There is trouble brewing for New York-based buyout firm Blackstone Group LP, after Dallas-based Alliance Data Systems Corp., a credit card processing company said it would be suing Blackstone for breach of contract and also to collect the $170 million that it was to get from the company as break-up fee.

Earlier, Blackstone refused to pay the fee after its plans to acquire Alliance Data fell through. The deadline within which the acquisition should have been completed, 17 April 2008, has also passed.

Issuing a statement Friday, Alliance Data said the $170 million represented money that Blackstone is liable to pay, since it not only rejected certain ‘reasonable and customary’ regulation requirements but also delayed the negotiations with regulators for a considerable amount of time.

Alliance Data said it would probably be filing the suit in New York Supreme Court. It says Blackstone has not accepted their contention that it was in breach of its contractual obligations. Alliance had announced the acquisition proposal in May, something it has subsequently terminated.

In his statement, Robert A. Minicucchi, Alliance Data’s special board committee chairman, said, “chose not to satisfy their obligations to consummate this transaction. We are compelled to litigate this issue to obtain payment in a full and timely manner.”

In a statement delivered over e-mail, Blackstone said it could not arrive at a mutually satisfying solution with the U.S. Office of the Comptroller of the Currency. The company’s statement read, “We have fully complied with all of our obligations under the merger agreement and any claims to the contrary by Alliance Data are purely self-serving. Blackstone will defend this suit vigorously and does not intend to settle it.”

A filing by the U.S. Securities and Exchange Commission last year gave the opportunity to Blackstone, which manages the biggest leveraged buy-out fund in the world, to pull out if the deal does not go through by the established deadline.

In January this year, Blackstone had said there were tough and almost impossible conditions that the Comptroller of Currency was placing before it for the business transaction at hand, i.e. the takeover of Alliance Data.

The Blackstone-Alliance Data transaction was the latest to hit the dead-end after the slump in the global credit markets last year. That slump had a very adverse impact on the economic climate in the US, leading to increased borrowing costs and slowing down the economy of the country itself.