Plastk Financial & Rewards Inc. v Digital Commerce Bank, 2023 ABKB 458

Court of King’s Bench of Alberta Citation: Plastk Financial & Rewards Inc. v Digital Commerce Bank, 2023 ABKB 458 Date: 20230803 Docket: 2301 00820 Registry: Calgary Between: Plastk Financial & Rewards Inc. Plaintiff/Defendant by Counterclaim - and - Digital Commerce Bank Defendant/Plaintiff by Counterclaim Corrected judgment: A corrigendum was issued on August 21, 2023; the corrections have been made to the text and the corrigendum is appended to this judgment. _______________________________________________________ Oral Judgment of the Honourable Justice J.S. Little _______________________________________________________ I. Application and Cross-Application

[ 1 ] Plastk Financial & Rewards Inc. (Plastk) seeks to confirm and expand interim injunctions granted by this Court in January, 2023 and March, 2023. Those injunctions were granted, at least in part, on the basis that the two parties needed some time to complete what they refer to as their corporate divorce. [ 2 ] Digital Commerce Bank (DCB) resists any extension or expansion and seeks to have those injunctions set aside and all agreements cancelled if Plastk is unable to consummate its new corporate marriage within a reasonable time. [ 3 ] This is the fourth hearing for interim relief in this lawsuit.

I note here that I do not claim to have read all the material prepared and delivered by counsel for a one-day hearing on the Commercial List. That material exceeds two ARC boxes and includes transcripts of the previous hearings, questioning transcripts, and responses to undertakings. My focus has been on the briefs, the correspondence contained in the affidavits and, in particular, the main contract between the parties.

I adopt that focus because, in my view, those materials reveal the business models and practices upon which the parties’ relationship is based. [ 4 ] As I read the transcripts from previous applications in this matter, Plastk has been successful in its applications to date largely as a result of its emphasis on the financial impact that DCB’s actions in setting off or “scooping” funds might have on Plastk’s cardholders, who have been characterized as requiring the Court’s protection.

An equally compelling argument can be made that it is Plastk’s inaction or lack of capitalization that might be putting the finances of those third parties at risk. II. Background [ 5 ] Plastk offers credit cards to people who are trying to upgrade their troubled credit records. Those people put up cash as security for a new VISA credit card offered by Plastk. [ 6 ] Pursuant to a contract with Plastk, DCB provides bank account and clearing services to Plastk, essentially acting as the banking intermediary between Plastk and VISA.

For that, DCB charges some fixed fees and some transactional fees. [ 7 ] It appears as though for about two years, while there were some hiccups in reporting and accounting, the parties worked through them. In about March, 2022, DCB became concerned that it was undersecured in what is called the Credit Settlement Account, which I will discuss momentarily.

DCB required an increase in that account of $450,000 to cover its exposure. [ 8 ] DCB’s concerns led to discussions and correspondence about severing the relationship: • In June, 2022, Plastk confirmed a telephone conversation in which the parties discussed a six-month separation notice. • In July, 2022, DCB sent a draft termination letter to Plastk for termination of the BIN, which I will discuss momentarily, effective January 1, 2023 which it stated was intended to give Plastk sufficient time to transition its credit card program to another issuer.

That process the parties call “migration”. • In October, 2022, Plastk requested that the BIN be transferred or migrated to People’s Trust as the new issuer. • In December, 2022, Plastk suggested a change from the January 1, 2023 termination date to March 1, 2023. • On January, 11, 2023, DCB sent a notice of termination of the BIN effective March 1, 2013, relying on s. 11.4 of the BIN which permits termination by reason of DCB’s determination that it faced financial risk, and claiming $450,000 in unpaid fees. [ 9 ] These examples do not represent all of the correspondence between the parties.

But they demonstrate that the parties have been contemplating their separation for a considerable time. [ 10 ] In early January, 2023, DCB froze certain of its accounts with Plastk and set off others, leaving Plastk cash strapped. [ 11 ] On January 16, 2023 Plastk obtained from Justice Johnston an order releasing $66,000 from a frozen account so that Plastk could meet payroll and ordering that there be no further set offs or freezing of accounts until the matter could be heard by Justice Sullivan as scheduled.

Justice Johnston confirmed that her order was without prejudice to either party. [ 12 ] On January 19, 2023 Plastk obtained from Justice Sullivan an interim injunction confirming Justice Johnston’s order and requiring DCB to return $100,000 to the Credit Settlement Account.

