Q: At the end of last week's column on ARC collection action, you wrote: "In most collection suits that I know about, ARC asserts claims against the owners for breach of fiduciary duty, conversion (civil theft), conspiracy and unjust enrichment." Does this apply if the agency is a corporation or a limited liability company? Does ARC also sue the members of the board of directors personally, in addition to the owners? Where does ARC sue? How is it possible for the owners, officers and directors to be personally liable to ARC? Is there anything we can do to avoid that liability?
A: According to my legal research, ARC now routinely sues all the owners listed in the agency's ARC application whenever ARC sues an agency after it is canceled for default and does not pay the amount that ARC claims to be due. ARC also sues the directors and officers of a corporation.
For example, in a recent court complaint arising from a default that I understand was due to credit card chargebacks for allegedly unauthorized charges, ARC sued the 55% shareholder, who was also the president of the corporation; a 30% shareholder who was vice president and corporate secretary; and two shareholders, with shares totaling 10%, who were also directors.
According to the complaints, the individuals are allegedly liable for conversion (civil theft) because they personally "sold or allowed the sale through their access to various systems and ARC Traffic Documents to consumers but kept the proceeds of those sales for their own use and benefit."
Similarly, the same individual defendants are allegedly liable for "breach of fiduciary duty" because they "sold and allowed the release of ARC Traffic Documents without paying ARC the proceeds of the sales." In another case, ARC sued the owners of a corporation for simple breach of the Agent Reporting Agreement, alleging that the individual owners "are required to hold Traffic Documents in trust for ARC."
While there are some precedents holding agency owners personally liable for defaults in some cases, these allegations make no sense at all in the context of defaults arising from debit memos for allegedly unauthorized credit card sales. The owners, officers and directors never receive "proceeds of sales," and they are not personally "required to hold" any documents.
ARC gets away with these allegations because it is trying to collect from mostly defunct agencies that cannot afford the expense of fighting ARC in court. It could easily cost $50,000 in legal fees to mount a defense to these charges of personal liability.
To make the fight as expensive as possible, ARC files its suits in state court in Arlington or federal court in Alexandria, Va., regardless of where the agency is located. A clause in the Agent Reporting Agreement states, "Agent agrees that the state and federal courts of the Commonwealth of Virginia shall have personal jurisdiction over all collection matters arising under this agreement in which agent is involved."
Every agency owner should do his or her best to avoid being sued by ARC. To do so, adopt practices designed to minimize credit card chargebacks by observing the rules in Section 8 of the ARC Handbook to the extent that you can. If you receive debit memos for chargebacks anyway, settle them with the carrier or ARC promptly.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email Pestronk at [email protected].