Payment Processor Account Freeze Demand Letters

Stripe, PayPal, Square & Other Payment Platform Disputes

Payment Processor Freeze Overview
💰 What Is An Account Freeze: Payment processor restricts account access, holds funds (sometimes for 90-180 days), and may terminate merchant account. Affects Stripe, PayPal, Square, Authorize.Net, Braintree, and others.
Common Freeze Triggers
Trigger Processor Concern Typical Duration
High chargeback ratio Exceeding 1% chargeback rate; fraud concerns 30-180 day hold
Sudden volume spike Rapid increase in transaction volume (10x+ growth) 7-30 day review
Restricted business type CBD, adult, nutraceuticals, high-risk verticals Immediate termination
Customer complaints Multiple refund requests, BBB complaints, disputes 30-90 day hold
Identity verification failure Unable to verify business legitimacy, owner identity Immediate freeze until verified
Terms of service violation Prohibited products, deceptive practices, policy breach Termination + 90-180 day hold
Legal Framework
  • Merchant agreement: Processors reserve right to hold funds, terminate accounts per TOS
  • Reserve requirements: Processors can impose rolling reserves (5-30% of transactions held)
  • Arbitration clauses: Most processor agreements require arbitration, waive class actions
  • State law claims: Breach of contract, bad faith, conversion, unfair competition (state-specific)
  • Federal claims: Limited; processors not subject to banking regulations for most disputes
Typical Fund Hold Periods
Platform Standard Hold Extended Hold (High Risk)
Stripe 90 days after termination 120-180 days for high chargeback merchants
PayPal 180 days standard reserve Up to 180 days + additional review period
Square 30-90 days after termination 120 days for elevated risk
Authorize.Net Determined by acquiring bank (varies) 180 days typical
⚠️ Urgent Action Required: Once account is frozen, timeline starts immediately. Processors review appeals within 7-14 days. Missing appeal window means funds remain frozen for full hold period. Document everything and respond quickly.
For Merchants - Fighting Account Freezes
Immediate Response Checklist
🚨 First 48 Hours Critical: Processors often provide narrow appeal window. Gather evidence, draft appeal, and submit within processor's deadline (typically 7-10 days).
  • Read termination notice: Identify stated reason for freeze/termination
  • Review merchant agreement: Understand processor's contractual rights and your obligations
  • Preserve evidence: Download all transaction records, customer communications, shipping confirmations
  • Calculate frozen funds: How much is held? What is stated release date?
  • Identify alternative processor: Don't rely on appeal succeeding; secure backup payment processing
  • File internal appeal: Use processor's dispute resolution system first (exhaustion requirement)
Building Your Appeal

Effective appeals address processor's specific concern with concrete evidence:

Freeze Reason Evidence to Submit
High chargebacks Proof of product delivery (tracking, signed receipts); customer service logs showing resolution attempts; improved fraud prevention measures implemented
Volume spike Explanation for growth (viral marketing, seasonal, legitimate business expansion); supporting documentation (press coverage, ads, customer acquisition records)
Restricted business Clarify product/service falls outside prohibited categories; cite TOS sections allowing your business type; evidence of compliance (age verification, licensing)
Customer complaints Refund policy documentation; customer service response times; resolution of specific complaints; testimonials from satisfied customers
Identity verification Government ID, business formation documents, proof of address, tax records, beneficial ownership documentation
Internal Appeal Process

Each platform has specific procedures:

  • Stripe: Email support with "Account Review Request" + evidence package; escalate to legal@stripe.com if denied
  • PayPal: Submit through Resolution Center; request supervisor review; escalate to Office of Executive Escalations
  • Square: Reply to termination email with appeal; request Account Review team involvement
  • Other processors: Follow stated appeals process in termination notice; document all communications
Demand Letter Strategy

If internal appeal fails or is ignored, formal demand letter sets stage for litigation/arbitration:

