In Re: JVJ Pharmacy Inc.
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
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.
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
one claim of constructive fraudulent transfer in violation of
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
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
Global Payments, in turn, reimbursed Harrah‘s for the amount of the cash advance the next federal wire day in a bulk settlement consisting of all cash advances from the prior day. Id. ¶ 66. Similarly, the financial institution that issued the card used at the Casino ATM reimbursed Global Payments for the funds advanced by Harrah‘s, plus fees. Id. ¶ 65. Global Payments charged a 4% cash advance fee for these transactions, with Global Payments retaining 25% of that fee and then transferring the remaining 75%, less any network organization fees, to Harrah‘s at the end of the month. Id. ¶¶ 42-46, 67.
From January 2, 2015 to August 3, 2015, Zambri caused the Transfers to be withdrawn from the Debtor‘s Chase Account, as a result of the cash advance process described above. Id. ¶¶ 70-72, 74. In other words, on multiple occasions, Zambri initiated a cash advance using the Debtor‘s debit card at an Ultron ATM at the Casino, Global Payments authorized and processed the transaction after obtaining approval from Chase, Zambri received a printed receipt from the ATM which he then provided along with identification verification at the cashier cage, and a Casino employee disbursed cash from the Harrah‘s cashier‘s drawer to Zambri after accessing Global Payments’ independent processing system to confirm authorization of the transaction. Id. ¶¶ 77-79. The parties agree that Global Payments and Harrah‘s then followed their usual process
after the cash was handed to Zambri at the Casino: The following federal wire day, Global Payments reimbursed Harrah‘s for the cash advanced to Zambri via a bulk settlement that included any other advances, and Global Payments was, at some point, paid by Chase from the Debtor‘s Chase Account for the amount of the Transfers, plus the 4% fee. See Joint Statement ¶¶ 65-66, 77; see also Dkt. 12 (“Harrah‘s Brief“) at 23; Dkt. 16 (“Trustee‘s Brief“) at 24.5 A legal collection analyst who provided collection services for Harrah‘s submitted a sworn declaration stating that, during the relevant period, no money was paid directly to Harrah‘s by the Debtor, Joint Statement ¶ 85; AA1149, and there is no evidence to the contrary.
C. The Bankruptcy Court‘s July 24, 2020 Order
Both the Trustee and Harrah‘s moved for summary judgment before the Bankruptcy Court. Adv. Proc. Dkts. 56-59, 61-69; AA0868-AA1006. In its motion, the Trustee argued that: (1) the Transfers were paid to Harrah‘s through its agent, Global Payments, rendering Harrah‘s the initial transferee; (2) Harrah‘s did not provide the Debtor with value in exchange for
subsequent transferee with a good faith defense to liability. See AA0882-AA0890. While not at issue on appeal, Harrah‘s also argued that the Trustee‘s New York fraudulent transfer claims should be dismissed because New Jersey law applied to these claims, and that there was no evidence of fraudulent intent to support an actual fraudulent transfer claim under
On July 24, 2020, the Bankruptcy Court granted both motions for summary judgment in part. The Bankruptcy Court dismissed the Trustee‘s New York fraudulent conveyance claims upon concluding that New Jersey fraudulent transfer law governed. July 24, 2020 Order at 17. The Bankruptcy Court also dismissed the Trustee‘s federal intentional fraudulent transfer claim after finding that the Trustee abandoned the claim by failing to respond to Harrah‘s arguments for its dismissal. Id. at 18-19.
