The Society of Lloyds v. Webb

• Decision Date: 29 March 2001
• Docket Number: No. CIV. A. 3 00 MC-042.,CIV. A. 3 00 MC-042.
• Parties: THE SOCIETY OF LLOYDS v. James Duncan WEBB.
• Court: U.S. District Court — Northern District of Texas

156 F.Supp.2d 632

THE SOCIETY OF LLOYDS v. James Duncan WEBB.

No. CIV. A. 3 00 MC-042.

United States District Court, N.D. Texas, Dallas Division.

March 29, 2001.

Andrew M. Edison, Attorney at Law, C. Thomas Kruse, Attorney at Law, Bracewell & Patterson, Houston, TX, for Plaintiff.

Paul D. Flack, Attorney at Law, Clements, O'Neill, Pierce, Nickens & Wilson, Houston, TX, David B. Miller, Law Office of David B. Miller, Dallas, TX, Bradley W. Hoover, Hoover & Harger, Sugar Land, TX, for Defendant.

MEMORANDUM OPINION AND ORDER

SOLIS, District Judge.

Now before the Court are:

1. Defendant James Duncan Webb's Motion For Summary Judgment Denying Recognition of Foreign Judgment, filed on July 14, 2000, and brief in support;

2. The Society of Lloyds' Cross Motion for Summary Judgment in Support of Recognition of Foreign Judgment, filed September 6, 2000;

3. Defendant's Response to the Society of Lloyds' Cross Motion for Summary Judgment in Support of Recognition of Foreign Judgment, filed September 29, 2000, and brief in support;

4. The Society of Lloyds' Appendix, filed September 6, 2000;

5. The Society of Lloyds' Appendix Volumes 1-3, filed July 14, 2000;

6. The Society of Lloyds' Supplement of Legal Authority, filed December 4, 2000;

7. The Society of Lloyds' Supplement of Legal Authority, filed January 31, 2001.

Having considered the arguments and authorities presented, and the papers on file in the instant action, the Court is of the opinion that Defendant Webb's Motion for Summary Judgment is hereby DENIED and Plaintiff Lloyds' Cross Motion for Summary Judgment is hereby GRANTED.

I. FACTUAL BACKGROUND

The facts, largely undisputed, are fairly detailed and involved.¹ James Duncan Webb (hereinafter "Webb") is an American investor in the Society of LLoyds. The Society of LLoyds, also known as LLoyds of London, is a market made up of syndicates which offers insurance and reinsurance of risks. Its members are made up of: 1) insiders who engage in the daily business of insurance (such as brokers, underwriters, underwriting agents) and 2) "Names," who are outside investors, whose money provides the capital for LLoyds. By becoming a Name, a person accepts a certain amount of the premium paid for an insurance policy and is also assigned a correspondent pro rata share of the insurance risk. A Name's profit is derived from the amount of money, if any, remaining of the premium and earned investment income after the Name pays his pro rata share of expenses and claims. A Name pledges money to back the insurance policies issued by LLoyds syndicates and the Name's liability on that pledge is unlimited. Lloyds' underwriting agents, managers and underwriters represent the Names at LLoyds and make the management decisions, as the Names are prohibited from being involved in the actual business of LLoyds. If a person wishes to become a Name, he must execute a contract termed the "General Undertaking." Under this agreement, a Name agrees to abide with Lloyds' bylaws and controlling parliamentary acts.

A syndicate is a group of Names. Their pooled resources serve as reserves and permit LLoyds to underwrite risks and issue insurance policies. Each syndicate can specialize in a certain kind of insurance. The underwriting agent places a Name in a particular type of syndicate and each syndicate has a life of one year and stops accepting new business on December 31 of each year. The syndicate reinsures its risks by paying a premium to its newly-reconstituted self for the following year of account. This is called a Reinsurance To Closes ("RITC") and the syndicate manager calculates the amount of premium necessary to be paid to the newly reconstituted syndicate, which usually has a different group of Names. The calculation is made so that no profits or losses are allocated to outgoing or incoming Names. If a syndicate manager cannot quantify the risk, he cannot assess the RITC, then the year remains open and the Names remain liable for all claims that could not be quantified. A syndicate is said to be in run-off if it is unable to close.

The syndicate calculates RITC, profits and losses at the end of three years (even though it is a one year venture) because it takes three years for a claim to reach the stage where an underwriter can accurately calculate the RITC. Losses that are covered but not yet reported are called IBNR (Incurred But Not Reported) and these are the most difficult to calculate. Statistical projections and historical data predict IBNR. So, if a particular syndicate year is profitable, profits will not be paid to the Names until approximately three and a half years later when the syndicate's financial report is issued. In the meantime, all premiums are held in a trust fund, which the syndicate uses to pay claims and expenses.

