Brown v. Lloyd's (In
re Brown), 219 B.R. 725 (Bankr. S.D. Tex. 1997)
IN RE CHARLES B. BROWN
and MARILYN E. BROWN, Debtors, CHARLES B. BROWN and MARILYN E. BROWN,
Plaintiffs, v. LLOYD'S a/k/a LLOYD'S OF LONDON, Defendant.
219 Bankr. 725; 1997
Bankr. LEXIS 2237; 12 TEXBCR 198
CASE NO.
97-44809-H3-7, ADV. NO. 97-4267
UNITED STATES
BANKRUPTCY COURT
FOR THE SOUTHERN
DISTRICT OF TEXAS, HOUSTON DIVISION
October 3, 1997,
Decided
October 3, 1997,
Entered
LETITIA Z. CLARK, UNITED STATES
BANKRUPTCY JUDGE.
Disposition Judgment entered denying Defendant's Motion to Dismiss, which
this court treated as a Motion for Summary Judgment pursuant to Bankruptcy Rule
7012 (Docket No. 7).
Counsel For Charles B Brown, Debtor: Keith P
Ellison, Attorney at Law, Houston, TX.
Pamela G. Johnson, Trustee, Baker
& Hostetler, Houston, TX.]
Opinion
Opinion by: LETITIA Z. CLARK
MEMORANDUM OPINION
The court has considered Defendant's
Motion to Dismiss the above captioned adversary proceeding (Docket No. 7). The
following are the Findings of Fact and Conclusions of Law of the court. A
separate Judgment will be entered denying the motion, and a separate Expedited
Pretrial Order will be entered. To the extent any of the Findings of Fact are
considered Conclusions of Law, they are adopted as such. To the extent any of
the Conclusions of Law are considered Findings of Fact, they are adopted as
such.
BACKGROUND
Charles B. Brown and Marilyn E.
Brown ("Debtors" or "Plaintiffs") filed a voluntary
petition under Chapter 7 of the Bankruptcy Code on May 7, 1997. On the same
date, Debtors filed the instant adversary proceeding.
In the instant adversary proceeding,
Debtors, who are investors in Lloyd's a/k/a Lloyd's of London
("Defendant"), allege that Defendant violated, prepetition, an
agreement not to draw down letters of credit pending resolution of Defendant's
claim against Debtors. Debtors seek equitable and injunctive relief requiring
Defendant to reinstate the letters of credit that Defendant has previously
drawn down, equitable and injunctive relief preventing Defendant from drawing
down any of Plaintiffs' undrawn letters of credit, damages, an award of attorney's
fees and costs, and such other and further relief to which Debtors may justly
be entitled.
The documents attached to the
complaint portray a substantial history of events prior to the filing of this
suit. Plaintiffs had been advised by Lloyd's that they owed money as a result
of certain losses sustained by Lloyd's insureds. Plaintiffs requested an
accounting, and continue to do so. None has been forthcoming. Plaintiffs were
assured in writing by Lloyd's that no letters of credit would be drawn upon
until a particular representative of Lloyd's, who was "on holiday",
had returned to address the matter with plaintiffs' attorney. Notwithstanding
this assurance, Lloyd's drew down upon certain letters of credit without
further word from the individual who had been "on holiday".
This case may, in part, be viewed as
one in a series of cases brought by the United States investors who believe
they have been defrauded by Lloyd's. The history of these cases, and a
discussion of the nature of the insurance market that is Lloyd's, is provided
in detail by the Fifth Circuit in its recent decision in Haynsworth v. The
Company, 121 F.3d 956, 1997 WL 534146 (5th Cir. 1997).i1 Indeed, counsel for
Lloyd's in the instant case also served as counsel for Lloyd's in the Haynsworth
case.
The question this court must address
is whether the fact that the Plaintiffs here have sought protection under the
United States Bankruptcy Code, enables them to survive Lloyd's Motion to
Dismiss this adversary proceeding. The court finds that at this early
procedural stage dismissal is not proper.
