Zambri Zaps Harrah’s Casino For $850,449.60 In Fraudulent Transfers Ordered Repaid To Bankruptcy Trustee
Published - www.Forbes.com
By Jay Adkisson
James F. Zambri was the principal of JVJ Pharmacy Inc., which was doing business as University Chemists. The JVJ Pharmacy had an operating account at Chase Bank in New York, and Zambri held a debit card by which he could access cash from that account. Zambri ultimately used the Chase Bank debit card to withdraw $859,040 of JVJ Pharmacy's funds at Harrah's Resort Atlantic City, which caused a big brouhaha when JVJ Pharmacy later filed for bankruptcy.
Harrah's is part of Caesars, a large casino company, and Caesars was party to a Master Services Agreement (the "MSA") with a company called Ultron Processing Services. The MSA allowed the patrons of Harrah's and Caesars to take cash from an Ultron ATM machine located on-premises. Ultron itself kept these machines full of cash. The patron's bank account then being tapped like any other ATM machine.
A different way for a patron of Harrah's and Caesars to get gambling dough was to get a cash advance from an ATM, but using a different MSA that the casinos had with Global Cash Access, Inc. This method worked a little differently. First, it was Harrah's and Caesars that kept their cash in these machines. Second, when the patron wanted a cash advance, he or she went to the ATM and obtained a slip of paper that the patron then walked over to the casino cage to get the cash (or, probably more often, gambling chips). Global Cash Access, Inc., would then ding the patron's bank account for the amount of the cash advance. Readers will probably see that this transaction is very similar to a casino marker, which is just a check drawn on the patron's bank account but processed electronically and thus much more quickly than an unpaid marker.
Harrah's and Caesars charged 4% for the cash advance transaction, of which Global got 1/4th (or 1%), and Harrah's and Caesars pocketed the rest. The MSA between Global and Caesars expressly stated that Global was not Caesars' agent, except — and this "except" would decide the outcome of this case — that Global served as Harrah's agent in relation to "quasi-cash advance services."
Global carried the risk-of-loss if it turned out that the patron had insufficient funds in his or her bank account to pay the cash advance. However, Harrah's bore the risk-of-loss if the patron (or, just the cardholder, as in the case of a stolen card) successfully disputed receiving the cash or chips. Although it looks like it is Global that is making the cash advance, it is really Harrah's which is extending credit to the patron, and Global is then reimbursing Harrah's once the patron's bank pays up.
The upshot of all this is that Harrah's was advancing gambling credit to its patrons, just like it would with a marker, but was using Global to get the money from the patrons' bank accounts. Now, back to Mr. Zambri.
In the seven months between January 2 and August 3 of 2015, Zambri repeatedly got his cash advance slip from the ATM and walked it over to the casino cage at Harrah's Atlantic City property, where the friendly folks there gave him $859,040 less the 4% processing fee. These transactions were precisely recorded in multiple ways, both through the Global system and through Harrah's records that it keeps to comply with gaming regulations (and anti-money laundering requirements).
Notably, Zambri didn't always use the cash advance and begin gambling immediately, nor did he always gamble it all away. Harrah's recorded over the seven months that Zimbra gambled about $1.175 million and that his winnings — at least temporarily since in the long run the house always wins — came to $488,455. But remember that the cash advances did not come from Zambri's personal account but the operating account of JVJ Pharmacy.
Again, all of this occurred in 2015 between January 2 and August 3. The next year, on March 3, 2016, JVJ Pharmacy filed for Chapter 11 bankruptcy, but couldn't get a viable reorganization plan approved. On December 21, 2017, the case was converted to a liquidation under Chapter 7. A Bankruptcy Trustee was appointed, and the following year, on December 19 2018, the Trustee sued Harrah's to get JVJ Pharmacy's money back.
The Trustee's theory was basically that it was JVJ Pharmacy (not Zimbra) which transferred money to Harrah's, that JVJ Pharmacy was insolvent when it made the transfers, and that JVJ Pharmacy got back nothing in return from Harrah's for the transfer — thus making it a fraudulent transfer. Alternatively, the Trustee alleged that Harrah's was unjustly enriched by the transfer. Harrah's defended on a number of grounds, including that the JVJ Pharmacy's money was actually transferred to Global, not Harrah's (with the implication being that if the Trustee wanted the money back then he should go see Global not Harrah's), and also that Harrah's was a good-faith transferee for value. Eventually, everybody moved for summary judgment and that resulted in the opinion that I shall next relate by the U.S. Bankruptcy Court for the District of New York, where JVJ Pharmacy's bankruptcy proceeding was being held.
