In the Matter of the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended And in the Matter of Section 191 of the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended And in the Matter of a Plan of Compromise or Arrangement of Air Canada and Those Subsidiaries Listed on Schedule "A" Application Under the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended [Indexed as: Air Canada (Re)]
66 O.R. (3d) 257
[2003] O.J. No. 2976
Docket No. C40198
Court of Appeal for Ontario,
Laskin, Sharpe and Cronk JJ.A.
July 25, 2003
Debtor and Creditor -- Companies' Creditors Arrangement Act ("CCAA") -- Arrangements -- Stay order -- Customers of Air Canada paying for air flight tickets by using credit cards -- Under process for use of credit cards, "fund processor" immediately paying Air Canada -- Upon use of credit card, card "issuer" debiting customer's account and subsequently issuer paying fund processor price of the ticket -- Air Canada applying for relief under CCAA -- Stay order granted and fund processor ordered to continue to its credit card processing services to Air Canada -- Order not contrary to s. 11.3(b) of the CCAA, which provides that no stay order shall have effect of "requiring the further advance of money or credit" -- Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, s. 11.3.
Approximately 80 per cent of Air Canada's customers paid for their tickets using a credit card. The process for payment involved four participants and four distinct but related contractual arrangements. The "cardholder", that is the customer, would immediately pay the "merchant", that is Air Canada, by using the credit card, and the "credit card issuer", for example VISA or MasterCard, would extend credit by debiting the cardholder's account. Upon being notified of the transaction, a "merchant acquirer" or "fund processor", that is Global Payments Direct Inc. and Global Payments Canada Inc. ("Global"), would make an immediate payment to Air Canada and then, within two or three days, Global would receive payment from the credit card issuer. Global also would receive a fee or "discount rate" from Air Canada for providing the processing service.
Air Canada applied for relief under the Companies' Creditors Arrangement Act ("CCAA"), and Farley J., in an initial stay order under s. 11 of the CCAA, required Global to continue to provide its credit card processing services to Air Canada. Global appealed the order and submitted that the order was contrary to s. 11.3(b) of the CCAA, which provides that no stay order shall have the effect of "requiring the further advance of money or credit". Global submitted that it was entitled to relief under s. 11.3(b) because of its alleged exposure to "chargebacks" should Air Canada cease operations. Chargebacks could arise if a customer had a claim against Air Canada and received a refund or credit from the credit card holder, in which case Global would be contractually bound to pay the credit card issuer the amount of the chargeback and be left to claim the same amount from Air Canada. [page258] Should Air Canada cease operations, Global estimated that its exposure to chargebacks for VISA and MasterCard ticket purchases was $432,513,123.
Held, the appeal should be dismissed.
Global's exposure to chargeback claims was mitigated by two factors. First, in most cases, the credit card issuer was not obliged to refund the cost of the purchased flight to the customer. Second, under the terms of an agreement whereby Global assumed CIBC's rights and obligations under the VISA, CIBC agreed to indemnified Global on certain terms in respect of its chargeback exposure to Air Canada. Farley J. was correct in concluding that the initial stay order did not have the effect of requiring Global to make a further advance of money or credit. Global's risk of chargeback exposure was a contingent liability rather than an extension of credit. The receipt by Air Canada of immediate payment was not a "further advance of money or credit" within the meaning of s. 11(3)(b). The receipt did not create a debt; Air Canada's promise was for future performance, not future payment, and there was no obligation to pay interest. Moreover, Global was two steps removed from liability for chargebacks as it only became liable if Air Canada failed to perform and if the credit card issuer decided to refund the cardholder. Accordingly, the appeal should be dismissed.
APPEAL of an order dismissing a motion to vary an initial stay order.
