|
KENNETH F. BONNY and FRANCESCA B.
BONNY, Plaintiffs, v. THE SOCIETY OF LLOYD’S, HARRIS BANK GLENCOE-NORTHBROOK,
N.A., HARRIS TRUST AND SAVINGS BANK, BANK OF MONTREAL, NORTHFIELD VENTURE,
INC., ROBERT B. KING, LIME STREET UNDERWRITING AGENCIES LTD., ROBIN C.
KINGSLEY, ROBERT C. HALLAM, PATRICK M. CORBETT, and BANKSIDE UNDERWRITING
AGENCIES, LTD., Defendants No. 91 C 5525 UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION 784 F. Supp. 1350; 1991 U.S. Dist.
LEXIS 13554 September 26, 1991 September 27, 1991, Docketed SUBSEQUENT
HISTORY: 784 F. Supp.
at 1354; Affirmed,
Bonny v. Society of Lloyd's, 3 F.3d 156 (7th Cir. 1993) JUDGES: [**1] Joan B.
Gottschall, United States Magistrate. OPINIONBY: GOTTSCHALL OPINION: [*1354]
REPORT AND RECOMMENDATION This matter
comes before the court on plaintiffs’ motion for a preliminary injunction to
enjoin The Society of Lloyd’s ("Lloyd's") from drawing upon funds
secured by letters of credit posted by plaintiffs and to enjoin the bank
defendants from releasing such funds. The injunction is sought principally to
preserve the availability of the funds in question to satisfy any judgment
plaintiffs may recover in the underlying suit, in which plaintiffs charge
Lloyd’s and associated defendants with violations of sections 12(1) and 12(2)
of the Securities Act of 1933, 15 U.S.C. § 771(1), (2), section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 of the
Securities and Exchange Commission. Pendent claims of common law fraud, breach
of fiduciary duty, common law negligence, breach of contract and violation of
New Jersey’s blue sky laws are also asserted. Defendants'
opposition to plaintiffs’ motion for a preliminary injunction has been limited
to one issue: whether this court lacks jurisdiction over this controversy
because the Agency Agreement and Members’ Agent’s Agreement, [**2] which define the parties’ relationship, contain
forum selection and choice of law clauses providing that English law shall
govern all disputes and requiring the submission of all disputes to the
exclusive jurisdiction of an English court or arbitrator. n1 - - - - - - -
- - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - n1 The parties
refer to this issue as "jurisdiction." It is not clear that it is in
fact a jurisdictional question. - - - - - - -
- - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - The matter was
heard on that basis on September 3 and 4, and was continued until September 6
for the limited purpose of allowing defendants to present proof of English law
on the question of whether the plaintiffs, if required to litigate in England,
would have a remedy. On September 5, in addition to materials concerning
English law, defendants submitted material suggesting that plaintiffs’ claims
are time-barred. Defendants maintain that if plaintiffs’ claims are time-barred
under U.S. law, remitting plaintiffs to whatever remedies they may have under
English law cannot injure them, since they cannot prevail in an American court.
As the court indicated [**3]
to the parties in its oral remarks, this issue was raised by defendants too
late to allow for an adequate adversary presentation within the schedule the
court had ordered. While the limitations issue is a substantial one, and is
relevant to the critical issue of whether plaintiffs have shown a likelihood of
success on the merits, the court does not believe it is any more relevant to
the issue of whether plaintiffs’ claims should proceed in this forum than is
any other matter of defense. If defendants wish the court to consider this
issue (or any other matter relevant to the question of whether plaintiffs have
shown a likelihood of success on the merits), the court will hear those issues
provided adequate notice to plaintiffs and a means of insuring the maintenance
of the status quo during the time necessary for the development of an adequate
record. [*1355] The court thus turns to the issue presented by all
parties as the key question for the court’s consideration on plaintiffs’ motion
for a preliminary injunction: whether the court should decline to act given the
forum selection and choice of law clauses in the parties’ agreements. The Supreme
Court has made abundantly clear in a series [**4] of recent decisions that forum selection clauses
and choice of law clauses in freely negotiated contracts should be enforced,
absent strong public policy reasons to the contrary. See The Bremen v. Zapata
Off-Shore Co., 407 U.S. 1,
32 L. Ed. 2d 513 , 92 S. Ct. 1907 (1972) (clause in towage contract selecting
English forum should be enforced even though an English court would likely give
more weight than would an American court to contractual exculpatory clauses
favoring German tug owner over American rig owner); Scherk v. Alberto-Culver
Co., 417 U.S. 506, 41 L.
