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Kirschenbaum v. Federal Insurance Co.

United States District Court, E.D. New York

February 6, 2014

KENNETH KIRSCHENBAUM, as Trustee for the Estate of EMS Financial Services, LLC, Plaintiff,
v.
FEDERAL INSURANCE COMPANY, WHITE LINES COM, LLC, BRUCE POLLAK and " JOHN DOE #1" through " JOHN DOE #10", defendants being unknown to Plaintiff, the parties intended being any party asserting a claim for coverage under Debtor's errors and omissions insurance policy (Policy Number 8223-2057) issued by Federal Insurance Company, Defendant

Page 127

For Kenneth Kirschenbaum, as Chapter 7 Trustee for the Estate of EMS Financial Services, LLC, Plaintiff: Steven B. Sheinwald, Esq., Of Counsel, Kirschenbaum & Kirschenbaum, P.C., Garden City, NY.

For Federal Insurance Company One Penn Plaza, Defendant: Courtney E. Scott, Esq., Of Counsel, Tressler LLP, New York, NY.

For White Lines Com, LLC, Defendant: Richard B. Podoll, Esq., Robert A. Kitsmiller, Esq., Of counsel, Podoll & Podoll, P.C., Greenwood Village, CO.

OPINION

Page 128

MEMORANDUM OF DECISION AND ORDER

ARTHUR D. SPATT, United States District Judge.

On March 6, 2012, the Debtor EMS Financial Services, LLC (" EMS" and the " Debtor" ) filed a voluntary petition for Chapter 7 bankruptcy in the United States Bankruptcy Court in the Eastern District of New York before United States Bankruptcy Judge Alan S. Trust. On May 30, 2012, the Plaintiff Kenneth Kirschenbaum, Esq., the Chapter 7 Trustee for EMS (the " Trustee" ), filed an adversary proceeding in the Bankruptcy Court against the Defendant Federal Insurance Company (" Federal" ) and other parties, including White Lines Com LLC (" White Lines" ), an entity allegedly injured by EMS. The Trustee sought a declaration of the rights, duties, and liabilities of the parties under certain insurance policies.

On August 7, 2012, Federal moved this Court to withdraw the adversary proceeding. On April 19, 2013, this Court granted Federal's motion to withdraw the reference.

White Lines now seeks to amend its answer to assert cross claims against Federal, including a declaratory judgment as to, among other things, whether EMS, Federal's insured, is liable to White Lines for negligence in an amount in excess of $5,000,000. For the following reasons, the Court denies the motion to amend.

I. BACKGROUND

A. The Policy

On or about January 5, 2011, an insurance policy was issued to EMS by Federal under Policy Number 8223-2057 (the " Policy" ). The Policy covered a one year period, from December 27, 2010 through December 27, 2011. The Policy was an errors and omissions policy, under which EMS and its officers, directors, and employees were insured for any loss resulting from a claim for wrongful acts committed by EMS or its agents. The Policy contained a $5,000,000 cap on any single claim and on all aggregate claims.

B. The Creditor Lawsuits

Prior to the filing of EMS's bankruptcy petition, litigation had been commenced against the Debtor by White Lines and Bruce Pollak (" Pollak" ) (collectively, the " Creditors" ) in two separate proceedings: (1) White Lines.Com, LLC, Plaintiff v. EMS Financial Services, LLC, et al., Defendants, in the Supreme Court of the State of New York, County of New York, Index Number 653221/2011; and (2) Bruce Pollak, Plaintiff, v. EMS Financial Services, LLC, Defendant, in the United States District Court for the Middle District of Pennsylvania, Case Number 11-cv-1969(YK) (collectively, the " Creditor Lawsuits" ). Neither White Lines nor Pollak are named insureds under the Policy. Federal has undertaken the defense of EMS and retained counsel in the Creditor Lawsuits, subject to Federal's continued investigation and a full reservation of its rights under the Policy.

Page 129

In each of the Creditor Lawsuits, the Creditors assert that funds given to EMS were improperly used. At the time of the bankruptcy filing, both Creditors had filed motions for a default judgment in their respective courts.

Subsequently, after the bankruptcy case began, the Creditors each filed a motion pursuant to 11 U.S.C. § 362 seeking an order to vacate the automatic stay so as to permit each of them to continue the prosecution of their respective lawsuits. The Bankruptcy Court lifted the automatic stay for the limited purpose of allowing the Creditors to adjudicate their respective motions for default judgment, and proceed to an inquest to determine the amount of their claims.

On October 5, 2012, the Supreme Court of the State of New York denied White Line's motion for a default judgment, and previously, on July 24, 2012, the United States District Court for the Middle District of Pennsylvania denied Pollak's motion for a default judgment.

In addition to Creditor Lawsuits, the Creditors each filed a proof of claim in the Bankruptcy Court proceeding. White Lines filed a proof of claim against EMS on March 22, 2012 in the sum of $7,840,643, and Pollak filed a proof of claim against EMS on June 5, 2012 in the sum of $1,325,000. The aggregate ...


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