Buyer Beware - Phone Reseller's Scam Provides Some Hard Lessons on Contracts

Paul H RothschildPaul H. Rothschild, Esquire

'Read the fine print.' That's the mantra that business owners - and consumers of all kinds - have heard forever.

And Paul H. Rothschild wants to amend it slightly. "They need to read it and understand it" he said, adding that the recent bankruptcy of a New Jersey-based phone-service reseller provides a textbook example of what can go wrong when people only glance - if they do that much - at what they think is boilerplate language.

Rothschild, a litigator with the Springfield-based firm Bacon & Wilson, represents a client, a local manufacturer, trying to somehow extricate itself from an equipment lease agreement it signed with Novergeance, a privately held reseller that duped thousands of small businesses in an elaborate scheme featuring equipment and service that wasn't delivered, and is now in Chapter 7 bankruptcy proceedings.

Novergeance sold the lease in question - just as a bank might sell a mortgage to a third party - along with thousands of others to finance companies, some with familiar names like Wells Fargo, GE Capital, and U.S. Bancorp. Those companies are now pressing for their monthly payments, and they are suing both those entities that have stopped paying - and those even thinking about stopping.

Rothschild said the Novergeance case, now being called one of the largest leasing scandals in history, is extraordinary in many ways, from the number of people who were scammed to the blunt wording in the contracts signed by the businesses and non-profit groups. There were clauses that would have sent up numerous red flags to any attorney skilled in contract law, he said.

Indeed, what amazes Rothschild is how many businesses and non-profit agencies skipped that step and signed on the dotted line without performing proper due diligence. These parties are now exploring several legal options, including a class-action suit, to get out of contracts they signed for equipment that never worked as promised.

Those clients are wondering why they are on the hook, figuratively, for phone and Internet service they are not getting, and they are arguing, in their defense, that details about the leases and terms under which they could be sold were buried in the fine print.

Rothschild told BusinessWest that this probably isn't a defense - there may well be other arguments to be used to invalidate the contracts, however - and that companies should learn valuable lesson from the emerging Novergeance mess.

"Just because it's in small print and it's on the back of the page doesn't mean it's standard language," he explained. "The lesson here is simple: if you don't understand something, don't sign it - and then make sure you do understand it."

BusinessWest looks this month at this intriguing legal development and the lessons it provides for all business owners.

A Real Cold Call


As he quoted some of the language from the contract his client signed with Novergeance, Rothschild paused often for effect, as if he couldn't believe what he was reading.

Take the section on warranties, for example. In short, there were none, and it said so in capital letters:

"NO WARRANTIES: We are renting the equipment to you AS IS. WE MAKE NO WARRAN-TIES, EXPRESS (sic) OR IM-PLIED, INCLUDING WARRAN-TIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE IN CONNECTION WITH THIS AGREEMENT."

There was more, especially the language concerning reselling of leases.

'You may not sell, pledge, transfer, assign, or subrent the equipment or this rental,' the agreement reads, adding quickly, "we may sell, assign, or transfer all or any part of this rental and/or the equipment without notifying you. The new owner will have the same rights that we have, but not our obligations. You agree that you will not assort against the new owner any claims, defenses, and set-offs that you may against us.'

"That wording alone would have prompted me to think that something wasn't right," said Rothschild, who acknowledged quickly that just because a clause is contained in a contract doesn't mean that it is enforceable. "I think I would have gotten half-way through the first column on the page and said, 'whoa;' and then I would have urged the business not to sign the contract."

But roughly 11,000 people did sign, and now they're looking for a way out. Rothschild speculates that many signed because they were being offered something that sounded too good to be true. And, in the end, it was.

Like other resellers, Novergeance offered to bundle phone, cell phone, Internet, and other services and save customers roughly 25% of their communications costs in the process. Novergeance's hook was a device it called the 'MATRIX unlimited calling solution,' or the MATRIX box, which, somehow, the company claimed, using some type of technology, managed all those phone and Internet products. Problem was, the box, which sold for about $600, had no practical use at all.

Clients, which included small businesses, non-profit agencies, and even the New Jersey Republican State Committee, signed contracts to lease the MATRIX box for five years, with typical payments of $1,000 per month. What those clients didn't know was that within days or sometimes hours after the lease agreements were signed, they were sold to banks and finance companies, outfits that are now collecting lease payments - or trying to - under the terms of the signed contracts.

As details of the Novergeance scam emerged, it became clear that the company was very methodical in its operation. Salespeople, hired after surviving a rigorous training regimen, had a detailed sales pitch based on a series of carefully worded scripts that made heavy use of acronyms and technology jargon. This sales force targeted mostly small- and medium-sized businesses (most without their own IT specialist and many without an in-house attorney) that had solid credit.

A tech specialist would probably have realized that the MATRIX box had little, if any, use, said Rothschild, and most attorneys would have spotted questionable language in the contract.

When Novergeance's ponzi scheme, as Rothschild called it, started to unravel, the company stopped paying the large phone companies it bought service from, and that, in turn, accelerated the slide into Chapter 11 and then Chapter 7.

Meanwhile, dozens of finance companies are left with an estimated $220 million worth of lease agreements they purchased from Novergeance, and companies that signed contracts but are receiving no services are looking for a way - any way - out.

Lawyers working on behalf of individual clients and attorneys general from several states are exploring a number of legal options, including class-action suits, said Rothschild, adding that much focus is being put on the finance companies that bought leases and the extent of their liability.

"Those who were scammed are saying that this is the finance companies' problem, not theirs," he explained, adding that near the end, Novergeance was signing on thousands of new customers without connecting their phone service. "Those finance companies should have known that something was wrong."

Rothschild said he isn't sure what will result from the various legal actions being taken or pondered. What he does know is that all or most of this trouble could have been avoided if people had read the fine print. "That's the moral to this story."

A Familiar Ring


If one were to Google the word Novergeance, he or she could enter several chat rooms in which business owners are sharing their thoughts and frustrations about the predicament they find themselves in.

"Frustrated ... I need this lease payment voided," writes one individual. "Someone explain to me, why and how this can be?"

Rothschild said the answer to that question is fairly simple; it 'can be,' because the fine print, the boilerplate, says so.

And that's why people need to not only read it, but understand it.

by: George O'Brien

Healthcare News, BusinessWest
December 2004, November 2004