Through the RITC, the members of the reinsuring syndicate agree to indemnify the members of the reinsured syndicate against all known and unknown liabilities arising out of business allocated to the closed year. If a year is closing with inaccurate numbers, the future Names will become liable for losses that should have been allocated to the past Names. Once a year is closed into a succeeding year, the RITC is final and LLoyds cannot correct past inaccuracies or inequities.

By the early 1980's LLoyds knew that it had problems with rising asbestos and toxic tort claims. The syndicates' reserves were inadequate to handle these rising claims and a committee known as the Asbestos Working Party was formed to gather information about the breadth of the problem. The problem was described as "the largest phenomenon that has ever hit the casualty insurance industry" and "the most significant legal and loss cost issue in the history of the industry." See Webb's Exhibit 9, Appendix 1 at Brief Exhibit 000905, 000920. Information about these claims was not published in the marketplace, was omitted from the audit instructions, and was not published in LLoyds financial statements for the year. Although a letter was prepared that provided the necessary disclosures to the Names, it was merely placed in a file and never distributed to the intended Names. Simultaneously, LLoyds was campaigning in Parliament for passage of the LLoyds Act of 1982 which granted LLoyds and its governing body extraordinary bylaw-making powers and immunity.² In exchange, LLoyds committed to providing better quality information to prospective Names. This promise was not fulfilled and LLoyds admitted to Parliament that it had not kept its promise. "The Council of LLoyds very much regrets that the undertaking to implement the recommendations ... within 2 years of the Royal Assent has not been kept." See Webb's Exhibit 8, Appendix 1 at 000416. Webb began investing in LLoyds in 1983.

During the five years that LLoyds failed to improve information disseminated to prospective Names, approximately 10,000 new Names had joined LLoyds, most of whom were U.S. investors. For the years of account 1988 through 1992, LLoyds suffered losses in excess of £8 billion (these were reported in 1991-1995). Once the Names' inquiries into the cause for the losses began, they concluded that LLoyds had been guilty of serious negligence and/or fraud. According to Webb, no one informed him when he joined that he would be assigned risks greater than LLoyds had ever experienced before. According to Webb's declaration, LLoyds informed him that LLoyds had suffered a loss in only one of its 300 years and that LLoyds was a safe investment. See Webb's Exhibit 2, Appendix 1 at Brief App. 000004-000009.

The Names eventually filed suits in numerous cities across the United States claiming fraud against LLoyds in connection with their recruitment as investors, their placement on high-risk syndicates and their continuing to underwrite at LLoyds.³ In each of the cases LLoyds moved to dismiss based on a forum selection (the forum being in England) and choice of law (the law being English) clauses contained in the General Undertaking (i.e., a contract) that the Names had signed. In each of the cases filed, the courts of appeals enforced the forum selection and choice of law clauses.

After trial in England, the English courts found Lloyds guilty of negligence with respect to their Names and awarded the Names damages totaling £1 billion. Pursuant to the Lloyds' Act of 1982, however, the Lloyds' Council enacted a by-law that caused the funds awarded to the Names to be frozen. The Lloyds' Council placed Lloyds as trustee of the trust funds. The appellate court of England upheld Lloyds' right to freeze the funds and appoint LLoyds as trustee under the LLoyds Act of 1982.

Because the losses were widely spread throughout the various syndicates, LLoyds developed a reorganization program in 1995-96 called Reconstruction and Renewal ("R & R"). This was a mandatory plan of reinsurance of all years of account prior to 1993 into one reinsurance company called Equitas Reinsurance Ltd. The available syndicate assets were £9.9 billion; yet the premium needed for the reinsurance (by December 31, 1995) was £14.7 billion. So, LLoyds put together a £3.2 billion package that included funds recovered in litigation, impounded, requisitioned from Names, from E & O insurers, brokers, underwriting agents, auditors, stop-loss recoveries, real estate sale, the Central Fund, assessments against Names, seizure of Names' deposits, and a credit facility. LLoyds set the Equitas premium of individual Names in a manner known only to it.

The Equitas premium was mandatory and each Name was required to pay Equitas the amount shown on his statement. If, however, the Name signed the settlement agreement included in the R & R package, the Name would be awarded a credit, which would result in a reduction in the amount he paid in. This credit was from the Names' litigation recoveries impounded by LLoyds and settlement proceeds attributable to the Names. To obtain the credit, the Name was required to...