Eurospark Ind. v. Underwriters at Lloyds

• Decision Date: 02 July 2008
• Docket Number: No. 1:05-CV-0208 (ENV)(JMA).,1:05-CV-0208 (ENV)(JMA).
• Citation: 567 F.Supp.2d 345
• Parties: EUROSPARK INDUSTRIES, INC., Debtor-in-Possession, Plaintiff, v. The UNDERWRITERS AT LLOYDS SUBSCRIBING TO THE RISK ON COVER NO. 97FA0071010A, and the Underwriters at Lloyds Subscribing to the Risk on Certificate No. FC10328697, Defendants. Eurospark Industries, Inc., Debtor-in-Possession, Plaintiff, v. Massachusetts Bay Insurance Company, Defendant.
• Court: U.S. District Court — Eastern District of New York

567 F.Supp.2d 345

EUROSPARK INDUSTRIES, INC., Debtor-in-Possession, Plaintiff, v. The UNDERWRITERS AT LLOYDS SUBSCRIBING TO THE RISK ON COVER NO. 97FA0071010A, and the Underwriters at Lloyds Subscribing to the Risk on Certificate No. FC10328697, Defendants.

Eurospark Industries, Inc., Debtor-in-Possession, Plaintiff, v. Massachusetts Bay Insurance Company, Defendant.

No. 1:05-CV-0208 (ENV)(JMA).

United States District Court, E.D. New York.

July 2, 2008.

Joshua L. Mallin, Esq., Weg & Myers, P.C., New York, NY, for Debtor-in-Possession.

Daniel Joel Friedman, Esq., Abrams, Gorelick, Friedman & Jacobson, P.C., New York, NY, for Massachusetts Bay Insurance Co.

Daniel C. Marotta, Esq., Raymond J. Dowd, Esq., Dowd & Marotta, New York, NY, for interested party Michael Spiegel.

MEMORANDUM and ORDER

VITALIANO, District Judge.

Plaintiff and debtor-in-possession Eurospark Industries, Inc. ("Eurospark"), a former manufacturer of gold jewelry, has sought relief under insurance policies issued by defendants Underwriters at Lloyds ("Lloyds") and Massachusetts Bay Insurance Company ("Mass. Bay") for various claims of loss relating to the alleged theft of gold from its premises in March 1998. Disclaiming coverage, Lloyds and Mass. Bay have each moved for summary judgment. Magistrate Judge Joan M. Azrack, to whom these motions had been referred, has filed her report recommending that Lloyds' motion be granted in part and denied in part, and Mass. Bay's motion be denied. The Court accepts and concurs in Judge Azrack's recommendation.

Facts and Procedural History

Eurospark's business was manufacturing at its Long Island City factory raw gold into finished chains and jewelry.¹ While in business, Eurospark always maintained various quantities of gold at its factory, including raw gold, finished products, and work-in-process. Most of the gold maintained there was on consignment to Eurospark by Fleet Precious Metals Inc. ("Fleet"). Eurospark was obligated to pay interest to Fleet on the consignment gold in its possession and, as it sold finished gold products to its customers, would make payments to Fleet. Gold is generally bought and sold at a set price known in the gold industry as the London Bullion Brokers 2nd fixing price, or 2nd London Fix. Eurospark's profits were derived from the charge it imposed on its customers for labor involved in manufacturing jewelry.

On March 14, 1998, an armed robbery supposedly occurred at the factory, with the loss of a quantity of gold.² Eurospark subsequently submitted claims under its insurance policies with Lloyds for the value of the stolen gold and with Mass. Bay for business income lost as a result of the robbery.

I. The Lloyds Claim

During the relevant period, Eurospark had both primary and excess "Jewellers Block" policies with Lloyds totaling $5.5 million in coverage.³ Following the alleged theft, Eurospark filed a proof of loss statement in which it claimed that it had sustained a loss of roughly $4 million based upon (a) the value, according to the relevant 2nd London Fix price, of 10,643 fine troy ounces (FTO) of the stolen gold, and (b) $959,109 in the value of labor lost in that portion of the gold that had been manufactured or was in the process of being manufactured into chains and jewelry. At some point after the claim was filed, Eurospark retained Bourget & Associates, Inc. ("Bourget"), a forensic accountant, to prepare a so-called "roll-forward" calculation to support its claim. A roll-forward calculation is done in lieu of a perpetual inventory, that is, a calculation starting with the known inventory as of the date of the last physical count, then adding "gold in" by FTO and subtracting "gold out" up to the date of the robbery. The roll-forward inquiry in this case began January 1, 1997 (the date of a physical count which had been audited and supervised by Eurospark's accountant, BDO Seidman) and extended to March 14, 1998, the date of the robbery.

