F.C.V., Inc. v. Sterling Nat. Bank

652 F.Supp.2d 928

F.C.V., INC., individually and as a representative of all others similarly situated, Plaintiffs, v. STERLING NATIONAL BANK, Defendant.

No. 08 C 5507.

United States District Court, N.D. Illinois, Eastern Division.

September 3, 2009.

COPYRIGHT MATERIAL OMITTED

F.C.V., Inc., pro se.

Jennifer Susan Burt, Askounis & Darcy, PC, Chicago, IL, for Defendant.

MEMORANDUM OPINION AND ORDER

JEFFREY COLE, Magistrate Judge.

On the surface, this might appear to be a routine case: A potential class member receives a notice of a class settlement in a case in the district court in New Jersey and does not respond—an event that is commonplace. After all, who wants to wade through a lengthy notice with legalese that is often intelligible only to its authors and where the payoff is often not worth the effort. Where the notice requires the recipient to opt out of the case, there is no adverse effect on the recipient who ignores the notice. He gets what other class members get. But this case is more complex and, certain of its facets are out of the ordinary.

For one thing, under the class settlement that gave rise to the instant case, the class plaintiffs paid the defendant—in some cases a fairly large sum—although at a substantially reduced rate from the amounts the defendants claimed were owed under the class plaintiffs' respective contracts.¹ So ignoring the notice to the class in the New Jersey case had consequences that differed from those in more routine class actions. Under the terms of the New Jersey settlement, if a plaintiff did not opt out, and if they did not pay Sterling the discounted amount—either in a lump sum or on a monthly basis—a default judgment could be entered against the plaintiff for the nondiscounted amount due under the original contract. That is what happened to Hollywood Services, Inc. and more than 50 other class plaintiffs.

The dispute underlying the New Jersey class action was ubiquitous, with multiple lawsuits throughout the country involving 11,000 small businesses, thirty-five or more financing companies, and the Federal Trade Commission. A cursory search reveals 46 reported federal cases dealing with the dispute, from the Districts of Illinois, New Jersey, California, Florida, Pennsylvania, Missouri, Ohio, Minnesota, and New York. There are an additional 35 state court cases reported, from many of those same jurisdictions, as well as Texas, Georgia, Iowa, Michigan, Colorado, Connecticut, Massachusetts, and Maryland.

The disputes were over what the FTC and the small businesses who dealt with NorVergence would call a telecommunications scam—a nationwide fraud of epic proportions—and what the financing companies who purchased the NorVergence contracts would call enforcement of a simple contract that included provisions common to all such contracts. Extended discussions of the history of the NorVergence debacle may be found in Windy City Metal Fabricators & Supply, Inc. v. CIT Technical Financing Services, Inc., 536 F.3d 663 (7th Cir.2008); IFC Credit Corp. v. Aliano Bros. General Contractors, Inc., 437 F.3d 606 (7th Cir.2006); and F.T.C. v. IFC Credit Corp., 543 F.Supp.2d 925 (N.D.Ill. 2008)—to name but a few.

Having failed to opt out of the New Jersey litigation, and having failed to pay Sterling the discounted amount due under the class settlement agreement, Hollywood Services, Inc. was subject to entry of a default judgment in the New Jersey case. That is exactly what happened. Hollywood has moved to quash a citation to discover assets Sterling filed against it in this district and to vacate the default judgment entered against it in the United States District Court for the District of New Jersey, claiming that court was without jurisdiction to have entered the default judgment.

BACKGROUND

A. What Norvergence Wrought

The "Helen" that launched all this trouble was a New Jersey telecommunications company, now bankrupt, called Norvergence. It was in the business of leasing telecommunications service packages to business customers. This was its hook: no matter what a customer said they were already paying, Norvergence could better it, substantially. Norvergence explained that it was all thanks to some wonderful and alluring gadgetry called the Matrix Solution, which was no doubt designed to evoke subliminal images of the Hollywood movie. It sounded too good to be true— and, of course, it was.

