M&T Bank has a Giant headache on its hands.

As the bank was preparing to end its cobranded credit card program with Giant Food Inc., the supermarket chain sued it.

M&T, a unit of First Empire State Corp. of Buffalo, had served notice on Giant in October, five months after the program began.

But the day before the scheduled pulling of the plug at 11:59 p.m. Tuesday, Giant filed for an injunction and restitution for the losses it said it would sustain in finding a new bank partner.

After a midafternoon hearing Tuesday, both parties agreed to suspend any further legal action until Giant reaches an agreement with another bank.

Chevy Chase Savings Bank in Maryland is waiting in the wings to take over the program under terms that would be more costly to Giant. The next hearing is scheduled for Jan. 15 in a federal court in Maryland, where Giant is based.

"At issue now is whether or not M&T breached its five-year contract with Giant and if it had the right to do so," said Anita Boomstein, a lawyer at Hughes, Hubbard & Reed in New York.

"We believe that we have the right to terminate the contract," said Gary Paul, senior vice president of M&T Bank in Oakfield, N.Y., "and that's the first thing that we have to resolve."

The flareup is the latest indication that cobranding has lost some of its former appeal, as banks pay the price of generous consumer reward offers. For example, Mercantile Bancorp. Citicorp and Apple Computer Inc. decided last week to end its cobranding agreement with Southwestern Bell, citing financial losses. And Citicorp and Apple Computer Inc. discontinued a two-year-old program in October.

Though the Giant Visa card was similar to other cobranding plans, M&T had made several concessions to Giant on the issue of who would carry the program's cost, Giant said.

Cardholders earned a 3% rebate on Giant Food purchases and 1% on other purchases. All rebates were to be funded out of finance charges received by M&T, according to Giant.

It would also get a 1% merchant rebate, effectively paying a minimal 0.2% on card sales.

"The merchant-fee concession is largely unheard of in the cobranding market," said Robert B. McKinley, president of Frederick, Md.-based RAM Research Group. "The fact that Giant didn't contribute anything to the program is even more rare."

M&T originally projected it would open 50,000 accounts in the program's first year. It actually signed up 65,000 in less than six months.

Cardholders were paying off their credit balances too quickly, though, and using the cards too often to yield sufficient profits, M&T said in a letter to Giant in October.

Whereas M&T had projected $3,600 of per-card spending per year, the total was actually $8,000, eventually costing the bank from $9 million to $14 million this year for rebates.

"Giant is a store frequented by affluent people in the Mid-Atlantic region," said Mr. McKinley. If M&T's officials "had done a little more homework on the number of revolvers in that customer base, then maybe they would have approached the agreement differently."

"It's very unusual for a cobranded partner to sue its own bank," said Stan Anderson, president of the Colorado consulting firm Anderson and Associates. "Any successor bank will be very wary when they enter into an agreement with that company."

Based on M&T's Oct. 6 termination letter, its officials "implied that they would not make any provisions for the cardholders," said Terry Gans, vice president, advertising and sales promotion, at the Landover, Md.-based supermarket chain.

"We unequivocally deny that we had plans to cancel the customer accounts that are already there," said Mr. Paul.

He added that the disagreement was between M&T and Giant, not between M&T and any cardholder.

Giant said its agreement with Chevy Chase would let cardholders continue to earn the same rebates but will not be as good a deal for the retailer.

"With Chevy Chase we will not get the merchant discount," said Mr. Gans, "and we have to pay a portion of the rebate. We feel that M&T is responsible for that extra expense, projected at $40 million."

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