Ed. 2d 270 , 94 S. Ct. 2449 (1974) (contractual agreement to arbitrate disputes
before the International Chamber of Commerce in Paris under Illinois law should
be enforced for the resolution of fraudulent misrepresentation claims under the
1934 Securities Exchange Act); Mitsubishi Motors Corp. v. Soler Chrysler
Plymouth, Inc., 473 U.S. 614,
87 L. Ed. 2d 444, 105 S. Ct. 3346 (1985) (contractual provision requiring
submission of disputes to arbitration in Japan, under Swiss law, held
enforceable as to car dealer’s Sherman Act defense to breach of contract
claims); Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 104 L. Ed. 2d
526 , 109 S. Ct. 1917 (1989) (predispute agreement [**5] to arbitrate claims held enforceable as to claims
arising under the 1933 Securities Act, overruling Wilko v. Swan, 346 U.S. 427, 98 L. Ed. 168
, 74 S. Ct. 182 (1953)). A key consideration in many of these decisions was the
Court’s view that in contracts touching on multiple countries and
jurisdictions, forum selection and choice of law clauses eliminate significant
uncertainties and serve important policy interests. See Carnival Cruise Lines,
Inc. v. Shute, 113 L. Ed. 2d 622, [499] U.S. [585],
111 S. Ct. 1522, 1527 (1991). As the Court stated in Mitsubishi, supra,
"concerns of international comity, respect for the capacities of foreign
and transnational tribunals, and sensitivity to the need of the international
commercial system for predictability in the resolution of disputes require that
we enforce the parties’ agreement, even assuming that a contrary result would
be forthcoming in a domestic context." 473 U.S. at 629. Despite this
strong commitment to the enforcement of forum selection and choice of law
provisions in international contracts, the Supreme Court has consistently
cautioned that such clauses should not be enforced if enforcement would cause
injustice, [**6] unfairness or a violation of
important American public policy interests. The Court’s willingness to sustain
forum selection provisions has depended on its determination, particularly in
the case of claims based on American statutory rights, that resort to the
contractually-agreed upon forum will provide a means for vindicating those
rights. As the Court stated in Mitsubishi, "By agreeing to arbitrate a
statutory claim, a party does not forgo the substantive rights afforded by the
statute; it only submits to their resolution in an arbitral, rather than a
judicial, forum." 473 U.S. at 628. See also Rodriguez de Quijas, supra,
490 U.S. at 481. The difficulty
presented by the instant case arises out of the special position of Lloyd’s and
its underwriters under English law. Plaintiffs have asserted that two statutes,
the English Financial Services Act of 1986 and the Lloyd’s Act of 1982,
immunize Lloyd’s and its underwriters from liability on plaintiffs’ securities
claims. Plaintiffs argue that if they are compelled to litigate in England,
they will be barred from any redress against Lloyd’s and its underwriters. The Financial
Services Act ("FSA") [**7]
appears on it face to be a comprehensive regulatory statute governing the
securities industry. It contains various regulatory requirements and penalties.
