107 F.3d 1422 (9th Cir. 1997), 95-55747, Richards v. Lloyd's of London

Docket Nº:95-55747, 95-56467.
Citation:107 F.3d 1422
Party Name:97 Cal. Daily Op. Serv. 1691, 97 Daily Journal D.A.R. 3209 Alan RICHARDS, et al., Plaintiffs-Appellants, v. LLOYD'S OF LONDON, an unincorporated association, et al., Defendants-Appellees. John R. NORTON, III; Doris S. Norton; Diane B. Allison; Charles G. Bentzin; F.M. Binkley; Delmar A. Brady; Samme Jo Brady; George Maning Close; Russell M. Collins
Case Date:March 06, 1997
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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Page 1422

107 F.3d 1422 (9th Cir. 1997)

97 Cal. Daily Op. Serv. 1691,

97 Daily Journal D.A.R. 3209

Alan RICHARDS, et al., Plaintiffs-Appellants,

v.

LLOYD'S OF LONDON, an unincorporated association, et al.,

Defendants-Appellees.

John R. NORTON, III; Doris S. Norton; Diane B. Allison;

Charles G. Bentzin; F.M. Binkley; Delmar A. Brady; Samme

Jo Brady; George Maning Close; Russell M. Collins; Peter

Dwares; Robert Flesvig; Donald P. Gallop; Charles A.

Gerlach, Jr.; Robert W. Gerwig; Richard C. Henry; Michael

C. Hirsh; R. William Johnston; James H. Kayian; Joanne S.

Kayian-Olooney; Suzanne Kayian; Lowell Conrad Lundell;

Judith M. Ott; H.E. Rainbolt; David L. Rosenblatt; Ray

Morse Sanderson; Claire Tillman; Warren G. Vander Voort;

Peter Beck; Harold Franz Ilg; John C. Griffin; Ted

Kosloff; Francis J. Milon; Glen R. Mogan; Melanie M.

Norton; Joseph F. Weller, Plaintiffs-Appellants,

v.

LLOYD'S OF LONDON, an unincorporated association;

Corporation Of Lloyd's, aka Society of Lloyd's,

aka The Society and Council of Lloyd's,

Defendants-Appellees.

Nos. 95-55747, 95-56467.

United States Court of Appeals, Ninth Circuit.

March 6, 1997

Argued and Submitted Nov. 5, 1996.

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Stephen A. Kroft, McDermott, Will & Emery, Los Angeles, California; Eugene I. Goldman, Robert E. Kohn, McDermott, Will & Emery, Washington, D.C.; Arlington Ray Robbins, Michael V. Pundeff, John H. Stephens, Robbins & Keehn, San Diego, California, for plaintiffs-appellants.

Phillip K. Fife, Seal Beach, California, for plaintiff-appellant E. Pomeroy Williams.

Dean Hansell, LeBoeuf, Lamb, Greene & MacRae, Los Angeles, California, Taylor R. Briggs, Sheila H. Marshall, Mary L.B. Betts, Stephen H. Orel, LeBoeuf, Lamb, Greene & MacRae, New York, New York, for defendants-appellees The Corporation of Lloyd's, the Society of Lloyd's, and The Council of Lloyd's.

Richard H. Walker, Jacob H. Stillman, Eric Summergrad, John W. Avery, Securities and Exchange Commission, Washington, D.C., as amicus curiae.

Eugene R. Anderson, Seth B. Schafler, Anderson Kill Olick & Oshinsky, New York, New York; Amy R. Bach, San Francisco, California, for amicus curiae United Policy holders.

Richard A. Brown, Leonard D. Venger, Ronald B. Turovsky, Donald R. Brown, Manatt, Phelps & Phillips, Los Angeles, California; Paul H. Falon, Manatt, Phelps & Phillips, Washington, D.C., William W. Palmer, General Counsel, California Department of Insurance, for amicus curiae California Commissioner of Insurance.

Appeals from the United States District Court for the Southern District of California, Irma E. Gonzalez, District Judge, Presiding. D.C. Nos. CV-94-01211-IEG, CV-95-00952-IEG.

Before: GOODWIN, WIGGINS and NOONAN, Circuit Judges.

NOONAN, Circuit Judge.

Alan Richards and 573 other individuals (collectively, the plaintiffs or the Names) brought suit against the Corporation of Lloyd's (Lloyd's) and against Lloyd's of London, a community of enterprises characterized by the plaintiffs as an Unincorporated Association (the Unincorporated Association). The plaintiffs alleged securities fraud under the Securities Act of 1933, 15 U.S.C. § 77a (the 1933 Act) and under the Securities Exchange Act of 1934, 15 U.S.C. § 78a (the 1934 Act). The suit also alleged related violations of the Racketeer Influenced and Corrupt Organizations Act of 1970, 18 U.S.C. § 1961 et seq. (RICO). The plaintiffs further alleged breach of state Blue Sky laws, breach of fiduciary duty, and common law fraud. On motion of the defendants under

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Fed.R.Civ.P. 12(b)(3) the district court dismissed the plaintiffs' action.

