Come 'Hell or High Water' NorVergence Causing a Stir over Documentation

The basic marketing scheme employed by NorVergence centered on its “MATRIX” box (which stood for “Merged Access Transport Intelligence Xchange”). The company alleged that the MATRIX enabled customers to receive unlimited local and long distance telephone service, cellular service and high-speed Internet access cheaply and efficiently. Customers would later realize that the MATRIX was nothing more than a router allocating bandwidth over a T-1 line.

The sales pitch, though, proved extremely successful. NorVergence was able to secure approximately 11,000 customers nationally, comprised mostly of small businesses, not-for-profit entities, and religious institutions. Customers typically signed a non-cancelable 5-year self-styled “rental” agreement for the MATRIX box and a cancelable, price-variable agreement by NorVergence to provide telecommunications services. The two agreements were presented as an integrated package, but, in fact, most of the customer's payment was allocated to the rental agreement. While the value of the MATRIX box was purportedly between $350 and $1500, payments under NorVergence rental agreements ranged from $400 to $5700 per month. The total cost under the rental agreement had no correlation to the MATRIX box, but was calculated solely to ensure a 30% discount to the customer from its existing cost of telecommunications services. However, NorVergence apparently had no long-term commitments from any telecommunication company to provide discounted services.

Each rental agreement contract contained a “hell or high water” clause, which obligated the customer to make payments under the terms of the lease upon acceptance of the goods, regardless of whether the goods were later lost, stolen, condemned, destroyed or found unsuitable for the purpose intended. Typical language included the following: “YOUR DUTY TO MAKE RENTAL PAYMENTS IS UNCONDITIONAL DESPITE EQUIPMENT FAILURE, DAMAGE, LOSS OR ANY OTHER PROBLEM.”

The agreements also contained language referred to generally as a “waiver of defense” clause in which any assignee's rights to payment would be free of defenses that a lessee could assert against the original lessor. For example, one form of agreement stipulated:

YOU UNDERSTAND THAT ANY ASSIGNEE IS A SEPARATE AND INDEPENDENT COMPANY FROM RENTOR/MANUFACTURER AND THAT NEITHER WE NOR ANY OTHER PERSON IS THE ASSIGNEE'S AGENT. YOU AGREE THAT NO REPRESENTATION, GUARANTEE OR WARRANTY BY THE RENTOR OR ANY OTHER PERSON IS BINDING ON ANY ASSIGNEE, AND NO BREACH BY RENTOR OR ANY OTHER PERSON WILL EXCUSE YOUR OBLIGATION TO ANY ASIGNEE.

Rental agreements also required the customer to litigate any dispute in the jurisdiction of the principal office of an assignee of NorVergence. A sample clause read as follows:

This agreement shall be governed by, construed and enforced in accordance with the laws of the State in which the Rentor's principal offices are located or, if the lease is assigned by Rentor, the laws of 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 in that State, such court to be chosen exclusively at Rentor or Rentor's assignee's sole option.

NorVergence then sold these rental agreements to third-party finance companies ' approximately three dozen by most accounts ' at a discount in order to convert the stream of income from lease payments into one lump sum.

Despite an estimated $6 million in weekly sales, NorVergence's revenue could not keep pace with its mounting debt. After technical problems arose in a potential new product line, and with amounts owed to Qwest alone nearing $2 million a week, the company refocused its efforts on enlisting new lessees. The goal was to alleviate short-term cash flow problems by increasing its revenues from the sales of leasing contracts to third-party finance companies. The initiative, though, proved too little, too late, and NorVergence was forced involuntarily into Chapter 11 bankruptcy on June 30, 2004. The proceeding was quickly converted to a Chapter 7 liquidation on July 14, 2004, and Peter Salzano, the CEO, subsequently filed for personal bankruptcy in Jan. 2005.

With conversion to Chapter 7, Qwest, Sprint and T-Mobile were each granted the right by the bankruptcy court to cease providing service to NorVergence customers. As customers of NorVergence scrambled to find alternative telecommunications providers, they also began to realize that this cessation of service did not excuse them from continuing to make payments to third-party finance companies under their NorVergence agreements.

