Abrams, Fensterman, Fensterman, Eisman, Greenberg, Formato & Einiger, LLP v. Underwriters at Lloyd's, London et al
Filing
30
MEMORANDUM AND ORDER denying 20 Motion for Summary Judgment; granting 27 Motion for Summary Judgment. For the reasons set forth herein, the Court grants summary judgment to Lloyds and denies summary judgment to the Abrams Firm. The Clerk of Court is directed to enter judgment for Lloyds dismissing the action and to close the file. ( Ordered by Judge Leonard D. Wexler on 1/2/2013.) (Fagan, Linda)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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ABRAMS, FENSTERMAN, FENSTERMAN,
EISMAN, GREENBERG, FORMATO
& EINIGER, LLP,
Plaintiff,
-against-
MEMORANDUM AND ORDER
CV 11-0665 (LDW) (WDW)
UNDERWRITERS AT LLOYD’S, LONDON,
Defendant.
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Wexler, J.
Plaintiff Abrams, Fensterman, Fensterman, Eisman, Greenberg, Formato & Einiger, LLP
(the “Abrams Firm”) brings this action against defendant Underwriters at Lloyd’s, London
(“Lloyd’s”) for, inter alia, a declaration that Lloyd’s is obligated to defend and (potentially)
indemnify the Abrams Firm in certain underlying actions against the firm pursuant to a
professional liability insurance policy (the “Policy”) with Lloyd’s. The parties cross-move for
summary judgment under Rule 56 of the Federal Rules of Civil Procedure (“FRCP”). For the
reasons below, the Court grants summary judgment to Lloyd’s and denies summary judgment to
the Abrams Firm.1
I. BACKGROUND
A. The Burman Action
In or about June 2010, Jan Burman, Steven Krieger and Scott Morrell (the “Burman
Plaintiffs”) commenced an action in Delaware Chancery Court (the “Burman Action”) against
1
Although oral argument has been requested, the Court finds that oral argument is not necessary
to its determination.
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various defendants (the “Burman Defendants”), including the Abrams Firm and its managing
partner, Howard Fensterman, Esq. (“Fensterman”). The original complaint contained the
following “causes of action”: (1) breach of fiduciary duty; (2) aiding and abetting breach of the
fiduciary duty; (3) malpractice; (4) breach of contract; (5) breach of contract; (6) unjust
enrichment; (7) fraud in the factum; (8) fraud in the inducement; (9) negligent misrepresentation;
(10) conversion; (11) aiding and abetting conversion; (12) constructive trust; (13) violations of
18 U.S.C. §§ 1961 et seq. (“RICO”); (14) RICO conspiracy; and (15) an accounting (the
“Burman Complaint”). Fensterman was named in all claims, and the Abrams Firm was named in
most but not all. As alleged, the claims arose out of the Burman Defendants’ fraudulent scheme
to induce the Burman Plaintiffs to invest in a Delaware limited liability company, American Gulf
Insurance, LLC (“AGIC”), whose primary business purpose was to underwrite and sell personal
and commercial insurance coverage. The Burman Defendants misappropriated the Burman
Plaintiffs’ funds and concocted an absurd story that the funds were stolen by members of a royal
family in the United Arab Emirates (“UAE”).
In or about October 2007, Fensterman solicited the Burman Plaintiffs to purchase
membership interests in AGIC, and represented that AGIC would be created to operate as an
insurance company in the UAE. Fensterman was a founding member and managing director of
AGIC, as well as a principal of Jordstac, LLC – a named defendant which was also a founding
member of AGIC. Several of the Abrams Firm’s other partners also held interests in AGIC.
Fensterman also was a founding member and holder of a 25% interest in American Gulf
Management Company, LLC (“AGMC”), which was formed to manage AGIC. Fensterman
stated to the Burman Plaintiffs that he had partnered with other Burman Defendants, including
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Michael J. Weinberg (“Weinberg”), who had experience in the insurance industry, and Amer and
Azzam Rustom, who had ties in the UEA that would facilitate AGIC’s operations and licensing
requirements. Fensterman purportedly traveled to the UAE with Weinberg – a founding member
and managing director of AGIC and managing member and holder of a 25% interest in AGMC –
to explore potential business opportunities for AGIC.
