Appendix — In re Allen
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Supreme Court, U.S.
FILED
61151 DEC 101%
No. Pye OF THE CLERK
IN THE
Supreme Court of the United States
October Term, 1996
In re LOUIS F. ALLEN, et al., Petitioners
Petition for a Writ of Mandamus Gaga
GEE to the United States Court of Appeals
for the Fourth Circuit and
The Honorable Paul V. Niemeyer, M. Blane Michael and
Diana Gribbon Motz, Circuit Judges
APPENDIX FOR PETITIONERS
A. Stephens Clay
Counsel of Record
Susan A. Cahoon
KILPATRICK & CODY, L.L.P.
1100 Peachtree Street, Suite 2800
Atlanta, Georgia 30309-4530
(404) 815-6500
Counsel for Petitioners
December 10, 1996
sindbis oiicieeaeatenieiinea canes ucendin a eatradk nce a
CASILLAS PRESS, INC., 1717 K STREET, N.W., WASHINGTON, D.C. 20036
i
TABLE OF CONTENTS
_ Page
Appendix A Opinion of the United States Court of
Appeals for the Fourth Circuit, dated
September 3, 1996, Allen, et al., v.
Lieyd’s, ef al., No. 96-2158. ............ la-15a
Appendix B Order of the United States District Court
for the Eastern District of Virginia,
Richmond Division, entered on
August 23, 1996, Allen, et al. v. Lloyd's,
et al., Civil Action No. 3:96cv522........... 16a
Appendix C Order of Preliminary Injunction of the
United States District Court for the
Eastern District of Virginia, Richmond
Division, entered on August 23, 1996,
Allen, et al. v. Lloyd’s, et al., Civil Action
I fn ean ea aa Wawa 17a-2la
Appendix D Memorandum Opinion of the United
States District Court for the Eastern
District of Virginia, Richmond Division,
dated August 23, 1996, Allen,
et al. v. Lloyd’s, et al., Civil Action
St. ag 5 4 beg ka Cok b tS RONS 22a-146a
Appendix E Order of the United States Court of
Appeals for the Fourth Circuit, entered
on September 11, 1996, Allen, et al. v.
Lloyd’s, et al., No. 96-2158.......... 147a-149a
Appendix F Order of the United States Court of
Appeals for the Fourth Circuit, entered
on September 20, 1996, Allen, et al. v.
Lloyd’s et al., No. 95-2158.......... 150a-152a
Appendix G Notice of Appeal, dated August 23, 1996,
Allen, et al. v. Lloyd’s, et al., Civil Action
No. 3:96cv522, United States District
Court for the Eastern District of Virginia,
rT ER ie Sie ea eben 153-156a
la
APPENDIX A
PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
~\
Louis F. Atten; Cart K. Baker;
Joyce P. Baker: Peter D.
BERRINGTON; OLIVER BiIRCKHEAD;
FLORENCE BLAUSTEIN; Mary L.
Bray; T. K. Brooker; Donacp J.
Brooks; Joseph CALLAGHAN; JAMES
CasseL; Terry G. CHapMan: J. A.
CLawson; Joun K. Corvin; Frep B.
Cox: JouN RAwWLYN CHARLES
CRABTREE; CHRISTOPHER P. CLUP;
Gorpon C. Davipson; RUTHERFORD
Day; Donatp D. Doty; M. D. A.
EmBuin; Aubrey FisHer; Donacp B.
GimBeL_; KENNETH J. GimpBe_:
KATHERINE Goocu; B. G. Harrison; > No. 96-2158
Yumiko Honna: Herpert W.
Hoover, III; Marcaret W. Jones:
DonaLp K. Kent; E. R.
KiInNEBREW, II]; Wacter J. Levy:
RoLAND Ley; SuZANNE RHULEN
LouGHLtn; Georce C. Lyman, Jr.:
Cuarces P. Lyon; Micuaet L.
McDermott; Ropert T. McINerny;
ARTHUR G. MicHeLs; WALTER P.
MuskaT; Water W. Musxart; A. D.
PisTILLi; Ropert A. Posner;
Junson P. Reis; Harry W. RHULEN;
Watter A. Ruuten; J. O. Ricke;
E. Joy Rose;
Mark S. Rose: A. F. Smitu; Own B.
Tapor; ALLEN M. Taytor; Trupe C.,
TAYLOR; Kart Aronson; Joan R.
FARROW AND JONATHAN M.
FARROW FOR THE ESTATE OF Jesse M.
-aARROW; JACK FLECK; MARILYN
FRANCKX; IsaneL L. GALLAGHER;
JENNIFER A. GALLAGHER; Mary
Craik GALLAGHER; Ropert E.
GALLAGHER; Ropert E.
GALLAGHER, Jk.; THomas J.
GALLAGHER; THOMAS H. GREEN:
Henry G. Hacer; THORNTON
Hutcuins: Vixct A. Konen: C. C.
Lucas; HERBERT A. MIDDENDOREE;
Ropert S. Dexeseim; DANA FISHER,
Sr.; WILLIAM ALEXANDER FLORENCE;
ANNE M. GALLAGHER; J. PATRICK
GALLAGHER; Mark E. GaLLaGHeR:
Mary Craikt GALLAGHER AS
EXECUTRIX FOR JOHN P. GALLAGHER;
KATHERINE GALLAGHER GUESE;
ALLEN S. Green; Rowert W. Hatcu:
Mary Craik G. JouNsoN; THomas V.
Lees; Guy A. Main; Evucent F.
MipptekamMp: MicHaEL MONTANA;
BARBARA H. Pisani; RicHarp B.
SaANnbperS; Jack R. Taytor; Ken
Noack; Ropert L. Pisani: Larry D.
Stroup; Nevitte G. Wittiams,
Plaintiffs-Appellees,
¥.
3a
LLoyp’s oF LONDON, an
unincorporated association:
CorPORATION OF LLoyp’s, a/k/a
Society and Council of Lloyd's:
CounciL oF LLoyp’s,
Defendants-Appellants,
and
Eourtas Hotpincs Limitep; Equitas
REINSURANCE LimiTED; Equitas
Limite, a/k/a Equitas or Equitas
Group,
Defendants.
AssociaATION OF LLoyp's MEMBERS,
GOVERNMENT OF THE UNITED KINGDOM
or GreaT BriTAIN AND NORTHERN
IRELAND; NATIONAL ASSOCIATION OF
INSURANCE BROKERS; CALIFORNIA
INSURANCE COMMISSIONER.
Amici Curiae.
a
Appeal from the United States District Court
for the Eastern District of Virginia, at Richmond.
Robert E. Payne. District Judge.
(CA-96-522)
Argucd: August 27. 1996
Decided: September 3, 1996
Before NIEMEYER, MICHAEL. and MOTZ., Circuit Judges.
Reversed and remanded by published opinion. Judge Nicmeyer wrote
the opinion, in which Judge Michacl and Judge Motz joined.
4a
COUNSEL
ARGUED: Harvey L. Pitt, FRIED, FRANK, HARRIS, SHRIVER &
JACOBSON, New York, New York. for Appellants. Alexander Ste-
phens Clay, IV, KILPATRICK & CODY, Atlanta, Georgia, for
Appellees. ON PLEADINGS: Michacl H. Rauch, Bonnie Steingart,
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON, New York,
New York; Cynthia T. Andreason, LEBOEUF, LAMB, GREENE &
MACRAE, L.L.P., Washington, D.C.; Henry H. McVey, Warren E.
Zirkle, Darryl S. Lew, MCGUIRE, WOODS, BATTLE & BOOTHE,
L.L.P., Richmond, Virginia, for Appellants. Richard R. Cheatham,
Susan A. Cahoon, Stephen E. Hudson, Christopher B. Lyman, KIL-
PATRICK & CODY, Atlanta, Georgia; Conrad M. Shumadine, Wal-
ter D. Keiley, Jr., WILLCOX & SAVAGE, Norfolk, Virginia, for
Appcliecs. Timothy M. Kaine, Rhonda M. Harmon, MEZZULLO &
MCCANDLISH, Richmond, Virginia, for Amicus Curiae Association
of Lloyd’s Members. Mark R. Joclson, Joseph P. Griffin, Thomas J.
O’Bricn, MORGAN, LEWIS & BOCKIUS, L.L.P., Washington,
D.C., tor Amicus Curiae United Kingdom. Ronald A. Jacks,
David M. Spector, MAYER, BROWN & PLATT, Chicago, Illinois,
for Amicus Curiae NAIB; Martin Shulman, Paul H. Falon,
MANATT, PHELPS & PHILLIPS, L.L.P.. Washington, D.C.; Rich-
ard A. Brown, Leonard D. Venger, Donald R. Brown, MANATT,
PHELPS & PHILLIPS, L.L.P., Los Angeles, California; William W.
Palmer, General Counsel, CALIFORNIA DEPARTMENT OF
INSURANCE, San Francisco, California, for Amicus Curiae Insur-
ance Commissioners.
OPINION
NIEMEYER, Circuit Judge:
In 1995, Lloyd’s of London announced a $22 billion "Plan for
Reconstruction and Renewal” to restructure the Lloyd’s market's
reinsurance needs and to revitalize the market. The Plan included an
offer by Lloyd’s managers to settle. for $4.8 billion, all intra-market
disputes, including existing and potential lawsuits by "Names," mem-
bers of the Lioyd’s market who underwrite insurance there. Ninety-
|
5a
three American Names filed this action in the Eastern District of Vir-
ginia under United States securitics laws to compel Lloyd’s to dis-
close more financial information about its proposed plan. The Names
also sought a preliminary injunction prohibiting Lloyd’s from forcing
American Names to make "an irrevocable election respecting their
investment" by an August 28, 1996 deadline established by Lloyd’s.
Applying United States securities laws, the district court granted
the Names’ motion for a preliminary injunction on August 23, 1996.
The court directed Lloyd’s to make disclosures as required by § 14(a)
of the Sccurities Exchange Act of 1934 by September 23. 1996. and
prohibited Lloyd’s from taking stcps to collect any amounts from
American Names pending completion of the disclosure and review
process. The court also scheduled a trial on the merits for November
4, 1996.
Lloyd’s appealed the district court's preliminary injunction and
sought expedited review because Names wishing to accept the scttle-
ment proposal that Lloyd's offered as part of its Plan were required
to advise Lloyd’s of their decision by noon on August 28, 1996, We
scheduled oral argument for August 27, 1996, and. following argu-
ment, entered the following order from the bench, reversing the dis-
trict court:
On the motion of appellants to stay the district court's
injunction entered August 23, 1996, and upon consideration
of the briefs. papers. and extensive arguments of counsel,
the court grants the motion. Because the court's decision
rests on its determination. to be articulated in a later opinion.
that the contractual provisions among the partics selecting
the law of and a forum in the United Kingdom should be
enforced, we reverse and remand this case with instructions
that the district court dismiss it.
This opinion provides the reasoning for our order.
I
Lloyd’s of London manages an insurance market that was created
over 300 years ago in a London coffee shop to insure shipping risks.
ih See MeN Bieter ee a a
6a
The market today is a large, complex arrangement under which
"Names,"’ who as members of the Society of Lloyd’s become mem-
bers in the market, join individual underwriting syndicates formed to
insure a broad range of risks. Managing agents assemble the syndi-
cates, collect premiums from the insureds, assess the Names, manage
the risks, and provide annual accountings to the Names. The under-
writing capital for each syndicate is supplied by cash advanced by the
Names, and excess losses — those that exceed the premiums paid —
are insured by the Namcs’ commitment to pay losses from their per-
sonal assets "down to their last cufflinks." The integrity of the market
is also assured by a Central Fund, created from assessments of
Names, which the market’s managing body, the Council of Lloyd’s,
controls and maintains to disburse to insureds when Names default.
The Lloyd’s market is governed by a scries of acts of Parliament,
enacted over the last 100 years, authorizing the Council of Lloyd’s to
adopt rules and bylaws to regulate the market. As a condition of their
membership in the Socicty, Names are required to execute a "General
Undertaking," by which they agree to comply with the controlling
acts of Parliament as well as the rules and bylaws of Lloyd’s.
Over 34,000 Names from 80 different countries participate in the
Lloyd's market: 3,000 Names are Amcricans. While individuals are
solicited in countries other than the United Kingdom, cach prospec-
tive Name is required to travel to London to participate in a personal
interview during which the Name’s financial commitment is
explained. Names are advised that they undertake unlimited personal
liability for their respective shares of the risks insured by the policies
they underwrite and that they cannot resign from the market until all
such obligations have been discharged. They are also advised that any
disputes over their participation in the market must be resolved in
British courts according to British law. .
The Lloyd's market operates under a three year accounting cycle.
At the end of the third year after a syndicate is formed, underwriting
profits and losses for cach syndicate year are calculated, and the esti-
mated liabilitics are routincly rcinsured by another syndicate.
Through this process, Lloyd’s reinsures undischarged risks to close
the account. When the magnitude of potential liabilities for a syndi-
cate cannot reasonably be estimated at the end of three years, the syn-
a
7a
dicate cannot reinsure them, and the participating Names remain
liable on their undertaking.
During the late 1980's and carly 1990's, unanticipated losses from
asbestosis and pollution claims, together with a string of catastrophic
events such as Hurricane Hugo and the bombing ol Pan Am Flight
103, caused losses far greater than the amounts of premiums that had
been collected. By Lloyd's estimation, the excess losses for the years
before 1993 will total approximately $22 billion.
As losses mounted, intra-market disputes arose. Names accused
managing agents and underwriters of mismanagement in assessing
risks and even fraud in assessing and disclesing the risks to Names
choosing syndicates. A considerable number of Names also became
unable or unwilling to satisfy their obligations and began to incur
debts to the Central Fund, and the ensuing litigation made it difficult
for the Central Fund to collect from non-paying Names. The integrity
and viability of the entire Lloyd’s market was thus called into doubt.
To restore the integrity of its market. Lloyd's embarked on a mas-
sive and complex effort to devclop a restructuring plan. After three
years and the expenditure of over $100 million, Lloyd's issued a Plan
for Reconstruction and Renewal with two gross componcnits. (1) the
settlement of intra-markct litigation whereby Names release all claims
against Lloyd’s and its various market participants in exchange for
¢4.8 billion in credits and (2) the reinsurance of Names’ pre-1993
underwriting obligations by a newly formed company. Equitas Rein-
surance Ltd. Under the Plan, Equitas’ capital is to be funded by loans,
a cash call on Names, and the $4.8 billion in credits assembled by
Lloyd’s for the settlement of the Names’ claims.
Lioyd’s circulated its Plan and offered cach Name the opportunity
to settle with Lloyd’s for a specified share of the settlement funds.
The Plan provides that if cnough Names agrec to scttle, those Names
who do not agree will nevertheless be forced to contribute capital to
Equitas through assessments authorized by their original commitment
to Lloyd’s. Under the Plan, any capital that remains after Equitas has
satisfied all outstanding pre-1993 obligations will be returned to the
Names. Lloyd's offered its settlement with Names subject to the con-
dition that Names respond by August 28. 1996, a deadline that
8a
Lloyd's claims was necessary because the continued solvency of its
market is in jeopardy and the scason for underwriting reinsurance tra-
ditionally begins in the fall.
The 93 American Names who have demanded more information
about the Plan filed suit in the Virginia district court. claiming that
Lloyd’s was denying them disclosure rights guaranteed by United
States securitics laws. Lloyd’s moved to dismiss the complaint on the
ground that the Names had agreed to litigate all disputes relating to
the Lloyd’s market in the United Kingdom under British law. The dis-
trict court denied Lloyd’s motion. Applying United States securities
laws, the court also enjoined Lloyd’s from demanding settlement
from the Amcrican Names without providing the disclosures required
by the securitics laws and ordered that Lloyd’s provide such disclo-
sures within 30 days. This appeal followed.
il
In reversing the district court by our August 27, 1996 order, we
determined that "the contractual provisions among the parties sclect-
ing the law of and a forum in the United Kingdom should be
enforced."" Those contractual provisions, which appear in the General
Undertaking between Lloyd's and the Names, specify that "any dis-
pute and/or controversy of whatsoever nature arising out of or relating
to" Names’ participation in Lloyd’s be submitted to the cxclusive
jurisdiction of the British courts and that British law gover all mat-
ters referred to in the Gencral Undertaking, including the partics’
"rights and obligations . . . arising out of or relating to" the Names’
participation in Lloyd's.
Since its seminal decision in The Bremen v. Zapata Off-Shore Co.,
407 U.S. | (1972), the Supreme Court has consistently accorded
choice of forum and choice of law provisions presumptive validity,
rejecting the "parochial concept" that "notwithstanding solemn con-
tracts . . . all disputes must be resolved under our laws and in our
courts." /d. at 9; see also Vimar Seguros Y Reaseguros, S.A. ¥. M/V
Sky Reefer, \15 S. Ct. 2322, 2329 (1995); Carnival Cruise Lines, Inc.
v. Shute, 499 U.S. 585, 595 (1991); Mitsubishi Motors Corp. v. Soler
Chrysler-Plymouth, Inc.. 473 U.S. 614, 631 (1985); Scherk v. Alberto-
Culver Co., 417 U.S. 506, 519 (1974). But the presumption of cn-
9a
forceability that forum selection and choice of law provisions enjoy
is not absolute and, therefore, may be overcome by a clear showing
that they are " ‘unreasonable’ under the circumstances." The Bremen.
407 U.S. at 10. Choice of forum and law provisions may be found
unreasonable if (1) their formation was induced by fraud or over-
reaching; (2) the complaining party "will for all practical purposes be
deprived of his day in court" because of the grave inconvenience or
unfairness of the selected forum; (3) the fundamental unfairness of the
chosen law may deprive the plaintiff of a remedy; or (4) their enforce-
ment would contravene a strong public policy of the forum state. See
Carnival Cruise Lines, 499 U.S. at 595; The Bremen, 407 US. at
12-13, 15, 18.
