Opinion
13456/03.
Decided July 2, 2008.
Moss Kalish, Esqs., Plaintiff.
Lewis Sandler, Esq. and Harvey Greenberg, Esq. Antonio I. Brandveen, J., Defendant.
The plaintiff sued the defendant for a consulting fee. The principal counterclaimed the consulting fee was not due under the "faithless agent" rule, and asserted the consultant participated in insurance fraud. This Court conducted a matter was 13 day trial.
G.K. Alan Assoc. Inc., the plaintiff and counterclaim-defendant, is a domestic corporation organized and existing under the laws of the State of New York and residing in the County of Nassau. Derval Lazzari, the defendant and counterclaim-plaintiff, is a natural person residing in the City and State of New York, County of Queens.
Harvey Katzenberg, one of two principals of G.K. Alan Assoc. Inc., and Lazzari entered into a stock purchase agreement on or about March 21, 2001. Lazzari agreed to engage G.K. Alan Assoc. Inc. as a consultant in connection with Lazzari's management of four affiliated companies in which Lazzari was becoming, on that day, a significant shareholder. The stocks were from four separate companies, including ACME American Repair, ACME American Refrigeration, ACME Environmental and Factory Parts Services. Katzenberg sold, and Lazzari purchased all of the stock owned by Katzenberg and Katzenberg's wife in those four companies. That stock amounted to the 50% of the outstanding stock of ACME American Repair, 33 1/3 % of the outstanding stock of ACME American Refrigeration, 20.5% of the outstanding stock of ACME Environmental and 50% of the outstanding stock of Factory Parts Services. The price ultimately determined in the stock purchase agreement was $1.9 million dollars plus an assumption of the loan of ACME American Repairs which amounted to approximately $350,000.00. Lazzari's assumed liability then would be one-half of that loan, to wit: $175,000.00. The purchase price for the stock was to be paid as follows: $400,000.00 down and $ 100,000.00 a year for the next 15 years. The assumed loan was paid off within the first year.
Under paragraph 1 of the consulting agreement, G.K. Alan Assoc. Inc. agreed to make itself available to assist Lazzari regarding sales to and service of the Acme Companies, to develop marketing strategies to explore new market places and areas of service development as well as to, among other activities, assist Lazzari in operating the business of the Acme Companies. Under paragraph 3 of the contract, Lazzari agreed to pay G.K. Alan Assoc. Inc. consulting fees of $25,000.00 per month, commencing on August 1, 2001, for a term of 15 years, plus expenses.
Katzenberg determined how the deal should be structured, and his attorney drafted the agreements pursuant to his instructions. Katzenberg agreed to have the deal consist of a stock purchase agreement and a separate consulting agreement. The consulting agreement was between G.K. Alan Assoc. Inc. as consultant and Lazzari as principal. G.K. Alan Assoc. Inc. became the consultant because Katzenberg applied for and received payments under a disability policy for a claimed full disability. The consulting agreement was executed by Katzenberg's wife as President of G.K. Alan Assoc. Inc. and Lazzari. Neither Lazzari nor his attorney had any input in the drafting of the documents that were executed at the time of closing. At the time of the closing, in addition to the stock purchase agreement, Lazzari signed a personal guarantee escrow agreement, a security and pledge agreement and a consulting agreement.
All payments made under the stock purchase agreement were made according its terms and conditions. The payments contemplated under the consulting agreement commenced on August 1, 2001, and continued through July 2003, amounting to 24 payments of $25,000.00 each, totaling $600,000.00. The plaintiffs' attorney made multiple representations during the depositions there was no question the appropriate amounts due under the consulting agreement were paid, so his client should be precluded from testifying only $22,500.00 was paid monthly, not $25,000.00. The total compensation contemplated under the consulting agreement would have been $300,000.00 annually for 15 years amounting to $4.5 million dollars. Harvey Katzenberg, on behalf of G.K. Alan Assoc. Inc., performed consulting services from the time of the execution of the consulting agreement until termination of that agreement by Lazzari. G.K. Alan Assoc. Inc. at no time owned any stock in ACME American Repairs, ACME American Refrigeration, ACME Environmental and Factory Parts Services. The consulting agreement and the stock purchase agreement were unambiguous. There is no evidence in the record anyone misunderstood the terms and conditions of the consulting agreement. The stock purchase agreement had a merger clause indicating it and the security pledge agreement, the escrow agreement and the guaranty were the only documents relating to the sale of the stock.
