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Sep 13, 2004

LEGAL LINE

Ed Maldonado, Esq.

Dear Legal Line,

Here is my soap opera: my wife owns a small accounting firm (not related to at all to prepaid or telecom) that has a big problem with a telecom reseller out of Newark, New Jersey called NorVergence. In November of 2003, she was solicited by phone by a Sales Rep from NorVergence who said that they had a plan that would consolidate her firm’s long distance, cell, and Internet services over a five-year period for a flat fee rate no matter what the actual consumption was monthly. She liked the idea and had an information package sent by Fed-Ex to her with all the details. Myself being the “telecom guy” of the family, she asked me to review it and tell her what I thought. It looked like a good deal at the time. The business would lease some equipment from NorVergence and its selected leasing company, all existing services would be transferred through those facilities, and a set monthly fee was paid to NorVergence to pay for both the lease and the services during that period through a box called “the Matrix”. I investigated NorVergence a little bit and found them all over the Internet in sales offers and statements on how they were growing like wildfire. So I told my wife to “go for it’. In December of 2003 she signed with NorVergence and with a leasing company out of Missouri that covered the equipment. She began paying regularly beginning January 1st 2004 through an ACH authorization through her bank. No big deal.

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Our first problem began by the end of January, there was no “Matrix” delivered. Not a single piece of equipment had been delivered since the signing. We called NorVergence numerous times and received numerous excuses for the delay. Finally in late February the equipment arrived to be installed. Meantime, her office was getting notices from her long distance provider and wireless provider as to past due amount. When she called NorVergence, the customer service rep told her to disregard the notices, as NorVergence would handle them. So she ignored them. Our second problem was that the “Matrix” was never installed. Again calls to customer service ended up with more excuses. Now she was panicking because the past due notices were getting more threatening about disconnection. Since she is an accountant and likes to be “up-to-date in payments” and since I am the “telecom guy” that told her to “go for it”, I got dragged back in this mess. So I raised some hell with NorVergence about the contract and the payments and everything else and by the end of May her equipment was installed by one of their contractors. The Notices stopped in early May and I thought all was back on track. I was wrong.



In beginning of June, she got a chapter 11-bankruptcy notice from them. It listed their bankruptcy attorneys but said NOT to contact them. Within a few days, it was all over the Internet about the 11 being changed to involuntary bankruptcy because they had not paid the long distance carriers and the wireless providers at all. About early June the past due Notices came back, but the ACH withdrawal was occurring regularly. So she cancelled it. Then she got a notice from the leasing company to work out an alternative payment. She refused because she never really got any services due to the installation date of NorVergence’s “Matrix” which was late May. Now the leasing company’s attorney is sending demand letters stating that the NorVergence service is separate from her lease. To top it off, she signed as a guarantor for the firm. Now, being the “telecom guy” of the house, she is blaming me for this whole mess. I see a lot of information about class action lawsuits on Internet sites like Ripoff.com and etc, but am very leery of what to do next. What is the real story here? Do you think that this will be resolved in a class action suit? What is your opinion about this?



-- In The Doghouse





Dear ITD,

As to the “Doghouse” problem between you and your wife, you may eventually need to consult a “non-telecom” attorney, but I most sincerely hope not. It is said that to love is to forgive. I hope this is the end result for the “telecom guy” of the family.



As to what has transpired with NorVergence over the past several months, it is really shaping up to be something in the order of another Enron case. Current estimates are that NorVergence has left as many as 11,000 small businesses, like your wife’s accounting firm, owing approximately $220 million to banks and finance companies for their “Matrix” boxes and service contracts. The claim by most of these small-businesses is that the box and equipment is virtually worthless and that they had primarily contracted it for telecom services, not the equipment.



Your wife’s case is pretty typical of what has happened with most of these businesses. Consumers were promised an aggregated cellular/long distance/Internet service and equipment deal to consolidate those costs over a five year period. The problem is that NorVergence never paid its venders, carriers, or leases, and left consumers holding the bag. Needless to say small-businesses were not the only causalities, major carriers such as Qwest and Sprint are allegedly out as much as $30 million.



Even NorVergence’s own employees did not come out of this unscathed. The New Jersey Department of Labor is currently investigating an entire month’s worth of bounced employee paychecks, and the U.S. Department of Labor is investigating whether NorVergence failed to pay the amount deducted from employee paychecks for healthcare to the company managing NorVergence’s health plan. Now the Federal Trade Commission appears to have launched its own investigation into NorVergence. This is reportedly through inquiries to a legal cooperative of affected former NorVergence business customers that has retained a number of law firms, including Weir & Partners from Philadelphia, to assist in determining the enforceability of the NorVergence rental agreements and fight the leasing companies and to the attorney appointed by the federal bankruptcy receiver.

It has also been reported that the New Jersey law firm of Kantrowitz & Graifman filed a class-action lawsuit in the Superior Court in Monmouth County, New Jersey that seeks to release former NorVergence customers from their lease contracts. The lawsuit names at least 14 leasing companies that purchased leases from NorVergence and alleges a laundry list of claims as to why the contracts should be held unenforceable. It appears from this Complaint that the manner in which NorVergence’s contracts were written, and specifically the verbiage forum clause used, leaves small-business customers fighting in out-of-state courts in the event of default of payment. Since this is a recently filed case, there is not much expositive information available. NorVergence meanwhile remains in the thralls of federal bankruptcy and is not going to formally disappear quite yet.



As to my experience with the case, my first contact with NorVergence’s problems came from former employees who were recently let go, and were left with huge out-of-pocket expenses. These were not small ticket items in any way. They were for leases of business offices, fixtures and corporate apartments related to the company. Over the past few months, however, I have heard of numerous former NorVergence business customers with stories just like your wife’s. The majority of these clients have been receiving ongoing calls from collectors for the leasing companies threatening lawsuits. However, none of my clients have been sued to date.



While some attorneys are more concerned with the class action aspect of the case, I have focused on the basics of challenging the individual contracts and the issues of fraud in the inducement and defenses to the enforceability of the contract on the individual consumer. This is simply a strategy choice and not telling of what may be the eventual outcome. However, pay attention to some of the current cases out there against NorVergence. Should the Monmouth County class action prevail, the situation will be ripe for taking judicial notice of those results, and provide more defenses for small business fighting the NorVergence leases. Likewise there is the FTC investigation, which may or may not yield results before the leasing company tries to sue your wife’s company. Much like the Monmouth County class action suit, if the FTC investigation finds certain contracts unenforceable, there may be more expansive defenses for your wife’s company.



My overall recommendation is to re-read your wife’s NorVergence contract and lease agreements and see what jurisdiction and venue applies. Thereafter, she should talk to an attorney from that particular jurisdiction, just in case she’s sued. It is also advisable to seek the consultation of a local attorney to see his or her thoughts as to the contract and the installation issues. The reason why is that their “contractor” may have been and agent or employee. If so, there may be other contacts to your jurisdiction for purposes of a lawsuit. Finally, patience is definitely called for in this matter. The legal claims in the wake of the NorVergence bankruptcy are still coming to the surface. There may be a number of twists and turns before the whole story behind NorVergence surfaces completely. The important thing to do is to keep informed and seek advice from attorneys familiar with the case.



It’s not over yet!



Good Luck & Success in the Industry!





•• Ed Maldonado is a Partner of Maldonado & Glenn. He can be reached atemaldonado@4counsel.net.

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