Justice Sullivan confirmed that his was not a final order and that the parties were free to return to court on proper notice for a Special. [ 13 ] On February 28, 2023, DCB purported to unilaterally terminate the BIN, which led to Plastk returning to court to obtain Justice Mah’s March 23, 2023 order confirming Justice Sullivan’s mandatory injunction until migration of the program to another institution or further court order. He stated that his order could be reviewed or revoked on ten days notice by either party for bona fide reason. III.

BIN [ 14 ] The main contract between DCB and Plastk, dated June 7, 2020, is referred to as the BIN Sponsorship and Processing Agreement (BIN). BIN stands for Bank Identification Number, which is used by VISA to identify credit charges incurred on the Plastk VISA cards. The holders of those cards are referred to in the BIN as Walletholders, Plastk is the Program Manager, and DCB is the Issuer. [ 15 ] The BIN is a complex contract, likely fully understood only by those familiar with accounting and banking practices,

including clearing and settlement transactions on a large scale. I accept Ms. Sutter’s

interpretation of this contract as confirming that although a bank, in this case DCB is not the lender. Plastk determines who gets credit and how much. The bank acts as an intermediary between the lender and VISA. [ 16 ] Of import to these applications are two accounts defined in the BIN: [ 17 ] Credit Settlement Account : This is an account into which Plastk is obligated to deposit and maintain at least $100,000. DCB can require additional amounts from time. This account is used by DCB to settle credit card balances. DCB is the primary beneficiary of this account.

Funds in this account are not considered a deposit to the credit of Plastk or the Walletholders. [ 18 ] Fee Security Account: This is an account into which Plastk is obligated to deposit and maintain at least $50,000 as security for payment of DCB’s fees earned under the BIN. DCB can require additional amounts from time to time. Again, DCB is the primary beneficiary of funds in this account, and the funds are not considered a deposit to the credit of Plastk or the Walletholders. [ 19 ] I draw particular attention to these two accounts because the BIN makes clear that these funds essentially belong to DCB.

Plastk has no beneficial interest in them. As Ms. Sutter points out in paragraph 23 of her brief, the money comes from Plastk. But it comes as a result of Plastk’s obligation to DCB to ensure that DCB is secured both for its settlement obligations and its fees. IV. Breaches of Justice Mah’s Order [ 20 ] Justice Mah granted the March, 2023 order essentially because of his determination that DCB was incorrectly interpreting the Sullivan injunction and interfering with the implicit term of that injunction that it would be business as usual between the parties.

Justice Mah made it explicit that DCB would cooperate in the required migration of the Plastk program from DCB to another issuer. [ 21 ] I am satisfied that it has done so. [ 22 ] Plastk argues that DCB has thwarted the migration in three different ways, all of which Ms. Sutter deals with beginning in paragraph 45 of her brief: 1. Plastk has come to terms with a new processor called i2C which requires certain confidential information and encryption keys, but DCB will not release that information or encryption keys to it. DCB is currently the processor and issuer.

It maintains that until Plastk comes to terms with a new issuer, in this case Peoples Trust, that information and those encryption keys cannot be released to the processor. That course of action appears to me to be prudent. I would not expect that a bank would release information to an entity which can process information unless the bank knew how and for whom that information would be used. 2. DCB has failed to undertake certain balancing activities required of it without payment of $75,000. DCB argues that these activities are extraneous to the migration.

That balancing appears to me to be part of any overall accounting required post-migration. And payment of a fee in advance seems prudent given that DCB has not been paid for a year. 3. DCB is not releasing interchange fees. These are essentially fees payable to and from a merchant’s bank to the cardholder’s bank. DCB argues that they were not covered by the prohibition against set offs contained in the Mah Order, but even if they were, they have been paid by DCB into the Credit Settlement Account. That relieves Plastk from having to use its own cash to maintain that account at the $100,000 minimum.

Again, that appears to me to be prudent. Plastk has that contractual obligation in any event, and without payment of those fees, it would have been in breach of that obligation. V. Walletholder Account [ 23 ] I will deal specifically with a few other points raised by Plastk in its application. [ 24 ] It refers to DCB improperly withholding funds, from the Credit Settlement Account, that Plastk needs to carry on its business, again in breach of the Sullivan and Mah Orders. In his affidavit, Mr.

