State ex rel. Barclays Bank PLC v. Hamilton Cty. Court of Common Pleas

• Decision Date: 14 February 1996
• Docket Number: No. 95-274,95-274
• Parties: , 64 USLW 2530, 29 UCC Rep.Serv.2d 330 . Supreme Court of Ohio
• Court: Ohio Supreme Court

Page 536

74 Ohio St.3d 536

660 N.E.2d 458, 64 USLW 2530, 29 UCC Rep.Serv.2d 330

The STATE ex rel. BARCLAYS BANK PLC et al. v. COURT OF COMMON PLEAS OF HAMILTON COUNTY, Ohio et al.

No. 95-274.

Supreme Court of Ohio.

Submitted Oct. 10, 1995.

Decided Feb. 14, 1996.

SYLLABUS BY THE COURT

1. The presence of a disagreement, however sharp and acrimonious it may be, is insufficient to create an actual controversy if the parties to the action do not have adverse legal interests.

2. An action to enjoin payment under a letter of credit or a confirmation of a letter of credit must include the beneficiary as a party in order to present an actual controversy within the common pleas court's subject matter jurisdiction.

Relator Barclays Bank PLC ("Barclays") is a bank organized under the laws of England and Wales with its headquarters and principal place of business in London, England. Intervenor-relator is Star Bank. Respondents are the Court of Common Pleas of Hamilton County, Judge Arthur M. Ney, and Judge Robert P. Ruehlman ("respondents"). The intervening parties in this action for a writ of prohibition include intervenors-respondents William A. Thurner, Howard Thiemann, Verna K. Dohme, executor of the estate of Arthur Dohme, and Durwood G. Rorie, Jr. ("intervenors"). ¹

Barclays seeks a writ of prohibition from this court to enjoin respondents from further exercising judicial power in the underlying suits because respondents do not have subject matter jurisdiction. The underlying suits concern standby letters of credit issued by Star Bank and confirmation letters of credit issued by Barclays in favor of the Society of Lloyd's ("Lloyd's"). To more fully explain the circumstances in the underlying suits a brief explanation of Lloyd's follows.

Society of Lloyd's

Lloyd's is not an insurance company, but rather an insurance marketplace somewhat analogous to the New York Stock Exchange. The Corporation of Lloyd's ("the Corporation") maintains and regulates Lloyd's insurance market. Through the Council of Lloyd's ("Council"), the Corporation promulgates standard form agreements which govern the relationships among the entities involved with the market. The Council acts as trustee of a fund maintained to ensure payment of policyholder losses. The Corporation itself, however, does not underwrite any insurance.

Individual investor members, called "Names," join together in syndicates to underwrite the insurance risks. Because a Name cannot conduct insurance business directly, each Name enters into an agency agreement with a members' agent who acts on the Name's behalf.

To become a Name, an individual must be sponsored by an existing member and must apply to the Corporation. Applicants must satisfy a means test to demonstrate that they possess sufficient assets to support the risk of possible claims. As a condition for investing in the syndicates, each Name is required to post security in cash or cash equivalent, such as an irrevocable letter of credit, in the amount of thirty percent of the value of the Name's investment. The Council, as beneficiary, requires letters of credit to be payable in England. Under a forum selection clause in the Name's contract with Lloyd's, any dispute between a Name and Lloyd's must be decided in the courts of England.

The security covers any underwriting losses that may occur to the syndicates in which the Name invests. Losses result when claims by insurance policyholders exceed the amount of premiums paid to syndicates by the policyholders. In the event that losses do exceed the premium amounts paid, the Council has the ability to make "cash calls" upon syndicate Names in proportion to the amount of their respective investments. If the cash call is not paid by a Name, the Council then may draw against the security posted by the Name.

Parties' Relationships

Barclays, Star Bank and intervenors do not dispute the following facts.

During the 1980s, members' agent R.W. Sturge, Ltd., d.b.a. Falcon Agencies, Ltd. ("Sturge/Falcon"), solicited each intervenor to become a Name in Lloyd's. Each of the intervenors invested in Lloyd's insurance market as a Name for three or more years between 1983 and 1994. ² As the intervenors' members' agent Sturge/Falcon placed the intervenors in syndicates.

To fulfill the security condition for investing in the insurance syndicates, each intervenor elected to provide the required thirty-percent security by way of a letter of credit. To that end, each intervenor contracted with Star Bank (or its predecessor) to issue irrevocable letters of credit payable in pounds sterling with the Council of Lloyd's as beneficiary. Because the Council required letters of credit to be payable in England, Star Bank requested Barclays to confirm each of intervenor's letters of credit. Star Bank sent the letters of credit to Barclays in London and Barclays confirmed each letter of credit by issuing a separate confirming document. The confirmation letters of credit required only that the claim be presented prior to the stated expiration date and in conformity with applicable international credit practices.

