Bonny v. Society of Lloyd's

• Decision Date: 05 August 1993
• Docket Number: 92-2771,Nos. 92-1662,s. 92-1662
• Citation: 3 F.3d 156
• Parties: , Fed. Sec. L. Rep. P 97,688 Kenneth F. BONNY, Francesca B. Bonny and Robert D. Flesvig, Plaintiffs-Appellants, v. The SOCIETY OF LLOYD'S, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 156

3 F.3d 156

62 USLW 2116, Fed. Sec. L. Rep. P 97,688

Kenneth F. BONNY, Francesca B. Bonny and Robert D. Flesvig, Plaintiffs-Appellants, v. The SOCIETY OF LLOYD'S, et al., Defendants-Appellees.

Nos. 92-1662, 92-2771.

United States Court of Appeals, Seventh Circuit.

Argued Dec. 4, 1992.

Decided Aug. 5, 1993.

Theodore William Grippo, Jr. (argued), Roy Thomas Simmons, Grippo & Simmons, Chicago, IL, for Kenneth F. Bonny, Francesca B. Bonny, and Robert D. Flesvig.

Timothy M. Maggio, Joseph E. Coughlin, Lord, Bissell & Brook, Chicago, IL, Sheila H. Marshall, Taylor R. Briggs (argued), Leboeuf, Lamb, Leiby & Macrae, New York City, for Society of Lloyd's.

Richard A. Wohlleber, George F. Venci, Jr., Chapman & Cutler, Chicago, IL, for Harris Bank Glencoe-Northbrook, N.A., Harris Trust and Sav. Bank and Bank of Montreal.

Bruce F. Hoffman, Jay M. Pollak, Pollak & Hoffman, Chicago, IL, for Northfield Venture, Inc. and Robert King.

John P. McGahey, James R. Denniston, Wilson, Elser, Moskowitz, Edelman & Dicker, Chicago, IL, Thomas W. Wilson, Jonathan C. Thau (argued), Wilson, Elser, Moskowitz, Edelman & Dicker, New York City, for Lime Street Underwriting Agencies Ltd., Robin C. Kingsley, Robert C. Hallam, Patrick M. Corbett and Bankside Underwriting Agencies Ltd.

Gary Kostow (argued), Suanne P. Hirschhaut, Kostow & Daar, Chicago, IL, for Alan J. Hunken.

Before CUMMINGS and CUDAHY, Circuit Judges, and LAY, Senior Circuit Judge. ^*

LAY, Senior Circuit Judge.

Kenneth Bonny, Francesca Bonny and Robert Flesvig brought claims in federal district court alleging that they were fraudulently, and in violation of various federal and state securities laws, induced to become members of the Society of Lloyd's (Lloyd's) and to participate as underwriters in several insurance syndicates. Suit was brought against Lloyd's, a British entity; Lime Street Underwriting Agencies Ltd., Bankside Underwriting Agencies Ltd., Robin Kingsley, Robert Hallam and Patrick Corbett, all British corporations or citizens (collectively referred to as "Members' Agents"); Northfield Venture, Inc. and its principals Robert King and Alan Hunken, all American defendants (collectively referred to as "Local Defendants"); Harris Bank Glencoe-Northbrook, Harris Trust & Savings Bank, and the Bank of Montreal ("Bank defendants").

On February 24, 1992, the district court denied plaintiffs' motion for preliminary injunction based upon the lack of likelihood of success on the merits due to the presumptive validity of forum selection clauses contained in the contractual agreements. 784 F.Supp. 1350. The injunction sought to bar the defendants from drawing upon a letter of credit issued by Harris Bank which the plaintiffs were required to obtain as a condition of their membership. Plaintiffs appealed on March 23, 1992 (No. 92-1662).

On May 29, 1992, the district court granted Lloyd's and the Managing Agents' motions to dismiss based on contractual forum selection and arbitration clauses designating England as the forum for dispute litigation and arbitration. ¹ In a clarification of this order on June 26, 1992, the district court ruled that its prior dismissal applied to all defendants, explaining that the non-moving local defendants were dismissed sua sponte. Plaintiffs thereafter appealed the order of dismissal (No. 92-2771). These two appeals were consolidated for oral argument and disposition; we now affirm the respective orders of the district court.

FACTS

The Society of Lloyd's operates one of the largest insurance markets in the world. ² Individuals invest in Lloyd's and thereby obtain the right to participate in Lloyd's insurance underwriting syndicates by becoming an Underwriting Member (a "Name"). A "Managing Agent" manages the syndicate and owes a contractual duty to Names to manage their syndicates with reasonable care. Most syndicates specialize in the underwriting of a particular type of insurance. A Name decides how much he or she wishes to invest in each syndicate based on limited financial information. Many Names join more than one syndicate in order to spread their underwriting across different types of insurance or across different syndicate managements. A Name is not allowed to deal directly with Lloyd's and must designate a "Member's Agent" to handle the Name's affairs. By agreement, Members' Agents owe a fiduciary duty to their Names and must act in the sole interest of their principal Name. In making decisions regarding in which syndicates to invest, Names rely to a great extent on the advice of their Members' Agents.