In the instant motion, Defendant
seeks dismissal on three grounds, based on a forum selection clause (the
"Forum Selection Clause") contained in the underlying documents
governing Debtors' relationship with Defendant. That clause provides:
Each party hereto irrevocably agrees
that the courts of England shall have exclusive jurisdiction to settle any
dispute and/or controversy of whatsoever nature arising out of or relating to
the Member's membership of, and/or underwriting of insurance business at,
Lloyd's and that accordingly any suit, action or proceeding (together in this
Clause 2 referred to as "Proceedings") arising out of or relating to
such matters shall be brought in such courts of England and irrevocably waives
any objection which it may have now or hereafter to (a) any Proceedings being
brought in any such court as is referred to in this Clause 2 and (b) any claim
that such Proceedings have been brought in an inconvenient forum and further
irrevocably agrees that a judgment in any Proceeding brought in the English
courts shall be conclusive and binding upon each party and may be enforced in
the courts of any other jurisdiction.
(Docket No. 7, at p. 6-7).
First, Defendant asserts that Debtors
are precluded from challenging the Forum Selection Clause because they
challenged the clause with respect to common law claims in another court.
Second, Defendant asserts that the Forum Selection Clause is enforceable
against Debtors. Third, Defendant asserts that the complaint must be dismissed
under the doctrine of forum non conveniens.
In the complaint in the instant
adversary proceeding, Debtors allege that they were required by Defendant to
obtain letters of credit to protect Defendant from loss if they failed to pay
any amounts that they owed Defendant. Debtors allege that they obtained letters
of credit from United States financial institutions, with Defendant listed as
the beneficiary. Debtors allege that the letters of credit were collateralized
with essentially all of Debtors' non-exempt assets.
Debtors' schedules in the above
captioned bankruptcy case reflect non-exempt property in the amount of $
51,645. This amount excludes municipal bonds held by Texas Commerce Bank as
collateral for the letters of credit issued by First City National Bank.ii2
Debtors list the value of these municipal bonds in their schedules to be $
395,794. (Docket No. 1, Case No. 97-44809-H3-7).
On August 11, 1997, an Agreed Order
was entered enjoining Defendant from taking any action to draw down an
additional letter of credit prior to September 18, 1997. (Docket No. 17). That
date has subsequently been extended to October 17, 1997. (Docket No. 19). The
parties announced in open court at the September 17, 1997 hearing on the
instant motion that the letters of credit expire by their own terms on December
31, 1997.
DISCUSSION
Defendant seeks dismissal under
Bankruptcy Rule 7012. The instant motion is silent as to the question of
whether Defendant requests dismissal under Rule 12(b)(1) (lack of subject
matter jurisdiction), Rule 12(b)(3) (improper venue), or Rule 12(b)(6) (failure
to state a claim).
The Supreme Court has not spoken to
the issue of which rule governs dismissal on the grounds of a forum selection
clause. Little consistency exists today between the Courts of Appeal, see,
e.g., Riley v. Kingsley Underwriting Agencies, Ltd., 969 F.2d 953, 956 (10th
Cir. 1992) (forum selection clauses often analyzed in context of motions to
dismiss for improper venue); LFC Lessors, Inc. v. Pacific Sewer Maintenance
Corp., 739 F.2d 4, 7 (1st Cir. 1984) (dismissals based on forum selection
clauses should be founded on Rule 12(b)(6) for failure to state a claim); AVC
Nederland B.V. v. Atrium Inv. Partnership, 740 F.2d 148, 152 (2d Cir. 1984)
(dismissal sought pursuant to 12(b)(1) motion for lack of subject matter
jurisdiction); New Moon Shipping Co. v. Man B & W Diesel AG, 121 F.3d 24
(2d Cir. 1997) (noting the lack of consistency).
The Fifth Circuit addressed, without
deciding, the question of which section of Rule 12 governs in an opinion issued
August 29, 1997, in the Haynsworth case, supra.
In the instant case, the grounds
asserted by Defendants for dismissal do not state a lack of subject matter
jurisdiction. Defendant's argument for dismissal on grounds of forum non
conveniens is essentially an objection to venue. Defendant's contentions that
the Forum Selection Clause is binding and that Debtors are precluded from
litigating the validity of the Forum Selection Clause are essentially
allegations that the complaint fails to state a claim upon which relief can be
granted.
