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The Green Sheet Online Edition

July 27, 2009 • Issue 09:07:02

Dude's got my money: What can I do?

By Theodore F. Monroe
Attorney at Law

These days, I receive two or more calls per week from ISOs or merchant level salespeople (MLSs) with the same complaint about some contractual counterparty higher up in the processing chain: "Some dude's got my money and won't give it back." I seldom received these calls before September 2008.

Thus, if my practice is any barometer, it appears ISOs and other higher-level counterparties are more frequently using tenuous (if not plainly bogus) claims to seize residual payments, portfolios and merchant reserves from downstream ISOs and agents to satisfy their need of cash.

Why do they do it?

One common justification for withholding money is that an MLS has breached the referral contract in some manner, resulting in a forfeiture of the residual stream.

Typical examples include the alleged breach of an exclusivity, nonsolicitation or monthly minimum provision contained in the contract.

Another common justification is that the agent is contractually responsible for all losses suffered by the counterparty as a result of merchant fraud.

These claims are often illegitimate; many make little sense except under the most strained interpretation of the contract or law.

Still, these cases can be hard to fight, and they often prove costly. The agent generally must hire a lawyer to deal with the situation immediately if he or she wants any hope of getting the money back (this, of course, means spending money).

In almost all cases, the counterparty rather than the MLS drafted the agreement; and almost always, the MLS did not have an attorney review the agreement before signing.

As a result, the contractual terms tend to be weighted heavily in favor of the counterparty, or may be vague or ambiguous on certain key points. Moreover, litigating these cases can take years - and cost the agent hundreds of thousands of dollars - without any guarantee of seeing a dime.

Indeed, the counterparty often has a strong incentive to use all means within its power to string out the lawsuit on the bet that the agent will not stay in business long enough to keep paying his or her attorneys or reach the finish line.

The real reason these upstream parties are holding the money may be easier to understand. Nowadays, times are tough. ISOs (big and small) are struggling to survive, and some are gravely concerned about their cash flow and making their payroll.

Accordingly, some ISOs are resorting to drastic and desperate measures, including simply seizing money (residual payments, portfolios, and merchant reserves) from their downstream agents and merchants.

Who are the victims?

Even more disturbing, the victims of these seizures do not appear to represent a random section of the MLS community.

Based on the calls I am receiving, it appears the perpetrators are selecting their victims systematically, specifically targeting agents and merchants they believe are less likely to fight back.

Thus, the primary group of victims seems to be those who lack the financial resources to survive the seizure of funds. Certain ISOs are hedging that such parties cannot afford to put up a fight and will therefore quietly fade away.

The next most targeted group appears to be MLSs and merchants who belong to ethnic or cultural minority groups - particularly those who are recent immigrants or non-native English speakers.

The perpetrators may pick disproportionately on this group because they believe such agents are less likely to understand, resort to, or benefit from the legal system (whether due to cultural or language issues). The other group consists of former rainmakers who are no longer bringing in new merchant accounts. Here, the ISOs appear to reason that, rather than send out a check each month and continue to pay an MLS who is no longer bringing in new business, they'll find an excuse (any excuse) for terminating the residual stream altogether.

What can you do to protect yourself?

The single most important action is to perform your due diligence. Deal only with counterparties who are ethical and reliable and have a reputation in the industry as such.

Ask around, and look at agency boards or sites such as www.ripoffreport.com to find out more about other people's experiences with those you are considering working with.

If they have cheated others in the past, they will probably cheat you if they get the chance. A close second is securing a good contract at the beginning of your relationship.

Look out for self-serving or ambiguous contractual terms, particularly those governing exclusivity, nonsolicitation, monthly minimums, and liability for merchant or employee misconduct. ISOs often link violation of these provisions to termination of residual streams.

Insist on plain language you understand, and make sure your contract clearly spells out the term and duration of any exclusivity and nonsolicitation provision, as well as the mechanism for terminating the relationship. You should also attempt to negotiate reasonable exceptions to such provisions.

Also, take a long, hard look at your responsibility under the contract for merchant and employee fraud. For example, try to negotiate a contract that requires the upstream ISO to prove you had knowledge of false or fraudulent information offered in connection with a merchant application before you can be held responsible.

The contract should also stipulate that you bear no responsibility for merchant fraud unless the ISO can prove you engaged in affirmative misconduct.

Finally, the contract should provide that, in the event you are responsible for any losses to the ISO, the residual stream will be reduced only by the amount of the loss, not terminated.

The present economic environment appears to be the driving force behind the increasing victimization of agents by their upstream counterparties in the payments industry.

Accordingly, whether or not you fall into one of the target categories discussed herein, protect yourself by dealing only with reputable ISOs, negotiating a good contract at the start of the relationship and having that contract reviewed by an experienced lawyer before you sign on the dotted line. end of article

The information contained in this article is for educational purposes only. Please consult an attorney before relying upon it for your specific legal needs. Theodore F. Monroe is an Attorney whose practice focuses on the electronic payment and direct marketing industries. For more information about this article or any other matter, e-mail Monroe at monroe@tfmlaw.com or call him at 310-694-8161.

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