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December 18, 1992



The opinion of the court was delivered by: GEORGE M. MAROVICH


 On June 1, 1992, South Central Bank and Trust Company ("South Central") filed a four-count complaint alleging breach of contract, breach of an agency agreement, and two claims of conversion against Citicorp Credit Services, Inc. ("CCSI"). On July 20, 1992, CCSI filed a motion to dismiss the complaint for failure to state a claim pursuant to Fed. R. Civ. P. ("Rule") 12(b)(6). For the following reasons, CCSI's motion is granted in part and denied in part.


 "A complaint should not be dismissed 'unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Gorski v. Troy, 929 F.2d 1183, 1186 (7th Cir. 1991) (quoting Conley v. Gibson, 355 U.S. 41, 45-6, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)). When dealing with a motion to dismiss, the court assumes the truth of all well-pled factual allegations and makes all possible inferences in favor of the plaintiff. See Janowsky v. United States, 913 F.2d 393, 395 (7th Cir. 1990); Rogers v. United States, 902 F.2d 1268, 1269 (7th Cir. 1990). Thus, for purposes of this motion, we accept as true the allegations contained in South Central's complaint.

 In October 1989, South Central and First Chicago Corp. National Bank ("First Chicago") entered into a "Bankcard Agent Bank Agreement" (the "Agreement"), pursuant to which South Central agreed to act as First Chicago's agent in soliciting merchants to purchase services provided by First Chicago in connection with processing "Visa" and "Mastercard" bankcard credit charges. Authority to accept or reject merchant applicants was vested solely in First Chicago. In negotiating the Agreement, First Chicago represented to South Central that it would fully investigate, among other things, the financial condition of all merchants whose applications it received and reject those applicants who were not qualified. South Central executed the Agreement based in part on this representation.

 After the Agreement was entered into, Alex Polishuk, the officer at First Chicago with primary responsibility for its relations with South Central, repeatedly assured South Central that First Chicago was investigating, among other things, the financial condition of each merchant whose application was submitted to it by South Central. Further, First Chicago reassured South Central that it would reject those not qualified. First Chicago did in fact conduct full investigations of merchant applicants and reject those not qualified. After the investigation, Polishuk would inform South Central if merchant applicants were accepted or rejected and the reasons for any rejections. South Central, with First Chicago's and Polishuk's knowledge and consent, did not conduct an independent investigation of the financial condition of merchants whose applications it submitted to First Chicago.

 On or about May 4, 1990, First Chicago assigned the Agreement and all of its rights, duties and obligations thereunder to CCSI, including the exclusive authority to accept or reject applicants. At or around the time of the assignment, Polishuk left First Chicago and became an assistant vice-president of CCSI, resuming his duty of the person with primary responsibility for relations with South Central under the Agreement. After the assignment, CCSI continued to accept the standard merchant application forms provided to South Central by First Chicago. Again, these application forms did not request financial information about the merchant, but instead, authorized only CCSI, as the principal bank, to obtain financial information about the applicant.

 Neither Polishuk nor any other CCSI officer ever told South Central that CCSI would not continue First Chicago's practice of fully investigating, among other things, an applicant's financial condition, or that it would not continue First Chicago's practice of rejecting unqualified merchants. South Central relied on CCSI to continue these practices.

 On or about March 6, 1991, South Central submitted to CCSI for approval a merchant application for American-European Express, Inc. ("AEE"), which operated a luxury passenger rail service between Chicago, New York and Washington, D.C. The application form used for the transaction was the First Chicago application form. South Central did not undertake its own investigation into the financial condition of AEE. Instead, it relied on CCSI to investigate the financial condition before accepting AEE's application.

 If CCSI had investigated AEE, South Central contends that the investigation would have revealed that at the time AEE entered into the merchant agreement with South Central, AEE had a negative net worth of $ 10 million, having deteriorated from a negative $ 3 million the year before; current assets of $ 300,000, down from $ 900,000 in 1989; current liabilities of $ 3,700,000, up from $ 2,800,000 in 1989; a net loss in 1990 in excess of $ 7 million, up from about $ 3 million in 1989; and $ 26,000 in cash. CCSI never told South Central that CCSI did not undertake a thorough investigation of, among other things, AEE's financial condition. Thus, South Central alleges it was not aware that AEE was not qualified, or that it had a precarious financial condition.

 CCSI approved AEE's application, and based on that approval, South Central entered into the requisite agent bank/merchant agreement with AEE. Pursuant to those agreements, AEE electronically reported "Visa" and "Mastercard" charges to CCSI and AEE was paid the amount of those charges by CCSI directly. Over the course of this relationship between CCSI, South Central, and AEE, AEE paid CCSI $ 12,187.34 for its services, of which CCSI retained $ 11,849.95, and paid its agent South Central $ 337.39.

 On June 21, 1991, an AEE train derailed in Indiana, substantially impairing AEE's ability to provide future rail service to its customers. Despite its impairment, AEE continued to accept reservations for future services through October 1991 and continued to accept credit card charges in advance payment for those services. AEE electronically reported these charges to CCSI and AEE received immediate payment for these charges from CCSI. AEE has since ceased operating, and cardholders who charged deposits for future services not rendered are entitled to a refund, or "chargeback," of the amounts charged. AEE advised South Central on November 29, 1991, that the total amount of chargebacks due cardholders for unperformed services is $ 152,772.75. CCSI reimbursed the cardholders.

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