At issue on appeal is the Bankruptcy Court‘s grant of summary judgment in favor of the Trustee on his constructive fraudulent transfer claim under
The court noted that the parties’ agreement that “Global [Payments] received the Transfers from the Chase Account” does not end this inquiry, as “the first recipient of the funds is not necessarily the ‘initial transferee’ of the funds.” Id. at 20 (citing Christy v. Alexander & Alexander of N.Y. Inc. (In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey) (“Finley“), 130 F.3d 52, 56-57 (2d Cir. 1997)). The Bankruptcy Court elaborated that “where the recipient—the first entity to touch the transferred property—is contractually obligated to turn it over to a third-party, the recipient is a ‘mere conduit’ and the entity it pays the transfer to is the ‘initial transferee.‘” Id. (quoting Finley, 130 F.3d at 58). The Bankruptcy Court then found that
Global Payments acted as Harrah‘s agent in connection with the Transfers, citing the absence of any Global Payments funds advanced to Zambri, Global Payments’ inability to retain any money transferred from the Chase Account other than a processing fee, and its contractual obligation to pay Harrah‘s any cash that Harrah‘s had advanced. Id. at 21. The court therefore found Harrah‘s to be the initial transferee of the Transfers, with the exception of the 1% processing fee that Global Payments retained. Id. at 21-22.7
Accordingly, the Bankruptcy Court found that the Trustee was entitled to $850,449.60, which is the full amount of the Transfers less the 1% fees retained by Global Payments for its services. Id. at 24. After calculating pre-judgment and costs, the Court entered a total judgment of $923,582.94 on August 6, 2020. Adv. Proc. Dkt. 73; AA1071-AA1072.
D. The Instant Appeal
Harrah‘s filed a notice of appeal on August 11, 2020. See Dkt. 1; Adv. Proc. Dkt. 75. The case was reassigned to the undersigned on September 29, 2020. On October 16, 2020, Harrah‘s filed its opening brief. Harrah‘s Brief. The Trustee filed his opposition brief on November 30, 2020, Trustee‘s Brief, and Harrah‘s filed a reply brief on December 21, 2020, Dkt. 17.8 The Court held oral argument on the appeal on June 9, 2021. 6/9/21 Tr.
II. Legal Standards
A. Standard of Review
This Court has appellate jurisdiction over appeals “from final judgments, orders, and decrees” of bankruptcy courts under
The Bankruptcy Code incorporates
B. Constructive Fraudulent Transfer
A trustee may avoid certain transfers of a debtor‘s interest in property pursuant to
Under
Once a trustee
917 F.3d 85, 98 (2d Cir. 2019) (citing Edward R. Morrison, Extraterritorial Avoidance Actions: Lessons from Madoff, 9 Brook. J. Corp. Fin. & Com. L. 268, 273 (2014)).
III. Discussion
Harrah‘s challenges the Bankruptcy Court‘s grant of summary judgment to the Trustee on his constructive fraudulent transfer claim and denial of its cross-motion for summary judgment on that same count. Harrah‘s Brief at 1. Harrah‘s argues that the Bankruptcy Court erred by (1) concluding that Global Payments acted as Harrah‘s agent for purposes of facilitating the cash
advances, id. at 13-21, (2) relying on that agency determination to find that Harrah‘s was an initial transferee despite the existence of genuine issues of material fact, id. at 21-35, and (3) holding that the Trustee met its burden in demonstrating that the Debtor did not receive
For reasons mentioned below, this Court finds that the Bankruptcy Court correctly held that the Debtor did not receive reasonably equivalent value for the transfers for purposes of
A. The Debtor Failed to Receive Reasonably Equivalent Value for the Transfers
Because the Transfers must be avoided under
This Court agrees that the Trustee made a sufficient showing that the Debtor “received less than a reasonably equivalent value in exchange for [the] transfer or obligation.”
(collecting cases for the proposition that a trustee bears the burden of proof on satisfying the elements of an avoidance claim under
Instead, Harrah‘s insists that it was possible that Zambri “used the funds to pay the Debtor‘s debts, support the business of the Debtor, entertain [the] Debtor‘s vendors and/or creditors, or even gamble intending to potentially win more money to pay of [sic] [the] Debtor‘s debts.” Harrah‘s Brief at 36. Even after drawing all reasonable inferences in Harrah‘s favor, there is no factual support for an inference that Zambri used the funds from the cash advances for the Debtor‘s benefit. To the contrary, it defies logic that a specialty pharmacy in Manhattan would have benefited from its principal withdrawing and gambling of the pharmacy‘s funds in Atlantic City, let alone benefit by an amount reasonably equivalent to the value of the Transfers. The unfounded speculation on the part of Harrah‘s that it is possible that some portion of the cash advances (or Zambri‘s gambling winnings) was used to pay the Debtor‘s debts or support its business falls well short. See Hicks v. Baines, 593 F.3d 159, 166 (2d Cir. 2010) (“[A] party may not rely on mere speculation or conjecture
The Trustee therefore has demonstrated that no genuine issue of material fact exists as to
this element under
B. Triable Issues of Fact Remain as to the Existence of an Agency Relationship Between Global Payments and Harrah‘s
The Court next turns to Harrah‘s challenge to the Bankruptcy Court‘s holding that Global Payments acted as an agent of Harrah‘s for purposes of the Transfers. Harrah‘s Brief at 13-21. Upon review of the evidence in the record, the Court vacates this holding and finds that there are triable issues of fact as to whether an agency relationship existed between Harrah‘s and Global Payments.
