10 N.Y.3d 941 (2008)
When the true nature of a consulting agreement is disputed and factual questions exist regarding its purpose (e.g., as additional compensation for a stock purchase), and the knowledge of parties regarding underlying fraud, summary judgment is inappropriate, and a trial is necessary to resolve those factual disputes.
Summary
G.K. Alan Assoc., Inc. sued Derval Lazzari for breach of a consulting agreement. Lazzari had purchased a business interest from Harvey Katzenberg, the shareholder of G.K. Alan, and entered into a consulting agreement with G.K. Alan. Lazzari later repudiated the agreement, claiming that G.K. Alan had defrauded the business by submitting incorrect insurance information. The Court of Appeals held that triable issues of fact existed regarding the true nature of the consulting agreement (whether it was actually a form of compensation for the stock purchase to avoid taxes) and the extent of Lazzari’s knowledge of the alleged fraud. Therefore, summary judgment was inappropriate.
Facts
Harvey and Pearl Katzenberg were the sole shareholders of G.K. Alan Assoc., Inc., which brokered insurance for companies in the Acme Group. Harvey Katzenberg sold his interest in the Acme Group companies to Derval Lazzari for $1.9 million, payable over 15 years. Simultaneously, Lazzari entered into a consulting agreement with G.K. Alan, where G.K. Alan (operated by Katzenberg) would provide consulting services to the Acme Group for $25,000 per month, totaling $4.5 million over 15 years. Lazzari later claimed G.K. Alan had submitted false information to lower insurance premiums and overbilled the Acme Group.
Procedural History
G.K. Alan sued Lazzari for breach of the consulting agreement after Lazzari repudiated it. The trial court dismissed G.K. Alan’s claims and sustained Lazzari’s counterclaim for rescission based on fraud. The Appellate Division reversed, finding that triable issues of fact precluded summary judgment for either party. The Court of Appeals affirmed the Appellate Division’s decision.
Issue(s)
- Whether summary judgment was appropriate when there were disputed issues of fact regarding the true nature of the consulting agreement and Lazzari’s knowledge of G.K. Alan’s alleged fraud.
Holding
1. No, because there were triable issues of fact as to whether the consulting agreement was actually additional compensation for the stock purchase (disguised to avoid taxes) and the extent to which Lazzari had knowledge of the alleged insurance fraud or embezzlement.
Court’s Reasoning
The court reasoned that two core questions needed to be resolved at trial: whether the consulting agreement was truly intended as an additional compensation stream for the stock purchase, and to what extent Lazzari, who had worked for the Acme Group for over a decade, knew about the alleged ongoing insurance fraud. Because these questions involved factual issues, summary judgment was inappropriate. The court emphasized the need for a trial to properly resolve these factual disputes, stating that the “two core questions… involve factual issues for proper resolution at trial.” The court implies that if the agreement was a disguised payment, typical contract defenses might not apply. The court’s focus on Lazzari’s prior knowledge suggests that a party cannot claim fraud if they were aware of the fraudulent activity before entering the agreement. This case highlights the importance of thorough due diligence before entering into business agreements and the potential scrutiny consulting agreements face when they are closely tied to other financial transactions.