Brican LLC was running a scam. The victims were dentists who wanted to lease multimedia systems (called Exhibeos”) for use in their waiting rooms. Each Exhibeo consisted of a computer and a television which could, say, demonstrate proper flossing technique and show ads for expensive cosmetic procedures.

The sales process worked this way: Brican would sell an Exhibeo to NCMIC Finance Corporation, which would then lease the equipment to a dentist. Brican promised all the dentists that another company, Viso Lasik, would buy enough advertising on the Exhibeos to cover the monthly lease payments. Further, if Viso ever stopped its advertising, Brican would buy the Exhibeos back from the dentists and they could cancel their contracts. In short, Brican lured the dentists with the promise that the Exhibeos were effectively free.

This plan not only sounded too good to be true, it was. Brican sold each Exhibeo to NCMIC for $24,000. But Brican was also paying Viso for the ads it placed with the dentists, which amounted to $29,000 over five years. In short, Brican was losing money on every Exhibeo it sold but would pocket the $24,000 from NCMIC upfront and then worry later about the $29,000 it owed in Viso ads. The only way this system could work, in the short run, was if Brican kept selling more and more machines. In the long run – well there was no chance of a long run.

NCMIC was attracted to the deal because dentists typically have a good credit rating and were agreeing to pay a high interest rate. It is possible that, at the beginning, NCMIC was unaware of Brican’s scam. However, once NCMIC discovered the truth, it responded by sharply increasing its lending to a rate of ten times more than it had been the year before. 

Eventually, the inevitable happened. Brican sales declined, it ran out of cash and then stopped paying for Viso ads on the Exhibeos. The dentists quit making their lease payments and NCMIC sued them. Because the leases were legally the same as a promissory note, the dentists alleged that NCMIC could not enforce the agreement because it was not a holder in due course -0 it had no acted in good faith because it was aware of Brican’s fraud. 

Questions:

1. Was NCMIC a holder in due course?

2. What were the legal issues in this case?

3. What was the court’s holding on those issues?

4. What was the court’s holding that NCMIC was not “without notice” of Brican’s scam?

5. Were the leases enforceable against the dentists?