Internet Web sites immediately began springing up offering legal support to customers seeking to avoid payment on their NorVergence contracts, and customers rapidly banded together to file class action suits against the third-party finance companies. These suits alleged breaches of contract and implied and express warranties, as well as fraudulent inducement on the part of NorVergence. At the same time, attorneys general in at least 10 states, including Arizona, Colorado, Florida, Illinois, Massachusetts, Pennsylvania, New Jersey, New York, North Carolina and Texas, instituted investigations into the leasing practices of the third-party finance companies. Of these states, as of the date of writing of this article, Florida, Illinois, New Jersey, Pennsylvania and Texas have formally sued finance companies, demanding that they stop attempting to collect on their NorVergence contracts.

In addition, the Federal Trade Commission (“FTC”) filed suit against NorVergence in Nov. 2004 alleging the bankrupt company committed “deceptive and unfair practices in its sale of telecommunications packages and transfer of equipment rental agreements, in violation of Section 5 of the FTC Act.” The FTC also intends to appear before the U.S. Bankruptcy Court to persuade the court to prevent NorVergence from attempting to sell or turn over additional customers to finance companies.

The four-count FTC complaint against NorVergence alleges various types of unfair or deceptive practices. The first count is premised on NorVergence's failure to deliver on express or implied representations that it would be able to provide long-term telecommunications services to its customers at a discount. The second count cites NorVergence for failing to disclose that it had no long-term commitments from service providers and that the MATRIX box was useless without the promised telecommunication services. The third count faults it for including in its rental agreement provisions allowing it or assignees to sue in specified or unspecified venues other than the customer's location. The fourth count alleges that, by providing rental agreements to finance companies which allowed them to (1) “misrepresent that customers owe money regardless of whether NorVergence provides services and (2) file collection suits in distant forums,” NorVergence provided these companies with the “means and instrumentality for the commission of deceptive or unfair acts or practices.”

Although the finance companies which purchased NorVergence leases were not named in its filed complaint, the FTC alleges that such companies knew or should have known that NorVergence was selling a discounted package of telecommunications services and that the MATRIX box was an incidental part of those services, that the box was essentially worthless without the provided services and that the contracts might have been part of a scheme to defraud customers. At least one finance company has already received a formal subpoena from the FTC.

Some third-party finance companies have agreed to settle with the state attorneys general. Though the New York attorney general has yet to formally file suit against any finance companies, the threat of litigation has enabled the office to secure settlements from at least seven finance companies. The settlements cover more than half of all New York customers of NorVergence and are said by the attorney general's office to be valued at least at $13 million. Companies settling include such major industry players as GE Capital, CIT, Lyon Financial Inc., DeLage Landen Financial, Wells Fargo Financial Leasing Inc. and TCF Express Leasing. In each case, the settlement forgives a percentage of the amounts owed to each finance company after the date of termination of telecommunications services (July 15, 2004), and requires a waiver of late fees, penalties and property insurance payments assessed on or after such date. To date, up to 14 other finance companies still face the threat of litigation in New York.

Florida and New Jersey have also extracted settlements from major finance companies. Like New York, the New Jersey attorney general secured settlements that resulted in the waiver of varying percentages of the balances due on the NorVergence contracts after July 15, 2004. Under the terms of certain settlements, NorVergence customers will have to make payments on their rental agreements through Jan. 31, 2005. However, all late fees and penalties incurred since July 15, 2004 will be forgiven and credited to the customer, if already collected.

Customers potentially covered by the settlements will have the opportunity to opt out to pursue private litigation. In each case, the finance company has refused to admit any violation of law or finding of fact.

Clearly, the economic fallout to the industry of NorVergence has been significant. Settlements are costing major reputable financial institutions millions of dollars. And while the larger players may be well able to absorb the impact of a settlement, smaller companies may have no choice but to fight the claims of the different state attorneys general.

The facts, of course, still formally remain open as to whether NorVergence's action in procuring leases at such inflated terms constituted fraud. Common law fraud requires showing: 1) a false statement of a material fact; 2) that the representor knew or should have known the representation was false; 3) the intent that the representation induce another to act on it; and 4) injury to the party acting in justifiable reliance on the representation. However, the state and class action suits were not seeking relief from NorVergence. Because NorVergence assigned its right to payment under the contracts to third-party finance companies, NorVergence customers and the state attorneys general had to seek relief from the third-party assignees.