In determining whether any of the foregoing circumstances apply
in this case to preclude enforcement of the parties’ choice of forum
and law, the district court first observed that "there is no contention
by the Names that they were fraudulently induced into agreeing to the
forum selection or choice of law clauses." Nor did the court believe
it" “gravely inconvenient’ for the Names to litigate in England." Not-
ing that "United States courts have consistently found English tribu-
nals to be neutral and just," the district court further found that the
"plaintiffs would not be effectively ‘denied their day in court’ were
they forced to present their claims in front of an English tribunal." But
applying the last basis for unrcasonableness, the court denied enforce-
ment to the parties’ choice of forum and law provisions on the ground
that they subverted a strong public policy of the United States—
namely, the unwaivable investor protections provided by the Ameri-
can securities laws’ disclosure requirements.
Although we agree with the district court that the first three bases
for finding unreasonableness do not apply here, we disagree with its
conclusion that the public policy underlying the United States securi-
ties laws justify denying enforcement of the parties’ choice of forum
and law clauses.
Ill
By adopting a policy of full disclosure of relevant information to
replace the doctrine of caveat emptor, the United States securities
laws play a critical role in sustaining honest and efficient domestic
10a
capital markets. See, e.g., SEC v. Capital Gains Research Bureau,
inc., 375 U.S. 180, 186-87 (1963). Indeed, the United States securities
laws prohibit attempts to waive their disclosure requirements. See 15
U.S.C. $$ 77n, 78cc(a). But the question remains in this case whether
the choice of forum and law clauses to which the Names agreed when
entering the Lloyd’s insurance market implicate the anti-fraud and
disclosure policies that underlie the United States securities laws to
the extent that those clauses cannot be enforced.
We do not believe that enforcing the partics’ forum sclection and
choice of law provisions in this case will subvert the United States
securitics laws’ policy of prohibiting fraud. British law not only pro-
hibits fraud and misrepresentations as do the United States securities
laws, but also affords Names adequate remedies in the United King-
dom. See Shell v. R.W. Sturge Lid., 55 F.3d 1227, 1231 (6th Cir.
1995); Bonny v. Society of Lloyd's, 3 F.3d 156, 161 (7th Cir. 1993),
cert. denied, 510 U.S. 1113 (1994); Roby v. Corporation of Lloyd's,
996 F.2d 1353. 1365 (2d Cir.). cert. denied, 510 U.S. 945 (1993);
Riley v. Kingsley Underwriting Agencies, Ltd.. 969 F.2d 953, 958
(10th Ci.), cert. denied, 506 U.S. 1021 (1992). Under British law, the
Names could bring claims based on the tort of deceit, breach of con-
tract, negligence, and breach of fiduciary duty, and could obtain
injunctive, declaratory. rescissionary, and restitutionary relicf. See
Shell, 55 F.3d at 1230-31. And "[t}he fact that an intemational trans-
action may be subject to laws and remedies different or less favorable
than those of the United Statcs is not a valid basis to deny enforce-
ment." Riley, 969 F.2d at 958.
Moreover, we do not belicve that Congress intended that the
disclosure requirements of the United States securitics law be
exported and imposed as goveming principles on markets conducted
entircly in other countrics simply because membership in such mar-
kets is solicited in the United States. See Leasco Data Processing
Equip. Corp. v. Maxwell, 468 F.2d 1326, 1334 (2d Cir. 1972) (finding
language of Sccuritics Exchange Act "too inconclusive" to find that
"Congress meant to impose rules goveming conduct throughout the
world in every instance where an American company bought or sold
a security"). "[Cjonfronted with |a] transaction that on any view [is]
predominantly foreign. [we] must seck to determine whether Con-
gress would have wished the precious resources of United States
lla
courts and law enforcement agencies to be devoted to them rather
than leave the problem to foreign countries." Bersch y. Drexel Fire-
stone, Inc., 519 F.2d 974, 985 (2d Cir.), cert. denied, 423 U.S. 1018
(1975).
For over 300 years, Lloyd’s has been regulating an insurance mar-
ket in London where members underwrite risks which are pooled into
syndicates and managed by agents. While Lloyd’s offers membership
in the market to persons outside the United Kingdom, including
Americans, syndicates are formed and managed at the market. When
an individual from a country other than the United Kingdom is solic-
ited for membership, market rules require that he travel to London for
a personal interview. The would-be Name is provided with written
materials advising him that he will be joining underwriting syndicates
formed in London to insure risks from around the world under laws
adopted by Parliament and bylaws promulgated by Lloyd’s regula-
tors. Prospective Names are also informed of the commitment of
membership, which requires that Names have sufficient means com-
mitted to the market in London.
Relieving Names of their agreements is not justified in these cir-
cumstances simply because solicitation for membership in the market
occurs in the United States. Membership solicitation is incidental to
the formation of underwriting syndicates and the management of
risks, all of which occur in London. Moreover, when members are
solicited for membership, they are not solicited to join particular Syn-
dicates or to underwrite identified risks. Those matters are unknown
until syndicates are actually created at the market. The United States
nexus to the transactions involved in this case is thus incidental and
tangential.
Although Amcrican courts have on occasion applied Unite’! States
securities laws’ anti-fraud provisions to predominantly foreign trans-
actions, the “anti-fraud provisions of Amcrican securities laws have
broader extraterritorial reach than American filing requirements."
Consolidated Gold Fields PLC y. Minorco S.A., 871 F.2d 252, 262
(2d Cir. 1989). This is because "an interest in punishing fraudulent or
manipulative conduct is entitled to greater weight than are routine
administrative requirements." Restatement (Third) of the Foreign
Relations Law of the United States § 416 cmt. a (1986).
12a
To permit the Names to escape their agreements to be bound by the
laws and rules of the British market just at a time when they face
losses would also violate the most fundamental precepts of interna-
tional comity. See Consolidated Gold Fields, 87\ F.2d at 263 ("[A]
court may abstain from exercising enforcement jurisdiction when the
extraterritorial effect of a particular remedy is so disproportionate to
harm within the United States as to offend principles of comity").
Imposing United States securities laws on this foreign market would
directly contravene the very rules and regulations adopted in Britain
for the creation and operation of the Lloyd’s market to which the
Names subscribed.
Finally, significant United States and forcign interests would be
adversely affected if we were to insist that Lloyd’s insurance under-
writing syndicates comply with United States disclosure require-
ments. Such a ruling would place at risk billions of dollars of
insurance coverage for United States citizens because American
Names could demand rescission on the ground that their syndicates,
even though they include citizens of various countrics, did not comply
with United States securitics registration and disclosure requirements.
Insurance commissioners from several states have deseribed the
potential mass confusion and damage to the domestic insurance mar-
ket that such a ruling would cause.
In short, we conclude that enforcement of the Names’ agreements
to litigate disputes in the United Kingdom under British law does not
contravene or undermine any policy of the United States securities
laws. And we reach that same conclusion when we apply the specific
provisions of the securitics laws, to which we now tum.
lV
The Names advance two arguments to support their assertion that
United States securitics laws apply to the Lloyd's Reconstruction and
Renewal Plan. First. they argue that the interests in Equitas offered by
Lioyd’s as part of the Plan are "investment contracts." subject to the
disclosure and anti-fraud requirements of the 1933 and 1934 Acts.
And second, they argue that their investments in Lloyd's pursuant to
the Gencral Undertaking are equity securitics under the applicable
securitics acts and that the Plan is, therefore, a solicitation for "con-
l3a
sent or authorization in respect of [a] security," subject to the require-
ments of § 14(a) of the 1934 Act, 15 U.S.C. § 78n(a).
To determine whether Lloyd’s Plan constitutes an "investment con-
tract" subject to the requircments of the securities laws, we apply the
test announced in SEC v. W.J. Howey Co., 328 U.S. 293 (1946). In
Howey, the Supreme Court established that “an investment contract
. . Means a contract, transaction or scheme whereby a person [1]
invests his moncy [2] in a common enterprise and [3] is led to expect
profits [4] solely from the efforts of [others]." /d. at 298-99, And the
Court later instructed that the Howey test is to be applied with an eye
to "the substance — the economic realities of the transaction — rather
than the names that may have been employed by the parties." United
Hous. Found., Inc. v. Forman, 421 U.S. 837, 851-52 (1975).
Focusing on the substance of the Plan before us, we discern two
components: the settlement offer and the reinsurance through Equitas.
The settlement component satisfies none of the Howey factors and,
therefore, cannot make the Plan a security. And, whatever else might
be said about the Equitas component, it docs not satisfy the third
Howey factor, none of the Names can expect to receive profits from
their participation in Equitas. Indeed, the Plan creates Equitas solely
to rcinsure and discharge Names’ preexisting obligations, not to
underwrite new risks for profit. While Names may receive rebates
should Equitas’ initial capitalization ultimately prove greater than
needed to discharge the Names’ outstanding liabilitics, such rebates
are not profits, but rather a rectum of capital. See Forman, 421 U.S.
at 854. Furthermore, Equitas is forbidden by its Articles of Associa-
tion from paying dividends, and Lloyd’s has indicated that, in the
unlikely event that it gencrates profits by investing Equitas’ capital
during its operation, Lloyd’s would donate such profits to charity.
Because Lloyd’s is not "induc[ing] purchases [in Equitas] by empha-
sizing the possibility of profits" or offering "profits [from Equitas]
. . . in the form of capital appreciation or participation in camings,"
Teague v. Bakker, 35 F.3d 978, 987 (4th Cir. 1994), cert. denied, 115
S. Ct. 1107 (1995), we readily conclude that no part of the Plan quali-
fies as a security for purposes of the securities laws.
We are similarly unpersuaded by the Names’ second argument —
that their initial investment in Lloyd’s pursuant to the General Under-
14a
taking is a Security and that the Plan is, therefore, a solicitation for
"consent or authorization in respect of [a] security” subject to § 14(a)
of the 1934 Act. Section 14(a) makes it "unlawful for any person, by
the use of . . . any means or instrumentality of interstate commerce
... to solicit... any proxy or consent or authorization in respect of
any [registered] security" in contravention of the rules and regulations
prescribed by the Sccurities Exchange Commission. 15 U.S.C.
§ 78n(a). Although the parties vigorously dispute whether the Names’
initial investment in Lloyd’s qualifies as an "equity security" within
the meaning of the Act, we need not resolve that issue because the
Plan docs not "solicit... any proxy or consent or authorization."
Section 14(a) embodies a policy of broad disclosure designed to
protect the basic right of corporate suffrage. See J.1. Case Co. v.
Borak, 377 U.S. 426, 431-32 (1964); see also Mills v. Electric Auto-
Lite Co., 396 U.S. 375, 381 (1970); H.R. Rep. No. 1383, 73d Cong.,
2d Sess., at 13 (1934) ("Fair corporate suffrage is an important right
that should attach to every equity security bought on a public
exchange"). But not every communication from management to cor-
porate sharcholders amounts to solicitation under § 14(a). Sargent v.
Genesco, 492 F.2d 750, 767 (Sth Cir. 1974); see also Brown v. Chi-
cago, Rock Island & Pacific R.R., 328 F.2d 122, 125 (7th Cir. 1964):
see generally 4 Louis Loss & Jocl Scligman, Securities Regulation
1952 (3d ed. 1990) (listing examples of communications not covered
by § 14(a) rules). Rather, it is only when management secks consent
or authorization for actions "requiring such approval" that § 14(a)
Steps in to ensure that approval is given with full knowledge. Gaines
v. Haughton, 645 F.2d 761, 775 (9th Cir. 1981), cert. denied, 454
U.S. 1154 (1982): see also Ash v. GAF Corp., 723 F.2d 1090, 1094
(3d Cir. 1983) (holding that "complainant must show that he suffered
harm from the infringement of his corporate suffrage rights" to state
a claim under § 14(a)): cf TSC Indus., Inc. v. Northway, Inc., 426
U.S. 438, 449 (1976) (indicating that securities laws require accurate
disclosure only of facts that would have assumed actual significance
in a reasonable investor’s decisionmaking).
Neither British law nor the Gencral Undertaking signed by cach
Name grants Names any role in the decision to form and capitalize
Equitas. Authorization to impose reinsurance through Equitas on the
Names does not derive from their consent, but by virtue of a Lloyd’s
l5a
bylaw passed in December 1995. Thus, the Plan is not a solicitation
within the meaning of § 14(a).
Similarly, Lloyd’s settlement offer is not subject to the disclosure
requirements of § 14(a). The offer of settlement presents each Name
with the choice of whether to waive his claim against Lloyd’s and its
agents in exchange for Lloyd's partial funding of his share of the
Equitas premium. The Names have not presented, and we have been
unable to find, any authority indicating that settlement offers in secur-
ities cases seek “consent or authorization in respect of [a] security,"
and we cannot conclude that Congress intended to bring all such com-
munications within the purview of the securitics laws.
V
In summary, the policies of the United States securities laws do not
override the parties’ choice of forum and law for resolving disputes
in this case. Indeed, because Lloyd’s Plan for Reconstruction and
Renewal is neither a security nor 4 solicitation in respect of a security,
the Plan is not regulated by the United States securities laws. For
these reasons we vacated the district court’s August 23, 1996 order
by our August 27, 1996 order and remanded this case with instruc-
tions to the district court to dismiss the action.
REVERSED AND REMANDED WITH INSTRUCTIONS
Sen eA Sen RRS gE ANI RES
16a
Filed Aug 23 1996
APPENDIX B Clerk, U §. District Court
Richmond, VA
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF VIRGINIA
Richmond Division
Civil Action No. 3:96cv522
LOUIS F. ALLEN, et al.,
Plaintiffs,
v.
LLOYD’S OF LONDON, et al.,
Defendants.
ORDER
For the reasons set forth in the accompanying Memoran-
dum Opinion, the defendant’s motion to dismiss is denied and
the plaintiffs’ motion for preliminary injunction is granted. A
separate Order of injunction shall be entered.
The Clerk is directed to send a copy of this Order to all
counsel of record and counsel for all amicus curiae.
It is so ORDERED.
/s/ Robert E. Payne
United States District Judge
Richmond, Virginia
Date: August 23, 1996
eo Lo a
17a
Filed Aug 23 1996
APPENDIX C Clerk, U.S. District Court
Richmond, VA
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF VIRGINIA
Richmond Division
Civil Action No. 3:96cv522
LOUIS F. ALLEN, et al.,
Plaintiffs,
v.
LLOYD’S OF LONDON, et al.,
Defendants.
ORDER OF PRELIMINARY INJUNCTION
Re
For the reasons set forth in the accompanying Memoran-
dum Opinion, the Court finds that:
(1) Plaintiffs will suffer irreparable harm if their motion for
a preliminary injunction is denied;
(2) The irreparable injury that plaintiffs and the other
American Names would suffer if their motion is deniec
significantly outweighs any demonstrated harm to Lloyd’s of
complying with its obligations under the securities laws of the
United States; and
(3) Requiring Lloyd’s to comply with its obligations under
the U.S. securities laws would serve the public interest in full
disclosure.
(4) The plaintiffs have met the test of Divex Israel, Lid. v.
Medical Breakthrough Corp., as to their claims that:
18a
(a) The investments in Lloyd’s pursuant to their
General Undertaking are “‘securities’’ within the meaning of
§ 2(1) of the Securities Act of 1933, 15 U.S.C. § 77(b)(i) and
§ 3(a)(10) of the Securities Exchange Act of 1934, 15 U.S.C.
§ 78c(a)(10) which are subject to registration under § 12(g).
(1) of the 1934 Act because the investments are equity
securities within the meaning of § 3(a)(11) of the 1934 Act,
15 U.S.C. § 78c(a)(11) and because Lloyd’s has more than
500 Names and total assets of more than $10 million.
(b) Lloyd’s is in violation of §14(a) of the Securities
Exchange Act, 15 U.S.C. § 78n(a); and that in seeking Names’
consent to the Settlement Offer dated July 26, 1996, Lloyd’s
is using the U.S. mail and other means or instrumentalities
of interstate commerce to solicit a ‘‘proxy or consent or
authorization’ from the plaintiffs and the other American
Names in contravention of rules and regulations promulgated
by the Securities and Exchange Commission (the “‘SEC’’),
and in particular, SEC Rules 14a-3 and 14a-9.
(5) Those entitled to the protection of § 14(a) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78n(a) include,
but are not limited to, the individually named plaintiffs in this
action and those plaintiffs sought to be added by motion. There
are approximately 3000 American Names entitled to the
disclosures and opportunity for considered reflection provid-
ed under the applicable securities law of the United States
before deciding whether to accept or reject Lloyd’s Setiie-
ment Offer.
(6) Some American Names have expressed support for
Lloyd’s July 26 Settlement Offer. This Court’s object, and the
mandate in this Circuit, is to formulate injunctive relief that
offers the protection Congress has assured without imposing
unwarranted restrictions on those Names who choose not to
avail themselves of such protection.
19a
(7) Further, Lloyd’s is entitled to as much latitude in con-
tinuing with its Reconstruction & Renewal plan as is consis-
tent with the enforcement of the federal securities laws ap-
plicable to Lloyd’s efforts to raise capital for Equitas in the
United States.
IL.
In recognition of these different interests and mindful of the
strictures on preliminary injunctive relief in this Circuit, and
for the reasons set forth in paragraphs I above and in the ac-
companying Memorandum Opinion, it is hereby ORDERED
that:
(1) Lloyd’s is enjoined from imposing on any American Name
the terms and conditions set forth in Lloyd’s Settlement Of-
fer Document dated July 26, 1996, except as set forth
hereinafter.
(2) Lloyd’s shall forthwith send a copy of this Order to every
Name who resides in the United States; provided, however,
that the expense thereof shall be borne initially by plaintiffs
subject to recoupment in any bill of costs.
(3) Not later than September 23, 1996, Lloyd’s shall make
disclosures to the American Names as required by § 14(a) of
the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), and
all applicable SEC regulations promulgated thereunder.
(4)(a) Any American name who elects to avail himself or
herself of the opportunity to review the disclosures provided
pursuant to paragraph (3) before responding to Lloyd’s Set-
tlement Offer of July 26, 1996 shall have the right and option
to do so without prejudice to, or adverse effect on, their
ultimate decision whether to accept or reject that offer on its
current terms.
