Verotel Merch. Servs. B.V. v. Rizal Commercial Bank

Decision Date13 January 2021
Docket NumberB276120,c/w B281869
PartiesVEROTEL MERCHANT SERVICES B.V., et al., Plaintiffs and Appellants, v. RIZAL COMMERCIAL BANK, et al., Defendants and Appellants.
CourtCalifornia Court of Appeals


California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

(Los Angeles County Super. Ct. No. BC467109)

APPEAL from a judgment and post judgment orders of the Superior Court of Los Angeles County, Michael J. Raphael, Judge. Affirmed.

David Steiner & Associates, David Paul Steiner; Rome & Associates, Eugene Rome; Greines, Martin, Stein & Richland, Robert A. Olson and Gary J. Wax for Plaintiffs and Appellants.

Bahar Law Office, Sarvenaz Bahar for Defendants and Appellants.


This appeal involves multiple entities engaged in processing internet credit card purchases in three roles: a merchant, a bank, and an intermediary agent between them. Defendant Bankard, Inc. (Bankard) is a banking institution based in the Philippines. Bankard, together with its parent, defendant Rizal Commercial Banking Corporation (Rizal),1 acted as the bank in processing credit card transactions for internet merchants between 2004 and 2006.

Plaintiff Verotel Merchant Services B.V. (VMS), together with its Philippines-based subsidiary, Verotel International Industries, Inc. (VII), operated as a merchant, sending internet credit card purchases to accredited banks for processing and payment. Plaintiffs contend that VMS sent its credit card transactions to defendants for processing from 2004 to 2006, using an agent of the bank as an intermediary to handle the transactions. Thus, VMS sent credit card purchases made on its websites through the agent to the bank, the bank received payment for those purchases from the credit cardholder's own bank, and the bank paid VMS for the purchases. For its services, the bank charged VMS transaction fees and subtracted these fees from the payments sent to VMS.

For most of the relevant period, Janet Conway acted as an intermediary in VMS's transactions with the bank. In addition, several entities she owned or controlled performed various services in connection with the bank's card processing services. Plaintiffs contend they believed Conway was working as an agent of the bank. After the credit card Associations suspended defendants' online processing business in 2006 for violating their rules, plaintiffs discovered that the bank's transaction fees were actually lower than the rate Conway had represented, and Conway had pocketed the difference.

Plaintiffs sued defendants, alleging that defendants used Conway and the entities she owned to manage their online credit card processing business and were therefore liable for her actions. Plaintiffs alleged they weredamaged in the amount of almost $1 million in unpaid fees. Plaintiffs also contended defendants failed to repay other money owed, resulting in a total claim of $1.5 million in damages.

For their part, defendants contend that Conway was never defendants' agent, but rather acted as plaintiffs' agent while defrauding the bank. Defendants also claim that they never had any relationship or agreement with VMS. Instead, they assert that VMS and Conway knowingly submitted VMS's transactions under a contract Bankard had with a different merchant, Grupo Mercarse Corp. According to defendants, they paid Grupo Mercarse for those transactions, and if VMS suffered losses while acting improperly as a sub-merchant in violation of the Associations' rules, that was not the bank's responsibility.

The jury found in favor of plaintiffs on all causes of action and awarded VMS compensatory and punitive damages. Defendants filed a motion for judgment notwithstanding the verdict (JNOV) and for a new trial. The court granted the motion for JNOV in part, striking the punitive damages award, but denied the remainder. The court also awarded cost of proof sanctions against defendants under Code of Civil Procedure section 2033.4202 for several factual denials made by defendants during discovery.

Defendants appealed from the entry of amended judgment and the trial court's order awarding sanctions. Plaintiffs appealed from the court's order striking the punitive damages award. We consolidated the appeals for all purposes.

In defendants' appeal, they contend that the statute of limitations bars plaintiffs' claims and that VMS lacks standing to sue. They further argue that there was insufficient evidence of agency or causation to support the jury's verdict and that the trial court erred in making several evidentiary rulings at trial. Finally, they assert that the trial court abused its discretion in awarding cost of proof sanctions against them. In plaintiffs' appeal, they contend that the court erred in overturning the jury's award of punitive damages, as there was sufficient evidence that Conway was a managing agent for defendants.

