Zambri Zaps Harrah’s Casino For $850,449.60 In Fraudulent Transfers Ordered Repaid To Bankruptcy Trustee


Harrah’s Atlantic City


James F. Zambri was the principal of JVJ Pharmacy Inc., which was doing enterprise as University Chemists. The JVJ Pharmacy had an working account at Chase Bank in New York, and Zambri held a debit card by which he may entry money from that account. Zambri in the end used the Chase Bank debit card to withdraw $859,040 of JVJ Pharmacy’s funds at Harrah’s Resort Atlantic City, which prompted a giant brouhaha when JVJ Pharmacy later filed for chapter.
Harrah’s is a part of Caesars, a big on line casino firm, and Caesars was get together to a Master Services Agreement (the “MSA”) with an organization known as Ultron Processing Services. The MSA allowed the patrons of Harrah’s and Caesars to take money from an Ultron ATM machine situated on-premises. Ultron itself saved these machines full of money. The patron’s checking account then being tapped like another ATM machine.
A special means for a patron of Harrah’s and Caesars to get playing dough was to get a money advance from an ATM, however utilizing a distinct MSA that the casinos had with Global Cash Access, Inc. This technique labored slightly otherwise. First, it was Harrah’s and Caesars that saved their money in these machines. Second, when the patron needed a money advance, she or he went to the ATM and obtained a slip of paper that the patron then walked over to the on line casino cage to get the money (or, most likely extra usually, playing chips). Global Cash Access, Inc., would then ding the patron’s checking account for the quantity of the money advance. Readers will most likely see that this transaction is similar to a on line casino marker, which is only a examine drawn on the patron’s checking account however processed electronically and thus rather more rapidly than an unpaid marker.

Harrah’s and Caesars charged 4% for the money advance transaction, of which Global received 1/4th (or 1%), and Harrah’s and Caesars pocketed the remaining. The MSA between Global and Caesars expressly acknowledged that Global was not Caesars’ agent, besides — and this “except” would resolve the result 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 inadequate funds in his or her checking account to pay the money advance. However, Harrah’s bore the risk-of-loss if the patron (or, simply the cardholder, as within the case of a stolen card) efficiently disputed receiving the money or chips. Although it appears like it’s Global that’s making the money advance, it’s actually Harrah’s which is extending credit score to the patron, and Global is then reimbursing Harrah’s as soon as the patron’s financial institution pays up.

The upshot of all that is that Harrah’s was advancing playing credit score to its patrons, identical to it might with a marker, however was utilizing Global to get the cash from the patrons’ financial institution accounts. Now, again to Mr. Zambri.
In the seven months between January 2 and August Three of 2015, Zambri repeatedly received his money advance slip from the ATM and walked it over to the on line casino cage at Harrah’s Atlantic City property, the place the pleasant of us there gave him $859,040 much less the 4% processing price. These transactions had been exactly recorded in a number of methods, each via the Global system and thru Harrah’s data that it retains to adjust to gaming rules (and anti-money laundering necessities).
Notably, Zambri did not all the time use the money advance and start playing instantly, nor did he all the time gamble all of it away. Harrah’s recorded over the seven months that Zimbra gambled about $1.175 million and that his winnings — a minimum of quickly since in the long term the home all the time wins — got here to $488,455. But do not forget that the money advances didn’t come from Zambri’s private account however the working account of JVJ Pharmacy.
Again, all of this occurred in 2015 between January 2 and August 3. The subsequent 12 months, on March 3, 2016, JVJ Pharmacy filed for Chapter 11 chapter, however could not get a viable reorganization plan authorised. On December 21, 2017, the case was transformed to a liquidation beneath Chapter 7. A Bankruptcy Trustee was appointed, and the next 12 months, on December 19 2018, the Trustee sued Harrah’s to get JVJ Pharmacy’s a refund.
