Aqua Star (USA) Corp v. Travelers Casualty and Surety Company of America
Filing
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ORDER DENYING Plaintiff's 45 Motion for Summary Judgment and GRANTING Defendant's 58 Motion for Summary Judgment, by Judge Robert S. Lasnik. (KERR)
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UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF WASHINGTON
AT SEATTLE
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AQUA STAR (USA) CORP., a subsidiary of
ADMIRALTY ISLAND FISHERIES, INC.,
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Plaintiff,
NO. C14-1368RSL
v.
TRAVELERS CASUALTY AND SURETY
COMPANY OF AMERICA,
ORDER ON CROSS MOTIONS FOR
SUMMARY JUDGMENT
Defendant.
This matter comes before the Court on plaintiff’s motion for partial summary judgment
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(Dkt. # 45) and defendant’s motion for summary judgment (Dkt. # 58). Having reviewed the
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parties’ briefing and exhibits, and the remainder of the record, the Court finds as follows.
BACKGROUND
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Plaintiff Aqua Star (USA) Corp. (Aqua Star) is a seafood importer that does business with
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Zhanjiang Longwei Aquatic Products Industry Co. Ltd. (Longwei), a vendor from which it
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purchases frozen shrimp. In the summer of 2013, Longwei’s computer system was hacked. The
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hacker apparently monitored email exchanges between an Aqua Star employee and a Longwei
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employee before beginning to intercept those email exchanges and send fraudulent emails using
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“spoofed” email domains that appeared similar to the employees’ actual emails – for example,
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substituting the number “1” for a lower case “l.” In these emails, the hacker directed the Aqua
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Star employee to change the bank account information for Longwei for future wire transfers.
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Aqua Star employees made the changes as directed and were ultimately defrauded of $713,890
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by the hacker.
At issue in this action is whether Aqua Star’s losses are covered by the “Wrap +” Crime
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Policy (the Policy) issued by defendant Travelers Casualty and Surety Company of America
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(Travelers). The Policy covered Computer Fraud: “The Company [Travelers] will pay the
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Insured for the Insured’s direct loss of, or direct loss from damage to, Money, Securities, and
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Other Property directly caused by Computer Fraud.” Dkt. # 22-1 at 4. This coverage was also
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subject to a number of exclusions. Id. at 15-17. Aqua Star sought coverage from Travelers,
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which denied the claim, stating that the loss was not directly caused by computer fraud and that
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several of the Policy exclusions applied.
Plaintiff moved for summary judgment on its claims for breach of contract and
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declaratory relief (Dkt. # 45). Defendant moved for summary judgment on all claims (Dkt.
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# 58).
DISCUSSION
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A. Summary Judgment Standard
Summary judgment is appropriate if, viewing the evidence and all reasonable inferences
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drawn therefrom in the light most favorable to the nonmoving party, the moving party shows
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that “there are no genuine issues of material fact and the moving party is entitled to judgment as
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a matter of law.” Fed. R. Civ. P. 56(a); Torres v. City of Madera, 648 F.3d 1119, 1123 (9th Cir.
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2011). The moving party “bears the initial responsibility of informing the district court of the
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basis for its motion.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Where the nonmoving
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party will bear the burden of proof at trial, the moving party may meet its burden by “pointing
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out . . . that there is an absence of evidence to support the nonmoving party’s case.” Id. at 325.
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Once the moving party has satisfied its burden, the nonmoving party must then set out “specific
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facts showing that there is a genuine issue for trial” in order to defeat the motion. Id. at 324.
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“The mere existence of a scintilla of evidence in support of the non-moving party’s position” is
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not sufficient; this party must present probative evidence in support of its claim or defense.
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Arpin v. Santa Clara Valley Transp. Agency, 261 F.3d 912, 919 (9th Cir. 2001); Intel Corp. v.
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Hartford Accident & Indem. Co., 952 F.2d 1551, 1558 (9th Cir. 1991). An issue is genuine only
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if there is a sufficient evidentiary basis on which a reasonable fact finder could find for the
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nonmoving party. In re Barboza, 545 F.3d 702, 707 (9th Cir. 2008). On cross motions for
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summary judgment, the Court evaluates the motions separately, “giving the nonmoving party in
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each instance the benefit of all reasonable inferences.” Lenz v. Universal Music Corp., No.
