Page 34 - GS230401

Education

Despite perceptions, however, the most likely legal char- Chargebacks/reversals
acterization of reserve funds is the same as unsettled mer-
chant processing funds. Specifically, if an acquiring bank Perhaps the most interesting situation for a bankrupt
holding reserves goes bankrupt, merchants are likely to be acquirer is for merchants to reverse all their pending
unsecured creditors with claims for their funds. transactions. This raises complicated questions of
competing interests of the bankrupt estate and merchants.
There is, perhaps, a slightly better claim for FDIC insur- I am not aware of this ever having been attempted, but
ance on merchant reserves, as these funds are perceived I suspect many merchants will try it if they learn their
as an account—a reserve account—held by the acquirer acquirer is going under.
for the merchant. I am not aware of whether the FDIC has
ruled on this issue, however. This column considers a number of fact patterns in general
terms, and the risk assessment of any given pattern
Unpaid residuals will vary greatly from one ISO or processor scenario to
another. The analysis herein will most likely not apply
No surprises here, dear reader. ISOs with unpaid residuals to any single reader’s business and must not be taken as
on a bankruptcy would have to get in line like other un- legal advice or a prediction of outcomes on bankruptcy of
secured creditors. ISOs do, however, have some ammuni- a bank. This is not financial advice; I don’t know anything
tion in the form of their relationships with merchants. In about CDs, T-bills and the like.
processor bankruptcy scenarios, I have seen the bankrupt
processor honor the duty to pay residuals as a means of
protecting the value of the assets of the bankrupt proces- In publishing The Green Sheet, neither the author nor the publisher is
sor, namely, the merchant portfolio. engaged in rendering legal, accounting or other professional services. If
legal advice or other expert assistance is required, the services of a com-
If the bankrupt acquirer sees its assets sold to a new bank, petent professional should be sought. For further information on this
the new bank might make a business decision to pay re- article, please contact Adam Atlas, Attorney at Law by email at atlas@
siduals that the bankrupt acquirer was unable to pay so adamatlas.com or by phone at 514-842-0886.
as to secure loyalty of ISOs and downstream agents and
preserve the value of the portfolio it bought out of the
bankruptcy.

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