If, on a motion asserting the
defense of dismissal for failure to state a claim upon which relief can be
granted, matters outside the pleadings are presented to and not excluded by the
court, the motion shall be treated as one for summary judgment and disposed of
as provided in Rule 56. Federal Rule of Civil Procedure 12(b) as adopted by Bankruptcy
Rule 7012(b). The parties have presented to the court matters outside the
pleadings in the above captioned adversary proceeding. The court therefore
considers the instant motion to be a motion for summary judgment pursuant to
Bankruptcy Rule 7012(b) as to the grounds asserted other than forum non
conveniens. The court takes judicial notice of the docket and file in this
adversary proceeding and in the main bankruptcy case, Case No. 97-44809-H3-7.
FORUM SELECTION CLAUSE
The United States Supreme Court has
addressed the applicability and enforcement of forum selection clauses in
international transactions. The Supreme Court set forth the standards for
determining whether to enforce forum selection clauses.
In The Bremen v. Zapata Off-shore
Co., 407 U.S. 1, 32 L. Ed. 2d 513, 92 S. Ct. 1907 (1972), the Supreme Court
held that federal courts must presumptively enforce forum selection clauses in
international transactions. The presumption of enforceability may be overcome
by a clear showing that the clause is unreasonable under the circumstances.
Unreasonableness potentially exists where 1) the incorporation into the
agreement of the forum selection clause was the product of fraud or
overreaching; 2) the party seeking to escape enforcement "will for all
practical purposes be deprived of his day in court" because of the grave
inconvenience or unfairness of the selected forum; 3) the fundamental
unfairness of the chosen law will deprive the plaintiff of a remedy; or 4)
enforcement of the forum selection clause would contravene a strong public
policy of the forum state. The Bremen v. Zapata Off-shore Co., 407 U.S. 1, 32
L. Ed. 2d 513, 92 S. Ct. 1907 (1972).
The Fifth Circuit addressed the
issue of enforcement of a forum selection clause in Haynsworth, supra. In
Haynsworth, suit was filed by several American investors (including Debtors),
who had participated in Defendant's insurance business, claiming fraud, breach
of fiduciary duty, violations of the Texas Deceptive Trade Practice-Consumer
Protection Act and violations of the Securities Act. None of the investors at
that time appear to have been in bankruptcy proceedings.
The Fifth Circuit held that
determination of whether to enforce the Forum Selection Clause was a question
of law, and that the standards for determining whether to enforce the Forum
Selection Clause are those set forth in The Bremen v. Zapata Off-shore Co., 407
U.S. 1, 32 L. Ed. 2d 513, 92 S. Ct. 1907 (1972). Haynsworth, 1997 WL 534146, at
p. 4).
Applying The Bremen, the Fifth
Circuit rejected Haynsworth's contention that the Forum Selection Clause is
"unreasonable" because it contravenes public policy as embodied in
the antiwaiver provisions of federal securities law, Texas securities law, and
the Texas Deceptive Trade Practices Act. Haynsworth, 1997 WL 534146, citing
Allen v. Lloyd's of London, 94 F.3d 923, 928 (4th Cir. 1996), mandamus denied
sub nom. In re Allen, U.S. , 117
S. Ct. 2497, 138 L. Ed. 2d 1004 (1997); Shell v. R.W. Sturge, Ltd., 55 F.3d
1227, 1229-32 (6th Cir. 1995). Roby v. Corporation of Lloyd's, 996 F.2d 1353,
1366 (2d Cir. 1993); Bonny v. Society of Lloyd's, 3 F.3d 156, 162 (7th Cir.
1993); Riley v. Kingsley Underwriting Agencies, Ltd., 969 F.2d 953, 958 (10th
Cir. 1992). But, c.f., Richards v. Lloyd's of London, 107 F.3d 1422, 1424-30
(9th Cir. 1997). The Fifth Circuit reasoned that insistence on the application
of American securities law invited a parochial notion that all disputes in
international business transactions must be resolved under our laws and in our
courts, an approach rejected by the Supreme Court in The Bremen. Haynsworth,
1997 WL 534146, citing The Bremen v. Zapata Off-shore Co., 407 U.S. 1, 32 L.
Ed. 2d 513, 92 S. Ct. 1907 (1972) and Scherk v. Alberto-Culver Co., 417 U.S.
