F.T.C. v. Ifc Credit Corp.

Decision Date09 April 2008
Docket NumberNo. 07 C 3155.,07 C 3155.
Citation543 F.Supp.2d 925
CourtU.S. District Court — Northern District of Illinois

David M. Horn, Maxine R. Stansell, Robert J. Schroeder, Federal Trade Commission, Seattle, WA, for Plaintiff.

Jeffrey Mark Wagner, Stephen Charles Schulte, Justin Lennon Leinenweber, Winston & Strawn LLP, David Alexander Darcy, Debra Rose Devassy, Askounis & Darcy, P.C., Kenneth D. Peters, Dressier & Peters, LLC, Vincent Thomas Borst, Askounis & Borst, Chicago, IL, Beth Anne Alcantar, IFC Credit Corporation, Morton Grove, IL, Peter J. Deeb, Frey, Petrakis, Deeb, Blum & Briggs, PC, Philadelphia, PA, for Defendant.


JEFFREY COLE, United States Magistrate Judge.

NorVergence, Inc. leased telecommunications equipment to small businesses, religious and other non-profit organizations as part of an integrated package of telecommunications services. The consumers — as we shall see, this is the appropriate designation under § 5 of the Federal Trade Commission Act ("FTCA") — were promised "dramatic savings" on the telecommunications services as the result of the "supposedly wondrous equipment," which NorVergence called a "Merged Access Transport Intelligent Xchange (MATRIX) device," IFC Credit Corp. v. United Business & Industrial Federal Credit Union, 512 F.3d 989, 991 (7th Cir.2008)(Easterbrook, C.J.), with its supposed "proprietary technology." (Complaint ¶¶ 13-14). But like the world in the Wachowski brothers' film, The Matrix, NorVergence's MATRIX was an illusion, incapable of doing the things NorVergence's salesmen claimed since it was merely a standard integrated access box that cost NorVergence only a few to several hundred dollars to buy. (Complaint ¶ 13).

The transactions, like most successful schemes to defraud, were "dressed in the garb of honesty and hedged about with all the appearances of legal and enforceable undertakings." Brooks v. United States, 146 F. 223 (8th Cir.1906). The transactions were structured so that the Equipment Rental Agreements ("ERAs") appeared as stand-alone agreements that made no mention of the telecommunications services (Complaint ¶¶ 8, 18), even though without those services the MATRIX boxes served no purpose, and the transactions would never have been entered into. Of the total monies due for service and equipment, the bulk was allocated to rental of the MATRIX box.

The ERAs contained a provision that is known in the equipment leasing industry as a "hell or high water" clause. In re United Air Lines, Inc., 447 F.3d 504, 507 (7th Cir.2006). In other words, the consumer must pay the rental fee for the equipment no matter what. Of course, the customer might have had defenses against NorVergence had there been a cessation of telecommunications services. See e.g., RSACO, LLC v. Resource Support Associates, Inc., 208 Fed.Appx. 632 (10th Cir. 2006). The scheme thus required that NorVergence assign the ERAs, thereby insuring, at least theoretically, that an assignee could insist on monthly lease payments even if there were an interruption or cessation of telecommunications services.

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. IFC insisted on continued monthly payments and filed hundreds of cases in forums distant from the residences of many of the defendants pursuant to the forum selection clause in the ERAs. So long as IFC could claim to be a holder in due course, it would be unfettered by any defenses that the lessee might have against NorVergence and could demand payment on the leases even if there had been a termination of telecommunications services. Cf. IFC Credit Corp., 512 F.3d at 989.

The Federal Trade Commission sued NorVergence for fraud and obtained a default judgment. It has brought the present action seeking to bar IFC from collecting on the MATRIX leases. Count I charges that in its attempts to collect the payments under the ERAs, IFC made deceptive statements in violation of § 5, consisting of statements to customers that they are unconditionally obligated to make payments under the rental agreements and that they had no defenses. Drawing all reasonable inferences in favor of the FTC, Count II charges that IFC should have known that the lessees thought that the predominant purpose of their transactions with NorVergence was the purchase of telecommunications services — not the rental of the Matrix box — that the ERAs, themselves, and other information available to IFC demonstrated the likelihood that the consumers were deceived into signing the ERAs (Complaint, ¶ 31)(emphasis supplied), and that IFC's acquisition and enforcement of the ERAs is an unfair practice under § 5 of the FTC A. 15 U.S.C. § 45. Finally, Count III charges that IFC's invocation of the forum selection clause is an unfair practice because it allows IFC to bring suits to collect lease payments in a forum hundreds or thousands of miles away the residences of the affected consumers.

