Rokeby-Johnson on Behalf of Sturge Syndicate v. Kentucky Agr. Energy Corp.

• Decision Date: 14 May 1985
• Docket Number: ROKEBY-JOHNSON
• Citation: 108 A.D.2d 336,489 N.Y.S.2d 69
• Parties: Henry Ralph, individually and on Behalf of the STURGE SYNDICATE and Other Concerned Underwriters at Lloyds, Plaintiff-Respondent, v. KENTUCKY AGRICULTURAL ENERGY CORPORATION and Citibank, N.A., Defendants-Appellants. FEDERAL INSURANCE COMPANY and Employers Insurance of Wausau, Plaintiffs-Respondents, v. KENTUCKY AGRICULTURAL ENERGY CORP., and Citibank, N.A., Defendants-Appellants.
• Court: New York Supreme Court — Appellate Division

Page 69

489 N.Y.S.2d 69

108 A.D.2d 336

Henry Ralph ROKEBY-JOHNSON, individually and on Behalf of

the STURGE SYNDICATE and Other Concerned

Underwriters at Lloyds, Plaintiff-Respondent, v. KENTUCKY AGRICULTURAL ENERGY CORPORATION and Citibank, N.A.,

Defendants-Appellants.

FEDERAL INSURANCE COMPANY and Employers Insurance of Wausau, Plaintiffs-Respondents, v. KENTUCKY AGRICULTURAL ENERGY CORP., and Citibank, N.A.,

Defendants-Appellants.

Supreme Court, Appellate Division,

First Department.

May 14, 1985.

Paul G. Pennoyer, Jr., New York City (of counsel, Jerome C. Katz and Donald W. Rose, New York City, with him on the brief; Chadbourne, Parke, Whiteside & Wolff, New York City, attorneys) for defendant-appellant Kentucky Agr. Energy Corp.

Thomas M. Geisler, Jr., Bradford Anderson and Henry A. Udow, New York City (on the brief with Paul G. Pennoyer, Jr.; Shearman & Sterling, New York City, attorneys) for defendant-appellant Citibank, N.A.

Leonard S. Leaman, New York City, of counsel (Peter L. Keane with him on the brief; Lord, Day & Lord, New York City, attorneys) for plaintiff-respondent Henry Ralph Rokeby-Johnson, etc.

Robert A. Rubin, New York City, of counsel (Lisa A. Banick with him on the brief; Postner & Rubin, New York City, attorneys) for plaintiff-respondent Federal Ins. Co.

Myron C. Martynetz, New York City, of counsel (Anthony Lanzone and Charmaine Marlowe, New York City, with him on the brief; Lanzone & Kramer, New York City, attorneys) for the plaintiff-respondent Employers Ins. of Wausau.

Before MURPHY, P.J., and KUPFERMAN, ASCH and BLOOM, JJ.

MURPHY, Presiding Justice:

The substantive issue presented on this appeal by defendants Kentucky Agricultural Energy Corporation ("KAEC") and Citibank, N.A., concerns the enforceability of a forum selection clause contained in certain insurance policies issued to KAEC by plaintiffs Henry Ralph Rokeby-Johnson, individually and on behalf of certain underwriters at Lloyds of London (hereinafter collectively, "Lloyds"), Federal Insurance Company ("Federal") and Employers Insurance of Wausau ("Wausau"). The court below denied the defendants' motion to dismiss or stay the two New York actions herein pending the determination of an action brought in the State of California by KAEC, Citibank and other plaintiffs against the insurers named above. For the reasons discussed below, we reverse the lower court's determination and order that these New York actions be stayed pending the determination of the California suit.

KAEC, a Kentucky corporation, was formed in 1980 for the purpose of building, owning and operating a fuel alcohol plant near Franklin, Kentucky. Eighty-three percent of KAEC's stock is currently owned by Chevron, USA, Inc., a California corporation.

To construct the plant, KAEC entered into a design contract with C & I Girdler Company, a subsidiary of Bechtel Corporation, and a construction contract with Becon Construction Company, also a Bechtel subsidiary. Both contracts contained guarantees that, upon its completion, the plant would meet certain minimum production specifications.

KAEC financed construction of the plant by securing a loan of $35,400,000 from Citibank and Simpson County Bank of Franklin, Kentucky. As a condition of the loan, KAEC was required to obtain "performance guarantee insurance" insuring against losses which might be incurred if the plant failed to meet the minimum production specifications outlined in the design and construction contracts. This insurance was obtained through a New York insurance broker, Fred S. James, in an amount totalling $35,400,000.

