Harrah's Atl. City Operating Co. v. Lamonica (In re JVJ Pharmacy Inc.)

• Decision Date: 19 July 2021
• Docket Number: 20 Civ. 7009 (JPC)
• Citation: 630 B.R. 388
• Parties: IN RE: JVJ PHARMACY INC., doing business as University Chemists, Debtor. Harrah's Atlantic City Operating Company, LLC, also known as Harrah's Resort Atlantic City, Appellant, v. Salvatore Lamonica, as Chapter 7 Trustee of the Estate of JVJ Pharmacy Inc., doing business as University Chemists, Appellee.
• Court: U.S. District Court — Southern District of New York

630 B.R. 388

IN RE: JVJ PHARMACY INC., doing business as University Chemists, Debtor.Harrah's Atlantic City Operating Company, LLC, also known as Harrah's Resort Atlantic City, Appellant,

v.Salvatore Lamonica, as Chapter 7 Trustee of the Estate of JVJ Pharmacy Inc., doing business as University Chemists, Appellee.

20 Civ. 7009 (JPC)

United States District Court, S.D. New York.

Signed July 19, 2021

Maximilien D. Fetaz, I, Frank M. Flansburg, III, Brownstein Hyatt Farber Schreck, Las Vegas, NV, Scott Anthony Griffin, Michael Domenico Hamersky, Griffin Hamersky LLP, New York, NY, for Appellant.

David Adam Blansky, Lamonica Herbst & Maniscalco, LLP, Wantagh, NY, for Appellee.

OPINION AND ORDER

JOHN P. CRONAN, United States District Judge:

JVJ Pharmacy Inc. (the "Debtor") operated a specialty pharmacy in Manhattan. After the Debtor petitioned for bankruptcy in 2016, Salvatore LaMonica, the appointed Chapter 7 trustee for the Debtor's estate (the "Trustee"), filed an adversary proceeding against Harrah's Atlantic City Operating Company, LLC, also known as Harrah's Resort Atlantic City ("Harrah's"). The Trustee sought recovery of numerous transfers of funds (the "Transfers") initiated by James F. Zambri, the Debtor's principal, through cash advances at an Atlantic City casino owned by Harrah's (the "Casino"). After Zambri initiated these cash advances at a Casino ATM using the Debtor's corporate debit card, non-party Global Cash Access Inc. ("Global Payments") authorized the advances pursuant to its contract with Harrah's. A Casino employee then handed cash to Zambri, and the next federal wire day, Global Payments reimbursed Harrah's for that money. The Debtor's financial institution at some point transferred the same amount of money to Global Payments, plus applicable fees.

Harrah's appeals an August 6, 2020 Judgment of the United States Bankruptcy Court for the Southern District of New York (Bernstein, J.), which granted summary judgment in favor of the Trustee on his claim of constructive fraudulent transfer in violation of 11 U.S.C. § 548(a)(1)(B) and awarded a total judgment in the amount of $923,582.94. At the core of this appeal is whether the Bankruptcy Court erroneously found Harrah's to be the "initial transferee" of the Debtor's funds. The Bankruptcy Code allows a trustee to avoid and, in certain circumstances, recover fraudulent transfers made by a debtor, thereby returning the transferred funds to the bankruptcy estate for the benefit of creditors. The standard to determine whether a trustee may recover such funds depends, in part, on whether a recipient of the funds was the "initial transferee," the entity for whose benefit the transfers were made, a subsequent transferee, or a mere conduit of the funds. The Bankruptcy Court found that Global Payments was operating as Harrah's agent for purposes of the Transfers, thereby rendering Harrah's the initial transferee.

This Court concludes, however, that there are triable issues of fact as to whether an agency relationship existed, including with respect to whether Harrah's exercised sufficient control over Global Payments during this process. Similarly, without the agency holding, material issues of fact remain as to the transferee status of Harrah's and Global Payments, including whether Global Payments was a mere conduit of the funds. Accordingly, and for reasons discussed below, the Bankruptcy Court's August 6, 2020 Judgment in favor of the Trustee is vacated, and the case is remanded for further proceedings consistent with this Opinion and Order.

I. Background

Unless stated otherwise, the facts set forth below are not in dispute and are taken from the Joint Statement of Undisputed Facts in Support of Cross-Motions for Summary Judgment, filed in the Bankruptcy Court. Adv. Proc. Dkt. 48; AA0001-AA0018 ("Joint Statement").¹