Cases referred to Algoma Steel Inc. (Re) (2001), 2001 5433 (ON CA), 25 C.B.R. (4th) 194, 147 O.A.C. 291, [2001] O.J. No. 1943 (QL) (C.A.); Consumers Packaging Inc. (Re) (2001), 2001 6708 (ON CA), 27 C.B.R. (4th) 197, 12 C.P.C. (5th) 208, [2001] O.J. No. 3908 (QL) (Ont. C.A.); In re Best Products Co., 210 B.R. 714 (Bankr. E.D. Va. 1997); In re Health Science Products, 181 B.R. 121 at 124n.2 (Bankr. N.D. Ala. 1994); In re Klein Sleep Products, 78 F. 3d 18 (2nd Cir. 1996); In re National Hydro-Vac Indus. Services, L.L.C., 262 B.R. 781 (Bankr. E.D. Ark. 2001); In re Thomas B. Hamilton Co., 969 F.2d 1013 (11th Cir. 1992); In re UAL Corporation, 393 B.R. 183 (Bankr. N.D. Ill. 2003) Statutes referred to Bankruptcy Code, 11 USC Sec. 365 Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, ss. 11, 11.1, 11.2, 11.3
Frank J.C. Newbould, Q.C. and Michael J. MacNaughton, for Global Payments Direct, Inc., and Global Payments Canada Inc. (appellants). William G. Horton and Linc Rogers, for CIBC. Peter F.C. Howard and Ashley J. Taylor, for Air Canada (respondent). Peter H. Griffin, for Ernst & Young Inc. (Monitor). Steven G. Golick, for GE Capital Canada Inc.
The judgment of the court was delivered by
[1] SHARPE J.A.: -- This appeal involves the interpretation of s. 11.3 of the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended ("CCAA") and its application to arrangements for processing of credit card payments. Farley J.' s initial stay order in Air Canada's CCAA application required Global Payments Direct, Inc. and Global Payments Canada Inc. [page259] ("Global") to continue to provide credit card processing services to Air Canada. Global submits that the order requires it to advance money or credit to Air Canada contrary to s. 11.3(b).
Legislation
[2] Section 11.3 of the CCAA provides that no s. 11 stay order to protect a company that has filed for CCAA relief shall have the effect of
(a) prohibiting a person from requiring immediate payment for goods, services, use of leased or licensed property or other valuable consideration provided after the order is made; or
(b) requiring the further advance of money or credit.
Facts
[3] The initial stay order required Global to continue to process Air Canada's VISA and MasterCard transactions under Global's pre-filing arrangements with Air Canada.
[4] Approximately 80 per cent of Air Canada's customers pay for their tickets using a credit card. There are four participants and four distinct but related contractual arrangements involved in a credit card purchase of an Air Canada ticket. The four participants are:
(1) the cardholder or customer;
(2) the merchant (Air Canada);
(3) the credit card issuer (a financial institution that issues credit cards to its customers); and
(4) the merchant acquirer or fund processor (Global).
[5] The four contracts are:
(1) the cardholder -- merchant agreement (between the cardholder and Air Canada for the purchase of a ticket);
(2) the cardholder -- credit card issuer agreement (the "cardholder agreement");
(3) the credit card issuer -- merchant acquirer agreement; and
(4) the merchant acquirer -- merchant agreement (between Global and Air Canada). With respect to VISA processing services, the agreement was initially between Air Canada and the Canadian Imperial Bank of Commerce (CIBC) [page260] ("VISA agreement"). Global subsequently assumed CIBC's rights and obligations under that agreement. Although the MasterCard agreement expired in 1997, on the evidence before the motions judge, Global has continued to process MasterCard transactions on similar terms.
[6] Pursuant to these agreements, credit card purchases are processed as follows. The cardholder initiates the transaction by contracting with Air Canada for future air travel and agreeing to pay for that service immediately by using a credit card. The credit card issuer extends credit to the cardholder by debiting the cardholder's credit card account. Upon being notified of the transaction, Global makes an immediate payment to Air Canada and subsequently (at most two to three days later) receives payment from the credit card issuer. Global receives a fee or "discount rate" from Air Canada for providing this processing service.
[7] Global's claim for relief under s. 11.3(b) arises from its exposure to liability for "chargebacks". A chargeback may arise where the cardholder has a claim against Air Canada. Such a claim would clearly arise if Air Canada were to fail to provide the cardholder with the travel service it had promised. In that situation, the cardholder may request a refund or credit from the credit card issuer. Under the terms of typical cardholder agreements, the credit card issuer has the right to refuse the cardholder's request in which case the cardholder's only recourse would be to seek a refund from Air Canada directly. However, under the terms of the VISA agreement, if the credit card issuer agrees to the cardholder's request for a refund, it can chargeback to Global the amount it refunds to the cardholder. Global is contractually bound to pay the credit card issuer the amount of the chargeback and is left to claim the same amount back from Air Canada.
