Fly On the Wall – with a Franchisor, Franchise Broker & a Predatory Lender’s Attorney

Portions of the following story might be fictional, though the actions of the parties suggest not.  The last names have been removed to protect franchisees, and not the guilty parties (leasing companies, brokers & franchisors) who have worked this plan for many many years.

R.B. – Glen, I’ve got a great new way to finance new franchises.  Let me show you something?

Glen – Sure R.B.

R.B. – You know how difficult it is to get financing for people from traditional lending institutions.  But there are leasing companies all over the country who are desperate to place their money.

Glen – Go on…

R.B. Well, if we package a bunch of stuff along with the franchise fee, we can write up a lease contract and get money from the leasing companies in minutes.

Glen – But how will that work?  How do we get our money?

R.B. – I brought along a friend who represents some leasing companies in the Midwest, meed “Ed”

Ed – Hi Glen.

Glen – So tell me more Ed.

Ed – It’s quite simple.  R. B. can write up an equipment lease contract with a hell/high water clause (essentially uncancelable and with no usury limits on interest) and the franchisee signs as financing for the package.  It consists of the franchise fee, some computer equipment and furniture and geographic protection fees.

R.B. – So I’ll write up the contract with Ed’s guidance.  The down payment in cash will be my commission.  Then I’ll sell the paper to Ed’s client for a discounted fee (this money going to you Glen).  The interest rate will allow Ed’s client to double his money in approximately 18 months.  In addition, they’ll be able to charge insurance fees on the equipment.  The leasing company paper work will allow them to force the franchisees into insuring the full lease rate because there is no breakdown as to the equipment portion of the lease.  This creates another windfall for all parties.

Glen – So R. B., you get your money from the down payment, we get our money from the sale of the paper to Ed’s client and then Ed’s client gets his money back in 18 months or so?  What happens then?

Ed – Well, my client will then sell the paper to another leasing company.  They’ll buy the paper for say, 20 cents on the dollar which will give us all another windfall and we can split that up three ways.  The new leasing company will then own the relationship and with the UCC 2A code, there is little to no risk of retribution.  The franchisees are too naive to dig any deeper than the reality of the fact they signed the lease and the hell/high water clause is final.  In addition, they are not resourceful enough to seek out a franchise-savvy lawyer to take any action.  There are summary judgments all over the country in favor of the leasing companies supporting this.

Glen – But R.B., I want my money at the outset, not later.  How can you guarantee me this?

R.B. – We have multiple leasing companies in multiple states.  The contracts move the venues around to states that are favorable to our side of the argument.  The paper is sold before the trainees even leave the building.  They’ll never know.

Ed – And because any action they take has to happen in the state of the leasing company, my backyard, they haven’t got a chance.  First of all, most never know about any actions, and by the time the leasing company that owns the paper takes action, they’re usually down and out and the judgment is unchallenged due to cost of defense.

Glen – So how do we lose?

R.B. – We don’t.  There isn’t any way to lose.  They cannot afford to defend themselves, the trail is muddy and we all get our money within 18 months and then we sell the paper.  Decisions all over the board and the fact that every franchisee has to fight his own battle all keep us from losing even if one of them decides to take action.

Ed – R.B. is right.  There is little to no risk as the people who are doing the signing don’t have the business acumen to figure out what has happened until it’s too late.

Glen – I like it.  One question though, how are they going to pay the lease after all the ink is dry?

R.B. – I got that covered.  I get them into a 401k rollover plan called ROBS which pulls all of their money into their corporation and this is the money they pay the lease with.

Glen – Can this be traced back to us?

R.B. – I don’t think so.  We’re getting paid with their downpayment monies and the sale of the paper to the leasing company.  They they’re on their own to figure out what the IRS will do to them.  We’ve been paid and given them all the paper work required to do the rollover.

R.B. – So what’s the actual franchise fee for the package Glen?

