COURT FILE NO.: CV-24-00715739-0000

Date: 2025-01-09
Superior Court of Justice – Ontario

Re: Peoples Trust Company, Plaintiff
And: PSP Services Inc., Defendant

Before: Justice Chalmers

Counsel:
I. Matthews, L. Thistle, and B. Brooksbank, for the Plaintiff
G. Gryguc, for the Defendant

Heard: 2024-12-11, in person

Endorsement

Overview and Factual Background

[1] The Plaintiff, Peoples Trust Company (PTC), brings this motion for a finding that the Defendant, PSP Services Inc. (PSP), is in contempt of court. The Plaintiff also seeks an order appointing an investigative receiver to complete the audit of PSP.

[2] PTC is a Canadian trust company that offers payment card services. It serves as an “acquirer” with merchants seeking processing and settlement through VISA and Mastercard payment networks. PSP is an independent sales organization (ISO). ISOs operate under a contract with a sponsoring acquirer. Here, PTC and PSP entered into an Acquiring Services and Sponsorship Agreement on August 28, 2019 (the Agreement). The term of the Acquiring Agreement is seven years.

[3] The Agreement provides that PSP is required to permit PTC to perform an on-site inspection of PSP at any time during the term of the contract to, inter alia, verify PSP’s compliance with the terms of the Agreement. PSP is required to “reasonably cooperate” with PTC and other persons authorized by PTC to conduct an audit, including giving them access to officers and the independent auditors of PSP.

[4] PTC states that it became concerned with the conduct of PSP because it was experiencing a higher-than-normal level of chargebacks. PTC sent a letter to PSP requiring PSP to increase the PSP reserve fund. The Agreement provides that PTC may require PTC to increase the amount of the reserve account at its sole discretion and at any time. PSP was required to make the payment into the reserve fund within 2 business days.

[5] PSP did not agree to increase the reserve account. On February 5, 2024, PSP gave notice that it was terminating the Agreement. It invoked the deconversion process, which involves the transfer of PSP merchants from PTC to a new acquirer. The deconversion process is to be completed within 6 months of the notice of termination of the Agreement. PSP is required to pay to PTC all actual and reasonable costs of the deconversion process.

[6] During the week of February 19, 2024, PSP informed PTC that it had experienced a technical incident which led to a drop in the typical amount of funds flowing into the settlement account.

[7] With the Agreement terminated and given its concerns about the technical incident, PTC invoked its right to conduct an audit. PSP took the position that PTC did not have any audit rights because the Agreement was terminated, and did not permit the audit.

[8] PTC brought an urgent motion seeking an interlocutory mandatory injunction requiring PSP to allow it to conduct the audit. PSP brought a cross-motion for an injunction requiring PTC to account for, and release funds PSP says PTC improperly moved to the reserve account.

[9] The matter came before Justice Myers. On May 6, 2024, he dismissed PSP’s cross-motion and granted PTC’s motion for a mandatory injunction. Myers J. found there was a strong prima facie case that PTC’s audit right applies after termination of the Agreement and during deconversion. He noted that the audit is a “very important mechanism” to give PTC some control of its exposure during the deconversion process. PSP was ordered to “reasonably cooperate with PTC” to complete the audit.

[10] On May 7, 2024, counsel for PTC delivered notice to PSP that it would commence the audit on May 13, 2024. PTC attended PSP’s premises on that date but was not permitted to audit. PTC delivered notices to commence the audit on May 17 and May 23, 2024. On both occasions, PSP refused to permit the audit.

[11] PTC brought this motion for a declaration that PSP is in contempt of Justice Myers’ order. I convened a case conference for May 17, 2024. PSP argued that it was considering an appeal of Justice Myers’s order and it was for that reason it refused to permit the audit. I noted that no motion for leave to appeal, or motion for a stay had been brought by PSP. I scheduled the liability and penalty phases of the contempt motion for May 24, 2024.

[12] The day before the contempt motion was to be heard, PSP agreed to permit the audit. On the return of the motion on May 24, 2024, PSP sought an adjournment of the contempt motion. I adjourned the contempt motion. I stated that the extent to which PSP complies with the audit will be a factor with respect to the liability and penalty phases of the contempt hearing.