The Underlying Suits

Between 1988 and 1991, the syndicates in which intervenors had invested experienced underwriting losses. To cover the losses, the Council made cash calls upon the intervenors and then draws against each intervenor's confirmation letter of credit. As of January 1995, intervenors had received additional cash calls by the Council for 1991 underwriting losses, and further draws against the confirmation letters of credit were imminent.

Intervenors filed suit in respondents' common pleas court against Star Bank and Barclays, alleging that Sturge/Falcon had sold securities to them in violation of the Ohio Securities Act. ³ Each complaint requested a temporary restraining order to stop Star Bank and Barclays from paying any funds pursuant to the letters of credit. The complaints also requested preliminary and permanent injunctions. Respondents granted the temporary restraining order enjoining both Star Bank and Barclays from paying on, making a demand for payment on, or assisting in collection of, the letters of credit.

Barclays sued for a writ of prohibition from this court to enjoin respondents from further exercising judicial power in the underlying suits because, Barclays asserts, respondents do not have subject matter jurisdiction. After Barclays initiated the original action in this court, all four complaints were voluntarily dismissed. The intervenors then refiled two new cases, Thurner II and Rorie II, and again alleged that Sturge/Falcon had sold securities to them in violation of the Ohio Securities Act. The new complaints also alleged that the Council had engaged in "rampant and pervasive fraud" towards the intervenors by recruiting Names without informing the Names of massive latent or "long-tail" liabilities in the market because of asbestos and pollution-related losses. Based on this, intervenors alleged that Barclays and Star Bank had a duty to review the evidence of fraud and to withhold payment on the letters of credit.

Barclays amended its complaint for writ of prohibition and included the two new cases which intervenors had filed.

Squire, Sanders & Dempsey, John R. Gall, Pamela H. Thurston and Philomena M. Dane, Columbus, for relator Barclays Bank PLC.

Dinsmore & Shohl and John W. Beatty, Cincinnati, for intervening relator Star Bank, N.A.

Joseph T. Deters, Hamilton County Prosecuting Attorney, and Philip L. Zorn, Jr., Assistant Prosecuting Attorney, for respondents.

Cohen, Todd, Kite & Stanford, Donald J. Rafferty and Michael R. Schmidt, Cincinnati, for intervenors William A. Thurner, Howard Thiemann, and estate of Arthur Dohme, Verna K. Dohme, executor.

Lindhorst & Dreidame Co., L.P.A., and James M. Moore, Cincinnati, for intervenors Thomas Tilsley, Durwood G. Rorie, and V. Snowden Armstrong.

COOK, Justice.

The critical issue in this case is whether a court has subject matter jurisdiction to issue an injunction to stop payment on a letter of credit when the beneficiary of that letter of credit is not a party to the suit. Because respondents lack such jurisdiction, we find prohibition appropriate, and issue the writ.

Prohibition is an extraordinary writ and we do not grant it routinely or easily:

" 'For a writ of prohibition to issue, a relator must ordinarily establish: (1) that the court against whom it is sought is about to exercise judicial power, (2) that the exercise of such power is unauthorized by law, and (3) that, if the writ is denied, he will suffer injury for which no other adequate remedy exists.' " State ex rel. Connor v. McGough (1989), 46 Ohio St.3d 188, 189, 546 N.E.2d 407, 408, quoting State ex rel. Largent v. Fisher (1989), 43 Ohio St.3d 160, 161, 540 N.E.2d 239, 240; and State ex rel. Fyffe v. Pierce (1988), 40 Ohio St.3d 8, 9, 531 N.E.2d 673, 674. Intervenors concede that the first prong of the prohibition tripartite test is established. In this case, the dispute centers on the second part of the test--whether the respondents' exercise of judicial power is unauthorized by law.

As to this central dispute, Barclays and intervenors agree that fraud by the beneficiary in the underlying transaction would permit a court to enjoin payment on the letter of credit. ⁴ In their new cases, intervenors have alleged fraud in the underlying transaction on the part of Lloyd's. Barclays asserts, however, that respondents lack subject matter jurisdiction because intervenors have not named Lloyd's, the beneficiary of the letters of credit, as a defendant in the underlying cases; therefore, no case or controversy exists, as there are no adverse litigants. Intervenors, on the other hand, contend that because R.C. 1305.13(B)(2) specifically authorizes a court to enjoin payments under letters of credit on the basis of fraud, respondents have subject matter jurisdiction.

First we note, as respondents correctly argue, that Ohio...