Thereafter, Fensterman induced the Burman Plaintiffs to wire a total of $1,600,000 to the
Abrams Firm’s IOLA account in December 2007 and July 2008 in connection with their
investments in AGIC, and the Burman Plaintiffs executed AGIC “Subscription Agreements for
Investor Membership Interests” in July and August 2008 regarding their investments. By the end
of 2009, the Burman Plaintiffs learned that the funds they had invested in AGIC had been
misappropriated. Fensterman allegedly made numerous false representations and omissions in
connection with the Burman Plaintiffs’ investments in AGIC and regarding the misappropriation
of their funds.
The Burman Plaintiffs alleged that they relied on Fensterman and the Abrams Firm for
legal advice and counsel regarding investing in AGIC. In particular, they alleged that they
executed the AGIC subscription agreements “upon the advice of Fensterman, as [their] attorney,”
which agreements were countersigned by Fensterman “on behalf of AGIC.” Burman Complaint
¶¶ 82-84. The malpractice claim, the third cause of action, alleged that Fensterman and the
Abrams Firm committed malpractice by, inter alia: (1) failing to conduct requisite due diligence
before and after the Burman Plaintiffs’ investments in AGIC; (2) failing to review and investigate
the documents issued in connection with the Burman Plaintiffs’ investments in AGIC; (3) failing
to adequately disclose Fensterman’s and the Abrams Firm’s interests in AGIC; (4) failing to
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obtain a waiver of conflict of interest from the Burman Plaintiffs relating to Fensterman’s and the
Abrams Firm’s interests in AGIC; (5) failing to protect the Burman Plaintiffs’ investments in
AGIC; (6) failing to disclose to, and concealing from, the Burman Plaintiffs the loss of the
Burman Plaintiffs’ investments in AGIC; and (7) failing to perform their professional duties as
the Burman Plaintiffs’ attorneys and to ensure the accuracy of documents governing the Burman
Plaintiffs’ investments in AGIC. Similarly, the fourth cause of action, for breach of contract,
alleged that the Burman Plaintiffs invested monies in AGIC in reliance and upon the consultation
and advice of Fensterman and the Abrams Firm and that Fensterman and the Abrams Firm
breached their promise to provide legal services in furtherance of the Burman Plaintiffs’ best
interests with the requisite skill and care.
The Burman Plaintiffs amended their complaint three times, the first time on December 3,
2010.
B. The Morrell Action
In or about August 2010, Scott and Roselee Morrell (the “Morrell Plaintiffs”) commenced
an action in New York Supreme Court (the “Morrell Action”) against various defendants,
including the Abrams Firm and its partners, Fensterman and Robert Abrams, Esq. (“Abrams”).
The original complaint contained the following “causes of action”: (1) breach of contract; (2)
breach of contract; (3) breach of fiduciary duty; (4) malpractice; (5) fraud in the inducement; and
6) an accounting (the “Morrell Complaint”). Abrams, Fensterman, and the Abrams Firm were
named in all six claims.
The claims arose out of the Morrell Plaintiffs’ loan to, and investments in, defendants
The Golden Goslings, Inc. d/b/a MYZIVA (“Golden Goslings”), MZ Consulting Company, LLC,
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and MZ National, LLC (collectively, “MYZIVA”). As alleged, MYZIVA offered internet-based
products and information relating to the nursing home industry to caregivers and consumers.