[13] PTC retained Ernst & Young (EY) to perform the audit. In its first status report dated June 5, 2024, EY stated that there had been numerous delays in the audit. It reported that the principal of PSP, Mr. Gurizzan, refused to allow EY to speak with key PSP personnel and insisted that all documentation had to go through him before it would be provided to EY.

[14] EY stated that the delays were “prohibiting the completion of our analysis”. EY noted that while the PSP audit is progressing, the audit team has “encountered exceptions to a standard third-party analysis process that would not be typically expected”. EY observed delays in the site visits, delays in the provision of payment services interactive gateway (PSiGate) data extracts and delays in complying with other document requests.

[15] PTC requested another case conference to address concerns regarding PSP’s delay in providing documentation. The parties returned before me on June 27, 2024. I stated that it was important that PSP respond to requests for documentation promptly. I ordered PSP to make “best efforts” to respond to requests for documentation within two business days.

[16] PTC states that PSP continued to delay in providing information to EY. The EY status report dated July 11, 2024, provides that there continued to be delays in site visits and the provision of documents. EY had not yet received documents related to the technical incident in February 2024, documents related to the reconciliation of merchant settlement transactions and documents related to merchant onboarding testing.

[17] A further case conference was convened for July 15, 2024. In my endorsement, I noted that EY had arranged a meeting with PSP’s chief technical officer (CTO) for July 3, 2024. On the day of the meeting, EY was advised that the CTO was not available. PSP states that the CTO was not available because it was month end. PTC also states that there was a significant amount of information that remained outstanding, and that PSP failed to respond to requests for confirmation that PSP advised its merchants of the deconversion on August 4, 2024.

[18] In my endorsement dated July 15, 2024, I stated that it was important that the audit not be delayed. I ordered PSP to respond to all outstanding requests by July 17, 2024, or provide a sworn declaration by that date outlining the efforts that had been made by PSP to comply with EY’s requests.

[19] PSP provided the statutory declaration on July 17, 2024. The declaration was sworn by an articling student. The student was cross-examined. He testified that the information contained in the statutory declaration was conveyed orally and was reproduced without any further investigation by him.

[20] PSP took the position that some of the documents requested by EY were outside the scope of the audit. On July 31, 2024, counsel for PSP delivered a letter to counsel for PTC setting out PSP’s position that the document requests were not reasonable on the following grounds:

a. the audit order did not require communications with merchants or merchant specific contact details;
b. PTC was in possession of the merchant contract details;
c. communications between PSP and its merchants are privileged communications;
d. pursuant to s. 2.7(1) of the Acquiring Agreement, PSP is not required to confirm when PSP’s websites would be updated; and
e. PSP is not required to provide written confirmation of correspondence between PSP and Global Payments.

[21] EY provided a status report dated August 9, 2024. EY noted that throughout the process “we have made requests, with multiple follow-ups to PSP that have not been answered. This has led to delays and information that has not yet been received.”

[22] With respect to its analysis of the technical incident, EY noted that there were $8,996,000 in rejected transactions around February 22 and 23, 2024. Those transactions were reprocessed by PSP up to three months following the incident. PTC requested a copy of the incident report. PSP advised that it would not be providing the incident report. EY was concerned that there may be an increase in chargeback fees because of the technical incident. EY requested further information with respect to the chargebacks that may be related to the technical incident. PSP refused to provide this information.

[23] EY performed a merchant settlement reconciliation to compare expected transaction activity based on PSP system extracts to the actual bank activity. EY found significant variances. There was a negative variance in the Canadian dollar settlement bank accounts balance by approximately negative $23,428,000 to negative $3,796,000. EY also found a negative variance in the US dollar settlement account by approximately negative $2,010,000 to negative $10,000. EY also found variances between the PSP instruction reports and the EFT activity on the settlement bank accounts. The variances ranged from approximately negative $33,226,000 to positive $11,851. EY requested further information with respect to the variances from PSP, but it was not provided.

[24] The EY report dated August 9, 2024, also dealt with the audit regarding merchant onboarding process. EY noted that PSP did not comply with the merchant onboarding policies. The sample testing revealed that incorrect information was included in the onboarding packages, documentation was not provided for certain aspects of the onboarding process and the system set-up was different from the onboarding package details. EY requested further details from PSP with respect to this information, but it was not provided.