1. Choice of Law
The Court must first decide which jurisdiction‘s agency law applies. As noted above, the Bankruptcy Court held that New Jersey law applied to the Trustee‘s fraudulent transfer claims. See July 24, 2020 Order at 17. On the issue of agency, however, both the Trustee and Harrah‘s cite to Second Circuit cases applying New York law. Harrah‘s Brief at 14; Trustee‘s Brief at 18-20; see Com. Union Ins. Co v. Alitalia Airlines, S.p.A., 347 F.3d 448, 462 (2d Cir. 2003) (citing Restatement (Second) of Agency and Meese v. Miller, 436 N.Y.S.2d 496, 499 (App. Div. 1981)); Itel Containers Int‘l Corp. v. Atlanttrafik Express Serv. Ltd., 909 F.2d 698, 702 (2d Cir. 1990) (discussing agency after finding that New York common law applied to the action). The Trustee similarly cited to New York agency law before the Bankruptcy Court, without resistance from Harrah‘s. See AA0927-AA0928.
While “such implied consent . . . is sufficient to establish choice of law,” Santalucia v. Sebright Transp., Inc., 232 F.3d 293, 296 (2d Cir. 2000) (alteration in original) (quoting Tehran-Berkeley Civ. & Env‘t Eng‘rs v. Tippetts-Abbett-McCarthy-Stratton, 888 F.2d 239, 242 (2d Cir. 1989)), a choice of law analysis is unnecessary here because, as relevant to this appeal, there is no conflict between New York and New Jersey agency law. A bankruptcy court generally “appl[ies]
the choice of law rules of the forum state.” Geron v. Seyfarth Shaw LLP (In re Thelen LLP), 736 F.3d 213, 219 (2d Cir. 2013). “In New York . . . the first question to resolve in determining whether to undertake a choice of law analysis is whether there is an actual conflict of laws.” Curley v. AMR Corp., 153 F.3d 5, 12 (2d Cir. 1998). As confirmed by counsel for Harrah‘s at oral argument, see 6/9/21 Tr. at 20-21, under both New York and New Jersey law, control by the principal—which, for reasons discussed below, is the pertinent issue here—is a necessary element of an agency relationship. See Bigio v. Coca-Cola Co., 675 F.3d 163, 175 (2d Cir. 2012); Jones v. Pi Kappa Alpha Int‘l Fraternity, Inc., 431 F. Supp. 3d 518, 527 (D.N.J. 2019). The Court therefore applies New York agency law.
2. Relevant New York Law Governing the Existence of an Agency Relationship
“New York common law provides that an agency relationship results from a manifestation of consent by one person to another that the other shall act
390 F. App‘x 55 (2d Cir. 2010); see also Restatement (Third) Of Agency § 1.02 (2006) cmt. a (“Although agency is a consensual relationship, how the parties to any given relationship label it is not dispositive.“).
“The existence of an agency relationship is a mixed question of law and fact that should generally be decided by [the trier of fact at trial].” Samba Enters., LLC, 2009 WL 705537, at *7. Only if the “material facts from which [agency] is to be inferred are not in dispute, the question of agency is not open to doubt, and only one reasonable conclusion can be drawn from the facts in the case,” may agency be decided by the court as a matter of law. Lumbermens Mut. Cas. Co. v. Franey Muha Alliant Ins. Servs., 388 F. Supp. 2d 292, 301 (S.D.N.Y. 2005) (alteration in original) (quoting Cabrera v. Jakabovitz, 24 F.3d 372, 386 n.14 (2d Cir. 1994)).
