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SOUTH CENT. BANK & TRUST CO. v. CITICORP CREDIT SE

August 22, 1994

SOUTH CENTRAL BANK AND TRUST COMPANY, Plaintiff,
v.
CITICORP CREDIT SERVICES, INC., Defendant. CITICORP CREDIT SERVICES, INC., Third Party Plaintiff, v. FCC NATIONAL BANK, Third Party Defendant



The opinion of the court was delivered by: RUBEN CASTILLO

 Plaintiff South Central Bank and Trust Company ("South Central") sues defendant Citicorp Credit Services, Inc. ("CCSI") for breach of contract and breach of fiduciary duty owed by a principal to its agent. The parties' cross-motions for summary judgment are before the court. For the reasons set forth below, South Central's motion for summary judgment is denied and CCSI's motion for summary judgment is granted.

 BACKGROUND

 The undisputed facts gleaned from the parties' Local Rule 12 Statements and accompanying exhibits are as follows. *fn1" South Central is an Illinois banking corporation. CCSI is a Delaware corporation engaged in, among other things, the business of providing credit card transaction services to banks and merchants. Under the terms of an agreement captioned "Bankcard Agreement Agent Bank" (the "Bankcard Agreement"), South Central acted as CCSI's agent in soliciting, maintaining, and servicing "Merchant Agreements." *fn2" Plaintiff's 12(M) Facts, Exh. 1, Bankcard Agreement ("In order to increase merchant acceptance of bank cards, other banks may act as agents for FCC in soliciting merchant agreements."). The Merchant Agreements permitted merchants to participate in the Visa and/or MasterCard system -- thereby enabling the merchants to accept payment by Visa and/or MasterCard bankcards ("bankcards") issued by member banks, and to deposit the sales slips generated through the use of bankcards to their accounts with the agent bank. Id.

 The present dispute between South Central and CCSI ultimately concerns which of these two parties will bear the cost of cardholder refunds ("chargebacks") associated with a certain merchant, American-European Express ("AEE"), which is now in bankruptcy. South Central, in its capacity as an agent bank, entered into a Merchant Agreement with AEE and submitted an application on AEE's behalf to CCSI which CCSI approved. Plaintiff's 12(M) Facts PP 9, 14. The application stated that AEE was a railroad and contained the Standard Industrial Classification ("SIC") for railroads (4011). *fn3" Id. P 9. South Central also included the SIC code for mail order houses (5961). Id.

 AEE operated two railroad lines. Id. On June 21, 1991, an AEE train derailed in Indiana, substantially impairing AEE's ability to perform. Id. P 29. Nevertheless, AEE continued, through October 1991, to accept payment by bankcard for services to be rendered at a later date -- but which ultimately were never performed. Id. AEE electronically processed the bankcard charges directly through CCSI. Id. Cardholders who had paid for future AEE services with bankcards but did not receive such services were entitled to refunds. Id. P 30. As the Principal Bank that processed AEE's charges, CCSI was required to make the refunds to the Principal Banks that had issued credits to these cardholders. Id. In turn, CCSI charged these refunds back to South Central by withholding sales slip proceeds -- unrelated to AEE -- from South Central amounting to $ 173,386.27, contending that South Central was liable for AEE-related chargebacks under the terms of the Bankcard Agreement. *fn4" Id. P 31.

 The Bankcard Agreement permits CCSI, in some instances, to require South Central to pay chargebacks when refunds are due from merchants whose applications South Central submitted. Id. P 7. In turn, South Central may attempt to collect the refunds from the merchant involved; if the merchant is unwilling or unable to pay, South Central bears the loss. Id.

 The Bankcard Agreement contains certain provisions for prescreening merchants by the agent banks, apparently as a means of ascertaining creditworthiness and filtering out unacceptable risks. In particular, the Bankcard Agreement provides:

 
Before entering into a merchant agreement with a merchant, [the agent bank] must comply with the following minimum requirements:
 
1) Ascertain from available records, independent reports and other available means that the prospective merchant is financially responsible and that there is no significant derogatory background information about any of the Principal(s) of the business,
 
2) Conduct an actual on-site inspection of the business. If sales slips will be generated as a result of either mail or telephone orders, a detailed description of the business must be obtained.

 Plaintiff's 12(M) Facts, Exh. 1, Bankcard Agreement P I.C.

 The allocation of the risk of credit loss, and risk-management procedures, were further described in various documents issued by CCSI to South Central in July 1990 ("the July 1990 Materials") after CCSI purchased FCC's merchant credit card processing portfolio. Because both parties rely on the July 1990 Materials to a significant degree in bringing and opposing the present motions for summary judgment, *fn5" we quote the materials in some detail.

 In a document entitled: "MERCHANT ACCEPTANCE PROCEDURES," CCSI states, in pertinent part:

 
As there have been no material changes to MasterCard and Visa Association rules relative to merchant acceptance procedures, your internal processes will remain essentially unchanged. In an effort to protect your interests and as a reminder, we offer you these Association mandated steps and our suggest ions which should be followed prior to submitting a new Merchant Application:
 
1. Conduct a personal visit to the merchant location to verify that it is a bonafide [sic] business capable of operating in the manner described.
 
. . .
 
3. Conduct a full background check on the business and its owners or principals. This may include such steps as obtaining business (i.e. D&B) and personal Credit Bureau reports (i.e. TRW), checking credit and trade references, reviewing banking relationships, etc. . . .
 Defendant's 12(N) Facts, Exh. 5 at HNDBK<13). in="" the="" "merchant="" application="" procedures="" and="" guidelines,"="" ccsi="" states,="" in="" pertinent="" part:="">
 
Given the everchanging bankcard processing environment, it is sometimes necessary to re-evaluate the credit policies and practices employed in merchant acceptance in order to avoid excessive risk.
 
The following is designed as an update to your current merchant acceptance procedures with our focus being solely to protect you from unnecessary and avoidable financial risk.
 
At Citicorp Card Acceptance Services, we take risk management seriously and have developed some very proactive programs which we believe will help to insulate you from the extraordinary losses being experienced by merchant banks throughout the industry. Association statistics reveal that a single fraud event can cause up to a seven figure loss episode; therefore, due care must be exercised when contracting with any merchant for bankcard processing.
 Id. at HNDBK<14).>

 The "APPLICATION PROCESSING" document describes the processing of an application by CCSI as including:

 
A) Review of application to insure that the merchant conducts an acceptable business." See Acceptable Business Guidelines included in this package.
 
B) Association mandated inquiry against the MasterCard/Visa Combined Terminated Merchant File (CTMF). The CTMF is a database maintained by acquiring institutions which contains information on merchants previously terminated for cause.
&nbsp;
C) An additional personal credit check of the owners and/or principal officers of the ...

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