GE has reached agreements with the attorneys general of New York and New Jersey to settle claims against GE Capital Corp. stemming from telecommunications equipment leased by the bankrupt New Jersey company, NorVergence, Inc.

Many of the 26 finance companies that either wrote or purchased NorVergence leases are now working to settle actions resulting from these leases.

NorVergence leased equipment it called “Matrix” boxes to customers across the country, most of which are small businesses and nonprofit organizations. The company claimed that through its boxes it could provide discounted wireless, local and long-distance telephone and high-speed Internet services.

However, in a complaint filed by the Federal Trade Commission against NorVergence in November of last year, the FTC alleges the black boxes were standard telephone routers that contributed little or nothing to savings. Lease terms varied, but some customers were obligated to pay as much as $340,000 for the boxes, which were worth no more than $1,500, according to law enforcement authorities.

The FTC contends that NorVergence sold the leases for its black boxes to finance companies, and used the proceeds to discount telecommunications services it purchased from other providers, thereby passing on savings to its customers. NorVergence was declared bankrupt last year.

Since then, NorVergence customers have sued the companies that wrote or assumed the equipment leases, seeking relief from lease obligations. The plaintiffs claim that NorVergence was operating a fraudulent ponzi scheme, and the leasing companies should be prevented from enforcing the terms of the leases. (See CEF Early Warning, Dec. 2004.)

In addition to actions brought by the attorneys general of New York and New Jersey, the AGs of Illinois, Pennsylvania, Florida and Texas are pursuing actions involving NorVergence leases. The FTC investigated the matter following a request from Sen. Hillary Clinton.

In agreements with New York and New Jersey, GE will forgive 85 percent of the balance of rental agreements accrued after July 1, 2004, when NorVergence ceased delivering service. The company is not forgiving payments due for periods prior to July 1. GE did agree to forego late fees, penalties, and property insurance charges assessed after July 1, refund over-payments resulting from the settlement, and clear credit reports reflecting failed payments during the period at issue.

GE’s settlement is substantially similar to those reached by other finance companies. New York Attorney General Eliot Spitzer announced settlements in NorVergence matters with CIT Technology Financing Services Inc., DeLage Landen Financial Services, Lyon Financial Services, Inc. (doing business as U.S. Bancorp Business Equipment Finance Group), TCF Leasing, Inc. and Wells Fargo. Florida Attorney General Charlie Crist announced a settlement in January with Wells Fargo and Lyon Financial.

The settlements may provide blueprints for resolving the matter elsewhere.

However, a key underlying issue remains unsettled—the validity of a so-called “hell-or-high-water” clause, which allows a company to collect under the terms of an equipment finance lease regardless of whether the equipment functions as expected.

On Nov. 1 of last year, a federal district court in New Jersey denied a preliminary injunction against the finance companies defending a putative class action brought on behalf of businesses that leased NorVergence equipment (See Exquisite Caterers, LLC v. Popular Leasing USA, Inc. (D.N.J. 04-04467, Nov. 1, 2004).). The defendants argued they should not be held responsible for warranties as to equipment value, condition or performance.

A decision to the contrary, the finance companies warned, could have a “disastrous precedent” for the $208 billion equipment leasing industry.