[25] A further case conference was convened for August 13, 2024. PTC argued that there continued to be delays in documentation being received from PSP. EY had not been able to complete the audit process. There continued to be unexplained variances in the millions of dollars.

[26] PTC also argued that there was an issue with respect to deconversion. Deconversion was to be completed by August 5, 2024. PTC stated that PSP moved approximately 300 merchants to a new ISO, Payfacto. Payfacto is backstopped by PTC. PTC argues that PSP should not have moved the merchants to Payfacto without first notifying PTC. PTC also argues that PSP failed to provide its consent to allow PTC to contact Global Payments to confirm that the PTC BINs would not be used after the deconversion date of August 4, 2024.

[27] PSP argues that it had complied with its obligations under the Agreement and that PTC is not entitled to additional information. PSP denies that there is a gap in the reconciliation. PSP also states that the 300 merchants were transferred to Payfacto in accordance with the agreement.

[28] In my endorsement dated August 13, 2024, I expressed my concern that PSP may not be using its best efforts to comply with the requests for documentation or to reasonably co-operate with the deconversion process. I scheduled the liability phase of the contempt motion for December 11, 2024. I also ordered PSP to provide its position with respect to the deconversion fee and whether it disputed any of the other fees and expenses claimed by PTC, by August 20, 2024. PSP did not provide its position with respect to the fees and expenses by that date.

[29] Between August 10 and October 4, 2024, EY communicated its document request list to PSP. PTC states that PSP has not provided the documents or commentary from PSP regarding the items requested. PTC also argues that PSP failed to produce certain information including documentation past August 4, 2024, and the financial statements for the year ended December 31, 2023. Pursuant to s. 2.7(p) of the Agreement, PSP was to deliver the financial statements no later than 90 days following the year end.

[30] PTC wrote to TSYS, the company used by PSP to facilitate the processing of transactions on PTC-owned BINs, to ask that TSYS block the PTC BINs for new credit card authorizations and sales transactions after the deconversion date of August 5, 2024. PSP did not provide its written consent and took the position that its consent was not necessary. PSP stated that the BINs belong to PTC, and PSP will not be using them after August 4, 2024.

[31] PTC argues that although the BINs were not used after August 4, 2024, there was the issue of refunds or chargebacks for transactions that had used the PTC BINs before the deconversion date. PTC states that it is important that any refund or chargeback use the same BIN as was used at the time of the original transaction. PTC requested a meeting with PSP to discuss the issue. PSP refused to meet with PTC and took the position that a meeting was not necessary.

[32] PSP states that it complied with its obligations in the deconversion process. All merchants were either put on Payfacto or transferred to PSP’s new sponsor bank, Equitable Bank, by August 4, 2024. PSP refused to provide any documentation following August 4, 2024. PSP states that once deconversion was complete, there were no new transactions involving PTC.

[33] PTC argues that it requires information after August 4, 2024, because some transactions may have been made before August 4, 2024, but not processed until after that date. There is also the issue of holdbacks and chargebacks on transactions made before August 4, 2024. EY states that this information is necessary for the purposes of the audit, and it extended its request for documents to August 31, 2024.

[34] The most recent report from EY is dated October 7, 2024. The report sets out the more recent difficulties with respect to PSP’s compliance with document requests. The following documents and information requests were outstanding as of the date of the report:

• an explanation for the delay between the technical incident in February 2024 and the processed transactions approximately two months later;
• refreshed PSiGate settlement extracts;
• listing of all chargeback transactions from October 18, 2021 to August 31, 2024;
• listing by merchant of settlement funds owed for transactions processed from July 1, 2024 to August 31, 2024;
• explanations regarding transactions assigned a “fileno” of value “0”;
• underlying data set to independently and efficiently reconstruct and reconcile accounts;
• PSiGate merchant samples;
• merchant samples involving banking payments commerce;
• written confirmation from PSP that merchants transferred to a new sponsorship bank have been given new merchant agreements;
• written confirmation from PSP that for all merchants where reserves are being held, a communication was sent advising them that the merchant reserves are being held;
• written confirmation that PSP has not sent communications to merchants regarding the termination of their sponsorship agreement with PTC and the transition of merchants to the new sponsor, Equitable Bank;
• detailed funding slip information associated with the merchant Flair Airlines;
• funding information associated with the merchant Flair Airlines; and
• 2023 MNP PSiGate Financial Statements.