Abrams was alleged to be “of counsel” to the Abrams Firm and the president of the MYZIVA
companies. The Morrell Plaintiffs alleged that Abrams, Fensterman, and the Abrams Firm
solicited and fraudulently induced Scott Morrell to make a $400,00 loan to MYZIVA at a time
when they knew that MYZIVA had no intent to satisfy the loan, and then they misappropriated
the funds from the loan. The Morrell Plaintiffs further alleged that Abrams, Fensterman, and the
Abrams Firm fraudulently induced each of the Morrell Plaintiffs to make a $100,000 investment
in MYZIVA, and then they induced both of the Morrell Plaintiffs to agree to a “Share
Abandonment Agreement” – which extinguished and assigned all of the Morrell Plaintiffs’
rights, title, and interest in Golden Goslings back to Golden Goslings – for nominal consideration
and by falsely promising Scott Morrell 10% of the profits in Golden Goslings. The stock
purchase agreement and shareholder abandonment agreement executed by Scott Morrell were
attached to the Morrell Complaint. Abrams executed the stock purchase agreement as president
of each of the MYZIVA companies. Similarly, Abrams executed the shareholder abandonment
agreement as president of Golden Goslings. According to the Morrell Plaintiffs, Abrams,
Fensterman, and the Abrams Firm engaged in this fraudulent conduct in an effort to stave off
significant personal financial loss.
The Morrell Plaintiffs alleged that Abrams, Fensterman, and the Abrams Firm were Scott
Morrell’s legal counsel in connection with the loan, and that they made their investments in
MYZIVA upon the advice and counsel of Abrams, Fensterman, and the Abrams Firm. The
malpractice claim, the fourth cause of action, alleged that Abrams, Fensterman, and the Abrams
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Firm committed malpractice by, inter alia: (1) failing to adequately advise the Morrell Plaintiffs
in connection with the Morrell Plaintiffs’ investments in MYZIVA; (2) breaching their fiduciary
obligations to the Morrell Plaintiffs by inducing the Morrell Plaintiffs to abandon their rights,
title, and interest in Golden Goslings for no consideration and in furtherance of Abrams,
Fensterman. and the Abrams Firm’s personal benefit; and (3) breaching their fiduciary duty by
putting their own interests ahead of the Morrell Plaintiffs’ interests.
The Morrell Plaintiffs amended their complaint on December 1, 2010.
C. The Policy
The Policy provides coverage for “Damages” and “Claims Expenses” that
[t]he Insured shall become legally obligated to pay because of any
Claim or Claims . . . first made against the Insured and reported to
[Lloyd’s] during the Period of Insurance or Extended Reporting
Period, arising out of any act, error or omission of the Insured in
rendering or failing to render professional services for others in the
Insured’s capacity as a lawyer, fiduciary, arbitrator, mediator or
notary public, but solely for acts on behalf of the Named Insured
designated on Item 1 of the Declarations and caused by the Insured,
except as excluded or limited by the terms, conditions, and
exclusions of this policy.
The Policy defines the term “Insured” to include the “Named Insured” designated in Item 1 of the
Declarations (i.e., the Abrams Firm), as well as any lawyers who are partners in the Named
Insured, “but solely for acts on behalf of the Named Insured.” The term “Insured” also includes
the following persons, but only to the extent that their acts were “solely . . . on behalf of” the
Abrams Firm: lawyers who are “of counsel”; lawyers or other employees (including contract or
temporary attorneys) employed by the Abrams Firm; certain persons who “previously qualified as
an Insured”; and any lawyer who, during the policy period, becomes a partner, member,
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stockholder or employee of the Abrams Firm. The Policy defines “Claim” as “a demand
received by any Insured for money or services including the service of suit or institution of
arbitration proceedings against the Insured.”
There are various exclusions under the Policy, two of which are relevant here. Exclusion
IV(F) excludes from coverage “any Claim arising out of any Insured’s activities as a trustee,
partner, officer, director or employee of an employee trust, charitable organization, corporation,
company or business, other than that of the Named Insured.” Exclusion IV(G) excludes from
coverage
any Claim made by or against or in connection with any business
enterprise (including ownership, maintenance or care of any
property in connection therewith), not named in Item 1 of the
Declarations, which is owned by any Insured or which is directly or
indirectly controlled, operated or managed by any Insured in a nonfiduciary capacity; however, this Exclusion only applies to any
Claims made by or against any business enterprise in which an
Insured has an ownership interest equal to or greater than:
(1) 5% of the issued and outstanding voting stock of
the shares in any business enterprise which is
publically traded; or
(2) 10% if the shares in the business enterprise are
closely or privately held.