It also contains this provision: [*1356] Other Exemptions § 42 Lloyd’s The Society of Lloyd’s and persons permitted by the Council of
Lloyd’s to act as underwriting agents at Lloyd’s are exempted persons as
respects investment business carried on in connection with or for the purpose
of insurance business at Lloyd's. Initially, it
appeared to the court, as announced orally in open court on September 6, that
this section would preclude securities actions against Lloyd's; Lloyd’s was
apparently exempt from regulation under the only securities legislation brought
to the court’s attention. Subsequent to that hearing, however, the Lloyd's
defendants presented the affidavit of John Lewis Powell, an English barrister
and Queen’s Counsel, with a commercial law practice and expertise in the areas
of financial services and professional negligence. Mr. Powell averred the
following concerning the Financial Services Act: 1) The
Financial Services Act of 1986 ("the FSA") establishes a system of
statute-backed self-regulation of the investment business. [**8] Under section 42 of the FSA, "The Society of
Lloyd’s and persons permitted by the Council of Lloyd’s to act as underwriting
agents at Lloyd’s are exempted persons as respects investment business carried
on in connection with or for the purpose of insurance business at
Lloyd's." According to Mr. Powell, the rationale for the Lloyd’s exemption
is to avoid regulatory duplication, given that Lloyd’s and Lloyd’s underwriting
agents are regulated under the Lloyd’s Act of 1982. Nevertheless, certain
provisions of the FSA are applicable to Lloyd's, specifically, sections 47, 56,
59 and 61. 2) Section 47
creates criminal penalties for misleading statements made knowingly or
recklessly; a reasonable belief that words or conduct would not create a
misleading impression may be raised as a defense to a section 47 charge. There
are geographical limitations on the reach of section 47, requiring in essence
that the misrepresentation be made in or from the United Kingdom or that the
affected person be in the United Kingdom. 3) Section 56
of the FSA prohibits "unsolicited calls" and provides for various
civil sanctions for the violation of its prohibitions. 4) Section 59
allows the Secretary of [**9]
State of Trade and Industry to issue a disqualification directive prohibiting
the Society of Lloyd’s and Lloyd’s underwriting agents from employing persons
judged to be unfit. 5) Section 61
permits the court, on application of the Secretary of State, to enjoin the
contravention or threatened contravention of sections 47, 56 or 59 by Lloyd's
or Lloyd’s underwriting agents. The section appears to include, among the
authorized injunctions, remedial orders for past violations and various
disgorgement, restitution and compensation orders. The Lloyd's
defendants maintain that section 47 provides remedies similar to those provided
by the American securities laws. This does not appear to be the case. Mr.
Powell’s affidavit indicates that section 47 provides for criminal penalties
only. Moreover, given its geographical limitations, it is doubtful that section
47 would reach misrepresentations made in the United States to United States
citizens. Section 61 would appear to have no application here, given that it
requires the initiation of litigation by the Secretary of State. The Lloyd's
defendants point out that the "exempted person" status given to the
Society of Lloyd’s under the FSA [**10]
does not protect Lloyd’s from liabilities arising other than under the FSA.
Based on § 61(9) of the FSA, n2 this appears to be the case. Accordingly, the
court concludes that it was in error in initially believing that the FSA
exemption barred all securities actions against Lloyd's. Inasmuch as no
evidence has been presented of any other statute which affirmatively provides
for suit against Lloyd's, however, the court is left to conclude that
plaintiffs would retain [*1357]
only whatever common law remedies are otherwise available under English law. - - - - - - -
- - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - n2 This
section preserves other remedies. - - - - - - -
- - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - This does not
end the matter. The situation is complicated by another statute, the Lloyd's
Act. The Lloyd’s Act provides in relevant part as follows: SECTION 14: Liability of the Society, etc DATE-IN-FORCE: 23 July 1982 (1) This section shall only exempt the Society from liability in
damages at the suit of a member of the Lloyd’s community. (2) For the purposes of this section a member of the Lloyd's
community shall be— (a) a person [**11]
who is— (i) a member of the Society; (ii) a Lloyd’s broker; (iii) an underwriting agent; (iv) an annual subscriber; (v) an associate; (vi) a director or partner of a Lloyd’s broker or an underwriting
agent; (vii) a person who works for a Lloyd’s broker or underwriting
agent as a manager; or (b) a person who has been a member of the Lloyd’s community in one