This posed a problem for the plaintiffs. It is well-settled law that both “hell or high water” and “waiver of defense” clauses are enforceable. However, the application of these provisions as well as all other contract provisions in the face of fraud is a murkier issue. Legal considerations as to whether the NorVergence conduct constituted intentional or constructive fraud, and whether the finance companies can be shown to be “agents” of NorVergence or had actual notice of its fraud, all weigh in the balance of a determination of enforceability of those provisions.

From an industry standpoint, there are strongly held but widely divergent opinions on the appropriate way to address the NorVergence situation. While certain voices have been clamoring for settlement of these cases on the theory that both sides will eventually be losers the longer these battles are fought, as noted above, smaller finance companies are loathe to take the economic hit that a settlement will undoubtedly involve. Moreover, many refuse to enter into settlement discussions which they see as a potential assault on fundamental provisions which underpin equipment finance, and characterize the attorneys' general efforts as attempts to change the laws governing lease financing by “unwarranted and legally unsupported” litigation. On the other hand, the longer the very public allegations of NorVergence misdeeds continue to receive press, the greater the risk of a legislative effort to resolve weaknesses in the plaintiffs' cases. Such a legislative effort could expand into other areas of leasing industry practice, such as the amount of embedded yield in payments under conditional sales contracts or the proper calculation, collection and application by lessors of personal property tax payments. It is also noteworthy that while commercial law has generally drawn a clear distinction between consumer and business obligors, the governmental actions in this case have not (one state referred to its proceeding as a “consumer investigation”). Government agencies, whether for the right or wrong reasons, are clearly seeking to disabuse finance companies of the notion that all business obligors are sophisticated enough in their financial transactions, relative to “consumers,” to fully understand their contractual arrangements, ask the right questions and be able to withstand high-pressure sales tactics.

Adverse case law is already being generated as the spawn of litigation involving NorVergence continues. For example, the U.S. District Court for the Northern District of Illinois recently invalidated the submission to jurisdiction clause in the NorVergence contract (what the New York attorney general's office referred to as a “floating jurisdiction clause”) on the grounds that Illinois public policy requires a clear and specific forum in the forum selection clause.

It is of course unclear where the industry will be when the dust finally settles on NorVergence. One point, though, for lease finance companies that is clearly emphasized by this case is the old adage: “know thy customer.” Disclosures in the wake of this scandal have revealed the rather questionable past of Thomas Salzano, a “consultant” to NorVergence and brother of the chairman and CEO. Media reports allege that Salzano's two previous businesses, a freight consulting business and a reseller of residential long-distance phone service (Minimum Rate Pricing Inc.), also filed for bankruptcy. According to one Web site, the telecommunications company, Minimum Rate Pricing, was subject to a record $1.2 million settlement with the FCC and entered into a $1 million settlement with 19 states over complaints that it switched customer phone service without their permission (“slamming”). MRP's license was revoked in certain states, including Nebraska, Tennessee and Wisconsin, marking the first time in 3 years the Tennessee Regulatory Authority banned a company from conducting business in that state. When MRP filed for bankruptcy in 1999, it listed assets of $33 million and liabilities of $116 million. Moreover, creditors accused Salzano of hiding $2.7 million, an accusation that was never finally resolved.

Of course, hindsight is always 20/20 and there are practical limitations to due diligence, but background checks against the principals of a company can be revealing. These disclosures eerily echo the facts that emerged about Lance Poulsen, president of National Century Financial Enterprises (“NCFE”), after that company declared bankruptcy in a massive fraud in late 2002. NCFE, which quickly grew over the 1990s to become the largest financier of health care providers in the country, borrowed more than $3 billion from investors against “eligible” health care receivables, receivables that ultimately turned out to be worthless. However, soon after the fraud became apparent, it was discovered that in the mid-80s, Poulsen was jailed in Florida's Dade County for passing bad checks, and ran a Florida company called Dinsmore Tire Center that went bankrupt. And in 1992, just before he founded NCFE, the IRS slapped him with a tax lien for $49,000 in back taxes. Clearly, creditors of that company might have thought twice about financing NCFE had those facts been timely revealed.

So-called “hell or high water,” “waiver of defense” and lessor favorable “submission to jurisdiction” clauses have long been cornerstones of equipment finance documentation. But, the unfolding debacle over the last year involving a company called NorVergence has cast an unfavorable light on these important provisions and, in doing so, entangled most of the top players in the leasing industry.