D. Lloyd’s Denials of Coverage
The Abrams Firm, through its broker, provided Lloyd’s with notice of the Burman Action
on or about July 8, 2010 and the Morrell Action on or about September 15, 2010. By separate
letters dated October 21, 2010, Lloyd’s, through its coverage counsel, Mendes & Mount, LLP,
denied coverage for the Burman and Morrell Actions, relying on, inter alia, Exclusions IV(F) and
IV(G) of the Policy for the denials.
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II. DISCUSSION
A. Summary Judgment Standard
To obtain summary judgment under FRCP 56, the party seeking judgment must
demonstrate that “there is no genuine dispute as to any material fact and the movant is entitled to
judgment as a matter of law.” Fed. R. Civ. P. 56(c); see Celotex Corp. v. Catrett, 477 U.S. 317,
322 (1986); Donahue v. Windsor Locks Bd. of Fire Comm'rs, 834 F.2d 54, 57 (2d Cir. 1987).
The burden of showing the absence of a genuine dispute as to any material fact rests on the party
seeking summary judgment. McLee v. Chrysler Corp., 109 F.3d 130, 134 (2d Cir. 1997).
B. Scope of the Duty to Defend and Indemnify
When determining whether an insurer has a duty to defend a particular action, the court
focuses on the four corners of the underlying complaint. The duty to defend exists unless “ ‘there
is no possible factual or legal basis on which the insurer will be obligated to indemnify the
insured.’ ” United States Underwriters Ins. Co. v. Falcon Constr. Corp., No. 02 CV 4179 (BSJ),
2004 WL 1497563, at *5 (S.D.N.Y. July 1, 2004) (quoting Napoli, Kaiser & Bern, LLP v.
Westport Ins. Corp., 295 F. Supp. 2d 335, 338 (S.D.N.Y. 2003)). If claims asserted in the
underlying action can be said to “rationally” fall within coverage of the policy at issue, there is an
obligation to defend. Seaboard Sur. Co. v. Gillette Co., 486 N.Y.S.2d 873 (N.Y. 1984); see also
U.S. Underwriters Ins. Co. v. Congregation Kollel Tisereth Tzvi, No. 99-CV-7398 DGT, 2004
WL 2191051, *4 (E.D.N.Y. Sept. 30, 2004) (stating that insurer bears “heavy burden of
demonstrating that there is no reasonable possibility of coverage under the policy” (quotations
omitted)). Similarly, where an exclusion is claimed, the insurer must show that the allegations in
the underlying complaint fall “solely and entirely” within an unambiguous exclusion from the
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policy’s coverage. U.S. Underwriters Ins. Co. v. 203-211 West 145th St. Realty Corp., No. 99
CIV. 8880 (WHP), 2001 WL 604060, at *4 (S.D.N.Y. May 31, 2001). If any exclusion applies,
there will be no coverage. See Maroney v. New York Cent. Mut. Fire Ins. Co., 805 N.Y.S.2d
533, 535 (N.Y. 2005). The burden of showing no duty to defend is on the insurer, and that
burden is high. Falcon Constr. Co., 2004 WL 1497563, at *5; Congregation Kollel Tisereth
Tzvi, 2004 WL 2191051, at *4. The duty to indemnify is narrower and exists only after a
determination that the “loss, as established by the facts, is covered by the policy.” Atlantic Mut.
Ins. Co. v. Terk Techs. Corp., 763 N.Y.S.2d 56, 60 (1st Dep’t 2003).
C. Coverage of the Burman and Morrell Actions
The Abrams Firm argues that the claims in the Burman and Morrell Actions fall within
the scope of coverage under the Policy, in that each of the underlying actions includes, on its
face, covered claims – namely, those sounding in legal malpractice. Lloyd’s argues, inter alia,
that even if any of those claims fall within the scope of the Policy, they are expressly excluded
from coverage. In this respect, Lloyd’s argues that notwithstanding the claims sounding in legal
malpractice, all claims in the underlying actions are barred by Exclusions IV(F) and IV(G) – socalled “business pursuit exclusions” and “business enterprise exclusions.”