The primary question presented on appeal is whether forum selection and choice of law provisions in the contracts signed by the Names (the Choice Clauses) require the application of English law to the plaintiffs' claims and the confinement of these claims to the courts of England. Holding that the Choice Clauses are void because they violate the 1933 Act and the 1934 Act, we reverse the district court's dismissal of the Names' federal claims. We affirm the district court's dismissal of the claims under the Blue Sky laws and the common law claims. We remand for consideration by the district court the amenability to suit of the Unincorporated Association.

Without passing on the truth of the allegations, we set out the plaintiffs' case as it is alleged by them.

THE ALLEGATIONS

The Unincorporated Association is engaged in the business of writing insurance and reinsurance. Its principal place of business is London, England. Its principal parts consist of the corporation (Lloyd's, the other defendant in this case); underwriting agents; brokers; and syndicates of underwriters. The corporation, Lloyd's, is governed by the Council for Lloyd's; the Council has "virtually complete control" over all of the operations of Lloyd's, including the operations of the underwriting agents and the brokers, and "virtually dictates the exact form of agreements and contents of agreements that are to be used ... and dictates not only the policies but the practices of those who constitute the Lloyd's community."

The members of each syndicate underwriting insurance are known as Names. They are divided into Working Names, a group of insiders who devote essentially full time to the business of insurance at Lloyd's, and External Names, recruited from all over the world. The Working Names control Lloyd's. The External Names are "totally passive investors" and "are absolutely prohibited" from being involved in the "underwriting process." They make a deposit, usually in the form of a letter of credit, equal to a percentage of the premium income they expect to receive in a given year from the underwriting syndicate of which they are members. They have several, not joint, liability on the policies written by the syndicate. The liability of each Name is unlimited.

Between 1970 and 1993 Lloyd's sought to increase its underwriting capacity and to do so undertook "a major recruitment program in the United States." Representatives of Lloyd's came to the United States to carry out the recruitment by offering investment contracts by which residents of the United States might become External Names at Lloyd's. Lloyd's provided printed information on its history and operations as part of the campaign. The United States mails were used to provide this information and to send questionnaires, applications, and agreements to potential Names resident in the United States. Brokerage firms in the United States were paid commissions by Lloyd's to recruit Names in this country. Existing Names in the United States were also given financial incentives to recruit additional Names here. The information furnished by Lloyd's did not meet the standards required of prospectuses by the Securities Exchange Commission (the SEC). The investment contracts offered by Lloyd's were securities but were not registered under either federal or state law.

As a result of its efforts, Lloyd's raised over $600 million in letters of credit and deposits furnished by residents of the United States who became External Names. Lloyd's also enormously expanded its underwriting capacity by securing the unlimited liability on insurance contracts from Lloyd's of 3,196 residents of the United States recruited to become External Names at Lloyd's. The plaintiffs are a portion of those so recruited.

Plaintiffs, the Names of this case, were defrauded by Lloyd's in at least one of two ways: (1) Lloyd's put them on syndicates reinsuring long tail asbestos and toxic waste claims which had arisen prior to these Names becoming members of such syndicates; (2) Lloyd's put them on syndicates carrying an unusual concentration of risks

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because of a reinsurance scheme (the LMX Spiral) that operated as a species of scam. In neither case did Lloyd's inform the plaintiffs of the magnitude of their exposure although Lloyd's was aware of the magnitude. In each case Lloyd's acted to benefit Working Members and other insiders at Lloyd's while pushing large liabilities foreseen by Lloyd's, but undisclosed by it, upon the unsuspecting and uninformed External Names of whom the plaintiffs form a portion.

In 1986, these plaintiffs each were required by Lloyd's to execute in the United States a contract with Lloyd's entitled "General Undertaking." Paragraph 2.1 of this agreement reads as follows: "The rights and obligations of the parties arising out of or relating to the Member's membership of, and/or underwriting of insurance business at, Lloyd's and any other matter referred to in this Undertaking, shall be governed by and construed in accordance with the laws of England." Paragraph 2.2 of this agreement reads in relevant part as follows: "Each party irrevocably agrees that the courts of England shall have exclusive jurisdiction to settle any dispute and/or controversy of whatsoever nature arising out of or relating to the Member's membership of, and/or underwriting of insurance business at Lloyd's...." These two provisions, the Choice Clauses, had not been in General Undertakings prior to 1986 but that group of plaintiffs who had become Names prior to 1986 and signed earlier General Undertakings without the Choice Clauses were required by Lloyd's to execute the 1986 form as a condition of remaining as Names. The group of plaintiffs who became Names in 1986 and thereafter were required by Lloyd's to execute the 1986 form as a condition of becoming Names. To neither group of plaintiffs did Lloyd's disclose the information it possessed as to the fraud or frauds being practised on them. The Choice Clauses were themselves obtained by fraud.

Such are the plaintiffs' allegations.

PROCEEDI...

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