W I N T E R 2 0 0 8
The Law Offices of Hemar, Rousso & Heald, LLP
Making Our Mark fOr MOre Than 30 Years
“Operation Lease Fleece”
Sidebar (A Cautionary Tale)
n our continuing endeav- he United States Department of Justice In addition to the losses suffered from
or to bring you timely charged twenty-three defendants inability to enforce fraudulent leases, there
articles of interest, our for their roles in a fraud scheme that are further losses sustained by the industry
first issue allegedly caused more than $20 million in in lost opportunities due to public skepticism.
of 2008 losses to several lease funders. Dubbed There is no real way to calculate the losses,
presents “Operation Lease Fleece,” the criminal which occur when well-intentioned lessees
information complaint includes charges of mail fraud, turn to other sources of business financing
on a recent wire fraud, and obstruction of justice from fear that they too will be swept up in
ruling in resulting from an on-going FBI investigation. some sort of fraudulent scheme. As the sub-
preference This investigation targeted individuals in prime lending situation looms larger every
litigation the equipment leasing industry, including day, it is imperative that the leasing industry
(which hopefully portends loan brokers and equipment vendors, hold itself to a higher standard of diligence,
the start of a trend in how who submitted falsified lease packages for not only to protect itself but to instill public
the bankruptcy courts deal funding. Operation Lease Fleece identified confidence in the industry.
with questionable cases), systematic patterns of broker/vendor fraud. The specific
as well as the latest on facts concerning
scandals that continue C l e a r l y, f r a u d
to plague the equipment continues to plague
Fleece” are still
leasing industry. We hope the leasing industry.
you find this Hearsay The cost is beyond
H o w e v e r, m u c h
issue informative and calculation. Certain
of the alleged
entertaining. Happy New bogus deals are
Year to one and all. eventually identified;
h o w e v e r, m a n y
— Richard P. Hemar fraud. Certain
are never detected
d e f e n d a n t s
and are simply “Operation Lease Fleece” — the criminal complaint
categorized as bad includes charges of mail fraud, wire fraud, and
In this Issue debt... summarily obstruction of justice... cash loans to
written off or written off after rudimentary
who were experiencing credit problems.
— Operation Lease collection efforts. In our representation of
Once the small businesses agreed to
Fleece lease financing companies, we frequently
apply for loans, these defendants instead
see cases where the funders’ decision to
— Preference Litigation submitted equipment-lease applications to
take aggressive collection action (often
Run Amok lenders. The equipment-lease applications
including action in the lessee’s bankruptcy
were inflated by the defendants to include
proceeding) reveals that what was initially
— HRH Happenings lucrative “commissions” for themselves.
believed to be simple bad debt was in reality
a fraudulent scheme at its inception.
(continues page 2)
“Operation Lease Fleece” 2) Know the equipment vendor? Similarly, a site inspection
(continued from page 1) of the lessee’s place of business will
The Norvergence saga is testing the
law on the legal duties of those involved also be beneficial. A simple review
The applications were supported by
in a multi-party lease transaction. of the business premises will breathe
false invoices purporting to document
Regardless of the legal ramifications, life into the perception of the business
the sale of computer equipment to the
from a business perspective, a funder and the reasonableness of this lessee
small businesses. Though purporting
should understand the equipment financing the invoiced equipment.
to sell valuable computer equipment,
being funded. A funder needs to bear Quiktrak, an independent inspection
in reality the equipment was typically
in mind the three C’s — “collateral, service company, estimates that 65%
non-existent, or far less valuable than
collateral, collateral.” If the funder of inspections uncover erroneous
invoiced. After the funding sources
contemplates recovery in the event of information of some kind. Although only
approved financing for the equipment
default will be derived from liquidation the minority of these errors are the result
leases, and funded the purported
of the collateral, the funder must also of fraud, correcting documentary errors
purchase of the leased equipment, in
remember that the words contained will produce increased collections and
fact, the proceeds were not used to
on the invoice are not what will be recoveries which would not otherwise
purchase equipment as invoiced and
liquidated. The collateral consists of been had.