In determining whether the exclusions apply, the Court finds instructive the First Circuit’s
decision in Mt. Airy Ins. Co. v. Greenbaum, 127 F.3d 15 (1st Cir. 1997). There, the First Circuit
concluded that an exclusion, similar to Exclusions IV(F) and IV(G), excluded coverage for all
claims, including legal malpractice claims. The court held that the subject business enterprise
exclusion “precludes coverage for any claim which arises out of or in connection with a business
venture controlled, operated or managed by any Insured or in which the Insured has an interest as
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an owner or partner. This includes all claims sounding in malpractice if the allegations charge
wrongdoing in connection with a business in which the Insured has such an interest.” Mt. Airy
Ins., 127 F.3d at 20 (emphasis in original). As the court explained:
[The insureds’] argument that the duty to defend is triggered by
allegations of legal malpractice misses the mark. [The subject
exclusion] does not even come into play unless the allegations
charge legal malpractice because coverage under the policy is
limited to malpractice. “There will always be an attorney-client
relationship when these exclusions are at issue. Absent an
attorney-client relationship, the insuring agreement does not apply
and the language of the specific exclusions does not come into
play. [The insureds’] contention would create an illogical result;
the policy exclusions would be rendered entirely meaningless and
of no effect.”
Id. (quoting Senger v. Minnesota Lawyers Mut. Ins. Co., 415 N.W.2d 364, 368 (Minn. App.
1987)). Indeed, one of the recognized purposes of a business enterprise exclusion is “ ‘to avoid
circumstances where an insured so intermingles his business relationships with his law practice
that an insurance carrier incurs additional risk of having to cover the insured for legal malpractice
claims relating to the conduct of business, rather than solely out of the professional practice.’ ”
Admiral Ins. Co. v. Adges, No. 11 Civ. 8289 (JPO), 2012 WL 2426541, at *2 (S.D.N.Y. June 27,
2012) (quoting Jeffer v. Nat’l Union Fire Ins. Co., 703 A.2d 316, 322 (N.J. Super. Ct. 1997)).
Under the reasoning in Mt. Airy, the claims sounding in legal malpractice and the
allegations of an attorney-client relationship between the Abrams Firm and the Burman and
Morrell Plaintiffs do not preclude applicability of the Policy’s business enterprise exclusions.
Indeed, a business enterprise exclusion “does not come into play” absent an alleged attorneyclient relationship. Id.
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Exclusion IV(F) excludes from coverage “any Claim arising out of any Insured’s
activities as a trustee, partner, officer, director or employee of an employee trust, charitable
organization, corporation, company or business, other than that of the Named Insured.” The
phrase “arises out of” is not defined in the Policy. However, the phrase is commonly interpreted
to mean “originating from, incident to, or having connection with.” See Maroney, 805 N.Y.S.2d
at 535; Atlantic Cas. Ins., 585 F. Supp. 2d at 326; see also Mt. Airy Ins., 127 F.3d at 20 (holding
that provision excluding coverage for “any claim which arises out of or in connection with a
business venture controlled, operated or managed by any Insured or in which the Insured has an
interest as an owner or partner,” extends to “all claims in connection with the conduct of an
Insured’s business entities”). Given that the exclusion applies to “any Claim,” even claims
sounding in legal malpractice may be barred from coverage provided a sufficient relationship
exists between the underlying claim and the insured’s conduct. See Maroney, 805 N.Y.S.2d at
535; Atlantic Cas. Ins., 585 F. Supp. 2d at 326; see also Mt. Airy Ins., 127 F.3d at 20. Moreover,
on its face, the exclusion applies whether or not the insured’s activities as a “trustee, partner,
officer, director or employee” of a business also constitute or involve professional services.
Upon consideration, the Court concludes that all claims alleged in the Burman Action
“arise out of” Fensterman’s activities as a “trustee, partner, officer, director or employee” of
AGIC and AGMC, the entity that managed AGIC. Fensterman’s conduct is alleged to have been
part of the fraudulent scheme to induce plaintiffs to invest in AGIC and to misappropriate those
funds, notwithstanding that the Burman Plaintiffs also alleged an attorney-client relationship and
that they acted “upon the advice of Fensterman, as [their] attorney,” Burman Complaint ¶¶ 82-84.