  • Breach of contract: Processor terminated without cause or failed to follow own TOS procedures
  • Bad faith: Unreasonable freeze duration; failure to investigate evidence; arbitrary enforcement
  • Conversion: Holding funds beyond reasonable reserve period without justification
  • Unfair competition (CA): Cal. Bus. & Prof. Code §17200 - unfair business practice
  • Damages: Frozen funds + lost business revenue + cost of alternative processing + interest
When Processors Must Release Funds
  • Reserve period expires: 90-180 days passes with no chargebacks or claims
  • Chargeback window closes: Credit card network chargeback period ends (typically 120 days from transaction)
  • No basis for hold: Processor cannot articulate specific fraud/chargeback risk
  • Settlement or court order: Negotiated release or court-ordered return of funds
⚠️ Business Continuity: Don't wait for appeal resolution. Immediately secure alternative payment processor (may need high-risk processor if mainstream options deny you). Frozen funds may be held 6+ months even if you ultimately win.
For Payment Platforms - Compliance & Risk
Legitimate Reasons to Freeze Accounts

Payment processors have valid business and regulatory reasons to freeze merchant accounts:

  • Fraud prevention: Protect cardholders from merchant fraud; reduce chargeback liability
  • Network compliance: Visa/Mastercard rules require processors to maintain low overall chargeback ratios
  • KYC/AML requirements: Bank Secrecy Act and anti-money laundering regulations require identity verification
  • Risk management: Sudden volume spikes may indicate stolen account, money laundering, or fraud
  • Prohibited businesses: Card networks prohibit certain business types (illegal products, high-risk services)
Reserve Hold Best Practices
Practice Why It Matters
Clear TOS disclosure Merchant agreement should specify reserve periods, freeze triggers, appeal rights
Risk-based holds Tailor reserve percentage and duration to actual chargeback/fraud risk (not blanket 180 days)
Provide specific reasons Termination notice should cite exact TOS violation or risk factor (not vague "high risk")
Allow appeals Fair process: accept evidence, review within reasonable time, explain decision
Release funds promptly Once chargeback window closes and no claims pending, release remaining balance
Defending Freeze Decisions

When merchant challenges freeze via demand letter or arbitration:

  • Document freeze basis: Specific chargebacks, fraud indicators, TOS violations
  • Show TOS compliance: Freeze/termination followed procedures in merchant agreement
  • Demonstrate risk: Chargeback ratio, complaints, fraud reports justify hold period
  • Offer early release: If merchant provides proof of legitimacy, consider partial release or shortened hold
  • Settlement value: Litigation/arbitration is expensive; releasing portion of funds may be cheaper than defending
Common Processor Defenses
  • Broad TOS language: Agreement allows termination "for any reason" or "at our discretion"
  • Arbitration clause: Forces dispute into arbitration (expensive for merchants)
  • Reasonable reserve: 90-180 day hold is standard to cover chargeback window
  • Legitimate business decision: Termination based on risk assessment, not arbitrary
  • No damages: Merchant has no right to use specific payment processor; can use alternatives
💼 Processor Liability Risk: Courts increasingly scrutinize unreasonable freezes. California unfair competition claims, conversion claims, and bad faith breach theories can pierce broad TOS language. Processors should balance risk management with fair treatment.
Sample Demand Letters
Sample 1: Merchant Demand to Stripe
[Your Company Name] [Address] [Email / Phone] [Date] Stripe, Inc. 510 Townsend Street San Francisco, CA 94103 Via Email: support@stripe.com; legal@stripe.com Re: Unlawful Account Freeze and Fund Withholding - Stripe Account [Account ID] Dear Stripe: I am writing regarding Stripe's freeze of my business account ([Account ID]) and withholding of $[Amount] in funds, effective [Date]. ACCOUNT FREEZE WITHOUT JUSTIFICATION: On [Date], Stripe froze my account and notified me of account termination citing [stated reason: "unusual activity" / "high risk" / "TOS violation"]. This freeze was unjustified for the following reasons: 1. No TOS Violation: My business [describe business] does not violate Stripe's Terms of Service. [If applicable: Stripe approved this business type when I applied and processed transactions for [X months/years] without issue.] 2. Low Chargeback Rate: My chargeback ratio is [X%], well below Stripe's stated threshold of 1%. [Attach: chargeback report from Stripe dashboard] 3. Verified Identity: I have provided all requested KYC documentation, including [list: driver's license, business formation docs, tax ID, bank statements, etc.]. 4. Legitimate Business Growth: [If volume spike cited] The increase in transaction volume resulted from [explain: successful marketing campaign, seasonal demand, viral product], not fraud. [Attach: marketing materials, press coverage, order records] STRIPE'S CONTRACTUAL BREACH: Stripe's merchant agreement requires [cite specific provision if applicable, or state general obligation of good faith and fair dealing]. By freezing my account without reasonable cause and withholding funds indefinitely, Stripe has: • Breached the implied covenant of good faith and fair dealing • Failed to follow its own stated procedures for account review • Converted my funds by withholding them beyond any reasonable reserve period DEMAND FOR IMMEDIATE RELEASE: I demand that Stripe: 1. Release all frozen funds ($[Amount]) within 7 business days 2. Provide detailed written explanation of freeze basis with supporting evidence 3. Reinstate account access, OR 4. If termination stands, release funds immediately rather than waiting [90/180] days LEGAL CLAIMS IF NOT RESOLVED: If Stripe does not release the funds, I will pursue all available remedies, including: • Breach of contract claim • Conversion claim (unlawful withholding of funds) • California Unfair Competition Law claim (Cal. Bus. & Prof. Code §17200) • Arbitration demand under Stripe's merchant agreement • Damages: Frozen funds + lost business revenue + interest + attorney's fees I estimate my damages at $[Amount: frozen funds + lost revenue + consequential damages]. SUPPORTING DOCUMENTATION: Enclosed: • Transaction records showing [low chargeback rate / legitimate business] • Customer testimonials / positive reviews • Shipping confirmations / delivery proof • [Other relevant evidence] Please respond within 7 days. I prefer to resolve this matter without arbitration, but I am prepared to file if necessary. Sincerely, [Your Name] [Title] [Company Name] [Email]
Sample 2: Attorney Demand on Behalf of Merchant
[Law Firm Name] [Address] [Phone / Email] [Date] PayPal Holdings, Inc. 2211 North First Street San Jose, CA 95131 Via Email: legal@paypal.com Via Certified Mail Re: Account Freeze - [Merchant Business Name], PayPal Account [Account ID] Dear PayPal: I represent [Merchant Business Name] regarding PayPal's freeze of their business account and withholding of $[Amount] in merchant funds. BACKGROUND: My client operated a PayPal business account for [X years] processing payments for [describe business]. On [Date], PayPal froze the account and imposed a 180-day reserve, citing [reason given]. This freeze is without merit and violates PayPal's contractual obligations. FREEZE IS UNJUSTIFIED: 1. Excellent Track Record: Client maintained [X]% chargeback rate over [timeframe] - well below industry average and PayPal's thresholds. 2. Verified Business: Client provided all KYC documentation including EIN, business license, proof of inventory/service delivery, and beneficial owner information. 3. Customer Satisfaction: [X]% positive feedback rating; [Y] transactions with minimal complaints. 