The plaintiff and Katzenberg contend the contemporaneously executed stock purchase agreement and consulting agreement represented an integrated transaction for the sale of Katzenberg's interest in the four companies under the consulting agreement, and a series of payments under the stock agreement. The plaintiff and Katzenberg claim they performed all of their obligations with respect to the transaction, but Lazzari breached the consulting agreement and Lazzari's obligation to pay for his shares in those companies that he purchased in the transaction. The plaintiff and Katzenberg assert the parties intent, when viewed in the surrounding circumstances, was the consulting agreement and the stock purchase agreement were to be treated as entire, to wit a single integrated transaction, not separable. The plaintiff and Katzenberg argue the payments due under the consulting agreement were part of the consideration for the sale by Katzenberg of his stock in the four companies, and a tax-favored means of paying a portion of the consideration for the stock purchase. The plaintiff and Katzenberg aver Lazzari consented to the promises; condoned any misconduct by G.K. Alan Assoc. Inc.; and participated in defrauding insurance companies before and after Lazzari purported to discharge G.K. Alan Assoc. Inc. The plaintiff and Katzenberg maintain, with respect to the consulting agreement, the four companies were not principals of G.K. Alan Assoc. Inc., and G.K. Alan Assoc. Inc. was not an agent of them. The plaintiff and Katzenberg point out G.K. Alan Assoc. Inc. did not engage in any misconduct in connection with the services it performed under the consulting agreement, and the alleged fraud perpetrated by G.K. Alan Assoc. Inc. on the other companies did not taint nor interfere with the performance of the services G.K. Alan Assoc. Inc. provided under the consulting agreement. The plaintiff and Katzenberg contend Lazzari paid G.K. Alan Assoc. Inc. $600,000.00 under the consulting agreement, and $3,900,000.00 is due and owing by Lazzari to G.K. Alan Assoc. Inc. under that agreement.
The defendant claims the consulting agreement was totally separate and in no way referred to the stock purchase Agreement. The defendant notes the consulting agreement had a merger clause indicating it was the only document that related to the subject matter of consulting services. The defendant asserts the stock purchase agreement did not, in any way, indicate the consulting agreement payments were part of the consideration for the stock. The defendant points out Katzenberg testified the money received under the stock purchase agreement was treated as a capital gain for the sale of stock, and the consulting fees were treated as ordinary income. The defendant avers Lazzari terminated G.K. Alan Assoc. Inc. when it was discovered G.K. Alan Assoc. Inc. over billed the ACME companies hundreds of thousands of dollars a year for insurance costs. The defendant claims Lazzari would not have entered into this transaction if it did not contain a consulting agreement as part of the deal. The defendant indicates Acme American Repairs paid for the car lease as required under the consulting agreement which lease payments amounted to $26,292.72; Acme American Repairs paid for a family medical insurance plan for Harvey and Pearl Katzenberg while the consulting agreement was in effect; and ACME Environmental and Factory Parts Services checks were used, on occasion, to pay for part of the monthly consulting fees due G.K. Alan Assoc. Inc. The defendant contends the ACME companies and Lazzari were principals under the consulting agreement.
In their Answer to Interrogatories, G.K. Alan admitted that Harvey Katzenberg performed consulting services "too numerous to mention. . ." Harvey Katzenberg ran the financial aspects of ACME American Repairs and related companies many years prior to the sale to Mr. Lazzari. After the sale to Mr. Lazzari, he continued to advise the ACME companies and run the financial aspects of the companies by mail and phone while residing in Arizona. Harvey Katzenberg had numerous daily conversations with the bookkeeper, Jerry Radocy, as well as other important members of the management and ownership of ACME American Repairs after the sale of the stock in the companies. By Stipulation at the commencement of the trial, the attorneys for the parties agreed all money received by G. K. Alan under the Consulting Agreement was treated as ordinary income and not as a capital gain. G.K. Alan was paid $600,000.00 for consulting services under the Consulting Agreement. Consulting services were performed for the ACME companies. Consulting services were performed for Derval Lazzari. Harvey Katzenberg performed consulting services under the Consulting Agreement.