or more of the capacities listed in paragraph (a) above; or (c) a person who is seeking or who has sought to become a member
of the Lloyd’s community in one or more of the capacities listed in paragraph
(a) above. (3) Subject to subsections (1), (4) and (5) of this section, the
Society shall not be liable for damages whether for negligence or other tort,
breach of duty or otherwise, in respect of any exercise of or omission to
exercise any power, duty or function conferred or imposed by Lloyd’s Acts 1871
to 1982 or any byelaw or regulation made thereunder-- (a) in so far as the underwriting business of any member of the
Society or the costs of his membership or the business of any person as a
Lloyd’s broker or underwriting agent may be affected; or (b) in so far as related to the admission or non-admission [**12] to, or the continuance of, or the suspension or
exclusion from, membership of the Society; or (c) in so far as related to the grant, continuance, suspension,
withdrawal or refusal of permission to carry on business at Lloyd’s as a
Lloyd’s broker or an underwriting agent or in any capacity connected therewith;
or (d) in so far as related to the exercise of, or omission to
exercise, disciplinary functions, powers and duties; or (e) in so far as relates to the exercise of, or omission to
exercise, any powers, functions or duties under byelaws made pursuant to
paragraphs (21), (22), (23), (24) and (25) of Schedule 2 to this Act; unless the act or omission complained of— (i) was done or omitted to be done in bad faith; or (ii) was that of an employee of the Society and occurred in the
course of the employee carrying out routine or clerical duties, that is to say
duties which do not involve the exercise of any discretion. (4) Nothing in this section shall affect any liability of the
Society in respect of the death of or personal injury to any person, and for
the purposes of this section the expression "personal injury" means
bodily injury, any disease and any impairment of [**13] a person’s physical or mental condition. (5) Nothing in this section shall exempt the Society from
liability for libel or slander. (6) For the purposes of this section "the Society" means
the Society itself and also any of its officers and employees and any person or
persons in or to whom (whether individually or collectively) any powers or
functions are vested or delegated by or pursuant to Lloyd’s Acts 1871 to 1982. No exegesis of
this statute has been provided. By its literal terms, § 14 appears to [*1358] exempt Lloyd’s from liability in damages for any
tort, breach of duty or acts or omissions related to the conduct of its
business except insofar as bad faith is established. This bad faith exception
would presumably save plaintiffs’ fraud claims under § 10(b) of the 1934
Securities Exchange Act, as well as its Rule 10b-5 and common law fraud claims.
Insofar as this court can determine, however, it would exempt Lloyd’s from
liability for violations of the 1933 Securities Act, since liability under §
12(1) and § 12(2) does not require proof of bad faith. See, e.g., Wolf v. Banco
Nacional de Mexico, 549 F. Supp. 841, 853 (N.D. Cal. 1982), appeal dismissed,
721 F.2d 660 (9th Cir. 1983); [**14]
Basile v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 551 F. Supp. 580,
590 (S.D. Ohio 1982). Thus, from what has been presented to this court, it
appears that an English court applying English law would hold Lloyd’s immune
from liability on plaintiffs’ 1933 Act claims. If this is the
result, the court has no choice but to conclude that the choice of forum and
choice of law clauses at issue cannot be enforced. The 1933 Securities Act
provisions asserted by plaintiffs serve important public interests under
American law. The complaint in this case asserts that defendants violated these
provisions in dealing with American citizens on American soil. It is clear that
permitting Lloyd's, by a forum selection clause, to avoid liability for
putative violations of the 1933 Act would contravene important American public
policy interests. Moreover, the
1933 Act itself explicitly directs that if this is the effect of the
plaintiffs’ contracts with defendants, the contracts are void. Section 14 of
the Act provides: Any condition, stipulation, or
provision binding any person acquiring any security to waive compliance with
any provision of this subchapter or of the rules and [**15] regulations of the Commission shall be void. 15 U.S.C. §
77n. The Supreme
Court addressed this issue in Mitsubishi. There, the Supreme Court ruled that
if the effect of enforcing a contractual forum selection or choice of law
clause is to vitiate a person’s right to pursue important statutory remedies
under the law of the United States, enforcement is improper: n3 In addition to
the clause providing for arbitration before the Japan Commercial Arbitration
Association, the Sales Agreement includes a choice-of-law clause which reads:
"This Agreement is made in, and will be governed by and construed in all
respects according to the laws of the Swiss Confederation as if entirely