Pursuant to a cooperation clause in the policy, Lloyds also demanded that various witnesses for Eurospark appear for examination under oath (EUO). Numerous witnesses appeared and testified, including Eurospark's president and sole shareholder, Michael Spiegel. Spiegel's testimony at his EUO forms the primary basis for Lloyds' disclaiming coverage in its instant motion. In particular, Spiegel was asked about two confirmations from Fleet in April 1997 that showed payments to Fleet totaling over $1 million for 3000 FTO of gold, resulting in a reduction to Eurospark's consignment account by that amount. Spiegel initially characterized these transactions as a purchase by Eurospark and stated that the purchase was made with extra money from Eurospark's accounts receivable. When confronted at the EUO both with Eurospark's bank statements for April 1997, which did not show the $1 million coming out of Eurospark's account, and with Eurospark's gold inventory for that period, which did not show a corresponding increase in the amount of gold, Spiegel advised the examiner that all questions regarding such records should be referred to his accountant, BDO Seidman. During this same line of inquiry at the EUO, Spiegel was also asked about one of Eurospark's customers, Mosexpo Moscow. Spiegel did not affirmatively state that the April 1997 transaction had anything to do with Mosexpo— though, Eurospark points out, Spiegel was not asked directly whether this transaction had any connection with Mosexpo.

After an elapse of time, in papers filed in connection with Eurospark's motion for summary judgment in the bankruptcy court (ultimately unsuccessful), and in responses to interrogatories in that proceeding, and in a Bankruptcy Rule 7030 deposition, Spiegel's description of the April 1997 transaction had changed significantly. Regardless the epiphany, Spiegel now recalled that the gold was not purchased by Eurospark, but by Mosexpo. According to Spiegel, Mosexpo placed a large order with Eurospark in early 1997 requiring 3000 ounces of gold to be manufactured into jewelry. Eurospark either did not have or did not wish to pay the $1 million necessary to acquire the gold from Fleet's consignment line, so it was agreed that Mosexpo would pay Fleet directly for the gold. Shortly after Mosexpo paid Fleet, however, Mosexpo cancelled the jewelry order with Eurospark, apparently due to a change in Russian tax laws that had made the order unprofitable for Mosexpo. However, Mosexpo still wished to take the raw gold for which it had already paid. Therefore, some weeks after the cancellation of the order, it picked up 3000 ounces of gold by messenger from Eurospark's factory. Mosexpo's order and cancellation were apparently given orally to Spiegel over the telephone, and Eurospark does not have records specifically reflecting Mosexpo's order, cancellation, or pickup of the gold.⁴

Lloyds now disclaims coverage on the grounds that Eurospark voided coverage when Spiegel gave false testimony at his EUO regarding the April 1997 transaction, and further, that Eurospark breached its obligations under the policy by failing to keep records regarding the Mosexpo transaction; it claims that the contract language entitles it to summary judgment as a matter of law. In the alternative, Lloyds moves for partial summary judgment dismissing that part of Eurospark's claim seeking indemnification for the "labor component" of the stolen gold, which, it contends, was not covered under the policy in any circumstance.

II. The Mass. Bay Claim

Eurospark also filed a separate claim with Mass. Bay for roughly $1.5 million in lost business income and for covered extra expenses resulting from the theft of the gold, which, pursuant to a co-insurance provision, Eurospark reduced to just over $1 million. The Mass. Bay policy insures for the loss of business income sustained during the "period of restoration" following a loss, which was to begin on the date of a physical loss of the property and end on the date when the lost property "should be repaired, rebuilt, or replaced with reasonable speed and similar quality." Mass. Bay now disclaims on the grounds that the policy excluded coverage for the stock on Eurospark's premises and, in the alternative, that Eurospark's records as to the gold allegedly stolen were so poor as to render its claim speculative.

III. Procedural History

Eurospark filed for bankruptcy in August 1998, and the instant action was commenced as separate adversary proceedings against the defendants in the bankruptcy court. The adversary proceedings were consolidated and referred to Judge Edward R. Korman of this Court, who then returned the case to the bankruptcy judge with instructions to complete all pre-trial discovery and return it to Judge Korman for trial. On January 13, 2005, the case was transferred back to Judge Korman for all purposes. On January 26, 2006, Judge Korman referred the instant motions for summary judgment to Magistrate Judge Azrack for a report and recommendation. On April 20, 2006, overall responsibility for the case was transferred to this Court. On February 1, 2008, Magistrate Judge Azrack issued her Report and Recommendation ("R & R"), recommending that this Court grant Lloyds' motion for summary judgment only with respect to Eurospark's claim for lost labor value and otherwise deny it, and deny Mass. Bay's motion for summary judgment altogether. Eurospark, Spiegel as intervenor, and Lloyds have each filed objections to the R & R. Mass. Bay has not filed an objection.

Magistrate Judge's Report and Recommendation

More specifically, as to Lloyds' motion to dismiss on the grounds of fraud, although Judge Azrack notes that Lloyds has adduced evidence that would permit a reasonable person to conclude that Spiegel had lied under oath regarding the April 1997 transaction, she recommends denial of summary judgment because the motion ultimately turns on assessments of credibility, which, she notes, are generally questions for a jury to...