[35] Steve Whitla, a partner in the Forensic & Integrity Services practice at EY, swore an affidavit on October 7, 2024, in which he deposes that the document requests were suitable and that all items listed in the EY document request list are required for the audit. PSP argues that some of the requests are beyond what is required in the Agreement and are not necessary for the audit. However, PSP did not cross-examine Mr. Whitla on his affidavit. PSP did not file an affidavit from a forensic accountant that provided a different opinion.

[36] EY notes that some information and documentation for the 20 outstanding requests had been received but have not yet been marked as complete because it is currently under review by EY. In argument, counsel for PSP advised the court that it continues to provide documentation to EY, and states that there are currently four requests for documents that remain outstanding.

The Issues

[37] There are two issues to be decided on this motion:

a. Has PTC proven beyond a reasonable doubt that PSP is in contempt of court?
b. Should an Investigative Receiver (IR) be appointed to complete the audit?

Analysis

Issue #1 – Has PTC proven beyond a reasonable doubt that PSP is in contempt of court?

[38] PTC argues that PSP is in breach of the audit order of Justice Myers dated May 7, 2024, and the various orders I made with respect to the production of documents. PTC states that because of PSP’s breach, the audit continues to be incomplete. PTC seeks two principal sanctions: the appointment of EY as an independent auditor to complete the audit and an order that PSP indemnify PTC for the audit costs.

[39] PSP argues that it has complied with the orders and extensively co-operated in the audit. PSP states that it has tried to keep up with EY’s expanded requests for information and documentation, and now only four matters remain outstanding. PSP states that it has not intentionally breached any order and that there should be no sanctions ordered against it. With respect to PTC’s request that PSP pay the costs of the audit, PSP states that it is not required to pay for the audit unless PSP is in breach of the agreement. Despite the extensive work performed by EY to date, there is no evidence of a breach of the agreement by PSP.

Legal Test

[40] There is no dispute between the parties as to the test for civil contempt.

[41] A motion for contempt is a remedy of last resort. To establish civil contempt, the moving party must prove the following three elements beyond a reasonable doubt:

a. The order that was breached must state clearly and unequivocally what should and should not be done;
b. The party alleged to have breached the order must have had actual knowledge of it; and
c. The party allegedly in breach must have intentionally done the act that the order prohibits or intentionally failed to do the act that the order compels: Carey v. Laiken, 2015 SCC 17, paras. 32-37.

[42] Contempt hearings are bifurcated into a liability phase and, if liability is established, a penalty phase. One of the reasons for the bifurcated hearing is to allow the court to determine whether the contempt proceeding has the desired effect of enforcing compliance with the order: Landmover Trucks Inc. v. Bhullar, 2017 ONSC 195, para. 19.

[43] Rule 60.11(5) provides that the court may make an order as is just. Where there is a finding of contempt the judge may make an order of imprisonment, a fine, to do or refrain from doing an act and to pay such costs as are just. If the defendant is a corporation, an order may be made under R. 60.11(5) as against any officer or director of the corporation.

Consideration of the Elements of Civil Contempt

i) Are the Orders clear and unequivocal?

[44] Justice Myers’ audit order provides that PSP is to reasonably co-operate with the audit conducted by PTC. The order is very specific and provides as follows:

• the audit is to take place between 9 am and 5 pm, on a business day and shall continue until the third-party auditor acting reasonably is satisfied that all information necessary to complete the audit is received, and understood by PTC;
• the audit shall occur at the PSP premises;
• PSP shall provide PTC with access to any PSP premises during business hours for the purpose of the audit;
• PSP shall provide PTC with access to its independent auditors, and such other third parties, that are required by PTC in the course of the audit and PSP will use its best efforts to cause its independent auditors to be available;
• PTC may attend the premises of PSP with a person authorized by PTC to assist in the audit;
• PSP shall reasonably co-operate with PTC and shall provide PTC with access to its data processing environment records, financial statements, bookkeeping, inventory and other documents, subject to solicitor-client and litigation privilege;
• the documents to be provided by PSP shall include sample merchant agreements, all bank account records used by PSP to hold funds flowing from the merchant agreements, all communications from any merchant relating to a breach of the merchant agreement, any internal communications of PSP relating to the funding of the reserve accounts, any records relating to any technical issues experienced by PSP in February 2024, including any incident reports, any correspondence with respect to the payment of network fees, and any documents related to PSP’s internal analysis of compliance with the Acquiring Agreement.