506, 518-21, 94 S. Ct. 2449, 2456-58, 41 L. Ed. 2d 270 (1974).
None of the cases considered above
have dealt with the unique issues presented when a forum selection clause is to
be given effect in conjunction with the federal Bankruptcy Code, where the
enforcement of that forum selection clause will result in a denial of the
benefits and protections accorded by the Code to Debtors, creditors, and the
bankruptcy estate.
In essence, the issue for
determination by this court on the motion to dismiss is not solely whether this
court (or the Federal District Court, in which original jurisdiction resides)
should address an international business transaction dispute. The threshold
issue is whether Debtors will be allowed to utilize the federal bankruptcy laws
of the United States, and whether the Debtors, their creditors and the estate
will get the same guarantees, rights, protections, and opportunities as does
any other Debtor, creditor or estate in the United States that avails itself of
this federal statute.
The Fifth Circuit has addressed the
conflict between on the one hand, litigation in bankruptcy court, and, on the
other, the mandates of a contractual arbitration clause. In Matter of National
Gypsum Co., 118 F.3d 1056 (5th Cir. 1997), the Fifth Circuit held that the
bankruptcy court had discretion to refuse to enforce an arbitration clause, on
the grounds that the arbitration clause was inconsistent with the Bankruptcy
Code, including the goal of centralized resolution of purely bankruptcy issues,
the need to protect creditors and reorganizing debtors from piecemeal
litigation, and the undisputed power of a bankruptcy court to enforce its own
orders (in that case, the discharge injunction). National Gypsum, 118 F.3d at
p. 1069. See also, Hays & Co. v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 885 F.2d 1149, 1155 (3d Cir. 1989); In re Barney's Inc., 206 B.R. 336
(Bankr. S.D.N.Y. 1997); In re Dunes Hotel Assoc., 194 B.R. 967 (Bankr. D.S.C.
1995).
The plaintiffs in the instant case
are bankrupt. They have voluntarily invoked the protections of the United
States Bankruptcy Code by filing a bankruptcy petition. These protections
include invocation of a stay, applicable to all entities, of, inter alia, the
commencement of an action or proceeding against the debtor, or to recover a
claim against the debtor; or any act to collect, assess, or recover a claim
against the debtor. 11 U.S.C. ¤¤ 362(a)(1); 362(a)(6). The stay is currently in
effect. These protections also include certain "strongarm" powers
which can be invoked by the trustee in Bankruptcy, inter alia, to avoid certain
transfers of the debtor's property which occurred immediately prior to the
filing of the debtor's petition, and which occurred while the debtor was
insolvent, or which caused debtor to become insolvent. 11 U.S.C. ¤¤ 544, 547,
548, and 549. Proceedings under these sections are "core"
proceedings. 28 U.S.C. ¤ 157(b). In a chapter 7 proceeding, these "strong
arm" powers are exercised by the chapter 7 trustee on behalf of the
bankruptcy estate; in a chapter 11 proceeding the debtors themselves exercise
these trustee powers. 11 U.S.C. ¤ 1107(a).
The complaint in the instant case
seeks relief which falls within 11 U.S.C. ¤¤ 547, 548, and 549, as plaintiffs
have contract rights in the letters of credit which have been drawn down upon,
and in letters of credit which have not yet been drawn upon, following
"standstill" agreements before the Bankruptcy court. The complaint
does not specifically invoke 11 U.S.C. ¤¤ 544, 547, 548 and 549 and indeed it
could not, at this stage, since the powers must be exercised by the chapter 7
trustee, who has not been served with notice of or entered an appearance in
this adversary proceeding. To the extent that the chapter 7 trustee or other
parties may be indispensable or necessary parties, Debtors may join them
pursuant to Bankruptcy Rules 7019, 7020.