4. No TOS Violation: Client's business [explain why business complies with PayPal AUP and does not fall under prohibited categories]. LEGAL CLAIMS: PayPal's actions constitute: • Breach of Contract: Freeze violates merchant agreement's implied covenant of good faith and fair dealing • Conversion: Withholding funds without legal justification • Unfair Business Practice (Cal. Bus. & Prof. Code §17200): Arbitrary enforcement, lack of due process • Bad Faith: Terminating long-standing merchant relationship without investigation DAMAGES: Client has suffered: • $[Amount] in frozen funds • $[Amount] in lost revenue (unable to process payments for [X weeks/months]) • $[Amount] in costs to secure alternative payment processor • Reputational harm Total estimated damages: $[Amount] SETTLEMENT DEMAND: To resolve this matter without arbitration or litigation, PayPal must: 1. Immediately release all frozen funds ($[Amount]) 2. Waive the 180-day reserve period 3. Provide written explanation of freeze with supporting evidence 4. [Optional: Reinstate account OR provide neutral reference for new processor applications] If PayPal chooses to maintain the freeze, we demand that PayPal: 1. Provide detailed written findings supporting freeze decision 2. Identify specific transactions, chargebacks, or customer complaints justifying hold 3. Agree to binding arbitration on expedited basis to resolve fund release DEADLINE: Please respond within 10 days. If we do not receive substantive response, client will file arbitration demand under PayPal's merchant agreement seeking: • Immediate return of all funds • Damages for lost business revenue • Interest and attorney's fees • Declaratory relief We prefer to resolve this cooperatively, but client cannot sustain business with funds frozen indefinitely. Please contact me directly to discuss resolution. Sincerely, [Attorney Name] [Law Firm] [Email / Phone] Enclosures: • Transaction data / chargeback reports • Customer satisfaction records • Business verification documents
Sample 3: Merchant Appeal to Square
[Your Name] [Business Name] [Email] [Date] Square, Inc. Account Review Team 1455 Market Street San Francisco, CA 94103 Via Email: [account-appeals@squareup.com or email provided in termination notice] Re: Appeal of Account Termination - Square Account [Account ID] Dear Square Account Review Team: I am appealing the termination of my Square account ([Account ID]) and the 90-day hold on $[Amount] in funds. APPEAL BASIS: Square terminated my account on [Date] citing [reason: high risk / unusual activity / TOS violation]. This decision was based on incomplete information. I respectfully request reconsideration based on the following: 1. BUSINESS LEGITIMACY: My business [Business Name] is a legitimate [describe business type]. I have been in business since [date], operating from [location]. Attached are: • Business license • Sales tax permit • Articles of incorporation • Product inventory / service documentation 2. TRANSACTION EXPLANATION: [If volume spike cited:] The increase in sales volume resulted from [explain: holiday season, successful promotion, product launch, media coverage]. This is documented by [attach: marketing materials, press coverage, sales forecast]. 3. LOW DISPUTE RATE: My dispute rate is [X]%, below Square's 1% threshold. Of [Y] total transactions, only [Z] resulted in disputes, all of which were [resolved / refunded / explained]. 4. CUSTOMER SATISFACTION: I maintain [positive reviews / customer testimonials / repeat customer rate]. Attached are [customer emails, reviews, testimonials] demonstrating customer satisfaction. 5. FRAUD PREVENTION MEASURES: I have implemented [describe: address verification, fraud screening, clear refund policy, customer service response protocol] to minimize chargebacks and disputes. REQUESTED RESOLUTION: I respectfully request that Square: 1. Reinstate my account, OR 2. If termination stands, release frozen funds immediately rather than imposing 90-day hold I am willing to: • Accept rolling reserve (e.g., 10% held for 90 days) rather than 100% freeze • Provide additional documentation Square requires • Implement additional fraud prevention measures Square recommends ALTERNATIVE PROCESSORS UNAVAILABLE: [If applicable:] I have attempted to secure alternative payment processing but have been denied due to Square's termination appearing in [MATCH list / payment processor databases]. This effectively prevents me from operating my business. Thank you for reconsidering this decision. I am available to provide any additional information or discuss this matter by phone. Sincerely, [Your Name] [Business Name] [Phone] [Email] Attachments: [List all supporting documents]
Legal Remedies & Escalation
Legal Theories for Recovery
Claim Basis Damages
Breach of Contract Processor terminated without cause or violated own TOS procedures Frozen funds + lost revenue + consequential damages
Breach of Implied Covenant of Good Faith Processor acted in bad faith (arbitrary enforcement, no investigation) Contract damages + possibly punitive (jurisdiction-dependent)
Conversion Wrongful withholding of merchant's funds beyond reasonable period Amount wrongfully withheld + interest
Unfair Competition (CA Bus. & Prof. Code §17200) Unfair business practice: unreasonable freeze, lack of due process Restitution (return of funds) + injunctive relief
Tortious Interference Processor's actions interfered with merchant's customer relationships Lost business value + reputation damages
Arbitration vs. Litigation