The first significant issue faced by the court was whether New Jersey or New York fraudulent transfer law applied to the conflict. Although New York has since adopted the Uniform Voidable Transactions Act (UVTA), these transfers occurred prior to that time and so New York's antiquated fraudulent conveyance law in effect. New Jersey followed the Uniform Fraudulent Transfers Act (UFTA).
The court held that fraudulent conveyance laws in general are "conduct regulating" and so the state where the transfers took place normally has the greater interest. Further, the purposes of such laws are to aid creditors, and of the 27 creditors of JVJ Pharmacy, only six were in New York and two were in New Jersey, so the court did not believe this to be "sufficient to overcome New Jersey's superior interest in regulating fraudulent conduct within its borders and the substantial injury caused to the Debtors' creditors the majority of which were located outside of New York, at least as of the Petition Date."
But in addition to New Jersey fraudulent transfer law, the Trustee had moved to recover under the fraudulent transfer statute found in the U.S. Bankruptcy Code at § 548. More specifically, the Trustee asserted that under the insolvency test (known by the oxymoron constructive fraudulent transfer) this was a slam-dunk case: JVJ Pharmacy was insolvent at the time that it transferred money to Harrah's, and Harrah's didn't give JVJ Pharmacy any value, much less reasonably equivalent value ("REV"), in return for the transfers. These are the only two elements (insolvency plus lack of REV) of an insolvency-based fraudulent transfer case.
But was Harrah's really a transferee, or at least what is known as a successor transferee or intermediate transferee? Here, the court noted that when determining who is the transferee under fraudulent transfer law, parties that are "mere conduits" are to be disregarded in the chain of transfers, and a party would be a "mere conduit" if it had a contractual obligation to pass the asset from the debtor or one transferee to another. That Global was a "mere conduit" of Harrah's was established by their contract:
"Under the Global MSA and as confirmed by Harrah's Rule 30(b)(6) witness, Global acted as Harrah's "agent" in connection with the cash advance services which included collecting the repayment from the Chase Account for Harrah's. Global did not advance any of its own funds to Zambri and was not entitled to retain the money it collected from the Chase Account except for its portion of the processing fee. It was contractually obligated to pay the balance to Harrah's and reimbursed Harrah's for the cash advance as part of a batch settlement on the next federal wire day through ACH.  Moreover, the Chase Account monthly statements show that the Transfers were made to Harrah's.  Finally, while the Global MSA identified certain situations calling for Harrah's to reimburse Global for cash advances, there was nothing to reimburse other than the 1% processing fee when Global did not advance its own funds, and Harrah's does not contend in any event that its reimbursement obligation was triggered in this case. Accordingly, Harrah's was the initial transferee of the Transfers within the meaning of § 548(a) except for the portion of the processing fee that Global retained.
"The conclusion that Harrah's is the initial transferee is consistent with the practical concerns expressed by the Bonded Financial Court when it compared the potential liability of initial and subsequent transferees. The initial transferee bears the burden of inquiry and the risk if the conveyance is fraudulent because the initial transferee is the best position to monitor the transfer from the transferor.  In this case, Global, Harrah's agent, dealt directly with Zambri, processed his request for cash, confirmed the availability of funds in the Debtor's Chase Account and took the necessary steps to assure reimbursement from that account before generating the receipt redeemed by Zambri at Harrah's cashier's cage. Global was in the best position to monitor the Transfers and knew or certainly should have known that the Debtor rather than Zambri was the owner of the Chase Account. Harrah's bore the risk that the transfer of funds by the Debtor to Harrah's to allow Zambri to gamble or use as he saw fit might be fraudulent and had the ability to decide whether that risk was worth the reward."
Now we come to arguably the most important issue in this case, one which has frequently required the deepest analysis by courts that have considered the issue of the "innocent service provider." These cases include the Golf Channel cases that occupied the attention of the U.S. Fifth Circuit Court of Appeals and the Texas Supreme Court, which is whether Harrah's gave reasonably equivalent value by providing hundreds of thousands of dollars in cash and gambling chips. The Trustee's position was simple: Since JVJ Pharmacy didn't get anything in return for its money, no REV was present.
