A Monroe businessman should not be allowed to use bankruptcy to stop collection of a $1.85 million debt, a creditor claims, because the debt was the result of a fraudulent scheme.
TSYS Merchant Solutions sued David Reich in federal bankruptcy court in Poughkeepsie on Aug. 15, seeking approval to continue a Colorado lawsuit against Reich that is scheduled for trial.
The Broomfield, Colorado, credit card processing company claims that Reich and several associates engaged in a Ponzi scheme that operated out of Reich’s home in Monroe in Orange County.
Reich’s bankruptcy attorney, Robert J. Rock of Albany, did not immediately respond to an email request for comment.
Reich filed for Chapter 11 bankruptcy protection in April, declaring $448,500 in assets and $3.1 million in liabilities.
Most of the debts are for business services provided to his company, NY Toner & Supplies Inc., including $2 million to TSYS that it lists as disputed.
TSYS claims that NY Toner was a front for Veteran Toner Services, a Monroe business that purportedly sold and serviced toner cartridges. In 2013, TSYS approved Veteran Toner’s application for credit card services.
TSYS processes transactions between merchants and the banks that issue credit cards. But Veteran Toner, according to TSYS, used fake invoices to disguise credit card transactions as toner sales, to raise cash for operations and personal expenses.
Veteran Toner operated with offices in San Pedro, California, Chicago and Monroe. The Monroe office, TSYS claims in a 2016 lawsuit filed in Colorado against Reich and associates, was the source of fraudulent credit card transactions.
Veteran Toner allegedly exploited the chargeback feature of credit cards. Customers who do not receive merchandise, for example, can ask the credit card company to cancel the debt, in some cases up to 180 days after the transaction. Then TSYS credits the customer’s bank and demands reimbursement from the merchant.
In late 2015, Veteran Toner began running up more credit card transactions, according to the Colorado lawsuit. In August 2016, Veteran Toner suddenly discontinued operations.
Then the chargebacks started coming in, totaling $1.8 million. Credit card holders claimed that goods had not been delivered, but the correspondence, purportedly sent by unrelated individuals, used nearly identical language, including grammatical errors.
When TSYS tried to recover the charges from Veteran Toner, it was notified that Veteran’s bank account had insufficient funds. Not a single chargeback transaction was reimbursed.
TSYS claims in the Colorado lawsuit that more than $1.1 million of the chargebacks were initiated by Reich, his wife Devora, or persons operating within one mile of their home.
The filing of a bankruptcy petition automatically stops creditors from collecting debts, so as to allow the petitioner to reorganize and the court to sort out obligations.
TSYS is asking the bankruptcy court for relief from the automatic stay.
Discovery in the Colorado lawsuit is completed, more than 79,000 pages of documents have been produced, and witnesses have been lined up for a five-day trial in December.
The Colorado court is familiar with the facts, and the trial would be the most efficient way to deal with TSYS’ claims, the company argues.
Reich filed for bankruptcy, TSYS states in a court filing, “almost certainly in an effort to delay or derail trial, or to seek a more convenient forum.”
His debt should not be discharged, TSYS argues, and bankruptcy court should award TSYS no less than what it obtains in the Colorado action.