The Trustee’s principle was mainly that it was JVJ Pharmacy (not Zimbra) which transferred cash to Harrah’s, that JVJ Pharmacy was bancrupt when it made the transfers, and that JVJ Pharmacy received again nothing in return from Harrah’s for the switch — thus making it a fraudulent switch. Alternatively, the Trustee alleged that Harrah’s was unjustly enriched by the switch. Harrah’s defended on various grounds, together with that the JVJ Pharmacy’s cash was really transferred to Global, not Harrah’s (with the implication being that if the Trustee needed the cash again then he ought to go see Global not Harrah’s), and likewise that Harrah’s was a good-faith transferee for worth. Eventually, all people moved for abstract judgment and that resulted within the opinion that I shall subsequent relate by the U.S. Bankruptcy Court for the District of New York, the place JVJ Pharmacy’s chapter continuing was being held.
The first important challenge confronted by the court docket was whether or not New Jersey or New York fraudulent switch regulation utilized to the battle. Although New York has since adopted the Uniform Voidable Transactions Act (UVTA), these transfers occurred previous to that point and so New York’s antiquated fraudulent conveyance regulation in impact. New Jersey adopted the Uniform Fraudulent Transfers Act (UFTA).
The court docket held that fraudulent conveyance legal guidelines typically are “conduct regulating” and so the state the place the transfers befell usually has the larger curiosity. Further, the needs of such legal guidelines are to assist collectors, and of the 27 collectors of JVJ Pharmacy, solely six had been in New York and two had been in New Jersey, so the court docket didn’t consider 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 along with New Jersey fraudulent switch regulation, the Trustee had moved to get well beneath the fraudulent switch statute discovered within the U.S. Bankruptcy Code at § 548. More particularly, the Trustee asserted that beneath the insolvency take a look at (identified by the oxymoron constructive fraudulent switch) this was a slam-dunk case: JVJ Pharmacy was bancrupt on the time that it transferred cash to Harrah’s, and Harrah’s did not give JVJ Pharmacy any worth, a lot much less fairly equal worth (“REV”), in return for the transfers. These are the one two parts (insolvency plus lack of REV) of an insolvency-based fraudulent switch case.
But was Harrah’s actually a transferee, or a minimum of what is called a successor transferee or intermediate transferee? Here, the court docket famous that when figuring out who’s the transferee beneath fraudulent switch regulation, events which might be “mere conduits” are to be disregarded within the chain of transfers, and a celebration can be a “mere conduit” if it had a contractual obligation to go the asset from the debtor or one transferee to a different. 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 reference to the money advance providers which included gathering the reimbursement from the Chase Account for Harrah’s. Global didn’t advance any of its personal funds to Zambri and was not entitled to retain the cash it collected from the Chase Account apart from its portion of the processing price. It was contractually obligated to pay the stability to Harrah’s and reimbursed Harrah’s for the money advance as a part of a batch settlement on the following federal wire day via ACH. [] Moreover, the Chase Account month-to-month statements present that the Transfers had been made to Harrah’s. [] Finally, whereas the Global MSA recognized sure conditions calling for Harrah’s to reimburse Global for money advances, there was nothing to reimburse aside from the 1% processing price when Global didn’t advance its personal funds, and Harrah’s doesn’t contend in any occasion that its reimbursement obligation was triggered on this case. Accordingly, Harrah’s was the preliminary transferee of the Transfers inside the which means of § 548(a) apart from the portion of the processing price 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.”
[Internal citations omitted.] Now we come to arguably crucial challenge on this case, one which has ceaselessly required the deepest evaluation by courts which have thought of the problem of the “innocent service provider.” These circumstances embrace the Golf Channel circumstances that occupied the eye of the U.S. Fifth Circuit Court of Appeals and the Texas Supreme Court, which is whether or not Harrah’s gave fairly equal worth by offering a whole bunch of 1000’s of {dollars} in money and playing chips. The Trustee’s place was easy: Since JVJ Pharmacy did not get something in return for its cash, no REV was current.
Harrah’s place was that it did hand over $850,449.60 which represented the amount of money acquired by Zambri much less the processing charges. Harrah’s additional argued that it was in good religion as a result of it did not know that Zambri was taking the cash from JVJ Pharmacy’s account.
The drawback with Harrah’s place is that, beneath Bankruptcy Code 548(c), to keep away from paying the cash again the transferee, the on line casino needed to give worth “to the debtor.” That Harrah’s gave cash to Zambri was plainly irrelevant beneath the clear textual content of the statute which offered that except JVJ Pharmacy because the debtor acquired the cash, it did not rely. Thus, the court docket awarded judgment to the Trustee for the $850,449.60.