20a
(b) In order to facilitate the orde;ly, efficient, fair and ex-
peditious administration of justice and in order to preserve the
status quo to the extent possible and the jurisdiction of the
court and at the agreement of counsel for the plaintiffs,
American Names who desire to take advantage of sub-
paragraph (a) shall pay the full amount indicated in their Finality
Statement [the line from the Finality Statement Summary —
July 1996, which states: ‘‘Finality (cost/surplus taking into
accouit funds at Lloyd’s’’], if any, no later than September
30, 1996, into an escrow account to be in Richmond, Virginia
opened by and pursuant to this Court’s Order on appropriate
terms and conditions, which counsel for the parties shall
memorialize in an Order and present for entry not later than
August 30, 1996.
(5) Lloyd’s shall inform all American Names who have made
such escrow payments, plaintiffs’ counsel and the Court when
the disclosures required above have been completed. Within
thirty (30) days thereafter, but not later than October 30, 1996,
absent further order of this Court, all such Names must notify
Lloyd’s in the manner and in the terms prescribed by the Set-
tlement Offer and the Reconstruction & Renewal plan whether
they accept or reject that offer. If they accept the offer, their
funds shall be released from the escrow account to Lloyd’s.
If they reject the Offer, their fund shall remain on deposit in
escrow subject to the completion of this action and any fur-
ther Order on the subject.
(6) Because the purpose of this Order is to protect American
Names, the Lloyd’s settlement offer and the August 28, 1996
deadline is hereby extended relative to all American Names,
(7) With respect to all American Names who elect to par-
ticipate in this disclosure and review process, Lloyd’s shall
not, pending completion of the disclosure and review process,
take any action to collect from such Names any amounts,
ao
2la
whether on deposit at Lloyd’s or otherwise, for the purpose
of Equitas funding.
(8) The terms of this order shall not affect in an way the
acceptances of the Settlement Offer given previously by any
American Name to Lloyd’s. Counsel for the parties shall con-
sult forthwith and advise the Court of their positions respect-
ing the determination of any future claim by any American
Name hereafter informing Lloyd’s of an intention to rescind
any such previous acceptance.
(10) The trial of this action on its merits is set for 9:00 a.m.
November 4, 1996.
(11) At 9:00 a.m. on August 30, 1996, there will be a pretrial
conference for consideration of a discovery plan and pretrial
schedule about which counsel shall confer forthwith and which
they shall present at the pretrial conference in the form of a
draft Order.
(12) Pursuant to Fed. R. Civ. P. 65(c), and having con
sidered the written submissions of the parties on the subject,
the plaintiffs shall post bond, with surety, in the amount of
One Hundred Thousand Dollars ($100,000.00), said amount
being in the discretion of the Court, sufficient. The bond shall
be posted not later than 2:00 p.m. August 26, 1996.
The Clerk is directed to send a copy of this Order to all
counsel of record and to counsel for all amicus curiae.
It is so ORDERED.
/s/ Robert E. Payne
United States District Judge
Richmond, Virginia
Date: August 23, 1996
22a
APPENDIX D cis, Gh Se tee
Richmond, VA
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF VIRGINIA
Richmond Division
Civil Action No. 3:96cv522
LOUIS F. ALLEN, et al.,
Plaintiffs,
v.
LLOYD’S OF LONDON, et al.,
Defendants.
MEMORANDUM OPINION
INTRODUCTION
Ninety-three citizens of the United States instituted this ac-
tion seeking disclosures guaranteed by the federal securities
laws as to the plaintiffs’ investments in Lloyd’s. Because the
plaintiffs are being forced by Lloyd's to an irrevocable elec-
tion respecting their investment on August 28, 1996 which
presents actual, imminent and irreparable injury, the plaintiffs
have sought a preliminary injunction. Having satisfied the re-
quirements of Direx Israel, Ltd. v. Breakthrough Medical
Corp., 952 F.2d 802 (4th Cir.1992), the plaintiffs are entitled
to a preliminary injunction upon satisfaction of bond and cer-
tain other conditions.
PROCEDURAL HISTORY
The plaintiffs (who, for reasons explained below, will be
hereafter referred to as ‘‘Names’’) instituted this action under
the Securities Exchange Act of 1934, 15 U.S.C. §§ 78G) and
23a
78(n) (the ‘‘1934 Act’’) against Lloyd’s of London, an unin-
corporated association; the Corporation of Lloyd’s, a/k/a the
Society of Lloyd’s; and the Council of Lloyd’s (hereinafter
referred to collectively as ‘‘Lloyd’s’’). The original Complaint
designated other defendants: Equitas Holdings Limited;
Equitas Reinsurance Limited; and Equitas Limited, a/k/a
Equitas or Equitas Group (hereafter referred to collectively
as ‘‘Equitas’’). The Names voluntarily dismissed Equitas
without prejudice.
The operative pleading around which the briefs have been
filed is the First Amended Complaint which added several new
plaintiffs. In Count One, the Names allege that Lloyd’s has
violated, and is violating, § 14(a) of the 1934 Act, by soliciting
proxies or consents or authorizations respecting equity securities
that are subject to the registration requirements of the 1934
Act. That count also alleges a violation of SEC Rule 14a-3
which prohibits the solicitation of any proxy or consent or
authorization subject to SEC regulation without currently fur-
nishing, or previously having furnished, a publicly filed writ-
ten proxy statement containing information required by the
Securities and Exchange Commission (‘‘SEC’’). Count One
also charges that information which is being distributed with
the solicitation of a proxy, consent or authorization contains
material misrepresentations or omissions in violation of SEC
Rule 14a-9. In Count Two, the Names allege that Lloyd’s has
violated, and is violating, § 10 of the 1934 Act and SEC Rule
10b. In Count Three, the Names seek a declaratory judgment
under 28 U.S.C. § 2201 that Lloyd’s is offering to sell to the
Names securities within the meaning of § 2b(1) of the
Securities Act of 1933, 15 U.S.C. § 77b(1) (the ‘‘1933 Act’’),
and that Lloyd’s is violating the 1933 Act.
Lloyd’s has moved to dismiss the action for lack of proper
venue and on the ground of forum non conveniens. The Names
have moved for a preliminary injunction. The Names have filed
24a
a motion for leave to file a Second Amended Complaint which
adds factual allegations and seeks additional relief based upon
transactions, occurrences or events which have taken place
since the First Amended Complaint was filed. The Second
Amended Complaint adds two new substantive counts for
relief, Counts Four and Five. In Count Four, the Names allege
that Lloyd’s has commenced an issue tender offer pursuant
to which Lloyd’s is offering to exchange new securities in
Equitas for the Names’ existing securities in Lloyd’s without
having complied with § 13(e) of the 1933 Act and the applicable
SEC rules. In Count Five the Names allege that Lloyd’s is
offering to sell, and is selling, an investment contract in Equitas
that is a security without having registered the interest therein
in violation of §§ 5 and 12(1) of the 1933 Act and that Lloyd’s
has committed misrepresentations and omissions in connec-
tion with that offer and sale, thereby violating § 12(2) of the
1933 Act. Lloyd’s has opposed the filing of the Second Amend-
ed Complaint.
Having reviewed the motion for leave to file the Second
Amended Complaint and the opposition thereto, it appears that
the plaintiffs are entitled to file the amendment and that Lloyd’s
will not be prejudiced thereby. Hence, the Second Amended
Complaint may be filed. The Second Amended Complaint adds
nothing which affects consideration of Lloyd’s motion to
dismiss under Fed.R.Civ.P. 12(b)(3) for improper venue or,
alternatively, under the doctrine of forum non conveniens.
Whereas Counts Four and Five takes affect the analysis of
the Names’ motion for preliminary injunction, they will not
be considered because the briefing of the preliminary injunc-
tion issues has been conducted without reference to the Se-
cond Amended Complaint.
25a
STATEMENT OF FACTS
The action and the motions currently before the court for
resolution present complex and serious issues respecting
somewhat unique transactions involving a rather unusual ar-
rangement between the Names and Lloyd’s. It is therefore
necessary to provide more than a brief explanation of the fac-
tual setting and circumstances at issue.
The General Background Of Lloyd’s Of London
What is now commonly known as the venerable institution
of Lloyd’s of London began in the late 17th century in a cof-
fee house which was a gathering place for marine underwriters
and shipowners. Because it was necessary for the individual
underwriters to share risks insuring seagoing vessels and their
cargoes, there arose a group of underwriters which subse-
quently became known as the Society of Lloyd’s. Lloyd’s was
granted a semi-exclusive right to underwrite marine risks in
the United Kingdom, and by the mid-1800’s, Lloyd’s began
to insure risks other than marime. By the late 1800’s, Lloyd’s
had begun to underwrite msks, marine and otherwise, in the
United States. Lloyd’s today, however, is a substantially dif-
ferent entity than it was in its early years.
The parties agree that, notwithstanding the popular concep-
tion to the contrary, Lloyd’s is not an insurance company. Roby
v. Corporation of Lloyd’s, 796 F.Supp. 103, 104 (S.D.N.Y.
1992), aff'd 996 F.2d 1353 (2nd Cir. 1993), cert. dented 510
U.S. 945 (1993); Second Affidavit of Stephen E. Hudson
(‘‘Hudson Aff. II’’), Exh. C, Report of Robert L. Westin § 33
(‘‘Westin Report, ¢ ___’’). Lloyd’s is a self-regulating
entity which controls an insurance market. This marker is sus-
tained by the called and uncalled capital of individuals who are
admitted to membership in Lloyd’s, and who pledge their per-
sonal assets to Lloyd’s, to support the underwniting of insur-
26a
ance and the market which Lloyd’s maintains and regulates.
Westin Report, ¢ 33. The organization and operation of Lloyd’s
and the Lloyd’s insurance market is based upon six ‘‘private’’
Acts of Parliament (the Lloyd’s Acts of 1871, 1888, 1911,
1925, 1951 and 1982).
The Corporation of Lloyd’s was created by the Lloyd’s Act
of 1871 and it is charged with conducting administrative func-
tions, advancing and protecting the interests of the members
of Lloyd’s (the Names) and the collecting, publishing and
disbursing of information about Lloyd’s.
The Lloyd’s Act of 1871 also established the Committee
of Lloyd’s, comprised of members of the Society of Lloyd’s,
whose purpose it is to manage the affairs of the Society and
to exercise the Society’s powers. The Lloyd’s Act of 1982
created the Council of Lloyd’s to take over the functions of
the Committee of Lloyd’s. The Council of Lloyd’s thus acts
much like the board of directors and officers of a corporation
in the United States. It also acts much like a regulatory agen-
cy with control over the insurance market that today func-
tions within Lloyd’s present day configuration.
Those who carry on the insurance business at Lloyd’s are
the insurance brokers, the active underwriters, the Members
Agents, the Managing Agents, and the Names. As explained
in an annual report recently issued by Lloyd’s, the Names are
the individual investors in Lloyd’s. (Hudson Aff. II, Exh. E).
The Names select a Members’ Agent from among several can-
didates designated by Lloyd’s and the Members’ Agent places
the Names in syndicates which are run by Managing Agents
approved and regulated by Lloyd’s. Roby, 796 F.Supp. at 104.
Although the Names are the ultimate underwniters of the
insurance, in that they are responsible to pay the losses
covered by the policy issued to an insured, the Names are
es ae
beat Ba A
27a
prohibited by Lloyd’s rules from participating in the under-
writing process or in the recruiting of other Names into the
syndicates to which they are assigned. The Names have no
management responsibility and they cannot bind their fellow
Names or any syndicate of which they become members. Each
Name’s membership in a Lloyd’s syndicate is a personal one
and is not assignable. /d.
Before 1969, memberships in Lloyd’s were limited to
citizens of the United Kingdom. Thereafter, membership was
available to citizens of the United States and, until 1994, only
individuals could become members. Beginning in 1994, Lloyd's
permitted corporations, foreign and domestic, to become
Names. Since 1995, individual citizens of the United States
no longer can be Names; however, any citizen of the United
States who was a Name before 1995 retains that status until
all insurance obligations are satisfied.
The Operation of Lloyd’s
The operation at Lloyd’s has been described as follows:
Members’ agents recruit new Names and handle the
admission of Names to Lloyd’s membership.
Member’s agents are ordinarily also chosen to act
as Names’ underwriting agents and, in that role, are
responsible for placing Names in syndicates. In con-
nection with the latter the member’s agent contracts
with the ‘‘Managing Agent”’ to place the member
in a group comprised of two to several hundred other
Names. These groups constitute the syndicates.
Managing agents run the syndicates. They hire the
syndicate’s active underwriter and maintain the syn-
dicates’ accounts and other records, among other
things.
28a
An employee of the managing agent, known as the
‘‘active underwriter,’’ acts on behalf of the Names
in the syndicate in the ‘‘buying’’ and ‘‘selling’’ of
insurance risks. Active underwriters are seated on
the underwriting floor at Lloyd’s in London. Brokers
approach the active underwriter at his desk — in
Lloyd’s parlance ‘‘the box’’ — to solicit the under-
writer's agreement to accept a risk. The active
underwriter decides which of the risks, offered to
him by brokers, to accept and at what premium, and
negotiates the conditions of coverage and the pro-
portion of risk his syndicate will assume.
Roby, 796 F.Supp. at 104-105 (internal footnote omitted).
There are two classes of Names: working members, who
are occupied principally in the business of insurance in the
Lloyd’s market, and external members, who are not thusly
occupied and who are expressly forbidden from participating
in the business of insurance at Lloyd’s. Westin Report, 4 34.
As put by Ian Hay Davison, former chief executive officer of
Lloyd’s: ’’[oJriginally Names at Lloyd’s were all workers in
the market themselves, but since 1945, with the rapid growth
of the membership of Lloyd’s, an increasing proportion are
outsiders. At the latest count, 82% of the Names were exter-
nal members who were in fact nothing other than passive in-
vestors in the syndicates in which they participated.’’ Second
Hudson Affidavit, Exh. F, A VIEW OF THE ROOM LLOYD'S
CHANGE IN DISCLOSURE, p. 28.
The Names subscribe to a certain percentage of the risks
on policies written through the syndicates to which they
subscribe and, in return, they are entitled to a certain percent-
age of the premium paid to the syndicate by the insured, after
the satisfaction of any insured losses and the deduction of fees
and charges. Roby, 796 F.Supp. at 105. The undisputed record
29a
is that the liability of each Name in a syndicate for the satisfac-
tion of the coverage written by the syndicate is several, not
joint.
A review of the record establishes that the Council of Lloyd’s
determines who may serve as Managing Agents. Lloyd’s also
appoints and approves the ‘‘Members’ Agents’’ who are sup-
posed to represent the Names. Jt appears that the Managing
and Members’ Agents are largely controlled, however, by
Lloyd’s. Thus, for example, it is Lloyd’s which develops,
prepares and dictates the use of the forms and contracts which
control the relationship between the Names and the Members’
Agents, between the Members’ Agents and the Managing
Agents and between the Managing Agents and Lloyd's.
The insurance products which emanate from the Lloyd’s
market are promoted under the trade name ‘‘Lloyd’s’’ or
‘‘Lloyd’s of London.’’ The Names are not listed as under-
writers or insureds in any report filed by Lloyd’s with any in-
surance regulatory body in the United States, except in Il-
linois and Kentucky where the Names are so listed because
in those states the syndicates in which they participate may
issue direct insurance.
To become members of Lloyd’s, Names must apply to
Lloyd’s and must be approved by Lloyd’s. They are subjected
to a personal interview in London by the so-called ROTA Com-
mittee of Lloyd’s to assure that they understand the nature
of the risks they are running. The Names also are subjected
to a ‘‘means test’’ to assure that they deliver upon the obliga-
tions to which they subscribe upon becoming Names. The
Names pay an entrance fee to Lloyd’s; they also deposit a
letter of credit with Lloyd’s. They agree that the premium
revenue generated in the syndicates to which they subscribe
is to be held into a premium trust fund; and that no profit
therefrom can be paid to them except pursuant to the rules
CWE ee
30a
by which claims are adjusted and paid by others. Meanwhile,
the premium trust funds are invested. The Names also agree
to pay an annual subscription fee and they contribute to the
Lloyd’s Central Fund, through levies on the premium trust
accounts. Additionally, the Names promise to meet cash calls
in the event that the premium trust funds and the revenues
therefrom are inadequate to pay any incurred loss. Finally,
the Names agree to accept unlimited liability, to which they
pledge their entire net worth (the proverbial ‘‘last cuff-link’’),
up to the percentage of risk they agreed to accept when they
form a particular syndicate.
Once a Name has paid the fees, made his deposit into the
Lloyd’s deposit, and selected a Members’ Agent from those
recommended by Lloyd’s, the Name may join syndicates
which, as explained above, are controlled by the Managing
Agent. Syndicates are formed annually. In the fall of each year,
Managing Agents underwrite particular rnsks. Membership in
a syndicate is opened to the Names when they receive a list
of possible syndicates from their Members’ Agents. Syndicates
are comprised of as few as two, and as many as several hun-
dred Names. Usually, Names join several syndicates. To do
so, they select from a list of syndicates recommended by their
Members’ Agents. As to each syndicate joined, the Name
specifies the quantity of risk to be assumed by designating
the amount of pounds sterling for which subscription is made.
The insurance policies are put together by the underwriters
employed by the Managing Agents. The policy language usually
contains standardized language, clauses and forms prepared
by Lloyd’s, but the underwriter is free, within limits, to select
or create non-standard insuring clauses, exceptions and other
non-standard policy language. The underwriter issues a policy
to the insured. The underwriter assigns to each Name the
fractional share of the risk designated in the form submitted
pies bibs
Need oe
AIEEE Tiga Nig Sik UNE 8 cod AE ARIE eR
3la
by the Name to the Members’ Agent. The underwriter col-
lects the premium and puts it in the syndicate’s premium trust
fund where it remains (and is invested) until the syndicate is
closed. Claims presented under the policy are adjusted, not
by the Name, but by the Managing Agent and losses are paid.