Glen – Oh, around 22K

R.B. – And the protection fee?

Glen – 7K

R.B. – So package in the deal 5 computers, a phone system and some furniture, some software and services, territory protection fees and we’ll write the paper for 100K or so.  We can charge them 15k downpayment which goes to me, sell the paper to Ed’s client for 25K (goes to Glen for the franchise fees) and we’re off!

Glen – You get 15K, we get our 25K and with about 18 months of payments, Ed’s client gets around 40K?

R.B. – Yep. And then we sell the paper in 18 months for 36K more and we’ll split that three ways for another 12K apiece.  The leasing company that buys the paper will still have 42 months of 2K payments or 84K for their 36K investment.  Nice profit eh?

Glen – I like it, but what are the potential risks, Ed?

Ed – Well, the UCC 2A argument is rarely uncovered and most judges rule in favor of the leasing company.  But as you know, there is always a risk of the UCC being thrown out as unconscionable or not applicable because only a small portion of the lease is actual equipment.  If a franchisee figures this out and argues it on the face that its not an equipment lease, but a finance lease, then the contract could be deemed illegal, subject to usury or perhaps other types of decisions we’ve yet to see.

Glen – I’m in.  If it comes up, we can deal with it as it happens.  History tells us that the courts are on our side.

R.B. – I’m definitely in

Ed – As long as you isolate the franchisees, there won’t be any problems on my end.  We’re in.

Paper Chasers! (Franchisees are being sold down the river by leasing companies)

Most people don’t realize they’ve been sold a balloon full of hot air with “franchise” written all over it until it’s too late.  People who tend to gravitate towards the thought of owning a franchise are usually in a state of transition.  They have either retired from a successful life or they’ve been dumped by the man we call corporate America.  It’s not expected that they would understand the process or even ask the right questions to get to the core of how franchises deal the paper.  So for those of you out there who are reading this and haven’t yet been conned into a crooked franchise, read on, you’ll be glad you did.  For those of you who might be victims, hopefully this will give you some ammo to pursue the crooks who took your money!

Franchisors tend to use brokers.  Take this broker, Total Lease Concepts in Los Osos, CA run by a very colorful fellow named R. B. Kluttz.  R. B. has addresses all over the country.  He has businesses all over the country.  In fact, he seems to operate as a broker, as an owner, as a leasing company and a 401K rollover company all in one.  He runs offices for his 401K rollover company inside the same address and suite as a recruitment franchise. (No one even knows if he has any employees at this location.)

R.B. has figured out that he can sell mom and pop a hot air franchise by convincing them to rollover their 401K into a corporation, then bundle a couple of cheap computers  and office furniture into a capital equipment lease (though only 5% of the deal is actual equipment).  Then he takes a big down payment for his commission (taking payment under another corporation of course) and voila!  Mom and pop have a worthless franchise, R. B. has a pocket full of cash and R. B. is on to the next mark.  But it doesn’t stop there!

You see, there’s a method to the madness.  R. B. knows this is questionable dealing, but he has friends in this grand scheme.  They are known as capital equipment leasing companies.  Most of them are small little shops that operate under various names with little to no regulation by anyone.  They change their names a lot and there isn’t a broker or franchisor they won’t sit and have dinner with to try and figure out how they can share in the booty of shady dealing!

Stage 2:  R. B. never executes any of the disclosure documents that might cause harm to him, in fact he simply forgets to return them to the franchisee and only attaches the capital equipment contract to the few non-incriminating docs and then he calls up his friends at Frontier Leasing and sells them the paper!  Now most people might think this is just another form of securitization, but in essence, they are all in bed together.  (See the attached link in pdf format of the legal decision in Frontier’s home state)  It looks sort of like this:

Franchise Fee was originally stated to be 79K.  R. B. adds equipment and other ancillary stuff to it to get it into a ‘capital equipment contract’.