While the United States Bankruptcy
Code may have parallels in other countries, the rights of the United States
bankruptcy trustee under the United States Bankruptcy Code, Sections 544, 547,
548, and 549 would be difficult and expensive to litigate in a foreign forum,
even were it permissible in that forum to assert those rights.
Because of the size of the claim
asserted by Defendant, the extent of Debtors' scheduled assets, and Debtors'
assertion that virtually all of Debtors' non-exempt assets are collateral for
the letters of credit at issue in the instant adversary proceeding, the instant
adversary proceeding is central to the collection of assets for distribution to
Debtor's creditors, and to the process of claims resolution to ensure that only
valid claims receive distributions.
Additionally, requiring the Debtors
to litigate their cause of action in England would undermine Debtors' fresh
start, and would effectively deny them their day in court, because of the
heightened expense of litigation abroad, for individuals who are already in
Bankruptcy. The court concludes that enforcement of the Forum Selection Clause
in the instant case would deprive Debtors of their day in court and contravene
the strong public policy of the Bankruptcy Code.
FORUM NON CONVENIENS
With respect to the forum non
conveniens argument, factors considered by courts in determining whether a case
should be dismissed on forum non conveniens grounds are the relative ease of
access to sources of proof; availability of compulsory process for attendance
of unwilling, and the cost of obtaining attendance of willing, witnesses;
possibility of view of premises, if view would be appropriate to the action;
and all other practical problems that make trial of a case easy, expeditious
and inexpensive. There may also be questions as to the enforceability of a
judgment if one is obtained. Courts weigh the relative advantages and obstacles
to a fair trial. It is often said that the plaintiff may not, by choice of an
inconvenient forum, "vex," "harass," or "oppress"
the defendant by inflicting upon him expense or trouble not necessary to his
own right to pursue his remedy. But unless the balance is strongly in favor of
the defendant, the plaintiff's choice of forum is rarely disturbed. Gulf Oil
Co. v. Gilbert, 330 U.S. 501, 67 S. Ct. 839, 91 L. Ed. 1055 (1947).
At the initial stage of litigation,
a party seeking to establish jurisdiction need only make a prima facie showing
by alleging facts which, if true, would support the court's exercise of
jurisdiction. When analyzing this preliminary showing, the facts must be viewed
in the light most favorable to the plaintiff. New Moon Shipping Co. v. Man B
& W Diesel AG, 121 F.3d 24 (2d Cir. 1997) (citing Marine Midland Bank, N.A.
v. Miller, 664 F.2d 899, 904 (2d Cir. 1981)).
In the instant case, Debtors have
made a prima facie showing that the balance is strongly in favor of retaining
jurisdiction in this court. Debtors' schedules and statement of financial
affairs indicates they cannot afford to litigate this cause of action in
England. There is no evidence to suggest that it would be fundamentally unfair
for this court to retain the instant adversary proceeding. The court concludes
that the instant motion to dismiss should be denied.
Based on the foregoing, a separate
Judgment will be entered denying Defendant's Motion to Dismiss, which this
court has treated as a Motion for Summary Judgment pursuant to Bankruptcy Rule
7012. (Docket No. 7). In light of the impending expiration of the letters of
credit and the parties' agreement, effective through October 17, 1997, not to
draw down on the additional letter of credit, a separate Expedited Pretrial
Order will be entered.
Signed at Houston, Texas on this 3rd
day of October, 1997.
LETITIA Z. CLARK
UNITED STATES BANKRUPTCY JUDGE
Footnotes
Footnotes for Opinion
1
The court notes that the Fifth Circuit's ruling in Haynsworth is not yet final,
as a petition for rehearing and a suggestion for rehearing en banc were filed
on September 12, 1997, thus preventing the issuance of mandate by the Fifth
Circuit. See, Fed. R. App. P. 41(a).
2
The court notes that First City Liquidating Trust, the successor in interest to
First City National Bank, has filed a motion seeking relief from stay in order
to allow it to liquidate Debtor's municipal bonds and apply the proceeds to
Debtor's debt based on an agreement to repay the letters of credit.