The Lloyd’s market operates pursuant to a three year ac-
counting cycle. Thus, although syndicates are formed annual-
ly for a single year of account, underwriting profits and losses
for each syndicate year of account are not determined until
the end of the second calendar year after the syndicate year
of account has ended. As a result, the syndicate year of ac-
count remains open for completing the business that was
underwritten for the year of account but there is no new in-
surance written for that year of account. Affidavit of Andrew
A. Duguid, Secretary to the Council of Lloyd’s, July 26, 1996,
q 23 (hereafter ‘‘Duguid Aff. 1, ___’’). To close the syn-
dicate’s year of account, its Managing Agent estimates
liabilities on reported claims and on claims incurred, but not
reported (contingent liabilities). The estimated liabilities are
then re-insured by another syndicate which underwrites in a
subsequent year of account. This process usually occurs at
the end of the third year and it is called ‘‘reinsurance to close
(RITC).’’ The Names delegate to the Managing Agent, pur-
suant to the Managing Agent’s Agreement, the authority to
close a syndicate year of account by obtaining reinsurance to
close. (Duguid Aff. 1, ¢ 24). Ordinarily, the Name is not
involved in that process.
RITC does not change the several nature of a Name’s liabili-
ty. Rather, RITC is a form of reinsurance in which one set
of Names agrees to reinsure the risks undertaken by another
set of Names in exchange for reinsurance premiums. (Duguid
Aff. 1, ¢ 25).
When it is not possible to estimate, with a reasonable degree
32a
of certainty, the magnitude of potential liabilities for a syn-
dicate, or, when for some other reason, it is not possible to
obtain RITC, the syndicate is then said to be in ‘‘run-off.’’
Names who are in a syndicate which is in run-off remain sub-
ject to further losses as claims are incurred, must maintain
their Lloyd’s Deposit, and cannot resign from Lloyd’s, even
they cease engaging in active underwriting, until all claims
underwritten in that syndicate’s year of account are settled.
(Duguid Aff. 1, ¢ 26).
Relationship Between Lloyd’s and Names
As explained previously, to become a Name a person must
become a member of the Society of Lloyd’s. Under the rules
of Lloyd’s, the prospective Name must be sponsored by a
Name. Lloyd’s sets the criteria to be met by Names and, as
a condition to membership, the Name is required to execute
a contract with Lloyd’s entitled the General Undertaking bv
which the Name agrees to comply with the six controlling
Lloyd’s Acts, any subordinate legislation adopted thereunder,
and the rules and bylaws of Lloyd’s. Two parts of the General
Undertaking operate together to define the controlling law and
the appropriate forum. Under § 2.1 of the General Undertaking.
The rights and obligations of the parties arising out
of or relating to the Members’ membership of,
and/or underwriting of insurance business at, Lloyd’s
and any other matter referred to in this Undertak-
ing shall be governed by and construed in accordance
with the laws of England.
Under § 2.2 of the General Undertaking:
Each party hereto irrevocable agrees that the courts
of England shall have exclusive jurisdiction to settle
any dispute and/or controversy of whatsoever nature
DT wn Ae oe
33a
arising out of or relating to the Members member-
ship of, and/or underwriting of insurance business
at, Lloyd’s and that accordingly any suit, action or
proceeding (together in this Clause Two referred
to as ‘Proceedings’) arising out of or relating to such
matters shall be brought in such courts and, to this
end, each party hereto irrevocably agrees to sub-
mit to the jurisdiction of the courts of England and
irrevocably waives any objection which it may have
now or hereafter to (a) any Proceedings being
brought in any such court as is referred to in this
Clause Two and (b) any claim that any such Pro-
ceedings have been brought in an inconvenient forum
and further irrevocably agrees that a judgment in any
Proceeding brought in the English courts shall be
conclusive and binding upon each party and shall be
enforced in the courts of any other jurisdiction.
Def.’s Ex. 35.
Lloyd’s also requires that a Name agree, as required by the
Lloyd’s Act of 1982, to place in trust, for the benefit of
policyholders, all premiums paid by insureds in connection with
any insurance business underwritten by a syndicate of which
a Name is a member. Those premiums in trust, therefore,
are the first source of payment of any valid claims underwrit-
ten by the syndicate. Of course, the premiums are not available
to the Name or to a creditor of the Name. (Duguid Aff. 1, 49).
Furthermore, the Names are obligated to provide collateral
as security for future underwriting obligations in the form of
the ‘‘Lloyd’s Deposit.’ The collateral can be in the form of
cash, securities or a letter of credit. Lloyd’s may draw down
on the credit, or otherwise resort to the security, when the
; funds in the syndicate’s premium trust fund are insufficient
; to satisfy the underwriting obligations and if the member does
34a
not respond to the cash calls which the Name agrees to make
at the request of a member’s agent. Funds drawn from the
Lloyd’s Deposit are then placed in the premium trust funds
and used to satisfy the Names’ obligations to policyholders.
(Duguid Aff. 1, 4 11).
It is also important to remember that each year the Names
are required to pay a nonrefundable assessment to the Lloyd’s
Central Fund, which was established in 1927 to protect
policyholders by affording a means of advancing payment to
them where an individual Name defaulted in the obligation
because of an inability to or refusal to pay. The assessment
for the Central Fund is made by Lloyd’s in the form of a levy
against the premium trust funds of the syndicate. Neither the
defaulting Name nor the policyholder has a legal right to de-
mand payment by the Central Fund. The power to disburse
from the Central Fund rests solely in the discretion of the
Council of Lloyd’s. Disbursement occurs only when, in the
opinion of the Council, “‘it is expedient for the advancement
and protection of the interests of the members of the Society
in connection with the business carried on by them as such
members.”’ (Duguid Aff. 1, ¢ 13.)
If the Council makes a payment to an insured from the Cen-
tral Fund in respect of a Name’s obligation, the Central Fund
is entitled to reimbursement from the Name. If reimburse-
ment is not forthcoming on a voluntary basis, the Name is sub-
ject to suit in the courts of England. The Central Fund is made
up by pooling contributions of all Names. (Duguid Aff. 1,
qq 12-14).
Consequences Of The Litigation Against
And Involving The Names And Other
Participants In The Lloyd’s Market
The Complaint alleges that, in the late 1980’s and early
1990’s, many Lloyd’s syndicates began to incur heavy losses
35a
as the consequence of so-called ‘‘long-tail’’ asbestos, pollu-
tion, and health hazard claims, as well as natural and man-made
disasters such as Hurricane Hugo, Pan Am Flight 103 and the
Exxon Valdez. It is further alleged that, beginning in 1986,
the liability for claims of this sort generally was passed along
to new Names during the RITC process so that risks which
were underwritten by earlier policies were knowingly and
fraudulently shifted to the new Names by Managing Agents
with the knowledge or assistance of some Members’ Agents,
accountants, Lloyd’s and others. It is also alleged that those
persons knew these risks to be extraordinary and inevitable.
According to the plaintiffs’ theory, the insiders of Lloyd’s thus
passed virtually certain liability on their part along to the new
Names, many of whom were American Names. (First Amend-
ed Complaint, 44 26-30). The Complaint further alleges, that
for several years and continuing until this date, the Names
in these victimized syndicates have been called upon by Lloyd’s
to pay substantial losses, driving many Names into financial
ruin.
The record confirms that fraud of this sort did occur in the
Lloyd’s market before 1993. Indeed, the Chief Executive Of-
ficer of Lloyd’s has admitted that Lloyd’s investors have been
victims of fraud. (Hudson Aff. 1, Exh. B). A report of the
British government confirms the past presence of widespread
fraud in the Lloyd’s market in some of the ways alleged in
the Complaint. (Hudson Aff. 1, Exh. C). State regulators in
the United States also have found that American investors
were defrauded in connection with soliciting the investment
that is represented by the Names’ membership in Lloyd's.
(Hudson Aff. 1, Exh. A, pp. 92-93; Hudson Aff. 1, Exhs. F
and G). The magnitude of the fraud and its impact is evidenced
in part by the fact that various Names and groups of Names
have secured judgments or arbitration awards against various
members of the Lloyd’s enterprise which in sum exceed £1
billion. (Westin Report, { 12).
36a
It is also undisputed that the extensive litigation by Names
against various members of the Lloyd’s market and persons
or professionals employed by them have created a serious
threat to the continued existence of Lloyd’s and to the in-
surance market it comprises. Additionally, a number of Names
have refused to pay any funds to their Members’ Agents for
application to the satisfaction of claims by policyholders, either
because: (i) they are unable to do so; (ii) they are unwilling
to do so until they realize on the awards or judgments to secure
recompense for the frauds against them; or (iii) they believe
that the frauds of which they are victims constitute defenses
to any obligation to pay. Thus, there have been defaults on
cash calls and there have been substantial drawn-downs from
the Lloyd’s Central Fund. (Duguid Aff. 1, 44 33-34).
The losses at issue occurred in syndicates formed in 1992
and before. The three most recent years of account (1993,
1994 and 1995), are expected to be profitable for most Names
whose syndicates underwrote in those years. (Duguid Aff. 1,
§ 33). As explained by Lloyd’s Chief Executive Officer, Ronald
Sandler, in Lloyd’s July 1996 Reconstruction & Renewal Pro-
posal (the settlement offer portion):
The Lloyd’s market has returned to profitability. As
announced on 12 July, 1996, the 1993 pure year of
account reported profits of £1,084 million after per-
sonal expenses, including the members’ special Cen-
tral Fund contribution. The 1994 and 1995 years of
account have not yet been closed but it is already
apparent that both will prove to have been very pro-
fitable trading periods. At this stage, managing
agents’ projections show profits to members after
personal expenses, including the members’ special
Central Fund contributions, of approximately £1
billion for 1994 and nearly £900 million for 1995.
a
a
2
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5
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37a
Id. p. ii. Notwithstanding this recent return to profitability,
the effect of the losses from the earlier years is still being felt;
syndicates from 1992 and before have not been able to secure
RITC, or otherwise satisfy their liabilities, and hence remain
open. One result is that the Names who underwrote through
those syndicates continue to be subject to continuing liability
on policies underwritten in those years. Many of those Names
are either unable to pay those losses or are unwilling to do
so because they believe that they were caused by the fraud
of members of the Lloyd’s enterprise. (Duguid Aff. 1, 435).
Equitas And Reconstruction & Renewal
The losses sustained by the Names for 1988 to 1992 were
approximately £8 billion. By early 1995, Lloyd’s determined
that by the end of 1996 the Central Fund could be exhausted
unless somehow replenished. This conclusion was based on
the results of a reserving project which had been wader way
at Lloyd’s since 1993 in an effort to assess the nature of the
liabilities presented in the syndicates which had been tainted
by the previously described fraud.
Lloyd’s also concluded that the insurance market could not
continue into the future unless the ‘‘1992 and prior’’ liabilities
were reinsured in some fashion. However, Lloyd’s was unable
to identify commercial reinsurers anywhere to take on these
vast potential liabilities. Without reinsurance to close, the 1992
and prior syndicates could not close and would go into ‘‘run-
off’’: a liquidation of sorts.
To solve this problem, and to revitalize the Lloyd’s insurance
market by creating a ‘‘firebreak’’ between the 1992 and prior
liabilities and the future Lloyd’s market, Lloyd’s has pro-
posed a ‘‘reconstruction and renewal’ (‘“‘R&R’’).
R&R is the product of an impressive and extensive effort
by many people. It has involved a reserving profit which
38a
consumed approximately 18 months and cost approximately
£150 (which Lloyd's paid for subject to reimbursement out
of the funding for the R&R to be paid by the Names). It in-
volved settlements with several groups of defendants (e.g.
Managing Agents, Members’ Agents, accountants, errors and
omissions insurers for Lloyd's offices and directors) in suits
brought by some Names. There has been extensive com-
munications with some 50 Names Action Groups respecting
the R&R. The resulting proposal is to be taken as the pro-
duct of serious, substantial efforts to resolve an insurance scan-
dal of great proportions and to create a new insurance market
that has been separated from the effects of its predecessor.
The goals of R&R are to:
(a) Enhance the security of policyholders for
pre-1993 policies by strengthening available
reserves and creating a means to achieve
‘economies of scale and returns on invested
reserves not available under the traditional
syndicate structure;’’
(b) Give Names “‘a final reckoning of their
ore-1993 underwriting liabilities which, if
satisfied, would allow Names to resign from
Lloyd’s;’’
(c) Settle ‘‘all disputes and litigation arising out
of pre-1993 years of account between
Names, their underwriting agent, Lloyd’s and
other participants in the Lloyd’s market;’’
(d) Provide substantia! financial assistance to
Names with substantial losses; and
(e) Enhance the stability of the market for the
benefit of those who continue to underwrite
in the future.
Bie ae 2. ee Oe ee ee. * OUT ~ =
39a
: Duguid Aff. 1, 436. According to documents published in con-
; nection with the R&R, the Society of Lloyd’s to date ‘‘has
been able to deal with the non-payment of members’ obliga-
: tions by resort to the Central Fund,’’ the net assets of which
3 as of June 30, 1996 stood at approximately £505 million. R&R
Proposal at ii. However, in the absence of a successful im-
; plementation of R&R, the Society believes that the Central
Fund would not be able to meet the anticipated cash re-
quirements caused by members’ shortfall. In that event, the
Society would be unlikely to meet the British government's
test for the solvency of the members of Lloyd. It also likely
would not meet the solvency tests of state insurance regulators
in the United States. According to the R&R, “‘if the
4 reconstruction plan were to fail, the Council would be required
to reconsider whether the Society were still a going concern."’
R&R Settlement Offer, July 1996, p. ii. If the going concern
i assumption were no longer valid, the Council would be obliged
; to put the Society into run-off with consequent damage to
members. /d.
: The R&R plan has two principal components: (1) a settle-
ment offer which is intended to achieve a global settlement
of all litigation, and (2) the formation of Equitas which is in-
tended to provide RITC for 1992 and prior syndicates. R&R,
Settlement Offer, July 1996, p. 1.
The settlement fund is made up of (1) combined litigation
settlement funds of approximately £1.1 billion contributed by
Lloyd’s, Managing Agents, Members’ Agents, Errors and
Omissions insurers of Managing and Members’ Agents,
auditors, Lloyd’s brokers, the past and present directors, of-
ficers, partners and employees of Lloyd’s, and various other
professionals who have been asserted to have liability to the
Names; and (2) £2.1 billion of debt credits. Jd. at p. 2. The
settlement fund and Equitas are umbilically connected because
i out i ded. ay se ‘ & y >,
RR ia eal k AS PAB BI pS Eg WAI LEIS PELE MLLER LIE IRE DOLE AISA LAEVIS
40a
the Settlement Fund will not go to the Names but will instead
become part of the capital of Equitas. Thus, as part of the
R&R each Name will be assessed a ‘‘premium share’’ of the
reinsurance to be provided by Equitas. A Name’s share of
the Settlement Fund must go to satisfy his Equitas premium.
To benefit from any allocations from the settlement fund, the
Names must accept the settlement offer, must enter into the
settlement agreement, and must pay their so-called ‘‘finality
bills.’’! The average Finality Bill is about $57,000. Westin
Report at 3. (Hudson Aff., Exh. C). However, ‘‘[a]ccepting
Names must agree to waive existing and future claims in
respect of their 1992 and prior business (including nghts against
Managing and Members’ Agents, E & O insurers, brokers,
auditors, Lloyd’s, Equitas, advisers and others.’’ R&R, Set-
tlement Offer, July 1996, p. 2.
The second component of the R&R plan, indeed, its key
element ‘‘is the creation of a company called Equitas which
will (i) provide reinsurance to close to those Names who have
liabilities on policies allocated to years of account prior to 1993
(including Names on syndicates in later years who have rein-
sured liability from 1992 or prior); and (ii) run-off management
services in respect of these reinsured liabilities. In effect,
Equitas will supply the reinsurance cover which Names who
underwrote through run-off syndicates have been unable to
procure through traditional means. Reinsurance to close will
be provided to the Names pursuant to a reinsurance contract
from Equitas Reinsurance Ltd.’’ (Duguid Aff. 1, ¢ 37).
Since 1993, independent professionals have conducted a
reserve analysis of all liabilities in the Lloyd’s market for the
1992 and prior underwriting years of account. That analysis
'The Finality Bill is a reconciliation of a Name’s insurance liabihues, the
credits to which he is entitled and his bill for the Equitas premium.
4la
2 Sila at ceca al
shows that Equitas must ‘‘receive sufficient reinsurance
premiums to obtain DTI (the British Department of Trade In-
dustry) authorization’’ to proceed, 1.e., to assure solvency.
: That amount, as of December 31, 1995, was estimated to be
3 £14.7 billion but is subject to change. (Duguid Aff. 1, { 38).
: Each Name will have to pay a part of that reinsurance premium
which, (Duguid Aff. 1, 4438-39), in essence will be the capital
for the formation of Equitas. The premium is said to repre-
sent the cost to the Name of reinsuring all underwniting obliga-
tions from pre-1993 syndicate years of account. The Equitas
premium will be funded from: (i) the Names’ interest in the
premium trust funds; (ii) financing made pursuant to the £2.1
billion debt credit package; and (iii) writing off by Lloyd’s of
£700 million of Central Fund debt owed by the Names to the
Society of Lloyd’s (which in turn will result in the transfer of
the Central Fund to Equitas).
According to the R&R plan, the debt credit and the com-
bined litigation settlement allocation for a Name is set out in
the Name’s Finality Statement. According to the R&R, once
the Name validly accepts the settlement offer, but not until,
‘‘Lloyd’s will apply any debt credit and combined litigation set-
tlement funds allocations to meet that Name’s obligations as
reflected in his finality statement.’’ R&R, Settlement Offer,
July 1996, p. 21. This is subject to the critical proviso that
the Name first must have paid his finality bill by September
30 (and that is so even if the conditions to finality of settle-
ment have not been achieved by then). The Name also, by
accepting the Settlement Offer, will acknowledge his obliga-
tion to pay his share of the Equitas premium which also is
reflected on the Finality Statement.
It is important to note that even acceptance of the Settle-
ment Offer and implementation of the R&R plan will not assure
that the Names are free of the obligations assumed by virtue
of their membership in Lloyd’s and their participation in the
42a
1992 and prior syndicates. The R&R plan frankly confesses
that the ‘‘finality’’ offered in it is not absolute and that ‘‘finali-
ty’’ will only be ‘‘absolute’’ if Equitas meets the 1992 and
prior liabilities in full as they fall due. (R&R, Settlement Of-
fer, July 1996, p. 142). That, of course, will not be known
for many years to come. The R&R pian also candidly confesses
that there are a number of factors which could in fact make
it impossible for Equitas to meet the 1992 and prior liabilities
in full as they come due. In that event, the Names would be
required to continue to pay any losses.