IFC has moved to dismiss all three counts for failure to state a claim on which relief can be granted. Rule 12(b)(6), Federal Rules of Civil Procedure. Although the arguments are count-specific, common to all is the contention that the lessees are "small businesses," religious and other notfor-profit organizations and thus are not "consumers" within the meaning of the Federal Trade Commission Act — a status IFC insists only includes natural persons who have purchased goods or services normally used for personal or household use.

Needless to say, the parties insist that their interpretation of "consumer" in the FTCA is the right one and the only one consistent with the text of the Act, its legislative history, and the FTC's own prior applications. Yet, they do agree that this is a case of first impression, and that no prior case has explicitly dealt with the question. One case involved unfair or deceptive practices directed against business entities, F.T.C. v. Cyberspace.Com LLC, 453 F.3d 1196, 1198 (9th Cir.2006), but the issue was not raised or discussed there, and thus it does not answer the question of how the term "consumer," in the FTCA is to be defined. Prior cases have precedential value only when there has been a deliberative consideration of the issue at hand. Sub-silentio or assumptive resolution is not enough. See Brecht v. Abrahamson, 507 U.S. 619, 631, 113 S.Ct. 1710, 123 L.Ed.2d 353 (1993); United States v. Moore, 521 F.3d 681, 683 (7th Cir.2008), 2008 WL 818007 at *2; United States v. Rodriguez-Rodriguez, 453 F.3d 458, 460 (7th Cir.2006); Petrov v. Gonzales, 464 F.3d 800, 802 (7th Cir.2006).

A. NorVergence And The Equipment Rental Agreements

NorVergence was a New Jersey company that purchased telecommunications services from common carriers and resold those services to its customers as part of an integrated, long-term package that included landline, cellular telephone and internet services and the leasing of hardware that made usable those services. The customers were "small businesses and religious and other non-profit organizations, and individuals who personally guaranteed the obligations." (Complaint, ¶ 8). The sales pitch promised exceptional savings on telecommunications costs. NorVergence salespeople would review a potential customer's bills for landlines, internet, and cell phones, and make a written proposal that typically resulted in a 30% savings for a package of similar NorVergence services, not to mention promises of unlimited long distance calling, unlimited cell phone minutes, unlimited internet service, and more. (Complaint, ¶¶ 8, 11-12).

NorVergence claimed it could achieve these stunning savings because of the MATRIX device. Of course that wasn't so: it was just a standard line splitter that came in two versions, the MATRIX 850 and the MATRIX Soho. The 850 was used to connect analog telephone equipment to a telecom provider's high bandwidth data line, while the Soho connected to a DSL or cable modem typically used to access Internet services. These devices cost NorVergence anywhere from $270 to $1300. The typical 60 month rental agreements could run as high as $60,000 to $120,000. (Complaint, ¶¶ 13-20).

Once the customer was on the hook — and perhaps as many as 60% found the lure of promised savings of 30% savings irresistible (Complaint, ¶¶ 12,32) — NorVergence had them sign not only the Equipment Rental Agreement, but several other documents: a "Customer Qualifying Questionnaire," an "Accurate Bill Receipt and Proposal Request," a "Receipt of Savings Guarantee Subject to Mutual Due Diligence & Acceptance by Engineering," a "Credit Application," a "Letter of Agency," a "No-Risk Reservation Agreement," a "Hardware Application," and a "Service Application." (Complaint, ¶ 16). The customers received itemized quotes of projected savings, which clearly stated that about 80% of the payments for the overall package would be for equipment rental. Each of the documents was just one or two pages in length. (Exhibits Supporting Plaintiffs Motion for Preliminary Injunction, Ex. K).

The ERA appeared to be a standard form equipment lease, covering both sides of a single page. It made no mention of telecommunications services and covered only the rental of the equipment necessary to provide the services. (Complaint, ¶ 8). Its terms were straightforward and understandable. The front side provided that the "renter" agreed that the equipment would "not be...

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