3. The Terms of the Global Payments MSA Are Not Dispositive as to an Agency Relationship
Both parties rely heavily on provisions from the Global Payments MSA, the contract that governed the relationship between Global Payments and Harrah‘s for purposes of cash advance services at the Casino. Harrah‘s points to Paragraph 21.b of the Standard Terms and Conditions section, which provided that Global Payments was an independent contractor and that neither Harrah‘s nor Global Payments would represent itself to be an agent of the other, nor possess any authority to create an obligation for or bind the other party:
Relationship of the Parties. [Global Payments] is an independent contractor. At no time will either Party represent itself as an agent, employee, lessee, sub-lessee, partner or joint venture partner of the other Party, and no employer-employee relationship shall exist between either Party and any employee or agent of the other Party. Neither party hereto shall have the express or implied right or authority to assume or create any obligation on behalf or in the name of the other Party or to bind the other Party in regard to any contract, agreement or undertaking with any third party.
Global Payments MSA, Exh. A, Standard Terms and Conditions ¶ 21.b; AA0224; see Harrah‘s Brief at 17-19.
The Trustee meanwhile relies on a different provision of the Global Payments MSA, contained in the Services, Equipment, and Software section. This language provided that Harrah‘s engaged Global
[Harrah‘s] engages [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.
Global Payments MSA, Exh. B, Services, Equipment, and Software ¶ 1; AA0226; see Trustee‘s Brief at 8-9, 18, 20-21.
Maintaining that these two provisions stand in conflict, Harrah‘s argues that Paragraph 21.b of the Standard Terms and Conditions controls pursuant to a provision that is contained on the first page of the Global Payments MSA. Under that provision, “[i]n the event of conflict between the Terms and Conditions and any exhibit . . . the Terms and Conditions shall control.” Global Payments MSA, p. 1 ¶ 3; AA0215. See Harrah‘s Brief at 18-19. Thus, Harrah‘s argues, the prevailing language of the agreement, i.e., Paragraph 21.b, disavowed any agency relationship between Harrah‘s and Global Payments. Harrah‘s Brief at 19. For reasons described below, however, the Court finds that the language of the Global Payments MSA is not dispositive on the issue of agency.
Notwithstanding the provision in the Services, Equipment, and Software section stating that Harrah‘s engaged Global Payments as an agent for purposes of providing cash advance services, “[t]alismanic language alone does not determine an agency relationship.” In re Nigeria Charter Flights Cont. Litig., 520 F. Supp. 2d 447, 461 (E.D.N.Y. 2007) (alteration in original) (quoting Pan Am. World Airways, Inc. v. Cont‘l Bank (In re Shulman Transp. Enters., Inc.), 33 B.R. 383, 385 (S.D.N.Y. 1983)). “That is because ‘it is fundamental that fiduciary liability is not dependent solely upon an agreement or contractual relation between the fiduciary and the beneficiary but results from the relation.‘” Supreme Showroom, 2018 WL 3148357, at *9 (quoting
EBC I, Inc. v. Goldman, Sachs & Co., 5 N.Y.3d 11, 20 (2005)); see also Morgan Art Found. Ltd. v. Brannan, No. 18 Civ. 8231 (AT) (BCM), 2020 WL 469982, at *20 (S.D.N.Y. Jan. 28, 2020); Veleron Holding, B.V. v. Morgan Stanley, 117 F. Supp. 3d 404, 454 (S.D.N.Y. 2015) (finding that the court “must look past the labels that [the parties] placed on their relationship, and instead plumb the real character of the services [provided] . . . because, ‘[u]ltimately, the dispositive issue of fiduciary-like duty or no such duty is determined not by the nomenclature “finder” or “broker” or even “agent,” but instead by the services agreed to under the contract between the parties.‘” (quoting Ne. Gen. Corp. v. Wellington Adver., Inc., 82 N.Y.2d 158, 163 (1993))). Thus, even if only before the Court were the contract‘s language that Harrah‘s engaged Global Payments as its agent for cash advance services, that language alone would not answer the question of whether an agency relationship in fact existed.