Most processor agreements require arbitration:

  • Stripe: Binding arbitration (AAA rules); merchant pays filing fee ($200-$300)
  • PayPal: Arbitration for claims over $10,000; small claims court allowed for smaller amounts
  • Square: Arbitration required; opt-out provision within 60 days of account creation (rarely used)

Arbitration Pros:

  • Faster resolution (6-12 months vs. 2-3 years for litigation)
  • Lower cost (if claim is under $75k, may be similar to litigation cost)
  • Can compel document production from processor
  • Arbitrator may be more sophisticated in fintech disputes than judge/jury

Arbitration Cons:

  • Filing fees ($200-$2,000 depending on claim amount)
  • Limited discovery compared to litigation
  • No appeal (arbitration award is final)
  • Processor has repeat-player advantage (same arbitrators see same defense lawyers)
Small Claims Court Option

For frozen amounts under state small claims limits:

  • California: Up to $10,000 (or $5,000 for businesses in some counties)
  • Advantages: Low filing fee ($30-$100); no attorney required; fast hearing (60-90 days)
  • Strategy: Sue for conversion + breach; bring all evidence to hearing; request immediate judgment
  • Processor response: May remove to arbitration if amount claimed exceeds small claims threshold
Settlement Leverage Points
  • Litigation cost: Processor's legal defense will cost $20k-$50k+; settling for partial release may be cheaper
  • Bad publicity: Processors sensitive to reputation; public disputes, social media pressure, media coverage can motivate settlement
  • Regulatory complaints: File complaints with CFPB, state attorney general, BBB; processors track complaint metrics
  • Pattern and practice: If processor has history of similar freezes, class action potential creates settlement pressure
  • Early release offer: Propose reduced hold period (e.g., 30 days instead of 180) + modest reserve percentage
Regulatory Complaints

Parallel to legal action, file complaints with:

  • Consumer Financial Protection Bureau (CFPB): Online complaint portal; CFPB forwards to processor requiring response
  • State Attorney General: Consumer protection division; some states actively investigate payment processor practices
  • Better Business Bureau: Processors maintain BBB ratings; complaint may prompt outreach from executive escalations team
  • FTC: For deceptive practices claims (less effective for individual disputes)
⚠️ Timeline Pressure: Processors know merchants are desperate for funds. Don't accept unreasonable settlement (e.g., releasing only 50% of funds) unless cash flow crisis requires it. Fighting in arbitration may recover 100% plus damages.
Litigation Success Factors

Merchants win when they can show:

  • Processor provided no specific evidence of fraud/chargebacks
  • Freeze was pretextual or arbitrary
  • Hold period far exceeds reasonable chargeback reserve (e.g., 180 days when merchant has 0% chargeback rate)
  • Processor violated own TOS procedures (e.g., didn't allow appeal)
  • Business is legitimate with strong documentation

Processors win when they show:

  • High chargeback ratio or fraud indicators
  • Merchant violated TOS (restricted business type, fraudulent conduct)
  • Broad TOS language allows termination "at any time for any reason"
  • Reserve period is standard (90-180 days) and reasonable
  • Merchant received notice and opportunity to appeal
Attorney Services for Payment Processor Disputes
Frozen Funds? Account Terminated?

I represent merchants in disputes with Stripe, PayPal, Square, and other payment processors. I handle demand letters, arbitration, and litigation to recover frozen funds and business damages.