James placed the performance guarantee insurance in the form of a primary policy and four layers of excess coverage. The primary policy was underwritten by Lloyds of London and provided the first $5 million of coverage. Excess policies were provided by Federal Insurance Company for the next $5 million, Employers Insurance of Wausau for the next $10 million, Midland Insurance Company for the next $5 million and International Surplus Lines Insurance Company for the final $10.4 million. The excess policies expressly incorporated the substantive terms of the primary Lloyds policy, except as to amount of coverage and premiums. The Lloyds policy contained a service of suit clause providing that:

"It is agreed that in the event of the failure of the Underwriters hereon to pay any amount claimed to be due hereunder, the Underwriters hereon, at the request of the Assured, will submit to the jurisdiction of any Court of competent jurisdiction within the United States and will comply with all the requirements necessary to give such Court jurisdiction and all matters arising hereunder shall be determined in accordance with the law and practice of such Court."

It is undisputed that KAEC has paid all premiums due under the primary and excess policies.

Shortly after the starting of the plant in December, 1982, it became clear that the facility failed to meet the minimum production specifications set forth in the design and construction contracts. By April of 1984, the plant had incurred losses totalling more than $19,000,000. On June 9, 1983, KAEC gave written notice of loss to James as agent for Lloyds and the excess carriers. Despite repeated inquiries, the carriers neither accepted nor rejected the claim.

On June 18, 1984, Lloyds brought the first of the instant actions in New York. Federal and Wausau brought the second a few days later. By letter dated June 19, 1984 Lloyds for the first time rejected KAEC's claim. Except for the complaints filed in their action, Federal and Wausau have never responded to KAEC's claim.

Briefly stated, the insurers' actions for rescission are based upon alleged misrepresentations made by the broker James to Lloyds to the effect that the technology of the gasohol plant and its process were not a "prototype" but had existed for many years in Europe and in Brazil; that the Bechtel subsidiaries had experience in the construction of gasohol plants, and that the technology and performance specifications of 80 gasohol plants previously constructed by a German manufacturer were similar to the construction contemplated in Kentucky.

Shortly after the commencement of the insurers' New York actions, KAEC, in return for additional financing, irrevocably assigned to Chevron its rights and interests in the policies issued by Lloyds, Federal and Wausau. On July 18, 1984, KAEC, Chevron, Citibank and Simpson filed suit against Lloyds, Federal, Wausau and the other excess carriers in the California Superior Court in San Francisco. By this action plaintiffs sought a declaratory judgment that the insurance policies are in full force and effect; they also sought damages against the underwriters for breach of contract, tortious breach of the covenant of good faith and fair dealing, and unfair claims practices under California law.

Thereafter the insureds, KAEC and Citibank, moved in the Supreme Court in New York for an order staying or dismissing the New York actions on the grounds, inter alia, that the forum selection clause in the Lloyds' policy gave the insureds, not the insurers, the right to select the forum in the event of a refusal by the insurers to pay a claim under the policies. Thus, the insureds assert, California is the proper forum for the resolution of this dispute. It is from the denial of that motion for a stay or dismissal that KAEC and Citibank now appeal.

Essentially, Special Term found that both the California and New York actions were properly commenced and that the forum selection clause "has absolutely no effect upon plaintiff's right to sue on the basis of plaintiff's perception of a taint by fraud." Further, the court, applying the analysis of forum non conveniens, found that the State of New York had a stronger nexus to the parties and transactions at issue than did California, which is the state of incorporation of Chevron. Despite these considerations, however, and under the facts of this case, we hold that the traditional criteria utilized in the forum non conveniens analysis must defer to a freely negotiated, rational forum selection clause the enforcement of which will not work undue hardship on any party.

Traditionally, courts have been generally reluctant to enforce forum selection clauses on the theory that such provisions may operate to improperly divest a court of jurisdiction. By 1972, however, the Supreme Court of the United States noted that the traditional view had been rendered "hardly more than a vestigial legal fiction," The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972), 407 U.S. at 12, 92 S.Ct. at 1914. InBremen, the Supreme Court enforced a provision included in an international maritime towage contract mandating that "any dispute arising must be treated before the London Court of Justice," despite the fact that neither party to the contract nor any aspect of the transaction had any connection with England. Holding that forum selection clauses are "prima facie valid"...