Each Name is responsible only for his or her share of a syndicate's losses, but liability is unlimited for that share. Similarly, each Managing Agent is independent of every other agent, responsible only for his or her own syndicate.

To become a Name, a candidate must prove financial means. The candidate must also deposit a specified sum via an irrevocable letter of credit issued by a Lloyd's approved bank in favor of Lloyd's. This serves as security and allows the Name to continue underwriting. When insurance claims exceed premium available, Lloyd's makes "cash calls" upon the Names responsible for those claims. If the cash calls are not paid, the Name's security can be used for that purpose.

Northfield, King and Hunken are agents of Lloyd's and Lime Street ³ operating in the United States. Kenneth Bonny was solicited by King in Illinois to invest in Lloyd's. Francesca Bonny invested based on the representations made to her husband. Robert Flesvig, who joined the suit in the Amended Complaint, was solicited by Hunken. King and Hunken introduced the Plaintiffs to Lime Street, the designated "Members' Agent." Lime Street compensated King and Hunken for the introduction.

Plaintiffs traveled to England and executed a General Undertaking for Membership that included both forum selection and choice of law clauses. ⁴ They also signed a Members' Agent Agreement providing that disputes between Names and Members' Agents will be arbitrated in England under English law.

To secure their obligations to Lloyd's, each of the plaintiffs issued irrevocable letters of credit in favor of the Society and Council of Lloyd's. ⁵ These letters were secured, issued and confirmed by the banks which are named defendants. The syndicates in which the plaintiffs participated ultimately experienced large losses resulting in calls in excess of 300,000 pounds. ⁶

Plaintiffs claim that the non-bank defendants, in order to induce them into investing in and remaining members of Lloyd's, failed to disclose material facts and risk factors concerning investment in Lloyd's, particularly through Lime Street. ⁷ They brought suit under Sections 12(1) and 12(2) of the Securities Act of 1933 and under Section 10(b) of the Securities Exchange Act of 1934. Plaintiffs also allege RICO violations and causes of action in common law for fraud, negligence and breaches of duty.

DISCUSSION

I. Enforceability of the forum selection clause

The enforceability of forum selection and choice of law provisions are questions of law which we review de novo. Hugel v. Corporation of Lloyd's, 999 F.2d 206 (7th Cir.1993); Northwestern Nat'l Ins. Co. v. Donovan, 916 F.2d 372, 375 (7th Cir.1990); Riley v. Kingsley Underwriting Agencies, Ltd., 969 F.2d 953, 956 (10th Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 658, 121 L.Ed.2d 584 (1992).

Plaintiffs claim that the district court erred in dismissing their amended complaint. They argue that the forum selection and choice of law clauses should be held void because together they violate public policy by prospectively waiving plaintiffs' Securities Act remedies. ⁸ Plaintiffs rely on Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985), where the Supreme Court stated in dicta that forum selection and choice of law provisions which operate as prospective waivers of statutory antitrust claims would not be enforced as against public policy. Id. at 637 n. 19, 105 S.Ct. at 3359 n. 19. Plaintiffs argue that they are being deprived of all substantive rights under the federal securities laws and should therefore be relieved of their agreement on public policy grounds.

The enforceability of forum selection clauses in international agreements is governed by the Supreme Court's decision in M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972). ⁹ In enforcing a forum selection clause in a contract between Zapata, an American corporation, and Unteweser, a German corporation, the Court held that forum selection clauses are "prima facie valid and should be enforced unless enforcement is shown by the resisting party to be unreasonable under the circumstances." Id. at 10, 92 S.Ct. at 1913. The Court reasoned that:

The expansion of American business and industry will hardly be encouraged if, notwithstanding solemn 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.

Id. at 9, 92 S.Ct. at 1912. Indeed, "[t]he elimination of all such uncertainties by agreeing in advance on a forum acceptable to both parties is an indispensable element in international trade, commerce, and contracting." Id. at 13-14, 92 S.Ct. at 1914-15.

In Scherk v. Alberto-Culver Co., 417 U.S. 506, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974), the Court enforced an arbitration agreement in a securities case arising out of an international contract. The Court stated:

[U]ncertainty will almost inevitably exist with respect to any contract touching two or more countries, each with its own substantive laws and conflict-of-laws rules. A contractual provision specifying in advance the forum in which disputes shall be litigated and the law to be applied is, therefore, an almost indispensable...