promised to the funders. Instead, the
funders were duped into making cash the actual, physical items which will Post-funding site inspection will also be
or greatly undersecured loans to the be sold, and more often than not, can useful. Many fraudulent transactions
small businesses, with the defendants be touched, seen, and examined. Just do not come to light as first or second
keeping a significant percentage of the as Warren Buffet only invests in things payment defaults. Post-funding site
funded amount as “commissions.” It he can understand, so too should the inspections may catch the unscrupulous
is alleged that hundreds of fraudulent funder. Pre-funding analysis by an offender unprepared and off guard, giving
equipment-lease packages with fake industry specific expert will go a long notice to the funder of what will unfold.
invoices were presented to funders. way in uncovering the true value of the Sporadic post-funding inspections
Matrix or “blinky” box. will provide increased awareness and
What can be done to reduce broker/
knowledge to the funder, increasing
vendor fraud? Though often repeated,
3) Do Proper Diligence the difficulty in successfully deceiving
certain principles cannot be stated or
Even knowing the equipment may the funder.
modernized too often:
not be enough. By pushing several Putting would-be schemers on notice
1) Know your customer keys or buttons, rapidly evolving that the industry is becoming more
technology enables a scammer to do vigilant will benefit the funders by
This must be viewed expansively.
more far more than his predecessor creating a deterrence to those seeking
Know not only your lessee-customer...
of yesteryear could have imagined. to exploit the industry.
but all of the parties and variables in the
Documents, such as invoices can
transaction. Know the brokers; know Operation Lease Fleece serves as
be created or altered masking their
the vendors. The funder should do its another reminder that ever toughening
felonious purpose. Now, more than
diligence to know and understand all scrutiny and higher levels of diligence
ever, site inspections are critical. A
of the parties. The funder typically are necessary to reduce fraud. Further,
vendor inspection will help detect
evaluates the lessee and its financial Operation Lease Fleece, with its
suspicious vendors. A seasoned eye
statement in deciding whether to fund a looming jail time for the defendants,
can identify various types of red flags
deal, focusing upon the obvious concern sends a message to those in the leasing
apparent from a simple visit to the site.
of payment from the lessee. The funder industry that all are accountable for their
For example, is the invoiced equipment
also needs to do due diligence on the actions. Equally important, Operation
consistent with the business location?
other parties to the transaction. Variables Lease Fleece sends the message to
Consider the overall appearance of
in the transaction are representations any contemplating taking similar sinister
the business, and its location and
made by the broker and vendor. These conduct that the lease industry is being
size. Does the invoiced equipment
representations are components in the policed and time at the gray bar hotel
seem appropriate for the business at
transaction being evaluated for funding. may lay in wait for those who continue
hand? Is there a logical nexus between
Doing diligence on these entities will their nefarious ways.
this lessee and/or broker and this
help expose phony deals.
—Irwin M. Wittlin
“Preference Litigation Run Amok”
got a payment on an account transactions, without something more, in large bankruptcy cases, in particular,
nearly two years ago,” the of ‘preference litigation run amok’ (i.e.,
ought not to be vulnerable as preferences.
client says on the phone, The new value defense says that where trustees and plan agents suing with
or in an urgent email. “Now I’ve got the creditor provides goods or services reckless abandon, every recipient of a
a complaint and a summons from a after the alleged preference, for which [preference], with no consideration of
bankruptcy trustee on the other side of no payment is made, the value of those obvious defenses, what makes economic
the country, saying I have to give that goods or services is deducted from the sense, or the underlying policies of the
money back.” total preference liability. preference laws….).” The court ordered
the bankruptcy trustee in that case
It’s a rotten situation, and one that Unfortunately, in recent years, the
to assemble and abide by a plan for
startles and even angers clients who preference litigation process has
analyzing and pursuing preferences, and
have not encountered it before: the frequently devolved into little more than
clearly signaled that simply suing every
Bankruptcy Code says that under certain a shakedown of creditors, backed by the
possible potential defendant without
circumstances, a creditor may be forced threat of the costs and inconvenience
regard to available defenses would
to return payments received by the of litigation. Creditors’ committees and
no longer be tolerated, at least before
creditor from a bankruptcy debtor, even trustees in bankruptcy often simply open
Judge Jernigan. The court put teeth in its
if the creditor unquestionably provided the bankruptcy debtor’s check register,
warning to bankruptcy professionals by
the goods or services for which the and sue every party that received a
mentioning that the court would consider
payment was made. In general, if a payment of any sort from the debtor
allegations of inappropriate conduct in
creditor receives a payment on an during the preference period, without
the pursuit of preference litigation either
existing debt within the 90 days prior reference to existing (and plainly evident)
by reducing professional fees, or even
to the payor’s bankruptcy, and that defenses. A preference defendant who
by awarding sanctions against offending
payment gets the creditor more than resides outside the debtor’s home state,
plaintiffs under federal procedural rules.
