Landen: A Teachable Moment
by Bernie Boettingheimer, CLP
President, Lease Police
It was a watershed moment when De Lage Landen filed a law suit on August 13, 2010 against the slow-motion demolition called Allied Health Care Services, Inc. The parade of expanded new claims against Allied seemed to start on August 4, 2010 by Texas Capital Bank with their call for a "replevin" action against Allied. It was mentioned earlier, but not as strongly as Texas Capital Bank did.
The De Lage Landen suit, which I noticed did not include Charles Schwartz because he did not guarantee the transaction, was strong because its claim for "unjust enrichment" against the vendor in the transaction - Donner Medical Marketing, Inc. and "fraud and conversion" against the owner of Donner Medical, Bruce Donner.
Donner Medical supposedly provided the bulk of the equipment to Allied. It is encouraging to finally see that the legal team of De Lage Landen understands the importance and the culpability of vendors in a financing/leasing transaction such as this. Of course, the courts will decide if the claims are valid but at least the gauntlet has been thrown down. Let me explain this further.
Lease Police was started on the theory that a finance/leasing transaction is like a three-legged stool. If one or two legs are broken the stool won’t stand. One leg is the lessee himself, the second the vendor and the third is the equipment. Just like the stool, a finance/lease agreement needs all three strong “legs” to stand upright. We have seen tragic results in the last few years as a result of neglect by companies to spend any time in investigation of the vendors and equipment.
While fraud education has improved greatly in this area of credit investigation, too many still do not understand that some legitimate vendors sell bad or poor equipment with representations that bring about delinquencies. Experienced and proactive leasing managers are now realizing that poor vendors and weak equipment usually spells disaster despite a customer’s prior credit history.
In the Allied case above, the “financials were too good to be true” and thus they overcame the common sense of many credit executives. They ignored basic and ordinary warning signs on the vendor and the equipment. In fact, there were over 400+ UCC filings in the last few years on this just one lessee.
As Kit Menkin wrote in one of his articles, a subscriber turned down Donner Medical, and the broker substituted a new vendor, who was on the Lease Police vendor list. In investigating Donner Medical, I had asked Kit Menkin if he knew anything about Allied Health Care Services, while I researched the vendor. Kit, in turn, asked his readers.
Donner Medical, the main equipment supplier in almost all these new UCC's was a vendor operating from his residence (Googlebrought up the house) with no web site until after Leasing News noted it and a month later than had one, which I should add was long after 99% of the leases were created. There was no membership in any industry associations. The equipment model being sold was out of production for over five years! Red flags started to pop up the more I looked into it, as well as Kit Menkin doing research on the equipment at my request.
Leasing News later reported the manufacture said the serial numbers were not theirs when bank credit officers and Leasing News, too, read invoice serial numbers to the manufacturer.
The latest resale prices found for the units purchased were in the $825--$1,250, but only small numbers were found since the unit was past production. The selling price for hundreds of units sold by Donner Medical was always $5,000 and the serial numbers were usually in consecutive sequence. The invoices were also quite amateurish.
WHAT WAS EVERYONE THINKING?
COULD THIS BE “A TEACHABLE MOMENT”?
It is high time our industry face the reality that focusing solely on the strength of the customer's credit will get you into trouble. A smart leasing and finance executive must focus on all "three legs" of the transactions - the customer, the vendor and the equipment. Each in its own way is equally important to the successful conclusion of any finance or leasing contract.
Bernie Boettingheimer, CLP
Lease Police, Inc.