While this well-settled principle also applies to provisions purporting to disclaim an agency relationship, some courts have given effect to agency disclaimers that are “express and unambiguous.” See Supreme Showroom, 2018 WL 3148357, at *9 (collecting cases). Nevertheless, “where a writing erects the essential structure of an agency relationship,” then “even an explicit disclaimer cannot undo it.” Veleron Holding, B.V., 117 F. Supp. 3d at 452 (citing EBC I, Inc., 5 N.Y.3d at 20). Here, the provision at Paragraph 21.b was not a sufficiently “express and unambiguous”
Particularly instructive is the analysis in Supreme Showroom, Inc., where the Honorable Paul A. Engelmayer found that similar contractual language did not effectively disclaim an agency relationship. 2018 WL 3148357 at *9. The contract in Supreme Showroom provided that “[the plaintiff] is an independent contractor and under no circumstances will [the plaintiff] . . . purport to legally bind [the defendant] in any matter, and/or hold himself out as an employee or agent with legal authority to bind [the defendant].” Id. In finding that this language did “not expressly
disclaim an agency relationship,” id., the court noted that “it is only colloquially that the terms independent contractor and agent are necessarily distinct,” id. (quoting CBS Inc. v. Stokeley-Van Camp, Inc., 522 F.2d 369, 375 n.14 (2d Cir. 1975)), and that “the power to bind a principal is not the sine qua non of an agency relationship,” id. (citing Restatement (Third) of Agency § 1.01 (2006) cmt. c (“Agents who lack authority to bind their principals to contracts nevertheless often have authority to negotiate or to transmit or receive information on their behalf.“)). See also Butto v. Collecto Inc., 845 F. Supp. 2d 491, 497 (E.D.N.Y. 2012) (“There is no doubt that an independent contractor may simultaneously be an agent.” (citing United States v. Thomas, 377 F.3d 232, 238 (2d Cir. 2004) and Restatement (Second) of Agency § 14N (1958)). The court also highlighted the types of “express and unambiguous” agency disclaimers that courts in this District have found valid, all of which were more explicit than the language used in the Global Payments MSA. Supreme Showroom, Inc., 2018 WL 3148357, at *9 (collecting cases); see also Samba Enters., LLC., 2009 WL 705537, at *2, 7-9 (finding that a contract‘s language that it was “not intended to create a[n] [agency relationship]” and that “[n]either party may act in a manner which expresses or implies a relationship other than that of independent contractor, nor bind the other party,” was not dispositive on whether the parties intended to create an agency relationship).
The same reasoning applies here. The language in Paragraph 21.b of the Standard Terms and Conditions section of the Global Payments MSA did not expressly provide that no agency relationship existed between Harrah‘s and Global Payments. It merely named Global Payments as an independent contractor, prohibited the parties from representing to others that an agency relationship existed, and prohibited the parties from binding each other to obligations through any implied or express authority. The Court must therefore look past this language—and the language in the Services, Equipment, and Software section—to determine the actual character of the relationship between Global Payments and Harrah‘s.
4. Genuine Issues of Material Fact Exist as to Whether Global Payments Acted as Harrah‘s Agent
The next question on the agency issue is therefore whether the relationship established by the structure of the Global Payments MSA and the respective responsibilities of Harrah‘s and Global Payments gave rise to an agency relationship for purposes of the Transfers. This Court concludes that the record presented could lead a reasonable trier of fact to find that Global Payments did not act as Harrah‘s agent.
When a party contends that an agency relationship arose by contract, “[a] principal‘s ability to exercise control over its agent is an essential element of agency.” Steinbeck, 400 F. App‘x at 575; see also Com. Union Ins. Co., 347 F.3d at 462 (“[T]he principal must maintain control
indifference as to the terms by which the freight forwarder extended credit also militated against a finding of direction and control. Id. at 296; see id. (“Ordinarily, an agent who sells goods or services on behalf of his principal cannot extend credit without the principal‘s authorization, nor can that agent initiate legal action to collect a debt owed its principal unless authorized to do so.“).
