides for the tripling of
damages and the award of attorney’s fees to successful
plaintiffs.
14. I
previously guaranteed payment of the Equipment Rental
Agreement. Do I have to pay you an additional fee?
No. We will endeavor to have the Holders of the
Equipment Rental Agreements barred from collecting
and/or enforcing those agreements against the renters
and any guarantors of payment, and will do so without
charging an additional fee to the guarantor.
15. What does
any Norvergence Equipment Rental Agreement and Service
Agreement consist of?
All of the documents you received from the Norvergence
Sales Representative, taken as a whole, will make up
your service contract. We also want to see
correspondence to and from you and Norvergence and/or
your Holder, as well as any certification by you to
Norvergence or the Holder that the Matrix device was
properly delivered and installed. If the Holder is not
named on the Equipment Rental Agreement, you should also
send us a copy of your monthly bill from your Holder.
16. Even
though suit has been brought by you, will I be liable
for costs, attorneys’ fees and damages?
We anticipate that the Holders will answer our complaint
and, to the extent any of our clients is delinquent in
payment, file counterclaims under that client’s
Equipment Rental Agreement demanding immediate payment
in full of all future rentals, plus attorneys’ fees,
repossession costs, overhead, and the like, all as
provided in the section of the Norvergence Equipment
Rental Agreement labeled “Default”. But, such claims can
be raised only if you are in default. To avoid exposure
to such claims, we again recommend that you keep your
rental obligations current until such time as we advise
that you may prudently cease making payments.
17. What if I
lose the case?
This can happen. After all, the Equipment Rental
Agreement strips you of many of the defenses that would
normally be available to a lessee of equipment and
separates your obligations to pay the rental payments
from the continued operability of the Matrix device or
the continued provision by Norvergence of
telecommunication services. And, we can’t guaranty that
we won’t lose. We can represent to you that we will
diligently pursue this matter on your behalf to the best
of our ability.
18. What is
your fee?
Our fee is three (3) times the monthly payment for each
and every Matrix device you have rented, but not less
than $1,000.00. Our fee to eligible nonprofit,
public service corporations that rely on private
donations to fund their operations, assuming we go
forward, will be $1.00, regardless of the number of
Matrix devices or the amount of the monthly payments,
unless the non-profit corporation decides, in its own
discretion, that it can pay more. If you are a
non-profit corporation and an ex-Norvergence customer,
please call for eligibility. We caution that the relief
we obtain will be provided to the clients named in the
suit and on whose behalf we bring the lawsuit. There
will come a time when we will be unable to add
additional parties as plaintiffs to the suit. You are
encouraged to come on board promptly.