Harrah's position was that it did give up $850,449.60 which represented the amount of cash received by Zambri less the processing fees. Harrah's further argued that it was in good faith because it didn't know that Zambri was taking the money from JVJ Pharmacy's account.
The problem with Harrah's position is that, under Bankruptcy Code 548(c), to avoid paying the money back the transferee, the casino had to give value "to the debtor." That Harrah's gave money to Zambri was plainly irrelevant under the clear text of the statute which provided that unless JVJ Pharmacy as the debtor received the money, it didn't count. Thus, the court awarded judgment to the Trustee for the $850,449.60.
The Trustee had also asserted an argument that Harrah's had been unjustly enriched by the transfers, which is a common "belt and suspenders" add-on to a fraudulent transfer complaint. The court dismissed this claim under the rationale that unjust enrichment is an "unusual remedy" which is not available where the plaintiff has some other avenue of available relief, such as the fraudulent transfer claim in this case.
Five years ago, I wrote about a very similar case in Medici Gambles At The Venetian But It Is The Venetian Who Gets Played (Forbes.com, May 14, 2015). These cases illustrate that the fraudulent transfer laws can lead to harsh results for service providers generally (compared to sellers of goods who can more easily demonstrate that reasonably equivalent value passed), and very harsh as to those in the leisure and entertainment sectors.
The ruling here essentially places the burden on a business to deeply investigate the source of any money that it receives, e.g., Harrah's should have discovered that JVJ Pharmacy was financially distressed before it extended credit to Zambri. To say that such a requirement is commercially unreasonable is to understate the issue. While no business can be allowed to turn a blind eye to its patron's financial activities, it is nothing short of ridiculous to require that a business conduct extensive forensic analysis of its patron before extending cash or credit. And what about the creditors who are always in a much better place to know their customer's finances? Are they without at least an equal duty to investigate before dealing with a company like JVJ Pharmacy? At least as to Bankruptcy Code 548, a legislative fix is probably necessary to at least partially re-balance the rights of creditors and service providers.
In the meantime, casinos and similar establishments need to be on guard against the business owner whose company is going down anyway, and decides to fail in high style. Considering the recent deep economic pullback, there may be literally thousands of future Medicis and Zambris out there who will make their pain the casino's pain on their way to the poorhouse.
The court's conflict-of-laws analysis, which chose New Jersey law because that state had the greater interest in a fraudulent transfer made by a New York company, is just goofy. Going forward at least, we don't have to worry about this issue since the Uniform Voidable Transactions Act has a new section 190 that sets the choice-of-law pointer at the debtor's state of residence at the time of the transfer. New York has already adopted the UVTA and New Jersey is expected to adopt the UVTA shortly.
Another place that the court was goofy was in its analysis of determining who identities of the transferee and the subsequent transferee. The court's analysis here is tortured for the primary reason that one find any tortured analysis in legal opinions: It is wrong. What really happened here is that JVJ Pharmacy transferred money to Zambri, and then Zambri transferred money to Harrah's. That's it; easy peasy. The stuff in the opinion about Global and its activities arises to no higher level than that of irrelevant fluff despite the technical attention unnecessarily lavished on it by the court.
Had the court focused on the simple JVJ Pharmacy to Zambri to Harrah's chain, then Harrah's would probably still have lost, but maybe not so badly. The reason is that Zambri was presumably providing something to JVJ Pharmacy by way of his own labors, which would be reasonably equivalent value and would have cut off the fraudulent transfer analysis to that amount since a subsequent transferee can only be liable to the creditor for whatever value that prior transferees did not give. This defense might not have been a home run for Harrah's, but it might have come away with a single or a double, which is much better than nothing.
Living in the Las Vegas area myself and thus being close to the heart of the gaming and leisure industry at least in proximity if not through some professional connections, I find fraudulent transfer opinions such as these horrifying to the industry, because their results are both very harsh and not susceptible of being prevented at least in any commercially reasonable way. Yes, the casinos have to be on the lookout for patrons who are in obvious financial distress but to impute that to making the casinos determine the financial health of their companies from whom they are receiving funds is that bridge too far and cries out for a legislative fix, or at least the courts taking better consideration of the relative equities in the matter and not simply adopting a simplistic analysis of these problems as the court here ended up doing.
LaMonica v. Harrah's Atlantic City Operating Co., LLC (In re JVJ Pharmacy, Inc.), 2020 WL 4251666 (Bk.D.N.Y., July 24, 2020).