Services for Merchants
  • Draft and send demand letters to Stripe, PayPal, Square, Authorize.Net, and other processors
  • File and prosecute arbitration claims under processor merchant agreements
  • Negotiate early release of frozen funds or reduced hold periods
  • Pursue breach of contract, conversion, and unfair competition claims
  • Represent merchants in small claims court (for claims under jurisdictional limits)
  • File regulatory complaints with CFPB, state AG, and FTC
  • Advise on alternative payment processing options during dispute
Services for Payment Processors
  • Defend account freeze and termination decisions
  • Draft and enforce merchant agreement terms of service
  • Respond to merchant demand letters and arbitration demands
  • Advise on compliance with card network rules and banking regulations
  • Negotiate settlements with high-value merchants
  • Defend regulatory investigations and class actions
Why Specialized Counsel Matters
Fintech Expertise: Payment processor disputes involve merchant agreements, card network rules, chargeback regulations, and fintech industry practices. I have represented both merchants and processors, giving me insight into how processors evaluate freeze decisions and what arguments succeed in arbitration.
Fee Structures
  • Demand letter: Flat fee $450
  • Arbitration: Hybrid fee (flat fee for filing + hourly for hearings, or contingency for high-value cases)
  • Small claims representation: Flat fee ($1,000-$2,000)
  • Litigation (if arbitration waived): Hourly or contingency depending on case strength
Typical Case Timeline
Stage Timeline
Demand letter preparation and sending 3-5 days
Processor response (if any) 10-30 days
Arbitration filing Immediately after demand rejected
Arbitration hearing scheduled 3-6 months after filing
Arbitration award issued 30-60 days after hearing
Total time to resolution 4-9 months (arbitration) or 12-24 months (litigation)
Representative Matters
  • Stripe account freeze ($150k frozen) - negotiated 30-day early release
  • PayPal 180-day reserve dispute - arbitration resulted in immediate fund release + $40k damages
  • Square termination (MATCH list placement) - overturned termination, account reinstated
  • High-risk processor disputes (CBD, nutraceuticals, subscription businesses)
  • Multi-merchant class investigation (pattern of unreasonable freezes)
Schedule a Call

Book a call to discuss your payment processor freeze. I'll review the termination notice, assess your legal options, and recommend whether to pursue arbitration or negotiate settlement.

Contact Information

Email: owner@terms.law

Frequently Asked Questions
Most processor agreements allow 90-180 day holds to cover chargeback window (credit card networks allow chargebacks up to 120 days post-transaction). However, if merchant has low/zero chargeback rate and no fraud indicators, court may find extended hold unreasonable. California courts have found 180-day blanket holds potentially violate unfair competition law when applied without risk-based justification. Practical answer: 90 days is defensible; 180 days is aggressive but common; beyond 180 days is likely challengeable.
Generally no - arbitration clauses are enforceable under Federal Arbitration Act. However, you can: (1) Sue in small claims court if amount is under state limit (arbitration clauses often don't apply to small claims); (2) File arbitration demand (which is similar to lawsuit but administered by AAA or JAMS); (3) Challenge arbitration clause if you can show it's unconscionable (difficult). Most merchant disputes proceed via arbitration, not court litigation.
Yes, but harder. If processor's TOS explicitly prohibits your business type, they likely have right to terminate. However, you can still recover frozen funds if: (1) Processor approved your business type when you applied (equitable estoppel); (2) Your specific product doesn't violate TOS (e.g., CBD is legal in your state and complies with regulations); (3) Hold period is unreasonably long relative to risk. Strategy: Secure high-risk processor for future transactions, negotiate immediate fund release (accept termination but fight hold period).
Depends on cash flow urgency and case strength. Processors make this offer to avoid arbitration. Considerations: (1) If you need funds to survive, 50% now may be better than 100% in 6-9 months; (2) If your case is weak (high chargebacks, TOS violation), 50% may be best outcome; (3) If your case is strong (zero chargebacks, arbitrary freeze), hold out for 80-100%. Get attorney review before accepting - sometimes processors increase offer to 70-80% when challenged. Don't accept first offer without negotiation.
No formal blacklist, but: (1) MATCH list (Mastercard Alert to Control High-Risk merchants) may include you if processor reports termination for fraud (legitimate legal dispute usually not reported); (2) Payment processors check prior processing history - you'll need to disclose prior termination when applying; (3) Having prior termination makes approval harder but not impossible (especially if you can show termination was unwarranted). Many merchants successfully obtain new processing after winning arbitration or settling dispute. Focus on resolving current freeze first; worry about new processor after.

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