The R&R plan, therefore, offers the Names the prospect
of some hope for finality, but no guaranty thereof. In addi-
tion, it provides accepting Names the benefit of:
e Allocations from the combined litigation settlement
funds
e Allocations of debt credit
e Expense refunds
e Any refund of the members special Central Fund
contribution
Id. at 145. In order to secure these benefits, each Name will
have to: (1) pay a finality bill by September 30, 1996, and (2)
execute a complete waiver and release of all claims by accepting
the offer presented in the R&R and agreeing to the plan, in-
cluding the funding of Equitas, by August 28, 1996. Id. If there
is no acceptance rejection will be deemed to have occurred.
The R&R forcefully describes the consequences to Names
who do not accept the settlement offer. As to Names who
are litigating with Lloyd’s, the following consequences are
identified:
e Loss of benefits of the settlement offer
Be ae ee ee ae ne
GRRE Rt SAE TAS Sec:
a og ARR ESA ANA a asa SN OEPE
43a
e Uncertainty of litigation recoveries (against
Lloyd’s and others)
e Increased litigation costs for removing litigants
(non-settling litigating Names wil! have to pay
more pro rata to maintain litigation)
e Names will face continued uncertainties in secur-
ing litigation proceeds (notwithstanding that it nas
lost at the trial court on the issue of whether litiga-
tion recoveries have to be applied to a Narne’s
trust fund, Lloyd’s will continue its litigation on
that issue through appeal)
© Continuing liability to pay full amount of their
underwriting liabilities (Lloyd’s threatens vigorous
litigation to extract the full measure from non-
settling Names)
e ‘‘Pay now, sue later’ (Names will be immediately
liable for their liabilities and may have to wait
months or years to recover from Lloyd's or any
third party)
¢ Claims against parties other than agents (including
auditors and brokers) will be complex and lengthy
Id. at 146-47.
The R&R also summarizes consequences for non-litigating
Names who do not accept the settlement offer:
e Loss of the refund of the members special Cen-
tral Fund contribution on the 1993, 1994 and 1995
years of account
e Loss of any debt credits
e Continuing siability to pay the full amount of their
44a
liabilities, which will be vigorously pursued by
Lloyd’s as described above
The Lloyd’s entities, the Department of Trade and Industry
(‘DTI’) of the British government, insurance commissioners
in the United States, various state agencies and others have
concluded that the R&R represents the best, realistic pro-
posal to restore the Lloyd’s market and to relieve the enor-
mous financial burden currently confronting the Names.
Lloyd’s contends that any delay in the approval of the R&R
will disable it from writing new insurance because the ensu-
ing three or four months are the ‘‘renewal season’’ in the in-
surance industry. This, says Lloyd’s, will put it at a competitive
disadvantage in the market and further deprive it of funds with
which to operate. Further delay in the approval of the R&R
will impair the ability of Lloyd’s to meet solvency tests in the
United States and England, which they say must be met by
the end of August, thereby compromising, or eliminating, its
ability to underwrite insurance directly or through reinsurance
in many markets.
The structure of Equitas is significant to the issues presented
by the preliminary injunction motion. The R&R proposal has
been set forth in various documents beginning in May of 1985
and the proposed structure of Equitas has been changed on
several occasions, in no small part as the result of Lloyd’s ef-
forts to avoid the need for compliance with the United States
securities laws.
Moreover, it is worth noting that, while the current settle-
ment offer purports to be in its final form there are a number
of statements in it which acknowledge that it is far from final
and that many of its terms remain to be negotiated. For ex-
ample, the settlement offer is being made to the Names ‘‘on
the basis of funding commitments which have been received
by the Council from the various contributing parties.’’ R&R,
Sarre ean mane pra eae spvemeneren
lhe SA itn ioe ht Ne earth
Re a BARE AEE
atebebhare
ee CS Se ek Rae LEE I
45a
Settlement Offer, July 1996, p. iii. The next sentence pro-
vides: ’’[A] number of these commitments are conditional or
remain subject to the receipt of final documentation ... The
risk remains, however, that some of these commitments may
not become legally binding and that the reconstruction plan
will fail.’’ Jd.
Also, in a rather remarkable aspect, the R&R plan is being
put forth with very broad disclaimers. As explained, the set-
tlement offer is made in full and final settlement of any and
all claims that in any way involves the Names’ 1992 and prior
business. And, there is a forward component to that waiver
by virtue of Clause 12.2 of the Settlement Agreement which
requires the Accepting Name to acknowledge that, in rela-
tion to the Settlement Agreement and the making of the set-
tlement offer:
e No party to the Settlement Agreement owes any
duty to disclose any matter;
e No party owes any duty of care in respect of any
statements or representations which are made;
e No party will be entitled to rescind, avoid, ter-
minate or cancel the Settlement Agreement on
the grounds of any misrepresentation, misstate-
ment, mistake or nondisclosure;
° No party shall have any liability to any Name for
any misrepresentation, misstatement, mistake or
nondisclosure; and
e Any claim a Name may have in respect to any of
the above is waived and released.
R&R, Settlement Offer, July 1996, p. 29 and Settlement
Agreement, Clause 12.2, p. 19. Furthermore, the R&R
documents contain much language which, at least arguably,
TE Te een
46a
would make reliance on any statement unreasonable within
the jurisprudence controlling recovery for fraud.
Finally, it seems to be beyond serious question that the
courts of England, applying English law, will enforce these
agreements and therefore nullify any obligation of disclosure
or any recourse for a misrepresentation in connection with
disclosure. In sum, the Names are being asked to agree to
enormous liabilities and to forego claims which, based on
previous judgments and arbitration awards, have been pro-
ven to be of substantial value on the basis of limited informa-
tion and with the knowledge that they will have no recourse
if whatever information has been provided is erroneous, in-
tentionally or otherwise.
Against this background, we consider the motion to dismiss
and then the motion for preliminary injunction.
LLOYD’S MOTION TO DISMISS THE ACTION
I. VENUE
Lloyd’s has moved for dismissal of this action pursuant to
Fed.R.Civ.P. 12(b)(3), claiming that the choice of law and
choice of forum provisions in the General Undertaking operate
to make any court in the United States, and specifically the
Eastern District of Virginia, an improper venue for litigation
over the issues presented in this action.?
The General Undertaking, which all Names are required to enter into
in order to become a Name, contains both a choice of law and choice of
forum provision. Paragraphs 2.1 and 2.2 of the General Undertaking state
respectively:
The nghts and obligations of the parties arising out of or relating
to the Member’s membership of, and/or underwriting of in-
surance business at, Lloyd’s and any other matter referred
to in this Undertaking shall be governed by and construed in
accordance with the law of England.
(footnote continued)
47a
A. The Applicability of the Choice Clauses
Because the choice of forum clause is a matter of contract,
the threshold issue is whether the clause applies to the claims
: presented by the pleadings. Hence, it is necessary first to
determine whether the disputes presented respecting both
the Names’ investment in Lloyd’s and the R&R plan ‘‘aris[e]
out of or relat[e] to [Plaintiff's] membership of, and/or [their]
underwriting of insurance business at, Lloyd’s.’’
Notwithstanding that the formation of, and the reinsurance
into, Equitas and the R&R plan were conceived long after the
execution of the General Undertaking, it cannot be said that
the controversies and disputes about them as presented in
: this action do not ‘‘aris[e] out of’’ or ‘‘relat[e] to’’ Names’
relationship and underwriting activities at Lloyd’s. Within the
Lloyd’s insurance market, reinsurance is an integral part of
underwriting. A principal purpose of the formation and
capitalization of Equitas is to provide reinsurance coverage in
an effort to relieve the Names of their 1992 and prior liabilities
which arose out of their memberships of Lloyd’s and which
relate to the insurance underwritten by the syndicate of which
they are members. Likewise, the individual settlement offers
being made to Names pursuant to the R&R plan arise out of
and relate to Names’ underwriting activities. The settlement
offers, which, if accepted, provide substantial financial assist-
(footnote continued)
Each party hereto irrevocably agrees that the courts of England
shall have exclusive jurisdiction to settle any dispute and/or con-
troversy of whatsoever nature arising out of or relating to the
Member’s membership of, and/or underwriting of insurance
business at, Lloyd’s and that accordingly any suit, action or
proceeding ... arising out of or relating to such matters shall
be brought in such courts and, to this end, each party nereto
irrevocably agrees to submit to the jurisdiction of the courts of
England and irrevocably waives any objection which it may
have now or hereafter ...
(emphasis added).
48a
ance in paying the Equitas premium, are bemg-made in set-
tlement of all claims arising out of the Names’ prior under-
writing activities.
The Names’ argument that the language in the choice
clauses, (if they are enforceable) does not control is based
on the theory that neither Equitas nor the related R&R plan
were contemplated or understood by the parties at the time
of the signing of the General Undertaking. The Names have
cited no authority for the proposition that the relevant inquiry
in determining what ‘‘aris[es] under’’ or ‘‘relat[es] to’’ their
activities is the contemplation of the parties at the time of sign-
ing. More importantly, under the express terms of the General
Undertaking itself, the entire agreement applies in a variety
of circumstances not explicitly or impliedly envisioned at the
time of signing. Section 1 of the General Undertaking reads:
Throughout the period of his membership of Lloyd’s
the Member shall comply with the provisions of
Lloyd’s Acts 1871-1982, any subordinate legislation
made or to be made thereunder and any direction
given or provision or requirement made or imposed
by the Council or any person(s) or body acting on
its behalf pursuant to such legislative authority and
shall become a party to, and perform and observe
all the terms and provisions of, any agreements or
other instruments as may be prescribed and notified
to the Member or his underwriting agent by or under
the authority of the Council.
(emphasis added). That language plainly provides that the
agreement brings within its reach future action by the Coun-
cil of Lloyd’s and other Lloyd’s entities such as the bylaws
which were passed in conjunction with the formation of Equitas
and the formulation of the R&R plan.
pS ee oe ee
Swhas bate 64
eee Sines a aie BS
49a
Moreover, as the Names argue on the merits of their mo-
tion for injunctive relief and as the evidence established,
Lloyd's is an integrated, interdependent enterprise. Therefore,
the broad language of Clause 2.2 (‘‘any dispute and/or con-
troversy of whatsoever nature arising out of or relating to the
Member’s membership of, and/or of underwriting insurance
business at, Lloyd’s’’) encompasses every activity and every
failure to act of which the Names complain.
B. The Enforceability Of The Choice Clauses
As Lloyd’s counsel made clear in argument, and as the
Names agree, Lloyd’s request for dismissal is to be tested
on the basis of the allegations of the complaint. Hence, unless
the allegations as to the existence of a security are facially
frivolous, (and they are not), resolution of the motion to dismiss
does not necessitate a determination whether, as a matter of
fact or law, there is a security. Rather, the existence of a
security is to be presumed and the question becomes whether,
in perspective of the securities laws of the United States, the
choice clauses are enforceable. If they are, the inquiry is ended
and the action must be dismissed.
Against that background, and assuming both that United
States’ securities laws apply and that the choice clauses would
apply by their terms to the controversies and disputes raised
in the Complaint, the next issue is whether the choice clauses
are enforceable.
Four United States Courts of Appeals have addressed the
enforceability of the choice clauses and each has held that the
clauses are enforceable. See Shell v. R.W.Sturge, LTD, 55
F.3d 1227 (6th Cir. 1995); Bonny v. Soctety of Lloyd’s, 3 F.3d
156 (7th Cir. 1993), cert. dented 510 U.S. 1113 (1994); Roby
v. Corporation of Lloyd’s, 996 F.2d 1353 (2nd Cir. 1993),
50a
cert. dented 510 U.S. 945 (1993); Riley v. Kingsley Under-
wnting Agencies, Ltd., 969 F.2d 953 (10th Cir.1992), cert.
denied, 506 U.S. 1021 (1992); See also Hugel v. Corporation
of Lloyd’s, 999 F.2d 206 (7th Cir.1993) (enforcing the choice
clauses against a Name who brought common law tort and con-
tract claims). All of those appellate decisions are based, to
varying degrees, upon interpretations of four decisions of the
Supreme Court of the United States dealing with the en-
forceability of similar choice of law and choice forum clauses
found in international contracts. See Bremen v. Zapata Off-
Shore Company, 407 U.S. 1 (1972); Scherk v. Alberto-Culver
Company, 417 U.S. 506 (1974) reh’g denied 419 U.S. 885
(1974); Mitsubtsht Motors Corporation v. Soler Chrysler-
Plymouth, Inc., 473 U.S. 614 (1985); Carnival Cruise Lines,
Inc. V. Shute, 499 U.S. 585 (1991).
This unbroken chain of intermediate appellate authority
respecting the choice clauses in the General Undertaking has
been the foundation for several district court decisions in other
circuits. See, e.g., Richards v. Lloyd’s of London, No. 94-1211,
1995 U.S.Dist. LEXIS 6888 (S.D.Cal. Apr. 28, 1995);
McDade v. NationsBank of Texas, N.A., Civ. No. H-94-3714
(S.D.Tex. June 28, 1995); Haynsworth v. Lloyd’s of London,
Civ. No. H-96- 210 (S.D.Tex. July 15, 1996). Only in Leslie
v. Lloyd’s of London, No. H- 90-1907, 1995 U.S.Dist. LEXIS
15380 (S.D.Tex. Aug. 20, 1995), has a federal court found
that the choice clauses in Lloyd’s General Undertaking were
unenforceable.
Therefore, it is not lightly that, in this action, this court parts
company with the previous decisions and agrees with the
3Richards is currently on appeal in the United States Court of Ap-
peals for the Ninth Circuit. Briefing has not yet been completed and oral
argument has not yet been scheduled. Memorandum of Law in Support
of Lloyd’s Motion to Dismiss First Amended Complaint (‘‘Lloyd’s
Memo.’’) at 17, n. 9.
5la
Names that those clauses cannot be enforced here. Three con-
siderations point rather clearly to that conclusion: (1) The
Bremen line and its progeny are factually different from this
action; (2) the Supreme Court recently has altered significantly
the analysis under The Bremen line of cases in a manner that
is controlling here, See Vimar Seguros Y Reaseguros, S.A. v.
MVV Sky Reefer, __ U.S. __, 115 S.Ct. 2322 (1995); and (3)
the previously cited decisions holding that the Lloyd’s choice
clauses are enforceable differ significantly on both factual and
legal grounds from this action. These three considerations are
explored throughout the analysis which follows.
1. Supreme Court Jurisprudence Establishes The
Presumptive Validity Of Choice Clauses In
International Agreements
Forum selection and choice of law clauses were historically
disfavored. However, beginning with The Bremen, 407 U.S.
1 (1972), the Supreme Court has accorded clauses of that sort
presumptive validity where the underlying transaction is fun-
damentally international in character. In The Bremen, an
American oil company, seeking to evade its contractual agree-
ment to an English forum and, by implication, English law,
filed a suit in admiralty in federal court against the German
corporation which was the other contracting party. Not-
withstanding that the English court would enforce provisions
of the contract which would exculpate the German party, and
fully aware that an American court would not enforce those
provisions, the Supreme Court gave effect to the chotce of
forum clause. In doing so, the Court recognized that in the
modern commercial era, it was essential that American courts
respect and enforce the decisions of contracting parties to
resolve disputes in the tribunals of foreign countries:
The expansion of American business and industry
will hardly be encouraged if, notwithstanding solemn
— secs a ies acca pmeare anata aac
ee
52a
contracts, we insist on a parochial concept that all
disputes must be resolved under our laws and in our
courts ... We cannot have trade and commerce in
world markets and international waters exclusively
on our terms, governed by our laws, and resolved
in our courts.
407 U.S. at 9.
The presumptive validity of choice of forum clauses found
in international agreements was confirmed in Scherk, 417 U.S.
506 (1974), wherein the Court categorized ‘‘[a]n agreement
to arbitrate before a specified tribunal [as], in effect, a special-
ized kind of forum-selection clause that posits not only the situs
of suit but also the procedure to be used in resolving the
dispute.’’ 417 U.S. at 519. Scherk involved an agreement bet-
ween an American company and a German citizen relating to
the purchase and sale of several interrelated business enter-
prises which were organized under the laws of Germany and
Liechtenstein. The contract contained a clause requiring ar-
bitration before the International Chamber of Commerce in
Paris of ‘‘ ‘any controversy or claim [arising] out of this agree-
ment or the breach thereof.’ ’’ Jd. at 508. The Court held
that the clause was enforceable, even though it assumed for
purposes of decision that the controversy would not be ar-
bitrable under Supreme Court jurisprudence. Jd. at 519-20.
In deciding Scherk, the Supreme Court emphasized the policy
considerations on which it premised the presumption that such
clauses were valid and enforceable:
A contractual provision specifying in advance the
forum in which disputes shall be litigated and the law
to be applied is ... an almost indispensable precon-
dition to achievement of the orderliness and predic-
tability essential to any international business tran-
saction. ...
Te
ET
53a
A parochial refusal by the courts of one country to
enforce an international arbitration agreement would
not only frustrate these purposes, but would invite
unseemly and mutually destructive jockeying by the
parties to secure tactical litigation advantages ... [It
would] damage the fabric of international commerce
and trade, and imperil the willingness and ability of
businessmen to enter into international commercial
agreements.
417 U.S. at 516-17.
Pe eee ant ee ke
od ahaa AE Se WA Rade Ab ae iat Ya ine
This presumption of enforceability has been strengthened
by subsequent Supreme Court decisions. See Mitsubishi Motors
: Corporation v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614,
631 (1985) (holding that The Bremen and Scherk ‘‘establish
a strong presumption in favor of enforcement of freely
negotiated contractual choice-of-forum provisions,’ and en-
forcing arbitration clause in international agreement even
assuming that a contrary result would be forthcoming in a
domestic proceeding under the Sherman Act); Carnival Cruise
Lines, Inc. v. Shute, 499 U.S. 585, 593 (1991) (enforcing forum
selection clause in cruise line’s passage contract ticket requir-
ing litigation of all disputes in Florida and emphasizing a
litigant’s ‘‘special interest in limiting the fora in which it poten-
tially could be subject to suit’’); Vimar Seguros Y Reaseguros,
S.A. v. M/V Sky Reefer, 115 S.Ct. 2322, 2328-29 (recogniz-
ing the strong presumption of validity for choice clauses in in-
ternational agreements and enforcing foreign arbitration clause
found in bill of lading).