NorVergence, Inc. was founded in 2001 by brothers Peter and Thomas Salzano. Within 2 years it had become a multi-million dollar telecommunications success story, generating revenues of more than $140 million in the year prior to its bankruptcy.

Headquartered in Newark, NJ, the company's main source of business was reselling telephone and Internet service that it purchased wholesale from such companies as Qwest Communications, Sprint Communications Co. LP and T-Mobile USA Inc. The NorVergence sales staff focused on offering deeply discounted telecommunications packages to small businesses throughout the country.

The basic marketing scheme employed by NorVergence centered on its “MATRIX” box (which stood for “Merged Access Transport Intelligence Xchange”). The company alleged that the MATRIX enabled customers to receive unlimited local and long distance telephone service, cellular service and high-speed Internet access cheaply and efficiently. Customers would later realize that the MATRIX was nothing more than a router allocating bandwidth over a T-1 line.

The sales pitch, though, proved extremely successful. NorVergence was able to secure approximately 11,000 customers nationally, comprised mostly of small businesses, not-for-profit entities, and religious institutions. Customers typically signed a non-cancelable 5-year self-styled “rental” agreement for the MATRIX box and a cancelable, price-variable agreement by NorVergence to provide telecommunications services. The two agreements were presented as an integrated package, but, in fact, most of the customer's payment was allocated to the rental agreement. While the value of the MATRIX box was purportedly between $350 and $1500, payments under NorVergence rental agreements ranged from $400 to $5700 per month. The total cost under the rental agreement had no correlation to the MATRIX box, but was calculated solely to ensure a 30% discount to the customer from its existing cost of telecommunications services. However, NorVergence apparently had no long-term commitments from any telecommunication company to provide discounted services.

Each rental agreement contract contained a “hell or high water” clause, which obligated the customer to make payments under the terms of the lease upon acceptance of the goods, regardless of whether the goods were later lost, stolen, condemned, destroyed or found unsuitable for the purpose intended. Typical language included the following: “YOUR DUTY TO MAKE RENTAL PAYMENTS IS UNCONDITIONAL DESPITE EQUIPMENT FAILURE, DAMAGE, LOSS OR ANY OTHER PROBLEM.”

The agreements also contained language referred to generally as a “waiver of defense” clause in which any assignee's rights to payment would be free of defenses that a lessee could assert against the original lessor. For example, one form of agreement stipulated:

YOU UNDERSTAND THAT ANY ASSIGNEE IS A SEPARATE AND INDEPENDENT COMPANY FROM RENTOR/MANUFACTURER AND THAT NEITHER WE NOR ANY OTHER PERSON IS THE ASSIGNEE'S AGENT. YOU AGREE THAT NO REPRESENTATION, GUARANTEE OR WARRANTY BY THE RENTOR OR ANY OTHER PERSON IS BINDING ON ANY ASSIGNEE, AND NO BREACH BY RENTOR OR ANY OTHER PERSON WILL EXCUSE YOUR OBLIGATION TO ANY ASIGNEE.

Rental agreements also required the customer to litigate any dispute in the jurisdiction of the principal office of an assignee of NorVergence. A sample clause read as follows:

This agreement shall be governed by, construed and enforced in accordance with the laws of the State in which the Rentor's principal offices are located or, if the lease is assigned by Rentor, the laws of 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 in that State, such court to be chosen exclusively at Rentor or Rentor's assignee's sole option.

NorVergence then sold these rental agreements to third-party finance companies ' approximately three dozen by most accounts ' at a discount in order to convert the stream of income from lease payments into one lump sum.

Despite an estimated $6 million in weekly sales, NorVergence's revenue could not keep pace with its mounting debt. After technical problems arose in a potential new product line, and with amounts owed to Qwest alone nearing $2 million a week, the company refocused its efforts on enlisting new lessees. The goal was to alleviate short-term cash flow problems by increasing its revenues from the sales of leasing contracts to third-party finance companies. The initiative, though, proved too little, too late, and NorVergence was forced involuntarily into Chapter 11 bankruptcy on June 30, 2004. The proceeding was quickly converted to a Chapter 7 liquidation on July 14, 2004, and Peter Salzano, the CEO, subsequently filed for personal bankruptcy in Jan. 2005.

