In Re: JVJ Pharmacy Inc.

Background

JVJ Pharmacy Inc., doing business as University Chemists, filed for bankruptcy in 2016. Salvatore LaMonica, the Chapter 7 trustee of the pharmacy’s bankruptcy estate, brought an adversary proceeding against Harrah’s Atlantic City Operating Company, LLC, also known as Harrah’s Resort Atlantic City. The trustee sought to recover transfers made from the pharmacy’s operating account after James F. Zambri, the pharmacy’s principal and president, used the pharmacy’s corporate debit card to obtain repeated cash advances at Harrah’s casino.

The cash-advance process involved several entities. Zambri initiated transactions at an ATM. Global Payments authorized and processed them through the card issuer, Chase. A Harrah’s cashier then gave Zambri cash from Harrah’s funds. Global Payments reimbursed Harrah’s in a later bulk settlement, and Global Payments was then paid by Chase from the pharmacy’s account, along with fees. The transfers totaled $859,040.

The trustee asserted a constructive fraudulent-transfer claim under 11 U.S.C. § 548(a)(1)(B). That provision allows a bankruptcy trustee to avoid certain transfers when, among other things, the debtor received less than reasonably equivalent value and was insolvent. The Bankruptcy Court granted summary judgment for the trustee on that claim and entered a total judgment of $923,582.94, after adding prejudgment interest and costs. It found that Global Payments acted as Harrah’s agent and that Harrah’s was the initial transferee, except for the 1% processing fee retained by Global Payments.

District Court’s Analysis

The District Court reviewed the Bankruptcy Court’s summary-judgment decision without deference on legal issues. Summary judgment is appropriate only when there is no genuine dispute about a fact that could affect the result and the law permits judgment without a trial.

The District Court agreed with the Bankruptcy Court that the pharmacy did not receive reasonably equivalent value for the transfers. The record showed that Zambri, rather than the pharmacy, received and used the cash for personal purposes. Harrah’s speculation that Zambri might have used some money for pharmacy debts, business support, or gambling intended to benefit the pharmacy was unsupported by evidence and did not create a factual dispute. The District Court therefore held that the transfers were properly avoided under the Bankruptcy Code.

The District Court disagreed, however, with deciding on summary judgment that Global Payments was Harrah’s agent. Under New York agency law, an agency relationship generally requires that one party consent to act for another and be subject to that party’s control. The court explained that contract labels do not decide the issue; the actual relationship and the principal’s ability to control the agent are important.

The contract contained language describing Global Payments as Harrah’s agent for providing cash advances, but it also described Global Payments as an independent contractor and limited each party’s authority to bind the other. The contract gave Harrah’s some control, including the ability to change certain fees, but it did not give Harrah’s authority to manage or modify how Global Payments authorized and processed transactions. Global Payments also retained control over aspects of the process. These competing facts created a triable issue about whether an agency relationship existed.

The agency question affected the separate question of who was the relevant transferee under 11 U.S.C. § 550. An initial transferee generally must have dominion or control over the debtor’s funds and the ability to use them for its own purposes. A mere conduit is an intermediary that receives funds only to pass them to someone else and lacks that control. The District Court rejected Harrah’s argument that Zambri was the initial transferee merely because he caused the withdrawals. The money given to Zambri came from Harrah’s, and he never controlled the pharmacy’s funds after they were transferred from the pharmacy’s account.

But the District Court could not determine from the existing record whether Global Payments was the initial transferee or merely a conduit, or whether Harrah’s was an initial or subsequent transferee. That determination could depend on the unresolved agency question, Global Payments’ control over the funds, and whether Global Payments transferred the pharmacy’s funds or its own funds to Harrah’s. The court also left for the Bankruptcy Court to address, if still relevant, Harrah’s potential defense as a subsequent transferee and whether the trustee adequately traced the funds.

Disposition

The District Court vacated the Bankruptcy Court’s August 6, 2020 judgment and remanded the case for further proceedings consistent with the opinion. The Bankruptcy Court retained discretion to permit further discovery, consider renewed summary-judgment motions, or proceed to trial on the existing record. The District Court directed the Clerk of Court to close the appeal.