[8] Global submits that it faces a substantial risk of exposure for chargebacks should Air Canada cease operations. As of the date of Air Canada's CCAA filing, Global estimated that its exposure risk for chargebacks for VISA and MasterCard ticket purchases was $432,513,123.
[9] Global's exposure to chargeback claims is, however, mitigated by two factors. First, in most cases, the credit card issuer is not obligated to refund the cost of the purchased flight to the customer. The typical VISA cardholder agreement does not grant the cardholder any entitlement either to refuse to pay or to seek recovery from the card issuer; instead, it provides that the cardholder "must still pay the amount owing and settle the problem directly with the store or merchant". Second, under the terms of the agreement whereby Global assumed the CIBC's rights and [page261] obligations under the VISA agreement, CIBC agreed to indemnify Global on certain terms in respect of its chargeback exposure to Air Canada. It would appear, however, that Global has no such guarantee or indemnity for its MasterCard chargeback exposure.
[10] Global took the position that the initial stay order requiring it to continue to process Air Canada credit card transactions was contrary to s. 11.3. Global moved for an order declaring that it "has no obligation to continue to provide credit to Air Canada via the credit card processing services currently provided by Global to Air Canada except upon terms satisfactory to Global".
[11] The motions judge ruled that pursuant to s. 11.3(a), Global was entitled to reasonable protection with respect to its post-filing fees. However, he rejected Global's claim for relief under s. 11.3(b), ruling that ordering Global to continue its credit card processing services did not have the effect of requiring Global to provide a "further advance of money or credit" to Air Canada. The motions judge ruled that credit was extended to the cardholder by the card issuer and that no credit was extended to Air Canada. He ruled as follows with respect to Global's chargeback exposure [at para. 8]:
What of the chargeback situation? It seems to me that functionally and legally if AC is charged back for failure to provide the flight, then credit is not being extended in the sense of s. 11.3 but rather that AC becomes obligated to pay back to the card issuer (through Global) the price of the ticket for credit (mechanical accounting) to the account of the credit cardholder. Prior to any actual chargeback, there is no credit extended as to the chargeback but rather, the potential for a chargeback is an inchoate contingent liability.
[12] Global was granted leave to appeal that decision to this court and the appeal was heard on an expedited basis.
Analysis
[13] Global submits that the motions judge erred and that because Air Canada, through Global's services, receives payment for a service yet to be provided, Air Canada is receiving "the further advance of money or credit" within the meaning of s. 11.3(b). Global contends that because it may be liable to repay cardholders through the card issuer if Air Canada fails to provide the promised service, the net result is that Global is being required to advance money or credit to Air Canada contrary to s. 11.3(b).
[14] In his oral submissions before us, counsel for Global abandoned the argument that Global was advancing money or credit to Air Canada on account of the delay between Global's payments to Air Canada and the credit card issuers' payments to Global. He made it clear that Global's argument that it is extending credit to Air Canada rests solely on the contractual arrangements relating to "chargebacks". [page262]
[15] CIBC supports Global's position and submits that its agreement to indemnify Global is not relevant for the purpose of s. 11.3(b) of the CCAA. CIBC argues that the existence of the indemnity cannot change the appropriate legal characterization of the relationship between Air Canada and Global and that, if the effect of the stay order is to advance credit to Air Canada through the credit card system, the precise location of the ultimate liability for the risk of Air Canada's default is irrelevant.
[16] In my view, the motions judge correctly concluded that the initial stay order did not have "the effect of . . . requiring the further advance of money or credit" to Air Canada within the meaning of s. 11.3(b). I agree with the motions judge's characterization of Global's risk of chargeback exposure as a contingent liability rather than the extension of credit.