Harrah‘s contracted with Global Payments to authorize and process the transactions that would allow Harrah‘s patrons to spend funds at the Casino. This entailed Global Payments securing approval from the cardholder‘s financial institution and receiving funds from that institution to cover the advances paid to the cardholder by Harrah‘s. The Global Payments MSA afforded Harrah‘s some rights to give interim instructions to Global Payments. For example, Harrah‘s had the right to unilaterally modify the processing fees charged for cash advances:
[Harrah‘s] may increase the Debit Card Purchase Fees from time to time by delivering at least ten (10) days prior written or verbal notice to [Global Payments.] In addition, [Harrah‘s] shall have the ability to waive all or any portion of the Debit Card Purchase Fee for an Individual Cardholder from time to time.
Global Payments MSA, Exh. B, Services, Equipment, and Software ¶ 11.B(1); AA0228. In addition, while the agreement specified that “[Global Payments] will supply Cash Advances,” Joint Statement ¶ 33; Global Payments MSA, Exh. B, Services, Equipment, and Software ¶ 1; AA0226, it was Harrah‘s who funded the cash advances to the cardholder at the Casino, Joint Statement ¶ 64, evincing Harrah‘s substantial involvement in the cash advance process.
On the other hand, the Global Payments MSA did not provide Harrah‘s with any rights to manage or modify the manner by which Global Payments authorized or processed the cash advances, or the process by which Global Payments communicated with the cardholder‘s financial institution to secure that institution‘s approval. This reflects a “lack of concern” by Harrah‘s over the process of how the money was collected, which the Second Circuit in
Services, Equipment, and Software ¶¶ 4.1, 5, 8-9; AA0227. As to Global Payments’ processing system utilized by Harrah‘s employees at the cashier cage, Joint Statement ¶ 64, the contract stated that “[Harrah‘s] will use the Cage System with due care and in accordance with instructions provided by [Global Payments] and the System‘s manufacturer(s).” Global Payments MSA, Exh. B, Services, Equipment, and Software ¶ 2.1; AA0226. Global Payments, like Harrah‘s, also retained certain rights of interim control over the undertaking. Under the contract, Global Payments was permitted to unilaterally deem a cash advance “questionable, fraudulent, not genuine or . . . otherwise unacceptable under the Card Association or Network Organization rules,” and thereby require Harrah‘s to “reimburse [Global Payments] for the full amount of the applicable Cash Advance transaction.” Global Payments MSA, Exh. B, Services, Equipment, and Software ¶ 4.3; AA0227.11
The record therefore does not provide a clear answer as to whether Harrah‘s exercised sufficient control over Global Payments to establish an agency relationship. Both Harrah‘s and Global Payments maintained a measure of control over the other. Generally, where a party has “submitted sufficient proof to raise a question with respect to the nature of the [agency] relationship,” this question must be resolved at trial. Carrion v. Orbit Messenger, Inc., 596 N.Y.S.2d 50, 51 (App. Div. 1993), aff‘d, 82 N.Y.2d 742 (1993); see also In re Nigeria Charter Flights Cont. Litig., 520 F. Supp. 2d at 461 (“[W]here the circumstances raise the possibility of a principal-agent relationship, and no written authority for the agency is established, questions as to the existence and scope of the agency must be submitted to the jury.“) (quoting Time Warner City Cable v. Adelphi Univ., 813 N.Y.S.2d 114, 116 (App. Div. 2006); LFD Operating, Inc. v. Ames Dep‘t Stores, Inc. (In re Ames Dep‘t Stores, Inc.),
274 B.R. 600, 618 (Bankr. S.D.N.Y. 2003) (“In New York, the sufficiency of control is a question of fact.“), aff‘d, 2004 WL 1948754 (S.D.N.Y. Sept. 1, 2004), aff‘d, 144 F. App‘x 900 (2d Cir. 2005). Because triable issues of fact exist, the Court vacates the Bankruptcy Court‘s agency holding.
