In re Lloyd's American Trust Fund Litigation

• Decision Date: 07 June 1996
• Docket Number: No. 92 Civ. 1262 (RWS).,92 Civ. 1262 (RWS).
• Citation: 928 F. Supp. 333
• Parties: In re LLOYD'S AMERICAN TRUST FUND LITIGATION.
• Court: U.S. District Court — Southern District of New York

928 F. Supp. 333

In re LLOYD'S AMERICAN TRUST FUND LITIGATION.

No. 92 Civ. 1262 (RWS).

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

June 7, 1996.

Camhy Karlinsky & Stein, New York City (Kenneth A. Lapatine, Mark H. Budoff, of counsel), Milberg Weiss Bershad Hynes & Lerach, New York City (Sanford P. Dumain, of counsel), for Plaintiffs.

Shearman & Sterling, New York City (Frederick T. Davis, Donald A. Goldsmith, Henry Weisburg, of counsel), Debevoise & Plimpton, New York City (John H. Hall, of counsel), for Defendant.

OPINION

SWEET, District Judge.

Plaintiffs Gasper Celamo, Michael Montana, and John Norton, plaintiffs in three class actions, have moved to remand the actions which have been removed by defendant Citibank, N.A. ("Citibank") from the Supreme Court of the State of New York. The motion is denied for the reasons set forth below.

The Parties

Each of the named plaintiffs is a citizen and resident of the United States and seeks to represent a proposed plaintiff class of citizens for each of whom at least one trust fund was to be maintained in the United States with Citibank as trustee and fiduciary (the "Plaintiffs").

The plaintiffs and proposed plaintiff class members are an underwriting members of Lloyd's of London ("Lloyd's"), known as "Names." Each accepts insurance risks by participating in underwriting syndicates under various agreements described in greater detail below. Each Name is responsible solely for his or her share of any claims, and his or her assets may not be reached to satisfy the obligations of any other Name.

Citibank, a national banking association with its principal place of business in New York, is a trustee under the trust agreements described below and individually as a fiduciary under New York law.

Prior Proceedings

I. The New York Action

On December 29, 1995, two of the present actions were commenced by filing of summonses and complaints in the Supreme Court of the State of New York, County of New York, captioned Celauro v. Citibank, N.A., (Index No. 60139/95) and Montana v. Citibank, N.A., (Index No. 601040/95). These actions were subsequently consolidated under the caption In re Lloyd's American Trust Fund Litigation, (Consolidated Index No. 661039/95) by stipulation and order dated January 23, 1996. The third action, Norton v. Citibank, N.A., (Index No. 600692/96), was commenced on February 9, 1996, and made a part of the consolidated proceedings.

On or about February 21, 1996, Citibank filed a Notice of Removal, removing the actions to this Court. The sole basis set forth in the Notice of Removal for subject matter jurisdiction in the federal court was the Edge Act, 12 U.S.C. § 632 ("Section 632").

The instant motion to remand was filed by the Plaintiffs on April 6, and affidavits were filed in opposition to the motion describing the agreements and activities at issue. The motion was argued on April 17, 1996, at which time it was considered fully submitted.

II. The California Action

On February 21, 1996, the California Commissioner of Corporations, on behalf of all Names resident in California, filed suit against Lloyd's, Citibank as trustee of the Lloyd's American Trust Fund ("LATF"), and a number of other Lloyd's-related entities in the Superior Court of California for the County of Los Angeles by filing a summons and complaint captioned People of the State of California v. Lloyd's of London, et al., Case No. BC144755 (the "California Complaint"). The California Complaint asserted various violations of state securities laws and sought, among other relief, a temporary restraining order imposing an equitable lien on the LATF and a freeze of all funds in the LATF. The Complaint requested the same relief in the form of a preliminary injunction.

On February 27, 1996, Citibank, one day after being served, removed the action to the District Court for the Central District of California in Los Angeles, on the ground that, since the Complaint sought relief against the LATF and Citibank as trustee of the LATF, the lawsuit arose out of transactions involving international or foreign banking and also arose out of international or foreign financial operations. The case was subsequently assigned to the Honorable Terry J. Hatter.

On March 4, 1996, the Commissioner of Corporations filed a motion for remand asserting, inter alia, that the involvement of the LATF and Citibank in the lawsuit did not sufficiently implicate Section 632 for the purposes of establishing federal jurisdiction. On March 15, 1996, Judge Hatter denied the Commissioner's motion. See People of the State of California v. Lloyd's of London, et al., CV 96-1357 (C.D.Cal. March 15, 1996).