[17] Extension of credit to a debtor generally arises in one of two ways. The first, contemplated by s. 11.3(a), is where goods, services or the like are provided on the promise of future payment. The second, contemplated by s. 11.3(b), is where a creditor advances funds on the debtor's promise of future repayment. In both situations, the extension of credit arises from the debtor's present promise to pay money in the future. A debt is created in favour of the creditor. There is almost invariably an obligation on the part of the debtor to pay interest to reflect the cost of borrowing, either immediately or after a specified period.
[18] While I would not wish to exclude the possibility that credit might be extended in other ways for the purpose of s. 11.3(b), I cannot accept Global's submission that by receiving immediate payment for a service to be provided in the future, Air Canada is receiving "the further advance of money or credit" within the meaning of s. 11(3)(b). Air Canada does obtain money and the benefit of its immediate use, but no debt is created. Air Canada's promise is for future performance, not future payment, and there is no obligation to pay interest. Air Canada is contractually bound to supply the promised service and may be liable to return the purchase price or pay damages if it fails to do so. While Air Canada does receive money, the phrase "further advance of money or credit" (emphasis added) in s. 11.3(b) does not embrace payments of any kind. The word "advance" is typically used in connection with payments made by a lender to a borrower. Moreover, Global is two steps removed from liability for chargebacks as it only becomes liable if Air Canada fails to perform and if the credit card issuer decides to refund the cardholder. As the motions judge explained, Global's exposure is more aptly characterized as an "inchoate contingent liability" rather than the advance of money or credit. [page263]
[19] I also agree with the motions judge that Global's own characterization of its role as merchant acquirer is telling. In its public filings with the United States Securities and Exchange Commission (Global Payments Inc. Form 10-Q for the quarterly period ending November 30, 2002), Global presents its chargeback exposure as a "contingent liability" rather than as an advance of money or credit:
The Company processes credit card transactions for direct merchants. The Company's merchant customers have the liability for any charges properly reversed by the cardholder. In the event, however, that the Company is not able to collect such amount from the merchants, due to merchant fraud, insolvency, bankruptcy or another reason, the Company may be liable for any such reversed charges. The Company requires cash deposits, guarantees, letters of credit or other types of collateral by certain merchants to minimize any such contingent liability. The Company also utilizes a number of systems and procedures to manage merchant risk.
(Emphasis added)
Global did not bargain for any deposit or other form of security from Air Canada to cover its chargeback exposure, and when Global asked for such protection when Air Canada started to falter after the September 11, 2001 terrorist attacks, Air Canada refused, and Global continued to provide Air Canada with its processing services. Moreover, in a press release issued by Global after the initial stay order, Global informed investors: "a material loss from the relationship [with Air Canada] is unlikely . . .".
[20] Global submits that the credit card system has similarities with other multiparty or related bilateral agreements and arrangements such as letters of credit. I agree, but in my view, this argument undermines rather than advances Global's case. In 1997, Parliament chose to deal with some of these relationships and to exempt certain financial service providers under s. 11. Section 11.2 specifically provides that no s. 11 order shall stay the obligation arising under a letter of credit. Similarly, s. 11.1 exempts certain specified "eligible financial contracts" from stay orders. Although credit card processing arrangements were widespread and well- known in 1997, Parliament did not exempt them.
[21] The motions judge cited a number of American cases dealing with credit card processing arrangements. While these cases are not directly applicable because they deal with the intricacies of the United States Bankruptcy Code (the "Code"), 11 USC Sec. 365, they do, in the result they reach, support the motions judge's conclusion. Section 365(c)(2) of the Code, loosely analogous to s. 11.3(b) of the CCAA, denies the debtor the right to assume an executory contract where "such contract is a contract to make a loan, or extend other debt financing or financial accommodations, [page264] to or for the benefit of the debtor". In several reported decisions, credit card processing agreements have been found to be assumable as they are not "financial accommodations" within the meaning of s. 365: In re Thomas B. Hamilton Co., 969 F.2d 1013 (11th Cir. 1992), at pp. 1018-20 ("Hamilton"); In re National Hydro-Vac Indus. Services, L.L.C., 262 B.R. 781 (Bankr. E.D. Ark. 2001), at p. 784; In re Best Products Co., 210 B.R. 714 (Bankr. E.D. Va. 1997), at pp. 717-18; In re Health Science Products, 181 B.R. 121 (Bankr. N.D. Ala. 1994), at p. 124n.2. Global points out that under the Code, where a contract is assumed post- filing and then breached, the creditor may gain some priority over other unsecured creditors (see s. 365(g) and In re Klein Sleep Products, 78 F.3d 18 (2nd Cir. 1996); however, that arises from the specific provisions of the Code applicable to all assumed executory contracts, not from the legal nature of credit card processing arrangements.