Omobamiduro explains how Plastk deposits a cardholder’s security to a Walletholder Account which is then transferred to the Credit Settlement Account. I note that there is no definition in the BIN of a Walletholder Account. If Plastk deposited all of its security to the Credit Settlement Account, this explanation might make some sense.

If Plastk has in the region of 9000 cardholders and each deposits $1000 security, the Credit Settlement Account should always have $9M and should always be able to cover both DCB’s obligation to settle accounts and Plastk’s obligation to return security to cardholders who leave the program. But that is inconsistent with the wording of the BIN, which requires only a minimum of $100,000 or such other amount as DCB determines. That determination would be dependent on the credit sought by cardholders, which is why when those obligations became larger as the program grew, DCB got nervous. [ 25 ] I can accept Ms.

Roberts’ argument that it was clear from Mr. Omobamiduro’s initial proposal to DCB that, in the beginning, Plastk intended to use its cardholders’ security payments to clear cardholders’ purchases, but it is also clear that not all of those security payments found their way into the Credit Settlement Account, which again is why the bank got nervous. [ 26 ] Further, it is inconsistent with the wording of s. 2.8 of the BIN which explicitly states that no funds in that account are to be treated as being on deposit for Plastk or a Walletholder.

So it is possible that during initial negotiations between the parties, the structure of the deal explained by Mr. Omobamiduro changed. [ 27 ] If Plastk deposits only some of the security it receives from cardholders into the Credit Settlement Account with the expectation that it can then withdraw those funds to refund a cardholder who quits the system, it is easy to visualize a situation where the Settlement Account is unable to cover both DCB’s settlement obligations and Plastk’s obligation to return security to a cardholder.

From Plastk’s apparent inability to refund security deposits to certain of its cardholders, that is what appears to be happening.

VI. Peoples Trust [28] In an affidavit filed by Mr. Omobamiduro August 1, 2023, he objects to the inclusion in a DCB affidavit of an email trailbetween DCB and Peoples Trust. In that email trail, Mr. Smith from DCB inquires of Peoples Trust on July 12, 2023 as to its progresstowards completing the migration. Peoples Trust responds on August 1, 2023 that it is waiting for DCB and Plastk to “resolve issuesprior to moving forward”. Mr. Smith thanks Peoples Trust for confirming that it is “unprepared to take on the Plastk Program.” [29] I agree with Mr. Omobamiduro that this is a self-serving statement.

The response from Peoples Trust is not confirmation thatit is rejecting the program. [30] Nevertheless, without assigning blame to any party, and recognizing that counsel are not taking issue with the timing ofproduction of the affidavit, it does confirm that completion of the migration is not imminent. As was the case when this matter was heardby Justice Mah over four months ago and Justice Sullivan over six months ago, what was intended as an interim injunction is getting longin the tooth. VII.

Test for Mandatory Injunction [31] Counsel for DCB argues that because Plastk is seeking further injunctive relief, I must look at the test afresh. [32] She cites the Ontario Superior Court case of Barton-Reid Canada Ltd. v Alfresh Beverages Canada Corp, (ON SC), [2002] CarswellOnt 3653 as authority for the proposition that the usual three-part test for an interlocutory mandatoryinjunction involves a higher onus than for a prohibitive injunction.

As was the case there, a mandatory injunction here requires these twoparties to continue to do business together despite the level of distrust and each knowing for over a year that a split was inevitable. [33] Counsel for Plastk refers to the test from R v CBC, 2018 SCC 5 in which Justice Brown set out the test as there having to be“a strong likelihood on the law and the evidence presented that the applicant will ultimately be successful at trial.” He stated as well thatan extensive review of the merits is required.

That is a difficult task here given the volume of evidence. [34] Is there a serious issue to be tried and a strong prima facie case? There is a serious issue in the sense that the dollar values arehigh. Mr. Kruk for Plastk went into some detail to point out defaults of the bank going back as far as 2021 to a time when DCB made anerror in calculation that had to be fixed. But it was fixed, and since then the pendulum seems to have swung such that it is Plastk which isunable to complete its migration notwithstanding the time that it has had to do so.