2. The Presumption Is Not Absolute
SAPs aD SE
SR cs ha Wd eal Ow ae hae ite
Sele ch NPM itl
brn ten tds SS Aas doe burs capa ag SLE
Bi sided ot sai,
This now settled presumption of enforceability is not ab-
solute, however, because it may be overcome by a clear show-
ing that the clauses are ‘‘ ‘unreasonable’ under the cir-
cumstances.’’ The Bremen, 407 U.S. at 10. The Supreme
ii Senor
na
54a
Court has construed this exception narrowly; forum selection
and choice of law clauses may be ‘‘unreasonable’’ in four situa-
tions: (1) if their incorporation into the agreement was the
result of fraud or overreaching, Carnival Cruise Lines, 499
U.S. at 595; The Bremen, 407 U.S. at 12-13; (2) if the com-
plaining party ‘‘will for all practical purposes be deprived of
his day in court,’’ because of the grave inconvenience or un-
fairness of the selected forum, The Bremen, 407 U.S. at 18;
(3) if the fundamental unfairness of the chosen law may deprive
the plaintiff of a remedy, Carnival Cruise Lines 499 U.S. at
595; or (4) if enforcement contravenes a strong public policy
of the forum state, The Bremen, 407 U.S. at 15.
The first three circumstances are not presented here. First,
a plaintiff seeking to avoid a choice provision on a fraud theory
must plead a fraud going to the specific provision; ‘‘the
teachings of Scherk, interpreting [The Bremen], require no
less.’’ Riley v. Kingsley Underwriting Agencies, Ltd., 969 F.2d
953, 960 (citing Scherk, 417 U.S. at 519 n. 14 (the fraud ex-
ception “‘means that an arbitration or forum-selection clause
in a contract is not enforceable if the inclusion of that clause
in the contract was the product of fraud or coercion’’)’ The
Bremen, 407 U.S. at 15 (clause must be invalid due tou d
or overreaching)). Here, there is no contention by the Names
that they were fraudulently induced into agreeing to the forum
selection or choice of law clauses. Nor is the second cir-
cumstance presented here because it does not appear to be
‘“gravely inconvenient’’ for the Names to litigate in England.
See Roby v. Corporation of Lloyd’s, 996 F.2d 1353, 1363 (2nd
Cir.1993) (finding it not ‘‘gravely inconvenient for the ..
Names to litigate in London; they found it convenient enough
to travel there for their mandatory interviews, and, in any
event, many of them presently are prosecuting actions
there’’).4
‘The record here does not disclose how many of the plaintiffs have ever
been in litigation with Lloyd’s, but plaintiffs’ counsel represent that most
have not.
pie ieee fas nenenanaceeins
55a
The third situation permits disregard of a choice clause if
the fundamental unfairness of the foreign forum deprives the
plaintiff of any remedy. However, ‘‘it is not enough that the
| foreign law or procedure merely be different or less favorable
4 than that of the United States.’’ Jd. at 1363 (citing Mitsubishi,
473 U.S. at 629; Medoil v. Citicorp, 729 F.Supp. 1456, 1460
(S.D.N.Y.1990). Instead, the issue on this facet of the inquiry
is whether the foreign law selected by the parties is so fun-
damentally unfair as to present the danger that the plaintiff
‘‘will be deprived of any remedy or treated unfairly.’’ Piper
Aircraft Co. V. Reyno, 454 U.S. 235, 255 (1981), reh’g dented,
455 U.S. 928 (1982). Although in certain situations English
substantive law may not be as favorable to a party as would
American law, United States courts have consistently found
English tribunals to be neutral and just forums. See The
Bremen, 407 U.S. at 12; Roby, 996 F.2d at 1363; Mitsubisht,
473 U.S. at 634: Rodriguez de Quijas v. Shearson/Amencan
Express, Inc., 490 U.S. 477, 479 (1989); Syndicate 420 at
Lloyd’s London v. Early American Ins. Co., 796 F.2d 821,
829 (5th Cir.1986); Manetti-Farrow, Inc. v. Gucci Amenica,
Inc., 858 F.2d 509, 515 (9th Cir.1988). Thus, plaintiffs would
not be effectively ‘‘denied their day in court’’ were they forced
to present their claim in front of an English tribunal.
RE ORE TR pe Ts O
ey Sabian eo ee aa as ae
16 tah ERE I ire RSS Sllah cA
is A Moc alee cas AL ls
The fourth Bremen factor is more problematic, however.
As the leading authority in support of the Lloyd’s choice clauses
observed: ‘‘[T]here is a serious question whether United
States public policy has been subverted by the Lloyd’s
clauses.’’ Roby, 996 F.2d at 1363. The concerns which
prompted that comment from the Second Circuit necessitate
i some explanation; and it is necessary to explain why, in this
i action, that issue is far more than ‘‘a serious question.’’
cuties
56a
3. The Presumption Of Validity For Forum
Choice And Choice of Law Clauses Under
Supreme Court Jurisprudence Does Not Apply
In This Case
a. The Combined Effect of the Choice of
Forum and Choice of Law Clauses Is to
Waive Substantive Statutory Rights
The Supreme Court has made quite clear that where “‘ ‘the
choice-of-forum and choice-of-law clauses operated in tandem
as a prospective waiver of a party’s night to pursue statutory
remedies ..., we would have little hesitation in condemning the
agreement as against public policy.’ ’’ Vimar, 115 S.Ct. at 2330
(emphasis added) (quoting Mitsubishi Motors, 473 U.S. at 637,
n. 19) (citing Knott v. Botany Mills, 179 U.S. 69 (1900) (nulli-
fying choice-of-law provision under the Harter Act, the
statutory precursor to COGSA, where British law would give
effect to provision in bill of lading that purported to exempt
carrier from liability for damage to goods caused by carrier’s
negligence in loading and stowage of cargo)). This significant
explication of the fourth measure of unreasonableness first was
made in Mitsubishi Motors. It was reiterated in Vimar in 1995.
On both occasions, it was made for the purpose of explaining
the confines of the decisions in The Bremen and its progeny.
This limitation is quite logical when it is remembered that
in The Bremen and its progeny, the Supreme Court construed
and applied only choice of forum clauses (as opposed to both
choice of forum clauses and choice of law clauses). See Scherk,
417 U.S. at 519-20 (upholding requirement that United States
company submit its United States securities law claims to ar-
bitration in a foreign forum where Illinois law was to apply);
Mitsubishi Motors, 473 U.S. at 640 (compelling arbitration of
United States antitrust claims under the Sherman Act in
ccm. 0 ~__, Sb <a
57a
; Japanese forum); Vimar, 115 S.Ct. at 2329-30 (enforcing clause
which mandated arbitration in Japan where it was not yet decided
. what law governed the proceedings and where the district
4 court retained jurisdiction over the case to ensure that substan-
tive legal rights are enforced); The Bremen, 407 U.S. at 15
(upholding provision in a maritime towage contract mandating
all disputes arising out of the contract be heard in London,
and merely presuming that English law would apply).
4 Clearly, where a court is enforcing only a choice of forum
clause, the plaintiffs retain the same substantive rights even
though they must resolve them in an alternative forum.
However, where both choice of forum and choice of law clauses
j are involved, the substantive rights themselves are derogated.
The Supreme Court consistently has guarded against the oc-
: currence of that situation. See Scherk, 417 U.S. at 519 n. 13
(noting that the case did not present a situation where an ar-
bitration agreement designating ‘‘arbitration in a certain place
might also be viewed as implicitly selecting the law of that place
to apply to that transaction’ since it was specified that Illinois
law would apply); Shearson/Amencan Express Inc. v.
McMahon, 482 U.S. 220, 229, reh’g denied 483 U.S. 1056
; (1987) (‘‘The decision in Scherk thus turned on the Court’s
judgment that under the circumstances of that case, arbitra-
tion was an adequate substitute for adjudication as a means
of enforcing the parties’ statutory rights’’); Mitsubishi Motors,
473 U.S. at 637, n. 19 (where ‘‘the choice-of-forum and choice-
of-law clauses operated in tandem as a prospective waiver of
a party’s right to pursue statutory remedies ..., we would have
little hesitation in condemning the agreement as against public
: policy’’).
3 The Supreme Court recently reiterated is commitment to
preventing prospective waivers of statutory rights in Vimar
Seguros Y Reaseguros, S.A. v. M/V Sky Reefer, 115 S.Ct. 2322
a a ae
58a
(1995), a case involving a foreign arbitration clause in a bill
of lading. Under the Carriage of Goods by Sea Act (COGSA),
any clause in a bill of lading ‘‘lessening [a carrier’s] liability’’
is void. 46 U.S.C. § 1300 et seg. The plaintiff, an insurer that
had paid claims arising from the damage to goods during ship-
ment by the defendant carrier, argued that there was no
guarantee that the foreign arbitrators would apply COGSA and
that the carrier’s liability to the cargo might be reduced.
Because it had not been established what law the foreign ar-
bitrators would apply and because the district court had re-
tained jurisdiction and would have an opportunity to later en-
sure that the plaintiff's substantive rights under COGSA were
addressed*, the Court enforced the arbitration clause. Jd. at
2330 (quoting Mitsubishi Motors, 473 U.S. at 637 n. 19, supra).
In so doing, however, the Supreme Court made clear that it
would not sanction enforcement of choice of forum and choice
5In both Mitsubtsht and Vimar, the Court found significance in the fact
that, after the foreign arbitration proceeding, the district court would re-
tain jurisdiction to ensure that laws and policies of the United States had
been respected. See Mitsubishi, 473 U.S. 614, 638 (‘‘Having permitted
the arbitration to go forward, the national courts of the United States will
have the opportunity at the award-enforcement stage to ensure that the
legitimate interest in the enforcement of the ... laws has been addressed’’);
Vimar, 115 S.Ct. 2322, 2329-30 (‘‘The district court has retained jurisdic-
tion over the case and ‘will have the opportunity at the award-enforcement
stage to ensure that the legitimate interest in the enforcement of the anti-
trust laws has been addressed’ ’’) (quoting Mitsubishi, 473 U.S. at 638).
In this case, the district court can take such a role. Notwithstanding
that the Supreme Court has categorized ‘‘[a]n agreement to arbitrate
before a specified tribunal [as], in effect, a specialized kind of forum-
selection clause that posits not only the situs of suit but also the procedure
to be used in resolving the dispute,’’ see Scherk, 417 U.S. at 519, the
forum selection and choice of law clauses in the General Undertaking are
distinguishable from foreign arbitration clauses. Here, enforcement of the
choice clauses mandates the dismissal of the plaintiffs’ claims with no
residual jurisdiction remaining in United States courts at all. There is no
“‘second chance’’ for United States courts to ensure that U.S. public policy
is respected and complied with.
TT
59a
: of law clause which, taken together, operate to deprive an
American plaintiff of a Congressionally conferred right.
: The waiver of rights threatened in Vimar, and cautioned
against in Scherk and Mitsubishi Motors, is precisely what
: would occur here if the choice clauses are upheld. It is un-
; disputed that an English court, applying the choice of law clause
4 in the General Undertaking, will not apply the securities laws
3 of the United States which the plaintiffs’ seek to secure by
; injunction in this case. Declaration of Kenneth Steward Rokison
: at §§ 45-55 (Exh. G to Plaintiff’s brief In Opposition to Lloyd’s
i
Motion to Dismiss). English conflict of law rules do not per-
mit recognition of foreign tort or statutory law. See Roby, 996
F.2d at 1362. Thus, if the plaintiffs’ claims in this case were
dismissed on the basis of the Lloyd’s choice clauses, plain-
tiffs would be deprived of the protections afforded to them
by the securities laws of the United States. This court should,
therefore, ‘‘not hesitate’ to forestall enforcement of the
Lloyd’s choice of forum and choice of law clauses.
inaum Ghee
je ie fal
b. Congress Expressed A Clear Statutory State-
ment Of Contrary Public Policy
Mane BR BAR
A second distinguishing feature here is that here Congress
has made a clear, unequivocal statutory statement which is
inconsistent with the enforcement of the choice clauses. The
securities law of this country contain anti-waiver provisions
which clearly state that, without exception, no substantive
rights under either the 1933 or 1934 Acts may be waived by
any contract provision. The 1933 Act provides that ‘‘[a]ny ...
stipulation ... binding any person acquiring any security to
waive compliance with any provision of this subchapter ... shall
be void.’’ 15 U.S.C. § 77n. Similarly, the 1934 Act states
‘‘fajny ... stipulation ... binding any person to waive compliance
with any provision of this chapter or of any rule or regulation
thereunder ... shall be void.’’ 15 U.S.C. § 78cc(a).
jet EDS Nc BARA GS “ees Set RIC IT HERR A IRE
ee
60a
In neither The Bremen nor any ensuing decision was the
Supreme Court called upon to apply the Bremen rule where
Congress has expressed so clearly a public policy that is in-
consistent with the enforcement of forum choice and choice of
law clauses. The anti-waiver provisions of the securities laws
are targeted directly at the precise type of choice of law and
forum clauses at issue in this case, and the anti-waiver provi-
sion on its face, and standing alone, necessitates that Lloyd’s
choice clauses not be given effect because they are void.
Nothing in the Supreme Court decisions on which Lloyd’s
bases it position permits a federal court to ignore an unam-
biguous Congressional directive that United States laws be
available to United States investors.
The well-settled rule in the Fourth Circuit, as explained in
Union Insurance Society v. Elikon, 642 F.2d 721 (1981), is
that where Congress has expressed a clear statement in a
statute which is inconsistent with the enforcement of choice
of forum and choice of law clauses, those clauses must not
be enforced. Elikon arose out of a contract, governed by the
COGSA, to sell American-manufactured goods overseas. The
bill of lading at issue provided that the laws of Germany would
apply and that such actions were to be brought exclusively
in West Germany.
The Fourth Circuit held that this choice clause was incon-
sistent with a Congressional policy expressed in § 3(8) of
COGSA which stated ‘‘any clause ... in a contract of carriage
relieving the carrier or the ship from liability ... arising from
negligence ... or lessening such liability otherwise than as pro-
vided in this chapter, shall be null and void and of no effect.’’
Elikon, 642 F.2d at 723 (quoting 46 U.S.C. § 1303(8)).
In reaching that result the Court of Appeals distinguied the
Bremen line of cases:
(iii cei me ase
6la
While The Bremen holds that forum selection
clauses are presumptively valid, particularly in in-
ternational transactions, it only expressed this view
in the absence of any congressional policy on the sub-
ject, much less a contrary congressional policy.
COGSA applies to [the] bills of lading in this case,
but those bills clash with the statute on their face
by their provision for German law ... Congress in-
tended COGSA to ameliorate this very difficulty of
bills of lading with one-sided form provisions ... We
think the general policy here [that forum selection
clauses are generally to be upheld] must recede
before the specific policy enunciated by Congress
through COGSA.
Elikon, 642 F.2d at 724-25. In Vimar, 115 S.Ct. 2322 (1995),
a COGSA case with substantially similar facts as Eltkon, the
Supreme Court rejected the Fourth Circuit's analysis under
the specific facts presented in Elikon. The Court in Vimar,
however, rejected only the reasoning under the facts
presented, and not the legal proposition articulated in Elikon.
Thus, both decisions continue to stand for the undeniable pro-
position that where the enforcement of choice clauses in in-
ternational agreements would conflict with a clear expression
of Congressional policy, the clauses are void.
ipa hea PASTA TAA inks’ Che ninbatais abbonicm toad mesa eall ciebidl
Wh iat
AAS NENA Salt BE i ES BG HRIA. A
a ae aiken oe Sa EIDE PANE OS ile
Similarly, the choice clauses in the General Undertaking
should not be enforced because, given effect in tandem, they
are directly contrary to a specific policy enunciated by Con-
gress in the anti-waiver provisions of the securities laws. The
Supreme Court and Fourth Circuit analyses thus instruct that
the Lloyd’s choice clauses not be enforced here.
he
wus
c. Effect Of Congressional Statement Of Con-
trary Public Policy
Where clear statutory statements by Congress stand con-
trary to the enforcement of international choice of law and
stgbtaa AGRE Renna iene intiat NIA S AS Iettheriet it Me baa a?
62a
forum clauses, as do the anti-waiver provisions of the securities
laws, the analysis under the fourth (or ‘‘public policy’’) ‘‘ex-
ception’’ to the presumption of enforceability, is altered. The
precise effect, however, that such Congressional statements
have upon the analysis under The Bremen and its progeny is
unclear. There are two possibilities. First, the anti-waiver pro-
visions may be viewed as entirely precluding the analysis of
whether the choice clauses contravene a strong public policy
of the United States. In the alternative, the anti-waiver pro-
vision may be viewed merely as evidence of the importance
and prominence of the public policies underlying the securities
laws.
The Names argue, as does the SEC in its amicus curiae
brief, that the anti-waiver provisions are not simply an expres-
sion of public policy that favors United States securities laws
unless other comparable laws are available. Rather, they assert
that the provisions are an express and unequivecal directive
that the rights and obligations under the securities laws can-
not be waived. Since this determination has been made by Con-
gress, the courts are not free to substitute their own public
policy determinations. Because that view comports with basic
principles of statutory construction and the fundamental
teaching of the Supreme Court on the subject, it must prevail
here.
The analyses in both Vimar, 115 S.Ct. 2322, and Eli2on,
642 F.2d 721, indicate that approach to be the correct one.
In Elikon, after determining that the choice of law and forum
clauses directly conflicted with a provision of COGSA, the
Fourth Circuit ended its analysis under The Bremen line of
cases. 642 F.2d at 724-25 (‘‘While The Bremen holds that
forum selection clauses are presumptively valid, particularly
in international transactions, it only expressed this view in the
absence of any congressional policy on the subject, much less
63a
a contrary congressional policy’’). The Elikon court found that
it was unnecessary, in light of the relevant congressional direc-
tive, to conduct an analysis of whether the choice clauses at
issue contravened the specific public policies behind the rele-
vant provisions of COGSA. See also Vimar, 115 S.Ct. at 2329
(analyzing whether the choice clauses at issue contravened
the specific public policies of COGSA only after concluding,
: contrary to Elikon, that the congressional directive in COGSA
: was not relevant to the facts presented, and thus not
; dispositive).