[22] The leading case, Hamilton, at p. 1020, held that the purpose of the credit card processing agreement at issue was to establish a relationship that would permit the merchant to accept credit cards instead of cash in the course of its business; the purpose was not to provide financing. Examining the relationship between the merchant, the merchant bank, the credit card company, the card-issuing bank, and the cardholder, the Hamilton court noted that it was the card-issuing bank, not the merchant bank, that carried the primary contractual obligation to extend credit: Id. at p. 1021. As noted by the motions judge, Hamilton was applied by Wedoff J., in the United Airlines bankruptcy proceedings: In re UAL Corporation, 393 B.R. 183 (Bankr. N.D. Ill. 2003), at p. 188:
The Eleventh Circuit's 1992 decision in Hamilton is the leading case, and no published opinions disagree with its analysis of the question: (1) the purpose of a credit card processing agreement is "to establish a relationship that will permit [the debtor] to accept the use by customers of credit cards instead of cash in the course of its business"; (2) "the specific terms of the Agreement do not evidence any intent on the part of [the processing bank] to extend credit to [the debtor]"; (3) the fact that the debtor is liable to the processing bank for chargebacks "can only be viewed as incidental to the overall relationship"; and (4) "[t]he Agreement is not, therefore, a contract to extend financial accommodations within the meaning of 365(c)(2)." [quoting Hamilton, supra at 1020]
[23] In holding that Global is not advancing money or credit to Air Canada within the meaning of s. 11.3(b), the motions judge appropriately weighed in the balance the general policy of promoting reorganization identified in Hamilton, at p. 1020:
The Agreement at issue here is typical of credit card merchant agreements between all kinds of merchants and merchant banks. If these agreements may not be assumed by the trustee following a bankruptcy filing, rehabilitation [page265] will be virtually impossible for any merchant who relies heavily on credit card sales.
[24] In both written and oral submissions before this court, counsel for Air Canada argued that even if we concluded that Global was advancing money or credit to Air Canada, we should dismiss the appeal as there is no evidence that Global's chargeback exposure has increased post-filing. Air Canada submits that even if Global is advancing money or credit, it is not advancing "further . . . credit" as contemplated by s. 11.3(b). As my conclusion with respect to the reach of s. 11.3(b) in relation to Global provides a sufficient basis to dispose of this appeal, it is unnecessary for me to express any opinion with respect to that alternative submission.
[25] I would add, however, that quite apart from s. 11.3(b), the nature and extent of the risk faced by a credit card processor could be relevant to the appropriate terms for a s. 11 order. In some cases, it might well be appropriate to impose terms to protect a party such as Global from unreasonable risk: cf. Hamilton at p. 1021. The motions judge's reasons demonstrate that he carefully considered the nature and extent of Global's chargeback exposure. As the order against Global is not barred by s. 11.3(b), the relief sought by Global falls squarely within the discretion of the CCAA supervising judge that is to be afforded substantial deference on appeal: Algoma Steel Inc. (Re) (2001), 2001 5433 (ON CA), 25 C.B.R. (4th) 194, 147 O.A.C. 291 (C.A.)); Consumers Packaging Inc. (Re) (2001), 2001 6708 (ON CA), 27 C.B.R. (4th) 197, 12 C.P.C. (5th) 208 (Ont. C.A.).
[26] Accordingly, I would dismiss the appeal.
[27] If the parties cannot agree as to the costs of the appeal, the court will entertain brief written submissions dealing with all aspects of the award of costs. Counsel for any party claiming costs shall deliver submissions and a bill of costs no later than ten days from the date of this judgment. Responding submissions may be delivered within seven days thereafter.
Appeal dismissed.