[45] The orders I made on July 15 and August 13, 2024, also set out the timelines and directions that PSP is required to follow. I ordered PSP to make “best efforts” to produce the documents requested by EY necessary to complete the audit.

[46] I am satisfied that the orders are clear and unequivocal.

ii) Did PSP have actual knowledge of the orders?

[47] Mr. Gurizzan conceded that the audit order required PSP to reasonably co-operate in the audit. At the time of the audit order, PSP was represented by Danny Gurizzan Jr. He is a member of the family that owns PSP. For the orders made on June 27, July 15 and August 13, 2024, counsel for PSP was in attendance on the case conferences. Mr. Gurizzan confirmed his general awareness of the orders on his cross-examination.

[48] I am satisfied that PSP was aware of the orders.

iii) Did PSP intentionally breach the orders?

Position of the Plaintiff

[49] PTC argues that PSP intentionally breached the orders to co-operate in the audit. It failed to comply with both the letter and the spirit of the order: Business Development Bank of Canada v. Cavalon Inc., 2016 ONSC 4084, para. 38.

[50] After the audit order was granted by Justice Myers, PTC refused to voluntarily submit to the audit. Mr. Gurizzan conceded on cross-examination that PSP did not permit PTC to conduct the audit after the order was made. PSP stated that it did not permit the audit because it was considering its appeal rights. However, PSP did not commence an appeal or bring a motion to stay the audit order. There was no basis to refuse to permit the audit.

[51] PTC also argues that once the audit was commenced, PSP did not reasonably co-operate. Instead, it acted to delay and frustrate the audit by failing to provide the documentation requested by EY and in failing to make their key personnel available. The most recent status report from EY lists a significant amount of information and documentation that remains outstanding. As a result, EY has been unable to complete the audit after almost 10 months.

[52] PTC also argues that PSP failed to comply with the deconversion process. There continues to be an issue with respect to chargebacks and holdbacks for transactions that were made on PTC BINs before the deconversion date. PTC also argues that PSP failed to fulfill its deconversion financial obligations. Although the parties have agreed on the deconversion fee, PSP has not paid the fee.

Position of the Defendant

[53] PSP argues that PTC has not satisfied the test to prove contempt beyond a reasonable doubt. Counsel for PSP states that it extensively co-operated with the audit and in fact took steps above and beyond what was required.

[54] PSP concedes that there was a delay in the commencement of the audit. Before the current counsel was retained, PSP believed it was not required to permit the audit to begin while it was considering its appeal rights. PSP states that once it retained new counsel it permitted the audit.

[55] It is PSP’s position that the requests for documentation and information went beyond what was required under the Acquiring Agreement. PSP states that it substantially complied with all requests. At the time of the hearing, only four requests were outstanding. EY confirms that PSP had complied with many of the requests; however, the information is not marked as completed because it is under review by EY.

[56] PSP also states that it co-operated with PTC with respect to the deconversion process. PSP states that the deconversion is complete and all merchants were transferred by the deconversion date. There have been no additional transactions after the deconversion date. The PTC BINs are turned off and are not being used.

[57] With respect to PSP’s financial obligations under the deconversion process, PSP states that PTC refused to take payment from the PSP reserve account. With respect to the audit fees, PTC states that under the Acquiring Agreement, PSP is responsible for the audit costs only if it breached the agreement. To date, there is no evidence of a breach.

Discussion

[58] It is my view that PTC has established beyond a reasonable doubt that PSP intentionally breached the audit order of Justice Myers, and my orders compelling PSP to co-operate with the audit and deconversion.

[59] As noted by Justice Myers in his endorsement dated May 7, 2024, the “whole point of an audit right is to provide real time access to a business to prevent harm from arising or to catch problems earlier that would otherwise be the case”. I find that PSP intentionally frustrated the audit process and failed to permit “real time access” to PTC and its auditors.

[60] PSP failed to immediately permit the audit to commence after the audit order was made. This is conceded by PSP. However, PSP states that it believed that it was not required to submit to an audit while it considered its appeal rights. This is not a valid excuse. PSP was represented by counsel at the time who knew or ought to have known that this was not a basis to refuse the audit. The failure to permit immediate access for the audit is a clear breach of the audit order.