The allegations of the Burman Complaint demonstrate that all of the claims have a sufficient
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causal connection with Fensterman’s conduct relating to AGIC and AGMC. Accordingly, all
claims in that action are barred by Exclusion IV(F).
As for the Morrell Action, all claims in that action “arise out of” Abrams’ activities as a
“trustee, partner, officer, director or employee” of the MYZIVA companies. All of the claims
have a sufficient causal connection with Abrams’ conduct relating the MYZIVA companies.
Indeed, Abrams executed the stock purchase agreement as president of each of the MYZIVA
companies and the shareholder abandonment agreement as president of Golden Goslings.
Accordingly, based on the Morrell Complaint, all claims in that action are barred by Exclusion
IV(F).
Given that Exclusion IV(F) applies, it is unnecessary to determine whether Exclusion
IV(G) also applies. Nevertheless, like Exclusion IV(F), Exclusion IV(G) applies to “any Claim,”
and, therefore, would include claims sounding in legal malpractice. The Burman Action is
barred by Exclusion IV(G), as (1) all claims in that action are “against or in connection with”
AGIC and/or AGMC; (2) Fensterman was a member of, and held a 25% interest in, AGMC, and
he was a founding member and managing director of AGIC; and (3) Fensterman participated in
the “control, operation and management” of AGIC in a non-fiduciary capacity. Thus, based on
the Burman Complaint, all claims in that action are barred by Exclusion IV(G).
As for the Morrell Action, all claims in that action are against or in connection with
MYZIVA, and Abrams, as president of the MYZIVA companies, was involved in the “control,
operation and management” of the MYZIVA companies in a non-fiduciary capacity. Although
the Morrell Complaint did not allege whether Abrams or Fensterman held ownership interests –
controlling or otherwise – in MYZIVA, the October 21, 2010 declination letter references that
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Abrams informed Lloyd’s and/or its coverage counsel that Abrams held a 25% interest in
MYZIVA (and that Fensterman and two other Abrams Firm partners held 25% each).2 This
extrinsic information does not contradict any of the allegations in the Morrell Action and
arguably does not even bear on the merits of the claims therein, but it is relevant to the
applicability of Exclusion IV(G). As such, the information properly was considered in Lloyd’s
determination and supports the application of Exclusion IV(G). Thus, all claims in the Morrell
Action are barred by Exclusion IV(G).3
Accordingly, the Court concludes that Lloyd’s denials of coverage were supported by the
Burman and Morrell Complaints. Therefore, Lloyd’s does not owe the Abrams Firm a duty to
defend or indemnify in the Burman and Morrell Actions. Accordingly, the Court grants summary
judgment to Lloyd’s and denies summary judgment to the Abrams Firm.
III. CONCLUSION
For the above reasons, the Court grants summary judgment to Lloyd’s and denies
summary judgment to the Abrams Firm. The Clerk of Court is directed to enter judgment for
2
Notably, paragraph 22 of the amended complaint, dated December 3, 2010, alleged that
Fensterman and Abrams maintain a controlling interest in MYZIVA.
3
This result is consistent with one of the recognized purposes of a business enterprise exclusion,
i.e., avoiding imposing additional risk on an insurer of having to cover the insured for legal
malpractice claims relating to the conduct of business, rather than solely out of the professional
practice. See Adges, 2012 WL 2426541, at *2; Jeffer, 703 A.2d at 322. Undoubtedly, an
insurance premium is set in reliance on the reasonable expectation that the exclusion would
avoid such a risk. To impose a duty to defend and indemnify under the circumstances here
would defeat that expectation and the purpose of the exclusions, and likely would cause a
significant rise in legal malpractice premiums.
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Lloyd’s dismissing the action and to close the file.
SO ORDERED.
_____________/s/_________________
LEONARD D. WEXLER
UNITED STATES DISTRICT JUDGE
Dated: Central Islip, New York
January 2, 2013
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