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13-16106, 2015 WL 5315388, at *2 (9th Cir. Sept. 14, 2015) (internal quotation marks and
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citation omitted).
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B. Interpretation of Insurance Policies Under Washington Law
Insurance policies are construed as contracts under Washington law. Weyerhaeuser Co.
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v. Commercial Union Ins. Co., 142 Wn.2d 654, 665 (2000), as amended (Jan. 16, 2001). The
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policy is to be construed as a whole and given a “fair, reasonable, and sensible construction as
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would be given to the contract by the average person purchasing insurance.” Id. (internal
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quotation marks omitted). In the case of clear and unambiguous policy language, “the court
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must enforce it as written and may not modify it or create ambiguity where none exists.” Id.
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(internal quotation marks omitted). A clause is ambiguous if it is “fairly susceptible to two
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different interpretations, both of which are reasonable.” Id. (internal quotation marks omitted).
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When determining coverage, the initial burden of proof is on the insured to show that a loss falls
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within the terms of the policy. Wright v. Safeco Ins. Co. of Am., 124 Wn. App. 263, 271
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(2004). The burden then shifts to the insurer to prove that the loss is not covered because of
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exclusionary provisions within the policy. Id.
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C. Exclusion G Applies
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Assuming, for the purposes of this motion, that Aqua Star’s loss was caused by Computer
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Fraud as defined in the Policy, Travelers’s denial of Aqua Star’s claim was proper if it fell
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within a coverage exclusion. Exclusion G provides that the Policy “will not apply to loss
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resulting directly or indirectly from the input of Electronic Data by a natural person having the
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authority to enter the Insured’s Computer System” unless covered under insuring agreements not
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applicable here. Dkt. # 22-1 at 15. Travelers relied on Exclusion G in denying coverage. In its
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initial denial letter, Travelers stated: “Exclusion G. excludes this loss from coverage, because
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there was no unauthorized use of your Computer System. Rather, access to and data input in
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your computer for this business transaction was accomplished by those authorized to use it.”
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Dkt. # 51-2 at 6. In a letter from Traveler’s outside counsel affirming denial of coverage,
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Travelers again relied on Exclusion G and summarized the facts leading to its conclusion that
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Exclusion G applied: “Pursuant to Mr. Curran’s instructions, Ms. Tchobanenko inserted revised
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banking information for Longwei into Aqua Star’s Computer System. Such information is
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Electronic Data under the Policy’s definition. Ms. Tchobanenko used this Electronic Data to
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create Wire Confirmation Detail documents that were transmitted to Bank of America, Aqua
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Star’s bank.” Dkt. # 51-4.
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Plaintiff acknowledges that Angela Tchobanenko, the Treasury Manager at Aqua Star,
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“saved the email with new wiring instructions, and entered the new bank account information in
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the Excel spreadsheet that [she] used to keep track of payments to Longwei.” Dkt. # 47 at 4.
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This process was consistent with Tchobanenko’s general practice at the time: “[I]f a vendor
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provided Aqua Star with new wiring instructions for paying the vendor, [she] would enter the
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new payment instructions in an Excel spreadsheet that [she] saved locally on [her] work
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computer.” Id. at 2. This spreadsheet served two purposes. First, Tchobanenko included it in a
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packet given to Aqua Star management to approve payments to vendors. Id. at 2, 4. Second, the
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spreadsheet was “a convenien[t] place [for Tchobanenko] to save and store the payment details
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for each vendor, so [she] didn’t have to look them up every time [she] made a payment.” Id. at
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3. Aqua Star does not contend that Tchobanenko was an unauthorized user or that she did not
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input Electronic Data into Aqua Star’s Computer System, as defined by the policy.