Neither Mr. Madan nor Mr. Lazzari were aware that G.K. Alan was adding a fee over and above the actual cost of the insurance premiums that it obtained on behalf of the companies. The admittedly excess charges, described by Mr. Katzenberg as "risk management fees" amounted to at least $450,000.00 for the period of two years while the Consulting Agreement was in effect. The Trial Exhibit (Defendants "A") prepared by Harvey and/or Pearl Katzenberg showed that for the period of time since the Consulting Agreement and Stock Purchase Agreement were executed and the Consulting Agreement was terminated, in excess of $700,000.00 was overcharged for insurance to the ACME companies. Mr. Lazzari terminated G.K. Alan for these unauthorized overcharges and because they were a theft from the companies. Harvey Katzenberg additionally admitted that he and his wife Pearl Katzenberg submitted false information to the insurance companies for many years ostensibly to obtain lower premiums for the companies. Harvey Katzenberg admitted that he was aware that G.K. Alan was adding on fees to its bills to the ACME companies without the permission or knowledge of the companies or the principals of those companies. Israel Cartagena determined that using the correct figures and submitting them to the insurance companies, decreased the cost of insurance that was being obtained by G.K. Alan prior to its termination. Moreover, without the Consulting Agreement Harvey and Pearl Katzenberg could not have continued their control of the financial aspects of the ACME companies which allowed them to continue their embezzlement from the companies. The "over billing" by G.K. Alan, Harvey Katzenberg and Pearl Katzenberg for insurance was not authorized.
Harvey Katzenberg admitted he was involved in the setup and continued maintenance of a second set of payroll for purposes of supporting the false information provided to the insurance companies. Lazzari was initially unaware of the false information that was being supplied to the insurance companies and when told this, he directed that the false information not be used. Tom Gough, the company's accountant, confirmed that Mr. Lazzari told him and the bookkeeper not to use false information and to discontinue any second set of payroll immediately after he was informed that one existed. Lazzari was unaware of any second set of payroll being maintained at the direction of Harvey Katzenberg until told by Tom Gough. Harvey Katzenberg promised Mr. Lazzari and Mr. Madan that he would correct the insurance problem but it would take time to do so, so that a "red flag" wouldn't be raised to the insurance companies. Nevertheless, Harvey Katzenberg and G.K. Alan never submitted the true and correct information to the insurance companies, placing the companies in legal and financial jeopardy. Harvey Katzenberg wanted a Consulting Agreement and payments thereunder so he could receive income to write off business expenses of G.K. Alan. The income derived as a capital gain, such as the sale of the stock, is passive income and could not be used as an income source to write off business expenses. Harvey and Pearl Katzenberg's personal tax returns for the years 2001 and 2002, fail to disclose profits of G.K. Alan of approximately $300,000.00. Harvey Katzenberg admitted taking $1,200.00 a week in cash out of ACME American Repairs and failing to report this on his income tax returns. Derval Lazzari did not take part in insurance fraud committed by G.K. Alan. Bir Maden did not take part in the insurance fraud committed by G.K. Alan. G.K. Alan committed insurance fraud. The ACME companies did not take part in insurance fraud committed by G.K. Alan. Harvey Katzenberg, Pearl Katzenberg and G.K. Alan committed insurance fraud.
Charles Lunden, the expert called on behalf of the defendant, testified that the fair market value of 50% ownership of the companies, ACME American Repairs, ACME American Refrigeration and ACME Environmental and Factory Parts Services, amounted to $1,620,000. That figure was for 50% ownership of all four companies even though Mr. Katzenberg only owned 50% in two of those companies and owned 33-1/3% and 20.5% in the two other companies.
Gary Karlitz was the expert produced on behalf of the plaintiff, and testified that the fair market value of the ownership interest sold in the three companies, Repairs, Refrigeration and Environmental was 3.5 million dollars. Karlitz admitted that the information he received including the tax returns and the financial statements of ACME American Repairs were inaccurate. Karlitz believed the tax returns for Environmental and for Refrigeration were also inaccurate based on the fact that the other documents he received in this case were inaccurate. Every normalization amounts Karlitz used increased the value of the companies. Karlitz was aware that the increased value of the company inured to the benefit of the plaintiff in this case who was his client. The source of this information to produce these normalizations that increased the value of these companies was Harvey Katzenberg. Karlitz was aware Harvey Katzenberg was involved in a massive insurance fraud, was involved in filing false tax returns for the company and was aware that the company that he and his wife owned were overbilling the companies hundreds of thousands of dollars and yet accepted the information he received from Mr. Katzenberg and relied on it to come to his determinations as to valuation in this case. The bill on behalf of plaintiffs expert, Karlitz, was expected to exceed $50,000.00. Harvey Katzenberg's Asset and Liability Statement for 2000 (Defendant Exhibit "F") stated the value of his interest in the companies as follows: Repairs $1.8 million; Refrigeration $350,000.00 and Factory Parts $15,000.00. That would total $2,165,000.00. These Asset and Liability Statements were sent to banks to obtain lines of credit for the business of Repairs. Harvey Katzenberg's financial statements constitute an admission as to the value of the companies. Harvey Katzenberg admitted to his expert witness that the tax returns for the companies and the financial statements for the companies were inaccurate and not to be relied upon.