other creditors actually or hypothetically or who is sued for a relatively small
In a welcome beacon for beleaguered
could have received on account of their amount, is at a tremendous disadvantage:
preference defendants, the court wrote
claims, the creditor is said to have the cold reality of the situation is that it
that it would “never tolerate abusive
received a “preference” or a “preferential may make sense to settle with the
preference litigation or extortion of
transfer.” Forcing the creditor to repay bankruptcy estate—even if the creditor
unsecured creditors on its watch.”
the preference is supposed to engender has valid defenses—because litigating
“equal treatment” of all creditors. and proving the defenses would cost It is unlikely that this single case—
more in attorneys’ fees and court costs however well founded—will change the
Creditors are supposed to have available
than the amount in controversy. preference litigation landscape overnight.
a number of defenses to return of
It is a milestone, however, in airing the
preferential transfers, the most common Recently, a Texas bankruptcy judge
“dirty secret” of bankruptcy avoidance
being “ordinary course” and “new value” made a welcome inroad in response to
litigation as a mere shakedown, and may
defenses. The ordinary course defense these issues. In an order entered in In
serve as a template for preventing, or
exempts payments made in the routine re Brook Mays Music Company, 2007
possibly having recourse for, extortionate
transmission of invoices and payments Bankr. LEXIS 2902 (Bankr. N. D. Tex.
between the parties, and is intended 2007), Judge Stacey Jernigan wrote
to recognize that common business that the court “was troubled by a trend — Wayne R. Terry
HRH Happenings At the October 2007, UAEL Conference in Tuscon,
Arizona, associate Irwin Wittlin taught the legal portion
of a course on lease law, lease documentation and
collections. At the same conference he was a panel participant in “Maintaining Your Line of Credit,” a panel discussion
which focused on how leasing companies can remain in a solid working relationship with their financial sources. Perhaps
of greater significance, Irwin was elected to the Board of Directors of UAEL and is currently serving as a board member.
Welcome and Welcome Back — Returning to Hemar, Rousso & Heald LLP after a two year absence is all around
great attorney and nice person Pamela Cox. Pam reports that she has been busy with new baby, Tristan Thomas Cox, born
October 11, 2007, and trying to get her three year old, Danielle, into pre-school.
We also welcome our other new arrivals: Cindy Herrera, Administrative Clerk; Cristina Gonzalez, Legal Assistant; Lauren
West, Accounting, Pat Trent, Accounting, Blanca Gutierrez, Legal Assistant; and Sanaz Adnani, Legal Assistant.
Continuing a long
tradition, many at
HRH enjoyed coming
to work in costume
on Halloween. We
took many pictures
(alas only a couple “Hey Lady! That’s not an
were in focus). opossum under your house!”
Partner Richard Hemar (center) flanked by some loyal denizens of the firm.
To close out the year, HRH gathered for its annual
Winter Holiday Party where everyone celebrated
with music, dining and dancing.
and husband Jerry
take a turn on
L-R: Associate Martina and husband
Bob Porter, and Paralegal Mary Ann
Rousso, in the breathless moment before
all three lunged for the steak sauce bottle.
(gripping a sheaf
raffle tickets) and Controller Kelly Sorenson
husband Michael. and Partner Richard Hemar,
cuttin’ a rug. L-R: Legal Assistants Tammy Dunn,
Denise Pauff, and Denise’s husband
David Van De Car, post-feast.
The Law Offices of Hemar, Rousso & Heald, LLP 15910 Ventura Blvd., 12th Floor, Encino, CA 91436, 818/501-3800, FAX 818/501-2985. The firm specializes in the fields of commercial
and consumer litigation, collections, bankruptcy and general corporate matters. Individual lecturers on the topics contained herein, as well as others on request.
This newsletter is published to inform our clients and others about matters of interest. It is not intended as legal advice and should not be acted upon without professional
No materials contained herein may be reproduced without written permission. Questions, comments and requests for additional information regarding our services are welcome.
Please feel free to write, call or fax us as indicated above, attention HEARSAY! Editors Susan K. Breen, Robert V. McKendrick.