With conversion to Chapter 7, Qwest, Sprint and T-Mobile were each granted the right by the bankruptcy court to cease providing service to NorVergence customers. As customers of NorVergence scrambled to find alternative telecommunications providers, they also began to realize that this cessation of service did not excuse them from continuing to make payments to third-party finance companies under their NorVergence agreements.

Internet Web sites immediately began springing up offering legal support to customers seeking to avoid payment on their NorVergence contracts, and customers rapidly banded together to file class action suits against the third-party finance companies. These suits alleged breaches of contract and implied and express warranties, as well as fraudulent inducement on the part of NorVergence. At the same time, attorneys general in at least 10 states, including Arizona, Colorado, Florida, Illinois, Massachusetts, Pennsylvania, New Jersey, New York, North Carolina and Texas, instituted investigations into the leasing practices of the third-party finance companies. Of these states, as of the date of writing of this article, Florida, Illinois, New Jersey, Pennsylvania and Texas have formally sued finance companies, demanding that they stop attempting to collect on their NorVergence contracts.

In addition, the Federal Trade Commission (“FTC”) filed suit against NorVergence in Nov. 2004 alleging the bankrupt company committed “deceptive and unfair practices in its sale of telecommunications packages and transfer of equipment rental agreements, in violation of Section 5 of the FTC Act.” The FTC also intends to appear before the U.S. Bankruptcy Court to persuade the court to prevent NorVergence from attempting to sell or turn over additional customers to finance companies.

The four-count FTC complaint against NorVergence alleges various types of unfair or deceptive practices. The first count is premised on NorVergence's failure to deliver on express or implied representations that it would be able to provide long-term telecommunications services to its customers at a discount. The second count cites NorVergence for failing to disclose that it had no long-term commitments from service providers and that the MATRIX box was useless without the promised telecommunication services. The third count faults it for including in its rental agreement provisions allowing it or assignees to sue in specified or unspecified venues other than the customer's location. The fourth count alleges that, by providing rental agreements to finance companies which allowed them to (1) “misrepresent that customers owe money regardless of whether NorVergence provides services and (2) file collection suits in distant forums,” NorVergence provided these companies with the “means and instrumentality for the commission of deceptive or unfair acts or practices.”

Although the finance companies which purchased NorVergence leases were not named in its filed complaint, the FTC alleges that such companies knew or should have known that NorVergence was selling a discounted package of telecommunications services and that the MATRIX box was an incidental part of those services, that the box was essentially worthless without the provided services and that the contracts might have been part of a scheme to defraud customers. At least one finance company has already received a formal subpoena from the FTC.

Some third-party finance companies have agreed to settle with the state attorneys general. Though the New York attorney general has yet to formally file suit against any finance companies, the threat of litigation has enabled the office to secure settlements from at least seven finance companies. The settlements cover more than half of all New York customers of NorVergence and are said by the attorney general's office to be valued at least at $13 million. Companies settling include such major industry players as GE Capital, CIT, Lyon Financial Inc., DeLage Landen Financial, Wells Fargo Financial Leasing Inc. and TCF Express Leasing. In each case, the settlement forgives a percentage of the amounts owed to each finance company after the date of termination of telecommunications services (July 15, 2004), and requires a waiver of late fees, penalties and property insurance payments assessed on or after such date. To date, up to 14 other finance companies still face the threat of litigation in New York.

Florida and New Jersey have also extracted settlements from major finance companies. Like New York, the New Jersey attorney general secured settlements that resulted in the waiver of varying percentages of the balances due on the NorVergence contracts after July 15, 2004. Under the terms of certain settlements, NorVergence customers will have to make payments on their rental agreements through Jan. 31, 2005. However, all late fees and penalties incurred since July 15, 2004 will be forgiven and credited to the customer, if already collected.

Customers potentially covered by the settlements will have the opportunity to opt out to pursue private litigation. In each case, the finance company has refused to admit any violation of law or finding of fact.

Clearly, the economic fallout to the industry of NorVergence has been significant. Settlements are costing major reputable financial institutions millions of dollars. And while the larger players may be well able to absorb the impact of a settlement, smaller companies may have no choice but to fight the claims of the different state attorneys general.

The facts, of course, still formally remain open as to whether NorVergence's action in procuring leases at such inflated terms constituted fraud. Common law fraud requires showing: 1) a false statement of a material fact; 2) that the representor knew or should have known the representation was false; 3) the intent that the representation induce another to act on it; and 4) injury to the party acting in justifiable reliance on the representation. However, the state and class action suits were not seeking relief from NorVergence. Because NorVergence assigned its right to payment under the contracts to third-party finance companies, NorVergence customers and the state attorneys general had to seek relief from the third-party assignees.