The Complaint

As set forth in the Complaints, the Plaintiffs and the class allege that Citibank breached its duties and responsibilities as the trustee of the trust fund of each plaintiff. It is alleged, inter alia, that Citibank engaged in a pattern of transferring money from the trust funds maintained by solvent Names to trust funds of insolvent Names in order to meet the latters' obligations, that Citibank engaged in unauthorized commingling of the funds in different trust funds, and that Citibank failed to maintain appropriate and necessary records with respect to each trust fund.

Specific allegations of improper activities include: improper loans and overdrafts (Comp. ¶¶ 60, 62, 64, 70, 71, 72, 102, 105, 109, 110, 114); improper transfers of money (Comp. ¶¶ 19(b)(vii), 86, 104, 107, 115); failure to establish and properly maintain bank accounts (Comp. ¶¶ 10, 45, 49, 52, 96, 103); improper investment of account funds (Comp. ¶¶ 47(f), 48); breaches of fiduciary duty (Comp. ¶¶ 96, 104, 106, 107, 115, 116); failure to render reports and accountings of bank accounts at Citibank (Comp. ¶¶ 11, 84, 93, 99); and violations of regulations issued by the Comptroller of the Currency that specifically govern banks (Comp. ¶ 19(b)(xii)).

Based on these alleged breaches and wrongful conduct, the plaintiffs seek an accounting by Citibank as to each trust fund, recovery of any damages suffered as a result of Citibank's breaches of its fiduciary and contractual duties, and an injunction enjoining Citibank from continuing to commit any breaches of the fiduciary and contractual duties owed to the plaintiffs and members of the plaintiff class.

The Facts

The facts as set forth below are derived from the complaint and the unrebutted affidavits submitted in opposition to the motion describing the activities of the Plaintiffs, Lloyd's and Citibank, and certain of the agreements relevant to their relationships.

Lloyd's is a unique and complex insurance market that has been operating in London for more than 300 years. In 1971, the Society and Corporation of Lloyd's (the "Corporation") was established by an Act of the British Parliament.

Lloyd's is not itself an insurer, but a market for insurance. It is the individual underwriting members of Lloyd's, the Names, and, since 1994, a limited number of corporate members, who are the insurers and who underwrite insurance through groups called syndicates.

In 1995, nearly 15,000 individual Names from more than fifty countries were actively engaged in underwriting at Lloyd's. Of those active Names, approximately 85 percent were British subjects; only five percent were American citizens on whose behalf these class actions have been brought. Since 1969 (when persons other than British subject were first permitted to become Names), U.S. Names have accounted for approximately ten percent of a total number of Names, or more than eight percent of the Lloyd's market's aggregate premium income (the aggregate amount of gross premium income earned by all Names).

The syndicates through which Names underwrite insurance are managed by underwriting agents known as Managing Agents, to which the Names in the syndicate each delegate the authority to select risks, set premium rates, hold premiums and pay claims on their behalf. Names, in consultation with their representative at Lloyd's, who is known as a Members' Agent, select the syndicates in which they are to participate in any particular underwriting year of account. Names generally underwrite through more than one syndicate in order to diversify their risk by spreading their underwriting across different types of insurance, different syndicate managers and different currencies. Because of this diversification, most U.S. Names underwrite a substantial amount of non-U.S. business in U.S. dollars, as well as non-U.S. currency; correspondingly, non-U.S. Names underwrite a substantial amount of insurance written in U.S. dollars.

To provide assurance to policy holders that their valid claims will be paid, Lloyd's participants have over time developed a so-called "chain of security" designed to ensure that there will be sufficient financial resources to provide claims payment security for policyholders.

In order to qualify for membership in Lloyd's, a Name must demonstrate that he or she has sufficient assets to pass a "means test." A Name is further required to provide security with respect to his or her underwriting business at Lloyd's in the form of a "Lloyd's Deposit," which may include cash, investments, guarantees or letters of credit and is held pursuant to the Lloyd's Deposit Trust Deed or the Lloyd's Security and Trust Deed. In addition, all active Names must also pay annual levies to the Central Fund for the current year of account. The Central Fund is available as a means for Lloyd's to, among other things, "make good any default by any Name under any contract of insurance underwritten at Lloyd's, and prevent the occurrence or reduce the extent of such default by any Name."

One key element at issue in these actions is the establishment of "premium trust funds". Pursuant to the U.K. Insurance Companies Act of 1982, all premiums relating to a Name's underwriting must be placed into a trust fund established in accordance with the provisions of...