A. The Underlying Bankruptcy and Adversary Proceeding

The Debtor was a specialty pharmacy located in Manhattan and, at all times relevant to this appeal, Zambri was the Debtor's principal and president. Joint Statement ¶¶ 1, 3. On March 3, 2016, the Debtor petitioned for Chapter 11 bankruptcy. In re JVJ Pharmacy Inc. , No. 16-10508 (SMB, DSJ) (Bankr. S.D.N.Y.), Dkt. 1.² On December 21, 2017, the Bankruptcy Court converted the case from Chapter 11 to Chapter 7 and appointed Salvatore LaMonica as the Trustee of the Debtor's estate. Id. , Dkts. 222, 223. On December 19, 2018, the Trustee commenced the adversary proceeding against Harrah's that has given rise to this appeal. LaMonica v. Harrah's Atl. City Operating Co. , No. 18-01853 (SMB, DSJ) (Bankr. S.D.N.Y.). After the Bankruptcy Court dismissed several claims in the initial Complaint without prejudice, id. , Adv. Proc. Dkt. 24; AA1281-AA1282, the Trustee filed an Amended Complaint against Harrah's on June 7, 2019, Adv. Proc. Dkt. 25; AA1283-AA1295 ("Amended Complaint"). The Amended Complaint alleged that Zambri, the Debtor's sole principal, caused the Transfers, totaling $859,040, to be made to Harrah's from the Debtor's bank account. Amended Complaint ¶¶ 14-15, 18. The Amended Complaint pleaded one claim of fraudulent conveyance in violation of 11 U.S.C. § 548(a)(1)(A), one claim of constructive fraudulent transfer in violation of section 548(a)(1)(B), four claims of fraudulent conveyance under New York law, and one claim of unjust enrichment. Id. ¶¶ 42-100.

B. The Cash Advance Process at the Casino

From January 2, 2015 to August 3, 2015, Zambri frequented the Casino and, using the Debtor's corporate debit card, initiated numerous cash advances from the Debtor's operating account at JP Morgan Chase Bank, N.A. (the "Chase Account"). Joint Statement ¶¶ 5, 8, 9 (p. 14), 70.³ During this time, and while the Debtor was insolvent, Zambri caused the withdrawal of $859,040, i.e. , the Transfers, from the Chase Account through such cash advances. Id. ¶¶ 71, 93-94. Because Harrah's liability under the Bankruptcy Code turns, at least in part, on whether Harrah's functioned as the initial transferee or as a subsequent transferee of the Debtor's funds, which is a determination that may be impacted by whether Global Payments was Harrah's agent and whether Global Payments functioned as a mere conduit for the funds, the Court reviews the process by which Zambri received cash advances at the Casino and by which the Debtor's funds left the Chase Account, including the relationships amongst the entities involved in that process.

At the relevant time, a third-party named Ultron Processing Services, Inc. ("Ultron") entered into a master service agreement with Harrah's to provide ATM services at the Casino. Id. ¶¶ 8 (p. 4), 17; AA0049-AA0213 ("Ultron MSA").⁴ "ATM Services" under the Ultron MSA included various functions that one would expect from an ATM, such as cash withdrawals and balance inquiries, as well as "gateway access for Optional Transactions and other services and duties," including cash advances. Joint Statement ¶¶ 20-22, 27; AA0065. Under the Ultron MSA, "Authorization for Optional Transactions" initiated on these ATMs was to be "provided by Global Payments" with cash advance transactions initiated at the ATMs to "be fulfilled at [the Harrah's] cashier cage." Id. ¶¶ 23-24; AA0069. Harrah's contracted with Global Payments to authorize such cash advances and to process the transfers with the relevant financial institutions. Id. ¶ 30; AA0214-AA0394 ("Global Payments MSA"). The Global Payments MSA provided that Harrah's engaged with Global Payments

to act as its agent for the sole purpose of providing a quasi-cash advance services [sic], whereby the authorized holders ... of a valid credit or ATM/debit card ... may obtain quasi-cash advances (individually, a "Cash Advance") in exchange for a service charge, subject in each case to (i) the Cardholder's available credit limit and/or account balance, (ii) receipt of proper authorization for the Cash Advance transaction from the Card issuer, and (iii) compliance by [Harrah's] with security policies and procedures ... and [Global Payments] and [Harrah's] desire to enter into this Agreement, whereby [Global Payments] will supply Cash Advances at the Locations listed on Schedule A for Cardholders who will ultimately purchase gaming chips.

Id. ¶ 33; Global Payments MSA, Exh. B, Services, Equipment and Software ¶ 1; AA0226. The Casino was added to Schedule A of this agreement, making it a location where Global Payments would provide cash advance services. Joint Statement ¶ 41; AA0263-AA0267.

Although certain language from the Global Payments MSA quoted above could be read to suggest that Global Payments itself would supply cash to the cardholder at the Casino, the evidence in the record reveals that cash advances proceeded as follows. After a cardholder initiated the transaction at a Casino ATM, Global Payments was responsible for obtaining approval from a pertinent cardholder association or from the card issuer, which in the Debtor's case was Chase. Joint Statement ¶¶ 5, 48, 63. If approved, the cardholder received from the ATM a receipt that read "PlayerCash @dvantage," a term Global Payments used to identify cash advance receipts. Id. ¶ 55. These paper receipts also included a header with the notation "Harrah's Atlantic City," along with Harrah's address, phone number, and merchant number. Id. ¶ 57. The receipt further directed the cardholder to bring it to a cashier cage in the Casino, where the cardholder also was required to show the cashier the card used to initiate the transaction and photo identification. Id. ¶¶ 48, 52. After verifying that the cardholder's identity matched the name on the card, the cashier confirmed that Global Payments' separate and independent processing system authorized the transaction. Id. ¶¶ 53-54, 62. If Global Payments system authorized the transaction, the Harrah's cashier provided funds to the cardholder. Id. ¶ 64. The actual money that the Casino's employee handed to a cardholder, such as Zambri, thus came from Harrah's...