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In this case, the entry of data into the Excel spreadsheet on Aqua Star’s Computer system
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was an indirect cause of Aqua Star’s loss. The fraudulent bank account information was entered
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in Aqua Star’s Computer System and used to prepare a packet of materials for approval of the
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payment by Aqua Star’s management. Dkt. # 47 at 2. Entering this data into a spreadsheet was
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a necessary step prior to initiating any transfer. Id. Tchobanenko printed out a copy of the
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spreadsheet and included it in a package of documents that was presented to a member of Aqua
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Star’s management for approval of the payment. Id. Even if management did not rely upon or
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even review the account number in the packet, however, Tchobanenko also used the information
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she input into the spreadsheet to prepare and initiate the wire transfers. Id. at 2-3. Therefore, the
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entry of Electronic Data into Aqua Star’s Computer System was an intermediate step in the chain
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of events that led Aqua Star to transfer funds to the hacker’s bank accounts. Because an indirect
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cause of the loss was the entry of Electronic Data into Aqua Star’s Computer System by
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someone with authority to enter the system, Exclusion G applies. None of Aqua Star’s
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arguments to the contrary, addressed below, justify another conclusion.
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Aqua Star’s primary argument against the applicability of Exclusion G is that in order to
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initiate the transfer, an Aqua Star employee had to enter data into the computer system of a third
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party, Bank of America. See Dkt. # 45 at 19-20. Although entering data into a third party’s
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computer system may have been the final step that led to Aqua Star’s loss, necessary
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intermediate steps prior to the transfer involved entering Electronic Data into Aqua Star’s own
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Computer System. Aqua Star does not explain why the involvement of a third party computer
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system would render Exclusion G inapplicable. Aqua Star also argues that saving the bank
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information in the spreadsheet “was not materially different than writing the information on a
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sticky note or index card.” Dkt. # 63 at 20. Although Exclusion G may not apply in such a case,
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that is not the factual situation before the Court. Here, an Aqua Star employee with the
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appropriate authority unquestionably entered Electronic Data into Aqua Star’s Computer System
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rather than using a record-keeping method that did not involve Aqua Star’s Computer System.
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Aqua Star additionally makes the argument that the “exclusion is intended to preclude coverage
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where a fraud is perpetrated by an authorized user of an insured’s computer system, such as an
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employee or customer.” Dkt. # 63 at 19 (citing Morgan Stanley Dean Witter & Co. v. Chubb
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Group of Ins. Cos., 2005 N.J. Super. Unpub. LEXIS 798 (N.J. Super. Ct.)); see also Dkt. # 78 at
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12. While Aqua Star may have a view regarding what Exclusion G should cover, the clear
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language of the policy does not limit the exclusion to fraud perpetrated by an authorized user,
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although as Morgan Stanley demonstrates, it certainly could apply in that situation. Finally,
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Aqua Star argues that Travelers has not applied Exclusion G consistently and that “either
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Exclusion G is so ambiguous that Travelers’ own employees do not understand the scope of the
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exclusion, or Travelers is asserting a strained interpretation of Exclusion G in this case in an
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effort to deny coverage to Aqua Star.” Dkt. # 20 at 26.1 Aqua Star does not cite any authority
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that requires an insurance company to consistently raise an exclusion or risk waiving its ability
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to rely on the exclusion in the future. The Court will not impose such a rule in this case.
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D. Breach of the Covenant of Good Faith and Fair Dealing and Violation of the Insurance
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Fair Conduct Act (IFCA)
The parties appear to agree that if the Court determines that Aqua Star’s loss was not
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covered by the Policy, summary judgment on Aqua Star’s claims for breach of the covenant of
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good faith and fair dealing and violation of the IFCA is appropriate. Aqua Star has offered no
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argument that these claims can proceed if the Court determines that coverage was properly
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denied. Indeed, it is difficult to comprehend how denial of coverage could be deemed
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“unreasonable” in violation of the IFCA or in breach of the duty of good faith if the Court has
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concluded that denial was proper. Therefore, the Court grants summary judgment for Travelers
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as to these claims.
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Aqua Star also requests that the Court take judicial notice of records and filings in other cases.
Dkt. # 53. The Court did not find it necessary to consider these documents, and Aqua Star’s request is
therefore DENIED.
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CONCLUSION
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For the foregoing reasons the Court GRANTS defendant’s motion for summary judgment
(Dkt. # 58) and DENIES plaintiff’s motion for summary judgment (Dkt. # 45).
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DATED this 8th day of July, 2016.
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A
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Robert S. Lasnik
United States District Judge
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