The Trustee had additionally asserted an argument that Harrah’s had been unjustly enriched by the transfers, which is a typical “belt and suspenders” add-on to a fraudulent switch criticism. The court docket dismissed this declare beneath the rationale that unjust enrichment is an “unusual remedy” which isn’t obtainable the place the plaintiff has another avenue of obtainable aid, such because the fraudulent switch declare on this case.
Five years in the past, I wrote a couple of very comparable case in Medici Gambles At The Venetian But It Is The Venetian Who Gets Played (, May 14, 2015). These circumstances illustrate that the fraudulent switch legal guidelines can result in harsh outcomes for service suppliers usually (in comparison with sellers of products who can extra simply show that fairly equal worth handed), and really harsh as to these within the leisure and leisure sectors.
The ruling right here primarily locations the burden on a enterprise to deeply examine the supply of any cash that it receives, e.g., Harrah’s ought to have found that JVJ Pharmacy was financially distressed earlier than it prolonged credit score to Zambri. To say that such a requirement is commercially unreasonable is to understate the problem. While no enterprise will be allowed to show a blind eye to its patron’s monetary actions, it’s nothing wanting ridiculous to require {that a} enterprise conduct intensive forensic evaluation of its patron earlier than extending money or credit score. And what in regards to the collectors who’re all the time in a a lot better place to know their buyer’s funds? Are they with out a minimum of an equal obligation to analyze earlier than coping with an organization like JVJ Pharmacy? At least as to Bankruptcy Code  548, a legislative repair might be essential to a minimum of partially re-balance the rights of collectors and repair suppliers.
In the meantime, casinos and comparable institutions should be on guard towards the enterprise proprietor whose firm goes down anyway, and decides to fail in excessive type. Considering the current deep financial pullback, there could also be actually 1000’s of future Medicis and Zambris on the market who will make their ache the on line casino’s ache on their approach to the poorhouse.
The court docket’s conflict-of-laws evaluation, which selected New Jersey regulation as a result of that state had the larger curiosity in a fraudulent switch made by a New York firm, is simply goofy. Going ahead a minimum of, we do not have to fret about this challenge for the reason that Uniform Voidable Transactions Act has a brand new part 190 that units the choice-of-law pointer on the debtor’s state of residence on the time of the switch. New York has already adopted the UVTA and New Jersey is anticipated to undertake the UVTA shortly.
Another place that the court docket was goofy was in its evaluation of figuring out who identities of the transferee and the following transferee. The court docket’s evaluation right here is tortured for the first cause that one discover any tortured evaluation in authorized opinions: It is incorrect. What actually occurred right here is that JVJ Pharmacy transferred cash to Zambri, after which Zambri transferred cash to Harrah’s. That’s it; simple peasy. The stuff within the opinion about Global and its actions arises to no larger degree than that of irrelevant fluff regardless of the technical consideration unnecessarily lavished on it by the court docket.
Had the court docket targeted on the easy JVJ Pharmacy to Zambri to Harrah’s chain, then Harrah’s would most likely nonetheless have misplaced, however possibly not so badly. The cause is that Zambri was presumably offering one thing to JVJ Pharmacy by the use of his personal labors, which might be fairly equal worth and would have lower off the fraudulent switch evaluation to that quantity since a subsequent transferee can solely be liable to the creditor for no matter worth that prior transferees didn’t give. This protection won’t have been a house run for Harrah’s, however it might need come away with a single or a double, which is a lot better than nothing.
Living within the Las Vegas space myself and thus being near the center of the gaming and leisure business a minimum of in proximity if not via some skilled connections, I discover fraudulent switch opinions equivalent to these horrifying to the business, as a result of their outcomes are each very harsh and never prone of being prevented a minimum of in any commercially cheap means. Yes, the casinos must be looking out for patrons who’re in apparent monetary misery however to impute that to creating the casinos decide the monetary well being of their firms from whom they’re receiving funds is that bridge too far and cries out for a legislative repair, or a minimum of the courts taking higher consideration of the relative equities within the matter and never merely adopting a simplistic evaluation of those issues because the court docket right 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). Full copy of the opinion at
Voidabletransactions2020 Harrahs New York Reasonably Equivalent Value Voidable Transaction Fraudulent Transfer