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Katzenberg v. Commercial Kitchen Designs

September 15, 2010

HARVEY KATZENBERG, PLAINTIFF,
v.
COMMERCIAL KITCHEN DESIGNS, INC., GREGORY ROWEHL AND BIRINDER MADAN, DEFENDANTS.



The opinion of the court was delivered by: Ramon E. Reyes, Jr., U.S.M.J.

OPINION & ORDER

"Happy families are all alike; every unhappy family is unhappy in its own way," Leo Tolstoy, Anna Karenina INTRODUCTION On January 16, 2009, Harvey Katzenberg ("Katzenberg"), a shareholder of Commercial Kitchen Designs, Inc. ("Commercial Kitchen"), brought this diversity action against the corporation and its other shareholders, Gregory Rowehl and Birinder Madan (collectively "Defendants") for breach of contract and breach of fiduciary duty. Katzenberg contends that pursuant to an oral agreement with his business partners he is owed at least $680,000 in dividends and distributions from the corporation. (Docket No. 1.) Before the Court is Katzenberg's December 30, 2009, motion for partial summary judgment on the issue of liability. (Docket No. 20.) For the reasons set forth below, the motion is denied.*fn1

BACKGROUND

I. Parties

Katzenberg resides in Arizona and owns thirty-five percent of Commercial Kitchen. (Plaintiff's Rule 56.1 Statement of Uncontested Material Facts ("Pl.'s 56.1 Stmt.") ¶ 1; Defendants' Response to Plaintiff's Rule 56.1 Statement of Uncontested Material Facts and Counter-Statement of Uncontested Material Facts ("Defs.' 56.1 Stmt.") ¶ 1.)*fn2 Defendant Birinder Madan resides in New York and owns thirty-five percent of Commercial Kitchen. (Pl.'s 56.1 Stmt. ¶ 5; Defs.' 56.1 Stmt. ¶ 3.) Defendant Gregory Rowehl also resides in New York, owns thirty percent of Commercial Kitchen, and serves as Commercial Kitchen's President. (Pl.'s 56.1 Stmt. ¶¶ 6, 8; Defs.' 56.1 Stmt. ¶¶ 6, 8.)

Commercial Kitchen is a New York S-corporation. (Compl. ¶ 16; Pl.'s 56.1 Stmt. ¶¶ 2, 17; Defs.' 56.1 Stmt. ¶¶ 2, 17; see also Gitlitz v. Comm'r, 531 U.S. 206, 209 (2001) ("a corporation that had elected to be taxed under Subchapter S of the [Internal Revenue] Code, 26 U.S.C. §§ 1361- 1379 [under which].... [t]he corporation's profits pass through directly to its shareholders on a pro rata basis and are reported on the shareholders' individual tax returns. (citing 26 U.S.C. § 1366(a)(1)(A)). Commercial Kitchen designs, builds, sells, and installs commercial kitchens, and sells and installs cooking equipment. (Pl.'s 56.1 Stmt. ¶ 7; Defs.' 56.1 Stmt. ¶ 7.)

II. Commercial Kitchen's Payments to the Shareholders and the Alleged Oral Agreement

There is no dispute that Commercial Kitchen made certain payments to Katzenberg, Rowehl and Madan until the fall of 2003, when the payments to Katzenberg ceased but continued to Madan and Rowehl. (Pl.'s 56.1 Stmt. ¶¶ 9, 17 at 3*fn3; Defs.' 56.1 Stmt. ¶¶ 17 at 5,*fn4 19 at 6, 20.) The parties dispute, however, whether these payments were consulting fees as Defendants claim, or dividends and distributions as Katzenberg claims. The parties also disagree whether the payments until 2003, however denominated, were made pursuant to a binding oral agreement.

Katzenberg argues that Defendants are bound by an oral agreement, under which Commercial Kitchen's "dividends and distributions, if made at all, would be made to each shareholder with respect to their pro rata interest in" the corporation. (Compl. ¶ 13.) According to Katzenberg, until 2003 Commercial Kitchen " regularly made distributions to Katzenberg, Madan[,] and Rowehl, (Pl.'s 56.1 Stmt. ¶ 9), some of which, "[f]or tax reasons," "were recorded on the books... of [the corporation] 'as consulting fees' or as purchases from an affiliated company," (id. ¶ 10). Katzenberg contends that the amount of the "consulting fees" each shareholder received was not related to any "consulting services" the shareholders "may or may not have provided to Commercial Kitchen." (Id. ¶ 13.) Instead, "distributions, regardless of form, were always made strictly pro rata to" each shareholder's ownership of the corporation. (Id. ¶ 12.)

Defendants deny these allegations and argue that no such oral agreement ever existed. Defendants contend that Commercial Kitchen "treated" the payments "as consulting fees or repayment of officer loans" on its tax returns, while Katzenberg and Madan treated these payments as income and not distributions to shareholders. (Defs.' 56.1 Stmt. ¶¶ 9--13, 21--22.) Defendants admit that no written consulting services agreement between Commercial Kitchen and Madan ever existed. (Pl.'s 56.1 Stmt. ¶ 16 at 4; Defs.' 56.1 Stmt. ¶ 16 at 5.)

Katzenberg demands $180,000 and $500,000 in damages on his breach of contract and breach of fiduciary duty claims, respectively, including punitive damages. (Compl. ¶¶ 24--25.) He contends that he continues to accrue federal tax liability on, but does not actually receive, his pro rata share of Commercial Kitchen's income. (Compare Pl.'s 56.1 Stmt. ¶ 18 at 5 with Defs.' 56.1 Stmt. ¶ 18 at 6 (denying the allegation).)

III. Related Disputes

Katzenberg contends that the Defendants' conduct here is related to the dispute in another action pending in this District, Acme Am. Repairs, Inc. v. Katzenberg, No. 03-CV-04740 (RRM) (SMG). Katzenberg argues that after Commercial Kitchen*fn5 brought that action together with related companies, the Defendants began withholding Katzenberg's share of Commercial Kitchen's dividends and distributions in order to create a "recovery fund." (Compl. ¶ 14, 22.)

It is undisputed that Commercial Kitchen has been implicated in at least three lawsuits and one arbitration involving Katzenberg and the corporate family of which Commercial Kitchen is a part (the "Acme Group"). To understand the dynamics involved ...


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