Velo Holdings Inc. v. Paymentech, LLC (In re Velo Holdings Inc.)

• Citation: 475 B.R. 367
• Decision Date: 18 July 2012
• Docket Number: Adversary No. 12–01564 (MG).,Bankruptcy No. 12–11384 (MG).
• Parties: In re VELO HOLDINGS INC., et al., Debtors. Velo Holdings Inc., et al., Plaintiffs, v. Paymentech, LLC, Defendant.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

475 B.R. 367

In re VELO HOLDINGS INC., et al., Debtors.

Velo Holdings Inc., et al., Plaintiffs,

v.Paymentech, LLC, Defendant.

Bankruptcy No. 12–11384 (MG).

Adversary No. 12–01564 (MG).

United States Bankruptcy Court,

S.D. New York.

July 18, 2012.

Quinn Emanuel Urquhart & Sullivan, LLP, By: Susheel Kirpalani, Esq., James C. Tecce, Esq., Stephen A. Broome, Esq., Katherine Scherling, Esq., New York, NY, Special Counsel to the Debtors in Possession.

Lowenstein Sandler PC, By: Norman N. Kinel, Esq., John K. Sherwood, Esq., David A. Van Grouw, Esq., Terrance D. Watson, Esq., New York, NY, for Paymentech, LLC.

Wilkie Farr & Gallagher LLP, By: Margot B. Schonholtz, Esq., New York, NY, for Barclays Bank PLC, as First Lien Prepetition Agent and DIP Agent.

MEMORANDUM OPINION AFTER TRIAL GRANTING DEBTORS' PERMANENT INJUNCTION AND RELATED RELIEF AND DENYING PAYMENTECH'S MOTION TO LIFT AUTOMATIC STAY

MARTIN GLENN, Bankruptcy Judge.

V2V Holdings LLC and its affiliated debtors in possession (collectively, “Vertrue” or the “Debtors”) filed an adversary proceeding seeking a permanent injunction barring their credit-card processor, defendant Chase Paymentech, LLC (“Paymentech”), from terminating certain credit-card-processing agreements. Vertrue further seeks a declaration that those agreements were not terminated prepetition and cannot be terminated now on the basis of an unenforceable ipso facto clause contained in the agreements. Paymentech argues that it had terminated those agreements prior to the Debtors' bankruptcy filing based on a material adverse change in Vertrue's financial condition (specifically, a missed interest payment on December 31, 2011 on its outstanding bonds, and a consequent downgrade in its rating by Moody's). Alternatively, in the event Paymentech did not succeed in terminating the processing agreements prepetition, it has filed a motion in the chapter 11 case seeking an order lifting the automatic stay for cause to allow it to terminate the agreements now. In support of the lift stay motion, Paymentech argues that Vertrue committed a material non-curable default of the processing agreements by failing to comply as of May 15, 2012 with the VISA International Operating Regulations, an express requirement of the processing agreements. For the reasons discussed below, the Court grants Vertrue's request for a permanent injunction and related declaratory relief in the adversary proceeding and denies Paymentech's motion to lift the automatic stay in the chapter 11 case.

I. BACKGROUND

A. Procedural History

On April 2, 2012, the Debtors filed their chapter 11 petitions and their motion for joint administration was granted the next day. (ECF Doc. # 22.) On April 20, 2012, the Debtors commenced an adversary proceeding against Paymentech (the “Adversary Proceeding”). ( See Complaint For Permanent Injunction And Declaratory Relief (the “Complaint”) (Adv. Proc., ECF Doc. # 1).) The Debtors also filed (i) the Motion, Pursuant to 11 U.S.C. §§ 105(a), 362(a), 365(e), 541(c), and Fed. R. Bankr.P. 7065, for Temporary Restraining Order and Preliminary Injunction (the “PI Motion”) (Adv. Proc., ECF Doc. # 2), (ii) a memorandum of law in support of the Motion(the “TRO Memo”) (Adv. Proc., ECF Doc. # 3), (iii) the declaration of Lorraine DiSanto in support of the PI Motion (the “DiSanto Declaration”) (Adv. Proc., ECF Doc. # 4), and (iv) the declaration of Susheel Kirpalani in support of the PI Motion (the “Kirpalani Declaration”) (Adv. Proc., ECF Doc. # 5). In response to the PI Motion, Paymentech filed the Memorandum of Law in Support of Paymentech, LLC's Objection to Plaintiff's Motion Pursuant to 11 U.S.C. §§ 105(a), 362(a), 365(e), and Fed. R. Bankr.P. 7065, For Temporary Restraining Order and Preliminary Injunction (the “PI Objection”) (Adv. Proc., ECF Doc. # 10), along with the declaration of Heidi Biesterveld, dated April 24, 2012 (the “Biesterveld Declaration”). (Adv. Proc., ECF Doc. # 9.)