C. This Case is Remanded to the Bankruptcy Court for Determination of Transferee Status
The Bankruptcy Court appeared to rest its determination that Harrah‘s was an initial transferee on its finding of an agency relationship between Harrah‘s and Global Payments. See July 24, 2020 Order at 20 (“One who accepts a preference not for his own account but as an agent for a principal is not the person receiving it or to be benefited thereby.” (quoting Carson v. Fed. Reserve Bank of N.Y., 254 N.Y. 218, 235 (1930) (internal quotation marks omitted)); id. at 21 (“Under the Global MSA and as confirmed by Harrah‘s Rule 30(b)(6) witness, Global [Payments] acted as Harrah‘s ‘agent’ in connection with the cash advance services which included collecting the repayment
While the Bankruptcy Code does not define “transferee” or “initial transferee” for purposes of
838 F.2d at 893 (“[W]e think the minimum requirement of status as a ‘transferee’ is dominion over the money or other asset, the right to put the money to one‘s own purposes.“). “In its simplest construction, the mere conduit doctrine ‘envisions that there are three relevant parties: the transferor, the conduit, and a third party who receives the transferred funds from the conduit.‘” McCord v. Ally Fin., Inc. (In re USA United Fleet, Inc.), 559 B.R. 41, 64 (Bankr. E.D.N.Y. 2016) (citing Bear, Stearns Sec. Corp. v. Gredd (In re Manhattan Inv. Fund Ltd.), 397 B.R. 1, 15 (S.D.N.Y. 2007)). This theory “is based on the premise that the conduit did not have dominion or control over the transferred property and cannot or should not be deemed a ‘transferee.‘” Id. (citing Silverman v. K.E.R.U. Realty Corp. (In re Allou Distribs., Inc.) (“Allou“), 379 B.R. 5, 15 n.6 (Bankr. E.D.N.Y. 2007)). The “mere conduit” is a financial intermediary, “with actual or constructive possession of the asset,” whose sole function is to transfer the property to another entity. Authentic Fitness Corp. v. Dobbs Temp. Help Servs. Inc. (In re Warnaco Grp., Inc.), No. 03 Civ. 4201 (DAB), 2006 WL 278152 at *6 (S.D.N.Y. Feb. 2, 2006); id. (“Mere conduits can do no more than transmit a transferor-debtor‘s funds to a transferee.“).
As a preliminary matter, the Court rejects on the undisputed record Harrah‘s argument that Global Payments and Harrah‘s were mere conduits because they were transmitting the Debtor‘s funds to Zambri, who in turn was the initial transferee. Harrah‘s Brief at 27-31. Harrah‘s argues that “equity supports finding that Global [Payments] and Harrah‘s were fiduciary intermediaries who merely facilitated Zambri‘s, as Debtor‘s principal, withdrawal of cash from [the] Chase [Account].” Id. at 23, 27. But when adopting the “mere conduit” test discussed above, the Second Circuit rejected an alternate approach of “exercis[ing] . . . equitable powers to excuse innocent and casual ‘initial transferees.‘” Finley, 130 F.3d at 56-58. Rather, the relevant inquiry in this Circuit is whether an entity exercised dominion and control over a debtor‘s funds. Id.; see Bruno Mach. Corp., 435 B.R. at 848 (“The majority of the circuits, including the Second Circuit, apply the
‘dominion and control’ test.“). The money that Zambri received at the Casino came from Harrah‘s, not from the Debtor‘s Chase Account. Joint Statement ¶¶ 64, 78. Because Zambri never exercised control or dominion over the Debtor‘s funds, he cannot be the initial transferee.
to his name, decide to use that receipt to pay his taxes, rent, or even withdraw cash at a different casino.14
conducting any further fact-finding the court deems appropriate. See Super Nova 330 LLC v. Gazes, 693 F.3d 138, 144 (2d Cir. 2012) (“[B]ecause of the Bankruptcy Court‘s specialized knowledge, we deem it wise to permit the parties to brief and argue the issue before that court in the first instance.“).
Further, because this Court is unable to resolve the transferee question as matter of law, it is also premature to determine on appeal two other issues raised by Harrah‘s: (1) if Harrah‘s is a subsequent transferee, whether Harrah‘s established the affirmative defense under
IV. Conclusion
Accordingly, the Bankruptcy Court‘s August 6, 2020 Judgment is vacated and the case is remanded to the Bankruptcy Court for further proceedings consistent with this Opinion and Order. The Bankruptcy Court retains discretion on whether to allow the parties to conduct further discovery, entertain renewed summary judgment motions, or proceed to trial on the current record.
The Clerk of Court is respectfully directed to close this matter.
Dated: July 19, 2021
New York, New York
JOHN P. CRONAN
United States District Judge