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FAQ: Norvergence litigation frequently asked questions.
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  1. What is the Norvergence Litigation?
     
  2. What is a Matrix device?
     
  3. Why did Norvergence customers have to rent Matrix devices?
     
  4. Where is that cash?
     
  5. Are the Holders of the Equipment Rental Agreements entitled to continue to receive monthly rentals for the Matrix device?
     
  6. Am I entitled to any remedy, such as voiding of the Equipment Rental Agreements, abatement of rental payments, or the like?
     
  7. Can I obtain damages?
     
  8. So, why settle?
     
  9. What if I do not pay the monthly rentals for the Matrix device and I am sued while the Norvergence Litigation is pending?
     
  10. How can I rely on your good faith to represent me in this matter? After all, I already got stung once?
     
  11. Why should I join the suit? Won’t I benefit if I just sit on the sidelines?
     
  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?
     
  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?
     
  14. I previously guaranteed payment of the Equipment Rental Agreement. Do I have to pay you an additional fee?
     
  15. What does any Norvergence Equipment Rental Agreement and Service Agreement consist of?
     
  16. Even though suit has been brought by you, will I be liable for costs, attorneys’ fees and damages?
     
  17. What if I lose the case?
     
  18. What is your fee?

 

 

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.

 

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