We conclude neither party has met its burden to establish error. We therefore affirm.

I. Structure of Online Credit Card Transactions

The rules governing credit card purchases are set by credit card associations/networks Visa and MasterCard (the "Associations"); these rules set "the infrastructure under which all the transactions flow." In general, there are four parties to every credit card transaction: (1) the credit card holder (the consumer); (2) the issuing bank (the cardholder's bank); (3) the merchant; and (4) the acquiring bank (the merchant's bank). An acquiring bank must be a member of the Associations in order to process credit card payments; in return, the bank agrees to abide by the Associations' rules. When a consumer makes a purchase using a credit card, the acquiring bank acquires the credit card transaction, pays the merchant (minus fees and charges), and receives payment from the cardholder's issuing bank (which, in turn, charges the consumer).

The Associations' rules require acquiring banks to have written merchant agreements with each merchant from whom it acquires transactions, which are called tripartite merchant agreements (TMAs). The bank then issues a merchant identification number (MID) to a merchant to allow the merchant to submit transactions for processing and allow the bank to track those transactions. In exchange for its processing services, the bank charges the merchant a transaction fee—here, a set percentage of the transaction amount as well as a per-transaction charge. The bank deducts these fees from the amount it pays the merchant; thus, the merchant receives less than the face value of the transaction.

If a customer seeks a refund for a purchase (also called a "chargeback"), and the merchant does not issue a refund, the acquiring bank is responsible. Accordingly, the bank may hold a certain amount in reserve from the merchant in order to cover any refunds. Also, if a merchant engages in illegal or "brand damaging" transactions, it could result in a fine from the Associations to the acquiring bank, which the bank may pass on to the merchant.

The acquiring bank may use intermediaries as agents to handle some components of this process. These third parties are called independent service organizations (ISOs) or member service providers (MSPs)3 and must be registered in this role with the Associations. Under the Associations' rules, some duties cannot be delegated to an ISO and must be performed by the member bank. Such non-delegable duties include settlement (i.e., payment for transactions) and approval of merchants for processing. Aspects of the merchant-bank relationship that can be delegated to a registered ISO include routing transactions for processing from the merchant to the bank.

Purchases made with a credit card online or over the telephone are called "card-not-present" purchases, as the merchant does not physically view the credit card. This type of purchase carries a higher risk for fraud, because the merchant cannot confirm the cardholder's identity. As such, fewer banks are willing to process card-not-present transactions, and those that do charge higher fees.

II. The Parties

Plaintiff VMS is a Netherlands corporation that operates as an internet payment service provider, providing payment services for merchants selling content on websites. Plaintiff VII is a Philippines corporation and, according to plaintiffs, is VMS's wholly-owned subsidiary. According to plaintiffs, from 2004 to 2006 VMS acted as the merchant in a processing relationship with defendants, sending transactions from VMS's websites to the bank through the bank's ISO.

Defendant Rizal is a Philippines corporation and a member of the Associations. Defendant Bankard is a Philippines corporation and Rizal's wholly-owned subsidiary. Defendants processed card-not-present transactions from 2004 through October 2006, when its processing rights were suspended by the Associations for various violations of the Associations' rules.

III. The Parties' Claims and Pleadings
A. Overview of Claims

Although they do not expressly acknowledge any agreement, both parties' pleadings alleged misconduct by Conway and related third parties,none of whom were ultimately involved in the litigation. Both plaintiffs and defendants contend that defendants' card-not-present processing business began as a proposal by Conway and two associates, Michael Conway,4 and Simoun Ung, to use several of their companies as intermediaries between defendants and merchants. Sometime between 2003 and 2005, Conway, Michael, and Ung presented defendants with a business model in which CNP Worldwide, Inc. (CNP) would act as Bankard's official ISO for its card-not-present processing business, conducting merchant solicitation, customer service,...

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