Worldpay US, Inc. - Validity of Reserve Fund Defended After Data Breach

Challenge

Following a data breach at several merchant-restaurant locations, AGG client Worldpay US, a credit card processor that provided services to the merchant, received notice of the potential for liability assessments from two major credit card brands, potentially exceeding $1 million. Given the specter of those assessments and the merchant’s recent bankruptcy filing, the client established a contractual reserve fund to capture a portion of the merchant’s revenues in order to protect itself against the looming liability. The merchant, however, sought an emergency restraining order prohibiting the reserve under the theories that: (i) creation of the reserve violated the automatic bankruptcy stay; and (ii) the liability assessments, including those under Visa’s ADCR program, represented an unlawful “penalty” that the processor was legally prohibited from passing along to its merchant-customer.

Approach

AGG defeated the merchant’s attempt to secure a restraining order and mounted a vigorous defense to the merchant’s underlying legal theories. Working cooperatively with Visa, moreover, it amassed evidence establishing the reasonableness of the ADCR assessment methodology, undercutting the merchant’s assertion that the assessment represented an unlawful “penalty.”

Result

Following discovery and a summary judgment hearing, the Court rejected all of the merchant’s arguments, permitting WorldPay US to establish the sought-after reserve and, thereafter, allowing it to obtain indemnification from the reserve for the ultimate ADCR liability assessment. In a precedent-setting win, moreover, it rejected the assertion that the ADCR assessment represented an unlawful “penalty” as a matter of law. See In re Golden Restaurants, Inc., Adv. No. 11-04024-rfn (Bankr. N.D. Tex. June 13, 2012).