The plaintiff has the burden of proof of proving its claim against the defendant by a fair preponderance of the evidence. The court finds the terms of the Consulting Agreement between the plaintiff and the defendant was unambiguous, clear on its face as what the responsibilities of the parties were, was not open to various interpretations of the intention of the parties and constituted the entire agreement of the parties. Further, the court finds the agreement created an agency relationship between the plaintiff and the Acme companies as well as the defendant.
In R/S Associates v. New York Job Development Authority 98 NY2d 29, (2002) the Court of Appeals held:
Because the contract term is unambiguous in this context we need not address R/S' remaining arguments, based on offers of extrinsic evidence. Unless the court finds ambiguity, the rules governing the interpretation of ambiguous contracts do not come into play (see Matter of Wallace v 600 Partners Co., 86 NY2d 543, 548 [1995]; Breed v Insurance Co. of N. Am., 46 NY2d 351, 355 [1978]). Thus, when interpreting an unambiguous contract term "[e]vidence outside the four corners of the document . . . is generally inadmissible to add to or vary the writing" (W.W.W. Assoc., 77 NY2d at 162). "`[E]xtrinsic and parol evidence is not admissible to create an ambiguity in a written agreement which is complete and clear and unambiguous upon its face"' (id. at 163 [quoting Intercontinental Planning v Daystrom, Inc., 24 NY2d 372, 379 (1969)]; see Reiss, 97 NY2d at 199).
Accordingly, the court finds the plaintiff has failed to establish that the Consulting Agreement and the Stock Purchasing Agreement constituted a single integrated transaction.
Further, the court finds the defendant has established by credible evidence that it was entitled to terminate the Consulting Agreement with the plaintiff on the grounds the plaintiff embezzled from the companies it was consulting with under the Consulting Agreement and committed insurance fraud.
Accordingly, the complaint is dismissed.
The defendant counterclaims for an award of $624,000 representing forfeiture of fees paid to the plaintiff under the Consulting Agreement while acting as a faithless servant. It is undisputed that the plaintiff engaged in an extensive insurance fraud scheme where on behalf of the Acme companies it routinely misstated the facts pertaining to the underwriting of the companies' insurance policies. When it received insurance invoices from the insurance companies it would sent its own invoices to the Acme companies with higher premiums amounts. Upon receipt of payment from the Acme companies it would keep the difference between the actual cost of the policies. This scheme was a clear violation of the Faithless Servant Doctrine ( see, Murray v Beard, 102 NY 508). The conduct of the plaintiff clearly violated the terms of the Consulting Agreement.
In Western Elec. Co. v. Brenner 41 NY2d 291 1977 the court held:
Drawing again on the law of agency, it is likewise basic that absent an agreement otherwise, an employee who makes a profit or receives a benefit in connection with transactions conducted by him on behalf of his employer is under a duty to give such profit or benefit to his employer, whether or not it was received by the employee in violation of his duty of loyalty (see Restatement, Agency 2d, §§ 388, 403).
Under New York Law an employee is prohibited from acting in any manner inconsistent with his agency or trust and forfeits any right to compensation ( see, Lamdin v Broadway Surface Advertising Corp., 272 NY 138). The New York Court of Appeals has never delineated the appropriate limitation of forfeiture under the faithless servant doctrine. In Musico v. Champion Credit Corp. 764 F.2d 102 C.A.2 (NY),1985 the court found that New York Law would allow relation of the law on forfeiture under certain conditions. Under the Consulting Agreement herein the plaintiff was engaged for a variety of duties including, consultation regarding sale to and service to customers, to develop marketing strategies, to explore new market places, to assist with tax and insurance audits, to assist with regulatory inquires, to assist with claims of customers or suppliers and to be available generally to assist the defendant in operation the business interest of each of the companies.
Accordingly, it is the order of this court that the defendant is awarded the sum of $350.000 on the counterclaim. Submit judgment.
So ordered.