There clearly is evidence that Plastk was selective infollowing the terms of the BIN which has put its cardholders and DCB at greater risk than was contemplated in the BIN. [35] Further, VISA apparently has notified DCB that it must terminate its arrangement with Plastk by October 10, 2023 or facepenalties, which suggests defaults by Plastk, though Plastk disputes the legitimacy of VISA’s reasons. [36] Accordingly, whether either party has a strong prima facie case is debatable and not a debate that I can determine here, whichmeans that Plastk has not met its onus. [37] As to irreparable harm, this is a fight purely about money.

Both parties talk about reputational risk, but I find that to beremote. There is reference in the evidence to a newspaper

article about a cardholder who had trouble getting his or her security back. ButI see that as peripheral. Everyone fights with his credit card company or bank at one time or another. [38] There is, as I alluded to at the beginning of these reasons, the potential of harm to the cardholders if DCB were to simplysettle current transactions, scoop money from the various accounts, and leave cardholders unable to access credit.

That, too, however, isremediable by Plastk, which could pay its overdue fees and top up the various accounts, adding those payments to its ultimate claim.DCB might then continue to abide by the BIN. But that would involve Plastk having to come up with additional capital. [39] As to balance of convenience, counsel for DCB points out that if Peoples Trust and Plastk are serious about doing businesstogether, they can do so. They are free to enter into their own arrangements and issue their own replacement cards.

There is no downsiderisk to Plastk if the injunction continues, whereas DCB’s receivable from Plastk continues to grow. VIII. Conclusion [40] For the reasons above, I am not prepared to expand the injunction to require payment of approximately $150,000 by DCB sothat Plastk can meet its obligations to return security to cardholders who have demanded repayment. [41] Nor am I persuaded that DCB is impeding the migration of the Plastk program to Peoples Trust. That, in fact, is the outcomethat it has been seeking for a year. [42] Nor am I prepared to continue the injunctive relief for a further indefinite period.

Plastk needs do its deal with Peoples Trustor another issuer. [43] But in order to allow additional time for the parties to digest this ruling and for Plastk to see if it can firm up its arrangementswith Peoples Trust or another financial institution, I will accept DCB’s suggestion that the current orders remain in place for a period oftime, ending August 31, 2023. In other words, the injunction is vacated effective August 31, 2023. I will not, as requested by DCB, alsoterminate all agreements between the parties. That would be determining that they exist now notwithstanding DCB’s notices oftermination.

What agreements exist and their terms is more properly the subject of a trial.

[ 44 ] DCB in its application seeks to pay all of the money it holds to the credit of the Plastk program into court after August 31, 2023 if Plastk has not completed its migration by then. To that end, counsel for DCB, in paragraph 82 of her brief, has set out a number of conditions to be imposed upon Plastk in the interim including a restriction on the issuance of new cards, maintaining minimum security of $100,000, and paying its receivable to DCB.

All of those essentially involve either a duplication of existing contractual obligations or a further injunction by this Court, which would involve further monitoring of compliance by this Court. [ 45 ] Further, determination of completion of the migration may be difficult for the Court to determine. Is it Plastk doing a deal with Peoples Trust on terms satisfactory to both DCB and Plastk or only to Plastk. Is it Plastk doing a deal with a third party? Only the parties can determine what completion of this migration looks like. [ 46 ] For those reasons, I decline to fix additional terms pending migration.

I will leave the matter of migration to the parties and simply vacate the injunction effective August 31, 2023 pursuant to s. 7 of the Mah Order. [ 47 ] Lastly, I wish to make clear that my ruling here is in no way intended to suggest that my colleagues’ rulings were not fully justified. They were given far less information. Their rulings were given at a time when it was not clear that the parties had had time to complete their corporate divorce without further damage to one or the other.

And their rulings specifically contemplated review over time. [ 48 ] As to costs, as agreed by counsel, if they cannot reach agreement, they are free to make application or written submissions by August 31, 2023 for my assistance. Heard and oral reasons given on the 2 nd day of August, 2023. Dated at the City of Edmonton, Alberta this 3 rd day of August, 2023 . J.S. Little J.C.K.B.A. Appearances: Ms. S. Roberts for the Plaintiff/Defendant by Counterclaim Mr. B. Kruk for the Plaintiff/Defendant by Counterclaim Ms. C. Sutter for the Defendant/Plaintiff by Counterclaim Mr. D.

Pope for the Defendant/Plaintiff by Counterclaim _______________________________________________________

Corrigendum of the Oral Judgment of The Honourable Justice J.S. Little _______________________________________________________ Names in appearances

section have been corrected.