Consumer Law

Come "Hell or High Water"

By Richard Alderman

Back in the day, scammers would rely on the holder-in due-course doctrine to enforce promissory notes against consumers who purchased worthless or defective goods. Today, it is the ?hell or high water? lease of Article 2. Preying mostly on small businesses, the scam involves ?leasing? equipment to a business, paid for through a finance lease or Equipment Rental Agreement [ERA]. The lease is either assigned to a third party or set up as a separate transaction, and the lessor claims no liability when the vendor delivers defective goods, fails to deliver, or files bankruptcy The lease contains provisions precluding any warranty liability, a choice of law clause and a forum selection clause. Under the provisions of the lease, the consumer is required to pay hundreds of dollars a month for several years, for a product that was either never delivered or never functioned.

In one of the first reported cases to challenge this practice, the Federal Trade Commission used §5 as a basis to assert a claim. Federal Trade Commission v. IFV Credit Corp involved the sale of telecommunications equipment. IFC, a privately held Illinois corporation in the equipment leasing business, sometimes purchases portfolios of equipment leases from other companies. Between 2003 and 2004, it purchased from NorVergence at a substantial discount about 800 of the ERAs with a face value of $ 21 million. The complaint charges that after three years, NorVergence's scheme collapsed, leaving the lessees with no telecommunications services, a worthless MATRIX box, and lease payments that in some cases approached $160,000. The lease in question had the typical ?hell or high water? language:

YOUR DUTY TO MAKE THE RENTAL PAYMENTS IS UNCONDITIONAL DESPITE EQUIPMENT FAILURE, DAMAGE LOSS OR OTHER PROBLEM. RENTER IS RENTING THE EQUIPMENT "AS IS", WITHOUT ANY WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE IN CONNECTION WITH THIS AGREEMENT. IF THE EQUIPMENT DOES NOT WORK AS REPRESENTED BY THE MANUFACTURER OR SUPPLIER, OR IF THE MANUFACTURER OR SUPPLIER OR ANY OTHER PERSON FAILS TO PROVIDE SERVICE OR MAINTENANCE, OR IF THE EQUIPMENT IS UNSATISFACTORY FOR ANY REASON, YOU WILL MAKE ANY SUCH CLAIM SOLELY AGAINST THE MANUFACTURER OR SUPPLIER OR OTHER PERSON AND WILL MAKE NO CLAIM AGAINST US.

The court denied the defendant?s motion for summer judgment, quoting Justice Story, "It would be strange, indeed, if parties could be allowed, under the protection of its forms, to defeat the whole objects and purpose of the law itself."

I have seen similar leases, with even more egregious facts, in Texas. My guess is that this is a major consumer scam. Hopefully, the FTC and state attorney generals will act promptly to stop it.

Full post as published by CL&P Blog on November 27, 2010 (boomark / email).