On April 25, 2012, following a hearing, the Court granted the Debtors' request for a temporary restraining order. ( See Order to Show Cause for Temporary Restraining Order and Preliminary Injunction (the “TRO”) (Adv. Proc., ECF Doc. # 12).) The TRO temporarily enjoined and restrained Paymentech from “terminating the Processing Agreements” and ordered Paymentech to show cause at a hearing on May 7, 2012 (the “PI Hearing”) why an Order should not be entered pursuant to Bankruptcy Rule 7065 preliminarily enjoining Paymentech “from terminating the Processing Agreements.” ( Id.) The TRO was subsequently extended and the PI Hearing was scheduled to commence on June 26, 2012. ( See Order Compelling Production of Electronically Stored Information and Consequences for Failure to Comply (Adv. Proc., ECF Doc. # 14).)

On May 23, 2012, Paymentech filed the Motion of Paymentech, LLC for Relief from the Automatic Stay to Terminate Processing Agreements (the “Lift–Stay Motion”). (ECF Doc. # 183.) In support of the Lift–Stay Motion, Paymentech relies on the declaration of Heidi Biesterveld, attached to the Lift Stay Motion as Exhibit D (the “Biesterveld Lift–Stay Declaration”). The premise of the Lift–Stay Motion is that if the Court determines that Paymentech did not successfully terminate the processing agreements prepetition, it can do so now because of Vertrue's material non-curable breach of the processing agreements.

Because Vertrue's request for injunctive relief and Paymentech's alternative request to lift the automatic stay involved common questions of fact, the Court combined the hearings on both requests for relief and entered a Scheduling Order with deadlines for filing evidence and briefs.¹(ECF Doc. # 38.) This Opinion sets forth the Court's findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52, made applicable to this proceeding by Fed. R. Bankr.P. 7052. In certain instances this Opinion also includes the Court's findings and conclusions about the credibility of witness testimony based on the Court's opportunity to read, hear, and observe the witness testimony.

B. Vertrue's Credit–Card–Processing Agreements

For more than fifteen years, Paymentech has served as Vertrue's exclusive credit-card-merchant processor. Paymentech is one of the world's largest processors of payment-card transactions. In 2011, it processed more than 24 billion transactions valued at approximately $553 billion, including nearly 50% of all internet transactions. (Biesterveld Decl. ¶ 4.) Paymentech is a wholly owned subsidiary of JPMorgan Chase Bank, N.A. ( Id. ¶ 3), which is the largest issuer of VISA and MasterCard cards in the world.

In a typical transaction, Vertrue transmits a digital sales record of the customer's card payment to Paymentech, which relays the information to the VISA or MasterCard network. The VISA or MasterCard network dispatches the transaction to the customer's issuing bank, which advances funds from the customer's line of credit, and remits the funds back to the network. The network makes a wire transfer to Paymentech of the dollar amount of the transaction to Vertrue, less a fee that Paymentech owes the issuing bank related to the transaction. Finally, Paymentech transfers the balance of the funds (net of any fees Vertrue owes Paymentech) to Vertrue's bank account. (Compl. ¶ 23.)

As provided in the Complaint, the following is a flow-chart illustrating the relationship between Paymentech, VISA, and Vertrue:

Image 1 (6.58" X 3.05") Available for Offline Print

Vertrue's major source of revenue consists of the charges it collects from members who pay for Vertrue's products and services with VISA credit cards. Vertrue collects approximately $10 million per month from such customers, accounting for more than 55% of its total revenue stream. Vertrue is not qualified to submit credit-card payment receipts directly to the VISA or MasterCard network, so Vertrue depends on Paymentech, an authorized credit-card processor, to consummate those transactions.

Vertrue and Paymentech are parties to three processing agreements: (i) Credit Card Processing Services Agreement, dated December 30, 1997 (the “U.S. Agreement”), (ii) Canadian/VISA Merchant Agreement, dated February 23, 1999 (the “Canadian/VISA Agreement”), and (iii) Canadian/MasterCard Merchant Agreement, dated February 23, 1999 (the “Canadian/MasterCard Agreement,” and together with the Canadian/VISA Agreement, the “Canadian Agreements”). (U.S. Agreement and Canadian Agreements, collectively hereinafter, the “Processing Agreements.”) Paymentech processes credit card and related online financial transactions for the Debtors' “Credit & Identity Theft Protection Business” and “Lifestyle & Shopping Business” (collectively, the “ACU Business”). ² (Biesterveld Decl. ¶ 8.)

The Processing Agreements automatically renew each year on January 25, unless Paymentech or Vertrue provides ninety days' written notice of non-renewal. ³ (Ex. 1 § 29; Ex. 2 § 12; Ex. 3 § 12.) Otherwise, as discussed more fully below, under the U.S. Agreement, Vertrue and Paymentech agreed that upon the occurrence of an event of default, either party may terminate the U.S. Agreement immediately without any notice. (Ex. 1 § 26.) Under the Canadian Agreements, if any party defaults in the performance of its obligations, upon written notice the defaulting party is provided with a ten-day period to cure such default. (Ex. 2 § 12; Ex. 3 § 12.) In the event that the defaulting party cannot cure the default, the non-defaulting party may terminate the Canadian Agreements immediately upon written notice to the defaulting party. ( Id.)

Under certain circumstances, Paymentech has the right to build a cash “reserve” by withholding a portion of the proceeds of Vertrue's sales drafts as security to protect Paymentech from exposure in the event it is required to make payments or incur liabilities on Vertrue's behalf, e.g., in the event Vertrue's chargebacks (defined below) exceed its net proceeds in a given period. (Ex. 1...