[61] I also find that PSP failed to comply with the orders that required it to “reasonably cooperate” with the audit and to make “best efforts” to produce information and documentation necessary for the audit. PSP took the position that many requests were beyond the scope of the audit. However, the only evidence before the court as to what was required for the audit is from Mr. Whitla, of EY. He deposes that for EY to complete the audit, all items listed in the EY document request list are required. PSP did not cross-examine Mr. Whitla or file an affidavit from a forensic accountant that provides the opinion that EY’s requests were not necessary. I am satisfied that the information requested by EY was reasonable and necessary for the audit.

[62] I ordered PSP to use “best efforts” to produce documentation requested by EY within two business days. Some of the documentation requested by EY remains outstanding. This is a breach of my order. As a result of the incomplete information and documentation, EY has been unable to complete the audit. EY has been unable to reconcile variances in the Canadian and U.S. dollar settlement bank accounts in the millions of dollars.

[63] I am also satisfied that PSP is in breach of my orders to co-operate with the deconversion process. PSP refused to meet with PTC with respect to the PTC BINs. It refused to provide its consent to TSYS to block PTC BINs from being used after August 5, 2024. It failed to ensure that returns and chargebacks are applied to the same PTC BINs as the original transaction.

[64] I find PSP liable for civil contempt of court. I am satisfied that a finding of contempt is just. Instead of attempting to comply with the orders, PSP frustrated and delayed the audit process. As a result, EY has been unable to complete the audit.

[65] In Carey v. Laiken, 2015 SCC 17, para. 30, the Supreme Court stated that, “the rule of law is directly dependent on the ability of the courts to enforce their process and maintain their dignity and respect.” I am satisfied that a finding of contempt as against PSP is necessary to maintain dignity and respect for the court.

Penalty Stage

[66] I convene a case conference with the parties to schedule the penalty phase of the contempt motion.

[67] PSP argues that it continues to comply with EY requests for information and documentation, and that currently there are only four outstanding requests. PTC confirms that EY has received additional material from PSP but that it is under review. The extent to which PSP complies with the four outstanding requests and any other reasonable requests from EY that are necessary to complete the audit, will be a factor in determining the appropriate penalty.

Issue #2 – Should an Investigative Receiver be appointed to complete the audit?

[68] PTC argues that the court has remedial authority to appoint an investigative receiver (IR) to bring the audit to a conclusion. PTC states that the appointment of the IR would be a just penalty for contempt of court, and as a stand-alone remedy under the court’s just and convenient authority under section 101 of the Courts of Justice Act, RSO 1990, c C.43.

[69] PSP argues that there is no basis for the appointment of an IR. PSP states that PTC failed to provide any serious grounds for the need for an IR. PSP continues to make efforts to comply with the EY requests for documentation and at present, there are only four outstanding requests. Once the requests are satisfied, EY will be able to complete the audit. PSP also states that the deconversion process is complete and there are more than sufficient funds of PSP held by PTC to satisfy any monies that may be owed.

[70] I am not prepared to appoint an IR at this time. The IR would be required only if EY is unable to complete its audit. PSP has recently provided additional information and documentation to EY. Presumably, once the review of the recently received information and documentation is completed, and the four outstanding requests are satisfied, EY will be able to complete the audit.

[71] In not making the order appointing the IR at this time, I am not making a determination as to whether there is a legal entitlement to an IR. If PSP fails to comply with EY’s reasonable requests for information and documentation, PTC may renew its request for the appointment of an IR at the penalty phase of the contempt hearing.

Disposition

[72] For the reasons set out above, I make the following order:

a. I find PSP liable for civil contempt;
b. I convene a case conference to schedule the penalty phase hearing;
c. PSP is ordered to comply with the existing orders to allow EY to complete the audit. The extent to which PSP complies with the orders will be a factor on the penalty phase hearing;
d. I do not appoint an IR at this time. If PSP fails to comply with the orders such that EY is unable to complete the audit, PTC may renew its request for the appointment of an IR at the penalty phase of the contempt hearing;
e. PTC is successful on the liability phase of the contempt hearing and is presumptively entitled to its costs. The issue of costs is reserved to the penalty phase hearing.

Date: January 9, 2025

Chalmers