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Facing Your Worst Fear: Wrongful Residual Termination

By Adam Atlas

In this column I will discuss the worst-case scenario for you, an ISO or merchant level salesperson (MLS): The wrongful termination of your residuals by a processor or bank. I wish this kind of thing never happened, but it does, and it's no Christmas present.

Wrongful termination of residuals occurs when a processor or bank that has been paying residuals on certain terms terminates those residual payments without any apparent wrongdoing on your part.

There are instances when you might deserve to loose your residuals, such as intentionally moving the processor's merchants to another bank, wrongfully modifying processor merchant agreements, perpetrating fraud or falsifying merchant information.

And sometimes it's hard to tell whether or not you deserve to loose your residuals; however, I won't address these cases here. Instead, I'm concerned with occasions when the processor deliberately and inappropriately decides to cut you off.

What makes wrongful termination of residuals so difficult is that it deprives you of means (i.e. money) to fight for a resumption of the payment of residuals. Below are 10 things to consider if your processor or bank wrongfully terminates your residuals:

1. Discussion

Payment processing is a complicated business. Things go wrong; people make mistakes. Before hiring lawyers to chase after your processor on an unpaid residual, give your processor a call to make sure it really did intend to stop paying you, and that it wasn't some clerical error.

2. ISO/MLS Agreement

The first place to go looking for your residuals if they are not delivered on time is your ISO/MLS agreement. It's important to know exactly what your rights are under your agreement in the event that the processor fails in its obligation to pay residuals.

When negotiating these agreements, processors are reluctant to even address this topic because, like all of us, they don't often prepare for their own wrongdoing.

Consequently, most agreements fail to address in detail your express rights upon a wrongful termination of your residuals.

Some agreements for larger ISOs do include, after negotiation, the right to: (1) stop sending new deals, when it's an exclusive deal; and (2) move existing merchants to another processor when a processor wrongly terminates residual pay ments to the ISO.

The agreement also informs you as the legal party with whom you have contracted and the legal notice provisions.

This information will be important because if you are without residuals, you should deliver written notice of the processor default within 24 hours of its occurrence, and you should send such default notice according to the notice provision of the ISO agreement.

3. Injunction

An interlocutory injunction is when a court orders a temporary solution to a problem pending the verdict in a trial. Residual commissions are usually too important to your cash flow to discount for the period of a trial that could take months or even years.

So you, along with your legal counsel, might deem it appropriate to seek an interlocutory injunction whereby a court would order the processor, within hours or days, to continue paying residuals until it has had time to hear the full merits of the case.

Claims for injunctions are hard to win. The burden of obtaining an injunction is placed on the party that seeks it. If you're claiming an interlocutory injunction for the resumption of residual payments, you will have to prove at least:

  • The existence of the legal obligation to pay the residuals (i.e. the ISO agreement);
  • That irreparable harm would be caused to you without a granting of the injunction.

These are exactly the same kinds of arguments you would make if a wrecking ball was swinging next to your house and you wanted a court to order a stop to the demolition. Most claims for injunctions are lost. I advise you to hire a lawyer for this kind of work.

4. Ordinary Claim

Regardless of whether a claim for an injunction succeeds, if you have wrongfully lost your residuals, you should waste no time in filing a claim for a resumption of the payments, together with damages associated with the interruption in payments.

For example, the ISO that looses agents because it is no longer able to pay them because of cash flow issues caused by processor-default may be in a position to claim and recover damages for loss of agents.

Similarly, depending on the wording of the ISO agreement, the ISO might also be able to claim for lost business that would otherwise have been attributed to the ISO but for the loss of its residuals and agents. I would advise the ISO to hire a lawyer for this kind of work.

5. Small Claims

Most wrongful residual termination cases involve agents and not ISOs. These cases often involve amounts of less than $5,000 per month. Some ordinary courts will not hear these types of cases because the dollar figure is too low. In that instance, don't hesitate to file a claim in your local small claims court. Judges don't like to see hard working people, such as MLSs, loose the income they have accumulated. Don't hesitate to exercise your rights. That's what the courts are there for. Small claims courts usually assist plaintiffs in making and filing their claims. Lawyers are usually not required.

6. Make Your Bed Well

There's a saying that goes, "How you make your bed, so you will sleep." When you think about getting into an ISO relationship, do everything you can to foresee the likelihood of a wrongful termination of residual payments. Talk to other ISOs/MLSs of the processor; take a close look at the agreement; ask the processor directly if it has ever terminated residuals; and get to know the principals at the processor.

Also, post questions on The Green Sheet's MLS Forum to learn more about your new business partners; and test the relationship early, so you know where you'll stand if things don't go well. If people in our industry did all of the above, I would have a lot less work.

7. Exclusivity

I strongly recommend against exclusive sales relationships. One of your processors will most likely be your main supplier; however, don't put all your eggs in one basket. In addition, do not favor one processing supplier over another based on legal constraint.

Your reasons for working with a processor should be that it makes business sense for you to send most of your deals to that processor.

When one processor wrongfully terminates your residuals, it's helpful to not be exclusive to that processor so that you can immediately channel your deal-flow to another provider.

Multiple suppliers mean multiple sources of income that can carry you through a rough period with one of them.

8. Rainy Day Account

While our industry depends on consumers using their credit cards and spending instead of saving, learn to save for a rainy day based on the numerous examples of relationships gone badly in merchant acquiring.

Most businesses must constantly spend to grow the business and take care of staff, so many companies have cash flow issues. However, I advise you to create your own "rainy day" fund in anticipation of an interruption in residuals. The fund should be big enough to support and sustain you as you build a new relationship with a processor.

9. "Pass Through"

Some processors claim that they have to cut back on paying residuals because of increases in interchange or other bank or card Association fees.

These fees should be "passed through" to the merchant and should not unreasonably eat into your residuals. The ISO agreement should include this kind of protection for you.

10. Reputation

Apart from the various legal constraints against wrongfully terminating residuals, processors do take their reputations very seriously. Being known as a processor that doesn't take care of its ISOs/MLSs is damaging to its own bottom line.

This, sometimes more than the legal constraints, is what often motivates a processor to honor its obligations.

Be careful not to spread false information or become the defendant in a libel or slander claim, and make sure you mind the confidentiality provisions in your agreement with the processor.

However, if your residuals are wrongfully terminated you might spread the word to protect others in your situation. Once again, do this only with extreme caution because of the possibility of a libel or slander claim by the processor. The most important thing to take away from this column is to remember that people and businesses sometimes do things that are wrong and contrary to the promises they've made.

Rather than live in fear of this difficult possibility, I advise you to face this uncertainty head-on and plan accordingly. In the meantime, I'd like to wish all readers a very happy holiday season.

In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, you should seek the services of a competent professional. For further information on this article, please contact Adam Atlas, Attorney at Law by e-mail at atlas@adamatlas.com or by phone at 514-842-0886.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.
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