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Acme American Repairs, Inc. v. Katzenberg

March 29, 2007

ACME AMERICAN REPAIRS, INC., ACME AMERICAN ENVIRONMENTAL CO, INC., ACME COMMERCIAL KITCHEN DESIGN, INC., ACME AMERICAN REFRIGERATION, INC., ACME PACIFIC REPAIRS, INC., BANA PARTS, INC., AND BANA PARTS COMMERCIAL KITCHEN, INC., PLAINTIFFS,
v.
HARVEY KATZENBERG AND PEARL KATZENBERG, F/K/A PEARL FEUER, DEFENDANTS.



The opinion of the court was delivered by: Gold, S., U.S.M.J.

MEMORANDUM AND OPINION

Introduction

This Memorandum addresses defendants' motion to disqualify plaintiffs' counsel. Plaintiffs recently discharged the attorney who had been representing them in this action and retained new counsel, the Law Offices of Vincent McNamara ("McNamara"), in his stead. Defendants' motion is based on McNamara's defense of Donna Zerbo ("Zerbo") in a pending state court malpractice action brought by defendant Harvey Katzenberg. Zerbo, who has long served as plaintiffs' outside counsel, also once represented Katzenberg*fn1 individually in connection with a stock sale. Defendants contend that McNamara, by virtue of his representation of Zerbo in the malpractice action, will have access to confidential communications between Katzenberg and Zerbo that may assist him in the prosecution of this action.

In the action pending before this court, plaintiffs are several companies that together comprise the Acme Group ("Acme"). Defendant Harvey Katzenberg was at one time the president and part owner of Acme. Acme obtained its insurance through a broker named G.K. Alan that was owned and operated by Harvey Katzenberg and his wife, Pearl. Plaintiffs contend that the Katzenbergs defrauded them out of more than two million dollars by overcharging Acme for the insurance it purchased on Acme's behalf.

I heard oral argument on defendants' motion on February 13, 2007. I denied the motion and indicated I would issue a written decision setting forth the reasons for my ruling. Minute Entry of 03/15/2007; Transcript of Feb. 13, 2007 Oral Argument ("Tr.")at 36.

Background

The pertinent facts are undisputed. Acme is in the business of repairing commercial kitchen equipment. H. Katzenberg Decl. ¶ 3. Defendant Katzenberg began working for Acme in or about 1977. Id. Over time, Katzenberg rose to the level of chief operating officer and, in 1980, president. H. Katzenberg Decl. ¶ 4; H. Katzenberg Dep. at 9. In 1995, Katzenberg and a partner, Birinder Madan, purchased Acme from its prior owner. H. Katzenberg Decl. ¶ 6; Def. Mem. Supp. Mot. at 3.

The lawsuit pending before this court involves the premiums paid by Acme for its insurance. From 1985 to 2003, Acme obtained its insurance through a brokerage firm called G.K. Alan, which is owned and operated by Harvey Katzenberg and his wife, Pearl. Am. Compl. ¶¶ 27-28. Pearl provided the brokerage services and obtained workers compensation, general commercial liability, and automobile insurance for Acme. It is undisputed that Pearl Katzenberg deliberately provided false information to the insurance companies with which she placed Acme's business in order to obtain reduced premiums on Acme's behalf. Indeed, in a letter dated June 4, 2003 to Zerbo, Acme's attorney, Pearl Katzenberg wrote:

You will realize that these payrolls are tremendously understated; hence the large savings afforded each of the companies . . . All the vehicles that are actually based in Brooklyn were rated on all policies in Lindenhurst, Suffolk County that afforded those companies with vehicles another tremendous savings. . . . I can only make an educated guess as to what the real umbrella and auto premiums would have been had the companies been given the proper information.

Decl. of Donald N. MacKenzie in Opp'n Mot. Disqualify Pl.s' Counsel ("MacKenzie Decl."), Ex. F at 1. It is also undisputed that G.K. Alan inflated the premiums actually charged by the defrauded insurance companies when it billed Acme so that it could retain some of the "savings" achieved by the fraud. In the same letter quoted above, Pearl Katzenberg wrote that:

[t]he original deal was made with Nat [Acme's then owner] in the mid 1980's who agreed that I should receive a percentage of the money that Acme would save. . . . When I explained the risks, Nat told me to take a third for myself. . . . I totally believe that I am entitled to the monies earned by G.K. Alan due to the fact that much larger savings went to the Acme Group and this is all money that should have been paid to the insurance companies.

Id. at 1, 4. Harvey Katzenberg also acknowledges the insurance scheme. In a declaration filed in support of the pending disqualification motion, he states as follows:

21. Commencing in the middle of the1980s, the Acme Group regularly provided artificially depressed payroll figures and erroneous employee work category classifications. The result was substantially lower insurance premiums.

22. The various principals of...Acme...including...Lazzari, were fully aware of and complicit in this plan...in fact, the Acme Group and its principal owners...benefitted greatly from the reductions achieved in insurance premiums as a result of consistent reporting of erroneous data....

23. In or around the spring of 2003,...the Acme Group began to believe that G.K. Alan and my wife and I had overbilled it for insurance services....

H. Katzenberg Decl. ¶¶ 21-23.

Plaintiffs claim in this action that they were unaware of the insurance scheme. They sue to recover the amounts by which they were "overcharged" by G.K. Alan, alleging that defendants violated RICO and asserting claims, among other things, for fraud, breach of contract, breach of fiduciary duty, and conversion.

The malpractice action in which McNamara represents Zerbo -- and which underlies defendants' disqualification motion -- arises from Katzenberg's sale of his Acme stock. In late 2000, Katzenberg decided to sell his stock to Derval Lazzari ("Lazzari"), who was then an Acme employee. H. Katzenberg Decl. ¶ 10. Katzenberg arranged for Zerbo to serve as his attorney in the transaction. Id. ¶ 11. Zerbo had long served as Acme's outside counsel, and Katzenberg presumably developed a close working relationship with her as a result. Id.

On January 3, 2001, Katzenberg sent Zerbo a memorandum setting forth the terms of the stock transaction. Id. The purchase price for the stock was $6,400,000. Id. ¶ 12. Zerbo helped Katzenberg structure the transaction, which included an agreement (the "Consulting Agreement") by Lazzari to pay a consulting fee of $25,000 a month for 15 years, totaling 4.5 million dollars, directly to G.K. Alan. Id. ¶¶ 13, 16. According to Katzenberg, the reason for paying part of the consideration in the form of consulting fees was to obtain certain tax advantages. Id. ¶ 13. At her deposition, with no objection from counsel for the Katzenbergs interposed at any point, Zerbo described her conversations with Katzenberg about the stock transaction as follows:

Q: ...What did you say to him [H. Katzenberg] and what did he say to you concerning the structure of the transaction?

A: I said to him, I guess keying off of this, there are two ways to structure the transaction; sale of stock with a downpayment and promissory note. And then the other structure as he was aware we had done this in [another] case, that is to sell the stock and have a consulting agreement.

Q: And did you explain to him how one transaction different from another? ...

A: We both conversed as to the ramifications of that structure. One structure sale of stock would ...


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