Under the agreement, customers "leased" the Matrix Solution equipment from Norvergence. The cost of the "lease" was enormously expensive in relation to the hardware's actual cost, but the bill for the telecommunications services was so low that the customers still looked forward to substantial savings. And, in some cases, it started out that way. But the chief utility for Norvergence of the "Matrix Solution" was its capacity to fool the gullible and the trusting. As for Hollywood monikers, it was really what Alfred Hitchcock would have called a "MacGuffin," and didn't have anything to do with providing savings. The way Norvergence strung customers along was by subsidizing the cost of the telecommunications services they were paying for. It funded the subsidies with the monies obtained from assignments of the lease agreements to various financing companies. But Norvergence couldn't keep up the scheme indefinitely, and it ultimately went bankrupt.

At this point, the finance companies came calling on the customers demanding payment under the terms of the purported equipment leases. Understandably, the customers who were now without telecommunications services balked at paying for equipment that was effectively worthless and which, in some cases, either didn't work at all or had never been installed by NorVergence. The finance companies, however, pointed to the "hell or high water" clause in the leases, which plainly said the customers were on the hook for renting the hardware whether they received service or not—service was separate. And the finance companies argued they bought the leases fair and square, so the customers couldn't use Norvergence's fraud against them. Not surprisingly, everyone started heading to court.

B. What Brought Sterling and Hollywood Into The Picture

One of the dozens of ensuing lawsuits was F.C.V., Inc. v. Sterling National Bank. It was filed in federal court in New Jersey in September 2004, on behalf of a class of "all persons and entities that entered into agreements with Norvergence, Inc." F.C.V., Inc. v. Sterling National Bank, 2006 WL 1319822, *1 (D.N.J.2006). The finance company defendant in this instance was Sterling. The complaint sought damages and declaratory and injunctive relief terminating the plaintiffs' obligations to make lease payments to Sterling based upon claims for fraud and negligent misrepresentation. Sterling denied any wrongdoing, and insisted it was entitled to be paid under the so-called rental agreements it purchased from Norvergence.

In January of 2006, the parties executed a settlement agreement that the court preliminarily approved shortly thereafter. The court entered an order with respect to notice, fairness hearing, and administration, and it designated class counsel, approved the proposed form of notice to the class, and certified the action to proceed pursuant to Fed.R.Civ.P. 23(b)(3) on behalf of the class. In a nutshell, the settlement called for Sterling to discount by 33% the balances that the class members owed on the Matrix leases and forgive any late fees. The company would also disavow any interest it claimed in the equipment and withdraw any adverse credit reports it had filed. Id., 2006 WL 1319822, *1-3.

The court held a fairness hearing on May 9, 2006. The settlement notice went out by first class mail in February 2006 to 274 class members, with well over half— 161—opting out of the settlement. There were also five objections. The court was concerned by the high percentage of opt-outs, but noted that the number of objections was minimal. Reviewing the opt-outs, however, the court found that they were based on the customers' stance that they were victims of fraud and should not be liable for any payments, no matter how discounted. So the court felt that the significant percentage of the opt-outs did not really reflect on the fairness of the settlement. The court scrutinized the terms of the settlement under the relevant criteria and granted final approval on May 9, 2006. Id., 2006 WL 1319822, *4-7. On May 30, 2006, the New Jersey District Court entered an Order for Final Judgment and Order Approving Class Settlement which stated that "no just reason exists for delay in entering final judgment." (Sterling Ex. I).

C. The Notice To the Class Members

One of the class members receiving the settlement notice—and there is no dispute that it did (Hollywood Ex. D, Guliana Aff. ¶ 5)—was Hollywood. The notice was eight pages long, and was simple and explicit in its explanation of the recipients' options and the consequences of those options. In capitalized, bold face text, its opening words informed the recipients that they were receiving notice because they had rented NorVergence telecommunications equipment from Sterling National Bank, and emphasized that the class action that prompted the notice "WILL AFFECT YOUR COMPANY'S RIGHTS." There was no "fine print" in the title or in the subsequent explanatory sections. The language could not have been plainer. It began by listing Sterling's obligations under the settlement:

Pursuant to a proposed settlement in a class action lawsuit described below, Sterling is offering you the opportunity to pay off the Rental Agreement at a substantial discount and to settle any and all disputes between your Company, any individual guarantor and Sterling arising from the Rental Agreement. If this Settlement is approved, Sterling will:

(a) forgive thirty-three percent (33%) of the outstanding balance under your Company's Rental Agreement;

(b) forgive any late fees, attorney fees,...