R. B. – charges $15,000 down payment which he puts in his pocket

R. B. –  (Because the paper is in the form of a lease and perceived to be UCC 2a compliant, R.B. can charge any amount of interest).  He uses the 79K number minus the downpayment,  charges between 20-40% and puts a monthly number of say, $2000.00 per month. He then sells the paper to Frontier Leasing for say – $20,000!

R.B. – is now free of the paper, has 20K which he passes on to the Franchisor (in the case below – MRI).  So now you know what the real value of the franchise is!  R. B. then is free to go and the relationship now is in the hands of Frontier Leasing.

Frontier Leasing: These guys are great financiers (NOT).  They have been named in multiple instances of leasing of fraudulent schemes including “Royal Links”, Norvergence, CCC (ATM fraud) and various other scams having to do with small mom and pops being bilked.   So Frontier now is taking 2K per month out of the franchisee’s account, with sales tax for the entire falsified fee.  They then bring in an insurance partner to charge for $70K worth of computer equipment!  (Remember that the deal was primarily the franchise and the computers were thrown in just to get it into a capital equipment lease so they can charge massive amounts of interest, state sales tax, insurance on the equipment and falsify the actual amount of the transaction.)  The unknowing franchisee doesn’t want to have their livelihood so they go along with the scam.  After all, they are honest and they really do believe that they can make a go of it.

18 months goes by, the franchisee isn’t making any money, the whole thing is beginning to stink to high heaven.  The franchisee has been doing everything the franchisor directed them to do to make a legitimate go of it to no avail.  His bank account is now approaching empty and he’s depleted his entire life savings on the promise of the franchisor that the business will come around.  (The franchisor is always upbeat because he isn’t trying to make a go of the business that he is selling, he’s selling more blokes down the river and he’s ecstatic!) And because he hides behind disclaimers and disclosures keeping you from blaming him for anything with terms like “good faith” and “non-disparaging”.

Each time the franchisee calls up the franchisor for advice on the payments or on the communications with the leasing company Frontier, the franchisor tells them that they have to take that up with the leasing company.  It’s out of their hands.

Frontier Leasing:  Now that 18 months have passed, Frontier has made their 20K back, and they now have 36k in collections along with state tax monies on the entire amount (illegal don’t you think?).  I wonder if the state tax collectors in each state even know Frontier Leasing by name or have ever received a nickel from them in taxes collected?  IT’S TIME TO SELL THE PAPER TO ANOTHER UNDESIRABLE LEASING FIRM! In captial equipment leases, once the paper is sold, Frontier is OFF THE HOOK!  (If it were a true finance lease and crooked, then Frontier could not sell its way out of the usury liability, but because it’s disguised, they can and the average court and the average lawyer doesn’t even recognize what is going on!) The UCC code 2a is often incorrectly applied because of its “Hell/High Water” clause stating that once it is signed, you cannot back out.

And the scam continues and continues and continues with the leasing companies laughing all the way to the bank.  Search on “Royal Links” and Norvergence and “CCC ATM” and you’ll read numerous cases where the little guy loses in courts all over the country.   Wake up America, your last and only liquidity, your life savings is disappearing.  Note the quotes from the just appointed baby-face of one of the 401K rollover firms, Guidant Financial (after his firm is pulling out due to investigations by the IRS):

“What we specialize in is franchises from $20,000 to $250,000 in startup costs. Those are the very, very small mom and pop franchise units that can be launched by hiring minimal employees and capital equipment. These types are very strong utilizers of Guidant’s services.”

“Guidant’s leadership feels it is the perfect time for a product like this. We literally have trillions of dollars in retirement savings. Even with the hit that retirement savings have taken with the overall economy, and the Dow Jones and NASDAQ, you still have trillions of dollars.” – Stephan Roche  February 2009

http://www.bluemaumau.org/6884/interview_with_guidant_financials_ceo_stephan_roche

http://caselaw.lp.findlaw.com/data2/iowastatecases/app/8-465.pdf