For the same reasons, the court concludes in this action
that the anti-waiver provisions of the securities laws of the
United States are controlling, and that it is neither permissi-
ble nor necessary for this court to substitute its own public
policy determinations for those made by Congress. Thus, in
the face of this clear congressional mandate, the choice clauses
found in the General Undertaking are void and unenforceable.
Even if, however, as Lloyd argues, a congressional state-
ment such as the anti-waiver provision should be viewed mere-
ly as evidence of the importance and prominence of the public
policies underlying the securities laws, rather than as entirely
precluding the public policy analysis, the choice clauses in the
General Undertaking should not be enforced.®
“elas Boni Nis el eee LONG A AREAL OM BREE EAPL TA
eR a
6The view that statutory directives, such as the anti-waiver provisions
of the securities acts, go towards proving the weight of the relevant public
policies, as opposed to megating entirely the public policy analysis under
The Bremen, is supported by Scherk, 417 U.S. 506 (1974). In Scherk,
the Supreme Court encountered the anti-waiver clause of the securities
: acts in the context of an arbitration clause mandating arbitration in a foreign
5 forum. The plaintiffs sought to set-aside the requirements of the arbitra-
; tion clause on the grounds that it violated the anti-waiver provisions of
the 1934 Act. After recognizing the presence of the anti-waiver provi-
sions, the Supreme Court continued on to examine both the public policies
underlying the Securities Acts and the United States Arbitration Act, 9
U.S.C. § 1, and whether the arbitration clause contravened those policies.
(footnote continued)
ot Ey RII
64a
That analysis begins with the language in The Bremen: ’’ {a]
contractual choice-of-forum clause should be held unen-
forceable if enforcement would contravene a strong public
policy of the forum in which suit is brought.’’ 407 U.S. at 156.
According to Roby, ‘‘[b]y including anii-waiver provisions in
the securities laws, Congress made clear its intention that the
public policies incorporated into those laws should not be
thwarted.’’ Roby, 996 F.2d 1364.
It appears that the proper method for conducting this public
policy analysis under The Bremen is a two step inquiry. First,
the court must determine the public policies which underlie
the United States securities laws. Second, the laws and
remedies provided by the foreign choice forum must be
evaluated in an effort to determine whether they contravene
these United States policies. See Pasztory v. Croatia Line, 918
F.Supp. 961, 966 (E.D. Va. 1996) (‘‘In deciding the enforce-
ability of the forum selection clause in the case sub judice, this
Court is compelled to follow the directives of [Vimar]. Accor-
dingly, we will consider: (1) whether the disputed clause is
void because of [conflict with COGSA]; and (2) whether the
substantive law the foreign forum would apply if the disputed
clause were enforced is less than what COGSA guarantees’’);
Roby, 9°6 F.2d 1353, 1364 (‘‘We believe therefore that the
public policies of the securities laws would be contravened if
the applicable foreign law failed adequately to deter issuers
from exploiting American investors’’); Vimar, 115 S.Ct. 2322,
2329-30 (comparing the procedures and remedies available
(footnote continued)
Id. at 513-519. However, on Scherk the Court was considering two Con-
gressional policies: arbitration and securities laws.
It appears that this interpretation of the effect of congressional
statements of public policy has now been recently rejected both by the
Fourth Circuit and the Supreme Court itself. See Vimar, 115 S.Ct. 2322
(1995); Elikon, 642 F.2d 721 (1981).
i ai oa a
Tata eae
65a
under COGSA with those available under Japanese Hague
Rules in light of the policies underlying COGSA); Mitsubishi
Motors, 473 U.S. at 633-635 (examining the public policies
under United States anti-trust laws and evaluating the specific
procedures and remedies available under foreign arbitration
clause in light of these policies); Scherk, 417 U.S. at 513-19
(examining both the public policies underlying the Securities
Acts and the United States Arbitration Act, 9 U.S.C. §1, in
order to determine whether the foreign forum arbitration
clause contravened those policies).
or ee ® ‘yn iil tase md Slade Na tlhe i
A Sewer 8 DLE i TE “aa al
i. Public Policies Underlying Security Acts.
Many courts have explored the public policies on which the
Security Acts are based and the interests which those laws
seek to protect. The framers of the securities laws were con-
cerned principally with reversing the common law rule favor-
ing ‘‘caveat emptor.’’ See e.g., SEC v. Arthur Young & Co.,
584 F.2d 1018, 1025 n. 51 (D.C.Cir.1978), cert. dented, 439
U.S. 1071 (1979). To this end, the securities laws are aimed
at ‘‘prospectively protecting American investors from injury
by demanding ‘full and fair disclosure’ from issuers.’’ Roby,
996 F.2d at 1364; See, e.g., Blue Chip Stamps v. Manor Drug
Stores, 421 U.S. 723, 727-28, reh’g denied, 423 U.S. 884
(1975); Tcherepnin v. Knight, 389 U.S. 332, 336 (1967).
‘‘Private actions exist under the securities laws not because
Congress had an overwhelming desire to shift losses after the
fact, but rather because private actions provide a potent means
of deterring the exploitation of American investors.’’ Roby,
996 F.2d at 1364 (citing Randall v. Loftsgaarden, 478 U.S.
647, 664, (1986); Abrahamson v. Fleschner, 568 F.2d, 862, 872
(2nd. Cir.1977), cert. denied, 436 U.S. 913 (1978)). In sum,
the ‘‘Commission’s basic philosophy ... has been one of
disclosure.’ Loss & Seligman, Fundamentals of Securities
Regulation (Third Ed.) at 437 (1995). That, of course, is what
the plaintiffs seek here.
66a
ii. Whether The Public Policies Underlying
The Securities Acts Would Be Contravened
By Applying English Law.
The courts which have enforced the choice clauses in the
General Undertaking did so only after satisfying themselves
that the American Names had ‘‘adequate remedies’’ in England
against Lloyd’s and other Lloyd’s-related persons and entities
for the claims which were before those courts. See Roby, 996
F.2d at 1365 (“‘the Roby Names have adequate remedies in
England to vindicate their statutory fraud and misrepresenta-
tion claims’’); Bonny, 3 F.3d at 162 (‘‘enforcing the clauses
here simply means that plaintiffs will have to structure their
case differently than if they were proceeding in federal district
court’’); Riley, 969 F.2d at 958 (‘‘Riley will not be deprived
of his day in court’’); Pasztory, 918 F.Supp. at 966 (enforcing
choice of forum clause after satisfying itself that the plaintiff
‘*failed to establish that the substantive law the foreign tribunal
would apply is less than what COGSA guarantees, as required
by the second half of the [Vimar] test’’). These courts
acknowledged that, under The Bremen and its progeny, “‘[a]
contractual choice-of-form clause should be held unenforceable
if enforcement would contravene a strong public policy [of
United States securities laws], whether declared by statute
or by judicial decision.’’ The Bremen, 407 U.S. at 15; see Roby
996 F.2d at 1363 (quoting The Bremen, 407 U.S. at 18); see
also Bonny, 3 F.3d at 160; Mercury Coal & Coke, Inc. v. Man-
nesmann Pipe & Steel Corp., 696 F.2d 315, 317 (4th Cir.1982)
(choice of forum clause is unenforceable where ‘‘enforcement
would effectively deprive that party of his day in court’’).
In each instance, however, the court found that the plaintiff
would be able to pursue damages or would have available
remedies that would suffice. This court finds that the public
policies of the securities laws would be contravened by the
application of English law on the facts of this action, because
umurrmeneniies a mike awe ner ia ieee Aine
SO
67a
English law is inadequate to prospectively deter British issuers
from exploiting American investors through inadequate dis-
closure. Although Roby suggests otherwise, Roby, 996 F.2d
: 1365-66, it is not on point because that court was not con-
fronted with an action seeking prospective disclosure under
United States securities laws.
Unlike the situation in Roby, the plaintiffs in this action seek
disclosure of certain financial information pursuant to §§ 14(a)
and 10(b) of the 1934 Act and the applicable SEC rules. These
provisions function as prophylactic rules requiring, as they do,
prospective disclosure by issuers of equity securities. SEC
Rule 14a-3, 17 C.F.R. § 240, provides that:
i PP SAB Fhe rl i
[N]o solicitation subject to this regulation shall be
made unless each person solicited is concurrently
furnished or has previously been furnished with a
y publicly-filed preliminary or definitive written proxy
statement containing the information specified in
Schedule 14A ...
Schedule 14A to the regulations specifies in 22 items the ex-
tensive information required to be disclosed in connection with
the solicitation of a proxy statement. Most relevant to the
Names’ requests is item 13, entitled ‘‘Financial and Other In-
formation.’’ This item details the financial statements and other
disclosures which must accompany a proxy statement. Similar-
ly, SEC Rule 10b-5 provides for criminal liability for the non-
disclosure of material fact in conjunction with the purchase or
sale of any security. In SEC v. National Securities, 393 U.S.
453 (1969), the Supreme Court held that Rule 10b-5 could
be applied to misstatements in proxy statements, even though
proxy solicitation was governed by specific SEC rules under
§ 14a.
English law would not provide plaintiffs with any similar pro-
tections by way of disclosure requirements, and thus its appli-
i
68a
cation would contravene United States public policy. To begin
with, Lloyd’s enjoys a special exemption from the English
securities laws. See Financial Services Act of Parliament § 42
(1986). Thus, even if the English securities law did provide
an adequate disclosure remedy, it would not appear to apply
in this case. See Wright Decl. §§ 7, 8. Even if the securities
laws of the United Kingdom applied, however, the remedies
they provide are not consistent with the strong public policy
in the federal securities laws in favor of broad-based, prospec-
tive disclosure. The only provision of the Financial Services
Act (FSA) which provides an investor with any opportunity
for prospective disclosure is § 61. Under this provision, an
investor may file a complaint with the Secretary of State, who
may in turn apply to the High Court for an injunction restrain-
ing the contravention ‘“‘by any person’’ of any provision of
\ 47 of the FSA.’ There is no private cause of action under
\ 61. Such an injunction could possibly prevent Lloyd’s from
proceeding with the R&R plan and the settlement offer unless
and until the contravention of § 47 had been properly remedied.
?Section 47(1) of the FSA provides:
Any person who—
(a) makes a statement, promise or forecast which he knows
to be misleading, false or deceptive or dishonestly conceals
any material facts; or
(b) recklessly makes (dishonestly or otherwise) a statement,
promise or forecast which is misleading, false or deceptive,
is guilty of an offence if he makes the statement, promise or
forecast or conceals the facts for the purpose of inducing, or
is reckless as to whether it may induce, another person
(whether or not the person to whom the statement, promise
or forecast is made or from whom the facts are concealed) to
enter or offer to enter into, or to refrain from entering or of-
fering to enter into, an investment agreement or to exercise,
or refrain from exercising, any rights conferred by an
investment.
69a
While at first blush the injunctive relief under § 61 may seem
somewhat akin to that provided for under United States law,
upon closer examination the insufficiencies and inadequacies
of the § 61 remedy are apparent. First, and most significant-
ly, § 61 would require the plaintiffs to file a complaint with,
and rely upon action by, the very same government which has
officially supported the Lloyd’s R&R plan. In fact, u this very
case the British Government filed an amicus curiae brief in
support of Lloyd’s motion to dismiss, which indicates that
government’s full support and approval for the R&R plan. Re-
quiring the plaintiffs to rely upon a department of the British
government to take action on their behalf with respect to the
lack of disclosures made in conjunction with the R&R plan,
when that very government has opposed them in this litiga-
tion concerning that very plan, would be tantamount to pro-
viding no disclosure remedy at all.
Section 61 of the FSA is also an inadequate disclosure
remedy because it only allows for injunctive relief based on
affirmative misstatements or the ‘‘dishonest concealment’’ of
material facts. See FSA §§ 47, 61 (courts may only enjoin con-
traventions of § 47, which provides liability for person who
‘‘makes a statement, promise or forecast which he knows to
be misleading, false or deceptive or dishonestly conceals any
material facts ...”’). Thus, to obtain an injunction pursuant to
§ 61 based upon the non-disclosure of necessary information,
the plaintiffs would be required to prove ‘‘dishonest conceal-
ment.’’ This contravenes the prophylactic nature of § 14(a),
which affirmatively mandates the disclosure of all relevant finan-
cial information without any showing by prospective investors.
By providing for extensive, mandatory disclosure in §§ 14(a)
and 10(b), and by including the anti-waiver provision in the
securities acts, Congress has recognized and emphasized the
importance of full, prospective disclosure in securities tran-
sactions. English securities law recognizes no such public
ee ee ge fe
70a
policies, and thus its application to this case would contravene
U.S. public policy.
Without adequate remedy from English securities law, plain-
tiffs would be forced to rely on general English law to provide
relief. This general law is similarly inadequate to provide the
requested relief, and thus its application to this case would
contravene U.S. public policy. To begin with, there is no doc-
trine under general English law which would provide a basis
for an English court to compel the disclosure of the informa-
tion sought by the plaintiffs. Lloyd’s argues, however, that
English law provides a number of potential alternative remedies
including actions for fraud, damages, judicial review pro-
ceedings and private law actions for ultra vires and bad faith
acts. These alternative remedies are inadequate in this case
for two reasons: (1) the plaintiffs have sought only disclosure
of information, and not any of these other remedies; and (2)
there are serious questions as to the actual availability of these
remedies to the plaintiffs.*
In sum, plaintiffs will have no adequate remedies in England
for the non-disclose claims they assert in this case. The en-
forcement of the choice clauses “‘would contravene a strong
8A fraud claim may be unavailable to plaintiffs because disclaimers
throughout the R&R plan and settlement proposal would vitiate a claim
of ‘‘reasonable reliance.’’ Lloyd’s has statutory immunity from damages
actions except for bad faith conduct under § 14 of the Lloyd’s Act of 1982
from damages actions. As for judicial review proceedings and private law
actions, an English court has recently decided that neither action lies. See
The Queen v. The Council of the Society Lloyd’s, ex parte Susan Johnson
and Others, High Court of Justice, Q.B. (August 16, 1996) (holding that
the court did not have jurisdiction for judicial review, that the R&R plan
did not constitute an ultra vires act, and that there was no evidence of
bad faith on the part of Lloyd’s).
After the preliminary injunction hearing, Lloyd’s CEO filed an affidavit
seeking to ameliorate this problem, but the stipulation therein is insuffi-
cient to that end.
ile eas
7la
public policy’’ of the United States securities law, and thus
the clauses are void and unenforceable. The Bremen, 407 U.S.
at 15.
4. The Cases In Which Federal Courts Have En-
forced The Lloyd’s Choice Clauses Are Both
Factually Distinguishable, And Incorrect
Legally
a. Factual Distinctions
The decisions on which Lloyd’s relies are not controlling
for the additional reason that they involved facts and claims
materially different from those at issue in this action. In those
cases, the plaintiffs were asserting that they had been
fraudulently induced to enter their original Lloyd’s in-
vestments; that they should be granted recision of the
agreements and protection from policyholder claims; and that
they were entitled to damages. See Bonny v. Society of Llovd’s,
3 F.3d 156 (7th Cir.1993); Roby v. Corporation of Lloyd’s, 996
F.2d 1353 (2nd Cir.); Riley v. Kingsley Underwriting Agen-
cies Ltd., 969 F.2d 953 (10th Cir.); Shell v. R.W. Sturge, Lid.,
55 F.3d 1227 (6th Cir.1995). In some cases, the Names also
sought an injunction to prevent Lloyd’s from drawing on their
letters of credit. See e.g., Riley, 969 F.2d at 956; Bonny, 3
F.3d 1 at 157. Finally, the plaintiffs in those cases sought
damages from other Lloyd’s-related persons and entities, such
as Members’ Agents, Managing Agents, and Underwriting
Agents.
In this action, the plaintiffs do not allege a claim for fraud
in the inducement. Nor do they seek to avoid obligations to
policyholders. And, they do not seek damages. Instead, here
the plaintiffs seek only injunctive relief to compel Lloyd’s to
make the disclosures guaranteed to them by the securities
laws of the United States, adequate time to consider the dis-
72a
closures, and an opportunity to make a fully informed deci-
sion about whether to accept or reject the settlement offer
which is central to the R&R plan.
The differences in the claims brought and the relief sought
alters the analysis under the ‘‘public policy’’ exception to the
presumption of enforceability for international choice clauses.
Because the plaintiffs here bring their claims under the
disclosure provisions of the Securities Acts, the policies
underlying the prospective disclosure requirements take on
a different significance because disclosure in advance is a core
policy of the securities laws. See supra, section ii (evaluation
of why the application of English law in this case would con-
travene the public policies underlying the disclosure re-
quirements of U.S. securities law).
This action is also factually distinguishable from the deci-
sions on which Lloyd’s relies because a basic factual premise
which was important to the holdings in those decisions that
the application of English law would not contravene U.S. public
policies — namely that the SEC had consented to Lloyd’s con-
duct or impliedly granted Lloyd’s an exemption from U.S.
security laws — is no longer tenable. Most of the previous
decisions relied heavily upon the SEC’s silence in determin-
ing that the choice of forum and choice of law clauses in the
General Undertaking were enforceable:
We believe that [the policy concern of deterring is-
suances without disclosing sufficient material infor-
mation to permit investors to make informed deci-
sions] is somewhat diluted in this case because the
SEC consistently has exempted Lloyd’s from the
registration requirements of the securities laws. Ap-
parently the SEC has decided that Lloyd’s’ means
test meets the requirements of [the regulations]. We
are extremely reluctant to dispute the SEC’s ap-
atrial iy ae
73a
parent judgment that the [Names] are sophisticated
enough that they do not need the disclosure protec-
tions of the securities laws.
