Twenty-six leasing companies have defeated a motion for a preliminary injunction in a putative class action brought on behalf of businesses that leased telecommunications equipment from Norvergence, Inc., before that company went bankrupt.
The widely watched dispute involves a challenge to the validity of “hell-or-high-water” leases, which allow companies to collect under the terms of an equipment finance lease regardless of whether the leased equipment functions as expected.
The Nov. 1, 2004, ruling denying a preliminary injunction in Exquisite Caterers, LLC v. Popular Leasing USA, Inc. (D.N.J. 04-04467) follows an earlier denial of a temporary restraining order. General Electric Capital Corporation is a party to the case.
The putative class is comprised of businesses that leased equipment from Norvergence to receive telecommunications services from the Newark, N.J.-based company. Plaintiffs’ lawyers estimated approximately 11,000 small businesses signed leases written by or assigned to the defendants.
The plaintiffs claim Norvergence represented it could reduce telephone, cellular and Internet telecommunications costs through “Matrix” boxes that are the subject of the disputed equipment rental agreements. The plaintiffs allege the boxes did not serve to reduce costs, and that Norvergence ran a “ponsi scheme” in which it used proceeds from the box sales to finance the cost of telecommunications services from providers such as T-Mobile, Qwest and Sprint. When Norvergence couldn’t sell enough new boxes to pay its telecommunications bills, it went bankrupt, the plaintiffs stated in their suit.
Norvergence was forced into bankruptcy in July 2004 and has ceased providing services to the plaintiff companies, according to court filings. The plaintiff allege the defendants, which either signed leases with Norvergence customers or assumed such leases, should have known the services provided by Norvergence were fraudulent, and therefore should be prevented from enforcing the lease terms.
The plaintiffs sought to enjoin the defendants from: 1) enforcing the equipment rental agreements; 2) selling, transferring or assigning the agreements; 3) filing suit, prosecuting any suit filed, or otherwise pursing litigation against the plaintiff companies; and 4) notifying credit agencies of delinquencies or defaults of the plaintiffs.
In defeating the motions for a preliminary injunction and TRO, the defendants argued the underlying lease agreements contained valid “hell-or-high-water” clauses requiring the plaintiff businesses to pay their leases in full regardless of any alleged breach by the rentor, Norvergence.
“The equipment leases signed by Plaintiffs and held by Defendants are well-recognized in finance law and have been upheld again and again,” the defendants stated in their brief responding to the plaintiffs’ motion for preliminary injunctive relief.
“Because a leasing company is a financing source, as opposed to a seller of equipment, it has no ability to make representations as to the value, condition or performance of the equipment,” defendants stated. “Accordingly equipment finance leases routinely contain provisions that disclaim all warranties, require payment by the lessee notwithstanding the performance of the equipment, and otherwise insulate the leasing company from complaints between the lessee and the seller/manufacturer of the equipment.”
Allowing the plaintiff businesses to walk away from their leases would set “disastrous precedent” for the $208 billion dollar equipment leasing industry, the defendants claim.
Attorney General offices in several states have issued subpoenas seeking documents concerning the Norvergence situation. The Attorneys General of Florida, Illinois and North Carolina have initiated cases against Norvergence, which either name the leasing companies or may lead to requests for relief from the companies.
Editor’s note: Reed Smith represents one of the defendant leasing companies in the case and led the defendants’ joint oral argument at the preliminary injunction hearing.