This posed a problem for the plaintiffs. It is well-settled law that both “hell or high water” and “waiver of defense” clauses are enforceable. However, the application of these provisions as well as all other contract provisions in the face of fraud is a murkier issue. Legal considerations as to whether the NorVergence conduct constituted intentional or constructive fraud, and whether the finance companies can be shown to be “agents” of NorVergence or had actual notice of its fraud, all weigh in the balance of a determination of enforceability of those provisions.

From an industry standpoint, there are strongly held but widely divergent opinions on the appropriate way to address the NorVergence situation. While certain voices have been clamoring for settlement of these cases on the theory that both sides will eventually be losers the longer these battles are fought, as noted above, smaller finance companies are loathe to take the economic hit that a settlement will undoubtedly involve. Moreover, many refuse to enter into settlement discussions which they see as a potential assault on fundamental provisions which underpin equipment finance, and characterize the attorneys' general efforts as attempts to change the laws governing lease financing by “unwarranted and legally unsupported” litigation. On the other hand, the longer the very public allegations of NorVergence misdeeds continue to receive press, the greater the risk of a legislative effort to resolve weaknesses in the plaintiffs' cases. Such a legislative effort could expand into other areas of leasing industry practice, such as the amount of embedded yield in payments under conditional sales contracts or the proper calculation, collection and application by lessors of personal property tax payments. It is also noteworthy that while commercial law has generally drawn a clear distinction between consumer and business obligors, the governmental actions in this case have not (one state referred to its proceeding as a “consumer investigation”). Government agencies, whether for the right or wrong reasons, are clearly seeking to disabuse finance companies of the notion that all business obligors are sophisticated enough in their financial transactions, relative to “consumers,” to fully understand their contractual arrangements, ask the right questions and be able to withstand high-pressure sales tactics.

Adverse case law is already being generated as the spawn of litigation involving NorVergence continues. For example, the U.S. District Court for the Northern District of Illinois recently invalidated the submission to jurisdiction clause in the NorVergence contract (what the New York attorney general's office referred to as a “floating jurisdiction clause”) on the grounds that Illinois public policy requires a clear and specific forum in the forum selection clause.

It is of course unclear where the industry will be when the dust finally settles on NorVergence. One point, though, for lease finance companies that is clearly emphasized by this case is the old adage: “know thy customer.” Disclosures in the wake of this scandal have revealed the rather questionable past of Thomas Salzano, a “consultant” to NorVergence and brother of the chairman and CEO. Media reports allege that Salzano's two previous businesses, a freight consulting business and a reseller of residential long-distance phone service (Minimum Rate Pricing Inc.), also filed for bankruptcy. According to one Web site, the telecommunications company, Minimum Rate Pricing, was subject to a record $1.2 million settlement with the FCC and entered into a $1 million settlement with 19 states over complaints that it switched customer phone service without their permission (“slamming”). MRP's license was revoked in certain states, including Nebraska, Tennessee and Wisconsin, marking the first time in 3 years the Tennessee Regulatory Authority banned a company from conducting business in that state. When MRP filed for bankruptcy in 1999, it listed assets of $33 million and liabilities of $116 million. Moreover, creditors accused Salzano of hiding $2.7 million, an accusation that was never finally resolved.

Of course, hindsight is always 20/20 and there are practical limitations to due diligence, but background checks against the principals of a company can be revealing. These disclosures eerily echo the facts that emerged about Lance Poulsen, president of National Century Financial Enterprises (“NCFE”), after that company declared bankruptcy in a massive fraud in late 2002. NCFE, which quickly grew over the 1990s to become the largest financier of health care providers in the country, borrowed more than $3 billion from investors against “eligible” health care receivables, receivables that ultimately turned out to be worthless. However, soon after the fraud became apparent, it was discovered that in the mid-80s, Poulsen was jailed in Florida's Dade County for passing bad checks, and ran a Florida company called Dinsmore Tire Center that went bankrupt. And in 1992, just before he founded NCFE, the IRS slapped him with a tax lien for $49,000 in back taxes. Clearly, creditors of that company might have thought twice about financing NCFE had those facts been timely revealed.