Roby, 996 F.2d at 1365-66.9 Whether that understanding of
the SEC’s position was correct at the time is beside the point
because the SEC has filed amicus cunae briefs in both Richards
and this action, asserting that the choice of law and forum
clauses in the General Undertaking are unerforceable because
the application of those clauses would contravene the public
policies behind federal securities laws. See Memorandum of
the Securities and Exchange Commission, Amicus Curiae;
Brief of the Securities and Exchange Commission, Amicus
Curiae in the case of Richard v. Lloyd’s of London.
For the foregoing reasons, the court does not consider that
it is proper to follow the authority on which Lloyd’s relies to
urge enforcement of its choice clauses. Moreover, and of great
significance, each of four decisions of the Courts of Appeals
addressing the enforceability of the Lloyd’s choice clauses was
decided before the Supreme Court clarified The Bremen line
of cases in Vimar, 115 S.Ct. 2322. In Vimar, the Supreme
%See also, Richards v. Lloyd’s of London, Case No. 95-55747
(S.D.Ca.1995).
However, none of plaintiffs’ documents negates the fact that
the SEC has never publicly taken any action to enforce federal
securities laws against Lloyd’s, despite the fact that the SEC
has at various times and by various persons been apprised of
Lloyd’s practices and of some of the allegations against Lloyd’s.
While the inferences drawn by the Roby court from the SEC’s
inaction may appear somewhat overstated, the Court does not
find plaintiffs’ evidence sufficient to controvert the conclusion
of the Second Circuit that the SEC’s inaction undercuts or
dilutes the strength of the policy argument that insufficient
deterrence exists for Lloyd’s with respect to adequate
disclosure under English law.
ER 102:23-34.
aaa =
74a
Court has had the last word: where the enforcement of forum
choice and choice of law clauses would be contrary to an une-
quivocal congressional statutory statement, and where the
clauses would in tandem serve to waive a plaintiff's substan-
tive statutory rights, the choice clauses are unenforceable and
void. That principle controls the result here.
Il. FORUM NON CONVENIENS
Alternatively, Lloyd’s seeks dismissal under the common
law doctrine of forum non conveniens.'° For the reasons which
follow, the alternative motion will be denied.
Notwithstanding the plaintiff's argument to the contrary, See
Plaintiff's Brief in Opposition To Lloyd’s Motion To Dismiss
at 24, the forum non conveniens analysis is a separate and
distinct inquiry which must be made before this action can be
retained in this forum. In Elikon, 642 F.2d at 725, the Fourth
Circuit determined that the district court erred in considering
only whether the forum choice clauses were enforceable and
10L ljoyd’s does not contend that venue for plaintiffs’ claims under the
U.S. securities laws is improper under 28 U.S.C. § 1391(d) and § 27(a)
of the Securities Exchange Act, as amended, 15 U.S.C. § 78aa. Venue
is proper in this « se under § 1391(d), because an alien defendant may
be sued in any district in the United States. In addition, courts have general-
iy given § 27(a) broad application and have sustained a plaintiff's choice
of venue. See, e.g., Lovenheim v. Iroquois Brands, Ltd., 618 F .Supp. 554,
558 (D.D.C.1985) (the mailing of a proxy statement that allegedly violates
the Exchange Act into a judicial district by interstate mail is sufficient by
itself to establish venue in that district under § 27(a) of securities acts);
Mayer v. Development Corp. Of Am., 396 F.Supp. 917, 928-30
(D.Del.1975).
In addition, at this time, Lloyd’s has not made a motion for transfer pur-
suant to 28 U.S.C. § 1404(a). A district court may properly grant a transfer
under § 1404(a) upon a lesser showing of inconvenience than is necessary
under the doctrine of forum non conveniens, where dismissal is the end
result. Norwood v. Kirkpatnck, 349 U.S. 29 (1955).
DPV te Pe PA Tt rin te le aii,
75a
remanded the case so that the district court could determine
whether ‘‘the Eastern District of Virginia is a forum non con-
veniens for this litigation.’’ Jd. The Court of Appeals explained
that it was not sufficient to rely only ‘‘on The Bremen and
merely not[e] the foreign nationality of the parties as an argu-
ment a fortiori in support of its declination of jurisdiction.’’
Id. Nonetheless, there is some overlap between the analysis
under Tne Bremen and the forum non conveniens analysis.
Therefore, the latter analysis somewhat flows from the former
and hence the forum non conventens analysis will be somewhat
truncated.
A. The Legal Standard
Briefly stated, the doctrine of forum non conventens as
originally developed is that, ‘‘where two or more courts in
different forums can exercise jurisdiction over the cause of
action, if an action is brought in an inconvenient forum the court
of that forum has the power to dismiss suit.’’ 1A Moore’s
Federal Practice § 0.204 at 2163. The decision is one entrusted
to the discretion of the district court and requires the balanc-
ing of several interests:
The forum non conveniens determination is commit-
ted to the sound discretion of the trial court. It may
be reversed only when there has been a clear abuse
of discretion; where the court has considered all rele-
vant public and private interest factors, and where
its balancing of these factors is reasonable, its deci-
sion deserves substantial deference.
Piper Aircraft Company v. Reyno, 454 U.S. 235 (1981); See
Kontoulas v. A.H. Robins Company, Inc., 745 F.2d 312 (4th
Cir.1984); Hodson v. A.H. Robins, 715 F.2d 142, 144 (4th
Cir.1983).
76a
In Piper Aircraft, 454 U.S. 235, 241 & n. 6, the Supreme
Court set forth the criteria that control consideration of a mo-
tion te dismiss on the ground of forum non conveniens. The
analysis depended upon an exploration and balancing of rele-
vant public and private factors. Jd. (citing Gulf O1l Corp. V.
Gilbert, 330 U.S. 501 (1947); Koster v. Lumbermens Mut. Cas.
Co., 330 U.S. 518 (1947)).
The burden is on the movant: (1) to overcome the presump-
tion which favors the plaintiff's chosen forum," and (2) to prove
both the availability and superiority of an alternative forum. }?
The Supreme Court has rejected the proposition that ‘‘where
a trial would involve inquiry into the internal affairs of a foreign
corporation, dismissal [i]s always appropriate.’’ Piper, 454
U.S. at 249 (citing Koster, 330 U.S., at 527). ‘‘That is one,
but only one, factor which may show convenience.’’ Koster,
330 U.S. at 527. And, the burden on Lloyd’s is not carried
unless the balance of the several interests strongly favors
dismissal. Kontoulas, 745 F.2d at 315 (the relevant public and
private interests must ‘‘strongly favor’’ a specific, adequate,
and available forum to warrant dismissal based on forum non
conventens) (emphasis added).
See, e.g., Piper, 454 U.S. 235, 255-56 (upholding district court’s holding
that there ‘‘ts ordinarily a strong presumption in favor of the plaintiff's choice
of forum, which may be overcome only when the private and public in-
terest factors clearly point toward trial in the alternative forum’’) (em-
phasis added); Koster v. Lumbermens Mut. Cas. Co., 330 U.S. 518 (1947)
(‘‘{iJn any balancing of conveniences, a real showing of convenience by
a plaintiff who has sued in his home forum will normally outweigh the in-
convenience the defendant may have shown’’).
12See Kontoulas, 745 F.2d at 315 (“‘A forum non conveniens dismissal
must be based on the finding that, when weighed against the plaintiff's
choice of forum, the relevant public and private interests strongly favor
a specific, adequate, and available alternative forum’’) (citing Verba-Chemie
A.G. v. M/V Getafix, 711 F.2d 1243, 1245 (5th Cir.1983), reh’g denied
724 F.2d 976 (1984) (emphasis added).
octatokhe Secbiinnt brat iee are Mi ?
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77a
B. Application of the Legal Standard: The Balancing
Of Public And Private Factors
The private factors identified in Piper Aircraft are: (1)
relative ease of access to sources of proof; (2) availability of
compulsory process for attendance of the unwilling witnesses
and the costs of obtaining attendance of willing witnesses; (3)
the possibility of view of the premises, if a view is appropriate
to the action; and (4) all of the problems that make trial of
a Case easy, expeditious and inexpensive. See Piper, 454 U.S.
235; Gulf Oil Corp. v. Gilbert, 330 U.S. 501 (1947).
The public factors to be considered are: (1) the ad-
ministrative difficulties flowing from court congestion; (2) local
interest in having localized controversies decided at home; (3)
the interest in having the trial of a diversity case in a forum
that is at home with the law that must govern the action; (4)
the avoidance of unnecessary problems in conflict of laws, or
in the application of foreign law; and (5) the unfairness of
burdening citizens in an unrelated forum with jury duty. Jd.
Where, as here, it is not claimed that another district within
the United States would be a more appropriate or convenient
forum, the proper forum comparison is between the United
States as a whole and England. Thus, contrary to the thrust
of Lloyd’s argument, there is no need to make a comparison
of the Eastern District of Virginia and England. See Piper Air-
craft, 454 U.S. 235, 260-61 (in comparing the appropriateness
of the chosen district court forum and the defendant’s re-
quested Scottish forum, the Court approached the issue as
presenting a choice between the Scottish forum and an
‘‘American court’’ or ‘‘the United States’’) (emphasis add-
ed); Mercter v. Sheraton Int’l., Inc., 935 F.2d 419, 429-30
(1st Cir.1991), cert. denied, 508 U.S. 912 (U.S. citizen plain-
tiffs asserting breach of contract claims in diversity case were
not residents of forum district; court of appeals reversed forum
78a
non conventens dismissal based upon comparison between U.S.
as a whole and the foreign country); Howe v. Goldcorp Invs.,
Ltd., 946 F.2d 944 (1st Cir.1991) (in considering motion to
dismiss on forum non conveniens grounds, court focused on
the United States as a whole), cert. dented, 502 U.S. 1095
(1992).
Application of the Piper Aircraft analysis to this action yields
the conclusion that the United States is the appropriate forum.
First, the United States has a strong interest in enforcing its
own securities laws which, as explained above, apply in this
action. There is also no concern here that the district court
will need to apply foreign (English) law, or, as discussed fur-
ther below, that there is a conflict of laws.
In addition, the evaluation of the relative ease of access to
evidence, and the relative costs of obtaining attendance of will-
ing witnesses, does not ‘‘strongly favor’’ England as a forum.
Whereas the record bespeaks the existence of vast volumes
of documents in England, that fact does not weigh heavily here
because the issue here is the need for compliance with
disclosure provisions of the federal securities laws, not an
assessment of liability for past conduct. Hence, recourse to
the vast quantity of documents in Lloyd’s possession will not
be necessary. In any event, federal courts have it within their
power to see that paper discovery does not obscure the pur-
pose of the action. And, that power will be exercised here
as it is in all cases in this district. A majority of the plaintiffs’
witnesses are residents of the United States. Several of
Lloyd’s’ witnesses are also residents of the United States.
Of course, a good number of Lloyd’s witnesses will be citizens
of England, but that fact alone does require dismissal.
Moreover, the claims asserted in this action do not call for
voluminous deposition discovery. And, in any event, that facet
of litigation is easily controlled by the court.
79a
Finally, this case presents no danger of unfairly burdening
potential jurors in an unrelated forum. There currently is no
demand for a jury trial and there likely will be none, given the
nature of the claims presented. But, if a jury trial should
become necessary, it would not be an unfair burden for
American jurors to hear the claims of American citizens under
this country’s securities laws.
The decisions which have dismissed claims under the United
States securities laws on the basis of the forum non conve-
niens doctrine are far different than the facts presented in this
action. For example, in Howe, 946 F.2d 944, on which Lloyd’s
principally relies, the defendant was a Canadian company which
had neither marketed nor sold securities in this country. An
American investor wishing to purchase the defendant’s
securities had to travel to Canada to purchase them, and all
of the relevant events surrounding the plaintiff's claims took
place in Canada. It was ‘‘undisputed’’ that no resident of the
United States ‘‘ha[d] knowledge relevant to the matters al-
leged in the amended complaint,’’ other than the plaintiff
himself. Jd. at 951. It was also undisputed that ‘‘Canadian
courts will either apply American law ... or they will apply
Canadian laws that offer shareholders somewhat similar pro-
tections ...’’ Jd. at 952. Thus, in dismissing the case on the
ground of forum non conveniens, the First Circuit merely held
that an American who purchases his shares in a foreign coun-
try, based on alleged misrepresentations that were made
abroad, is required ‘‘to bring his case abroad in a nation that
offers its shareholders roughly equivalent protections.’’ Jd.
at 953.
In this action, there is a much greater connection between
the events alleged and the United States. Lloyd’s actively has
recruited American citizens in this country to become Names
and, in response, American citizens invested significant capital
80a
in the Lloyd’s market. Further, Lloyd’s R&R plan has been
actively marketed in the United States, and acceptances by
U.S. Names have been actively solicited. The record
establishes that, pursuant to its effort to raise capital for
Equitas and to secure the acceptance of R&R, Lloyd’s has
sent numerous letters, pamphlets, brochures, videotapes, and
countless other documents to the American Names in the mail
of the United States providing them with information and urging
them to accept the R&R plan. This conduct alone may be
enough to establish the United States as an appropriate
forum.!3 The Lloyd’s offer can be accepted by mail from the
United States. Lloyd’s officers and employees, including its
Chief Executive Officer, have traveled to the United States
on many occasions to both initially recruit American Names,
and to meet with groups of American Names in an effort to
persuade them to accept the R&R plan. In addition, Lloyd’s
has hired several public relations firms in the United States
to contact the American Names, encourage them to accept
the plan, and to monitor the level of acceptance for the plan
in the United States.
Lloyd’s also asserts that dismissal is appropriate because
the courts of England afford adequate remedies. The plain-
tiffs assert the contrary. The issue respecting the adequacy
of remedies in England is to be assessed in perspective of the
observation of the Supreme Court in Piper Aircraft that:
We do not hold that the possibility of an un-
13 See Tvenhetm v. Iroquois Brands, Ltd., 618 F.Supp. 554, 558
(D.D.C.1985) (the mailing of a proxy statement that allegedly violates the
Exchange Act into a judicial district by interstate mail is sufficient by itself
to establish venue in that district under § 27(a) of securities acts); Mayer
v. Development Corp. Of Am., 396 F.Supp. 917, 928-30 (D.Del.1975)
(same).
8la
favorable change in law should never be a relevant
consideration in a forum non conveniens inquiry. Of
course, if the remedy provided by the alternative
forum is so clearly inadequate or unsatisfactory that
it is no remedy at all, the unfavorable change in law
may be given substantial weight; the district court
may conclude that dismissal would not be in the in-
terest of justice. In these cases, however, the
remedies that would be provided by the Scottish
courts do not fall within this category. Although the
relatives of the decedents may not be able to rely
on a strict liability theory, and although their poten-
tial damages award may be smaller, there is no
danger that they will be deprived of any remedy or
treated unfairly.
Piper Aircraft, 454 U.S. at 254-55 (footnote omitted).
That observation, in turn, must be considered in perspec-
tive of the issue presented in Piper Aircraft, which was whether
a dismissal on grounds of forum non conveniens is permissi-
ble where the private and public interest factors militate strong-
ly in favor of dismissal but where ‘‘the law applicable in the
alternative forum is less favorable to the plaintiff's chance of
recovery.'’ Piper Aircraft, 454 U.S. at 250. And, the obser-
vation must be considered against the Court’s explanation that
the public interest factor analysis prescribed by Gilbert ‘‘points
toward dismissal when the [federal district] court would be
required to ‘untangle problems in conflicts of laws, and in law
foreign to itself.’ ’’ Jd. at 251 (citing Gulf Oil Corp. v. Gilbert,
330 U.S. 501, 509 (19047). Viewed in this context, the forum
non conveniens analysis to be made in this action simply does
not require untangling foreign law; it is unnecessary to
assess the adequacy of English law to in order to decide the
motion presented by Lloyd’s because, unlike Piper Aircraft,
82a
the public and private factors all militate against dismis-
sal.!4
Thus, based on the Piper Aircraft balancing test of the public
and private factors, Lloyd’s motion to dismiss for forum non
conventens must be denied.
Ill. INTERNATIONAL CHOICE OF LAW RULES
Lloyd’s argues that, even absent the choice of law and forum
choice provisions, English law should still apply because a con-
flict of law exists and England is the forum that has the most
significant relationship to tis dispute. The British Govern-
ment, appearing amicus curiae, concurs with this argument
which is based both on principles of international comity and
on §{§ 6 and 188 of the Restatement (Second) of Conflicts of
Laws (19791), which mandate that where a conflict of law ex-
ists, the proper forum is the one with the most significant rela-
tionship to the dispute, both in terms of contacts with the sub-
ject matter and in terms of the nature of the dispute. (See also,
Affidavit of Hans Smit).
Whatever may be said for the application of those principles
generally, they do not apply here because in this action there
is a ‘‘substantial question’’ as to ‘“whether ‘there is in fact
a true conflict between domestic and foreign law.’ ’’ Hartford
Fire Insurance Co. v. California Merret Underwniting Agency
Management Ltd., 509 U.S. 764, 798-99 (1993) (quoting Soctete
Nationale Industrielle Aerospatiale v. United States District
Court, 482 U.S. 522, 555 (1987) (Blackmun, J., concurring
in part and dissenting in part)). For that reason, the Supreme
Court has rejected similar arguments recently raised by
‘4However, if it were necessary to engage in the analysis, it would be
essentially the same as the explanation made previously in the public policy
analysis under The Bremen doctrine. And, for the same reasons, it could
not be said that Lloyd’s has met its burden on that issue in the context
of a forum non conveniens analysis.
83a
Lloyd’s in Hartford Fire, 509 U.S. 764 (1993), wherein Lloyd's
sought to insulate itself from antitrust claims brought by private
plaintiffs under the Sherman Act by arguing principles of comity
and conflict of laws. The Supreme Court stated:
The London reinsurers contend that applying the Act
to their conduct would conflict significantly with
British law, and the British Government, appearing
before us aS amicus curiae, concurs. They assert
that Parliament has established a compreheive
regulatory regime over the London reinsurance
market and that the conduct alleged here was
perfectly consistent with British law and policy. But
this is not to state a conflict. The fact that conduct
is lawful in the state in which i
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