performed therein." The United States raises the possibility that the
arbitral panel will read this provision not simply to govern interpretation of
the contract terms, but wholly to displace American law even where it would
otherwise apply. The International Chamber of Commerce opines that it is
"conceivable, although we believe it unlikely, [that] the arbitrators
could consider Soler’s affirmative claim of anticompetitive conduct . . . to
fall within the purview of this choice-of-law provision, with the [**16] result that it would be decided under Swiss law
rather than the U.S. Sherman Act." At oral argument, however, counsel for
Mitsubishi conceded that American law applied to the antitrust claims and
represented that the claims had been submitted to the arbitration panel in
Japan on that basis. The record confirms that before the decision of the Court
of Appeals the arbitral panel had taken these claims under submission. We therefore
have no occasion to speculate on this matter at this stage in the proceedings,
when Mitsubishi seeks to enforce the agreement to arbitrate, not to enforce an
award. Nor need we consider now the effect of an arbitral tribunal’s [*1359] failure to take cognizance of the statutory cause
of action on the claimant’s capacity to reinitiate suit in federal court. We
merely note that in the event the choice-of-forum and choice-of-law clauses
operated in tandem as a prospective waiver of a party’s right to pursue
statutory remedies for antitrust violations we would have little hesitation in
condemning the agreement as against public policy. 473 U.S. at
637 n.19 (emphasis added; citations omitted). - - - - - - -
- - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - n3 Mitsubishi
dealt with Sherman Act claims. The court views the U.S. public interest in the
enforcement of the 1933 Securities Act to be at least as strong and perhaps
stronger, given Congress’ explicit command in § 14 that prospective waivers of
rights under the Act shall be invalid. - - - - - - -
- - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - [**17] As the
above-quoted language suggests, it is not certain that an English court
applying English law would invoke the Lloyd’s immunity in this case. It is at
least theoretically possible that the court would conclude that under English
choice of law principles, American law should govern the parties’ dispute. There
is no evidence, however, that this would be the case, and the court has serious
doubts that it is a reasonable possibility. Not only did the parties select
English law, which an English court could conclude indicates an intent to be
bound by English substantive law, but it appears that the protection of Lloyd's
from the interference of tort-type actions not involving fraud represents a
deliberate and explicit English public policy choice. The court cannot
reasonably conclude, in the absence of supporting evidence, that an English
court would decide the case under the 1933 Securities Act and make Lloyd's
answerable to American plaintiffs in circumstances in which English plaintiffs
would have no remedy. Unlike the situation confronting the Supreme Court in
Mitsubishi, no one has given this court reason to believe that plaintiffs'
claims would be submitted to an English [**18] court on the basis of American statutory law. n4 - - - - - - -
- - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - n4 Because it
appears that Lloyd’s immunity represents an important English public policy
choice, the court is not convinced that the Lloyd’s defendants’ agreement not
to "argue that [plaintiffs’ 1933 Act claims] fall within the provisions of
§ 14 of the Lloyd’s Act" adequately assures that the rights sought to be
vindicated by the 1933 Act will be adequately protected by an English court.
Defendants implicitly suggest that Lloyd’s statutory immunity is waiveable. But
if the Lloyd’s immunity represents English public policy, it is unlikely that a
court would disregard it, whether it was argued by Lloyd’s or not. - - - - - - -
- - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - For the above
reasons, the court concludes that plaintiffs have shown a likelihood of success
on the merits on the issue of plaintiffs’ right to bring suit in this court. With respect
to irreparable injury, the issue is straightforward. If defendants are
permitted to withdraw the funds secured by plaintiffs’ letters of credit, will
plaintiffs lose the possibility [**19]
of a remedy for their 1933 Act claims? Given the conclusion that it is likely
that plaintiffs will prevail on the merits of their jurisdictional argument and
be permitted to proceed to trial here, the question becomes whether a judgment
in plaintiffs’ favor on those claims would be enforced by an English court. The
court explicitly put this issue to defendants, making clear its view that if
the answer were in the affirmative, it would recommend the denial of
plaintiffs’ motion, given the balance of harms and public interests involved.
Defendants did not offer any evidence concerning English law on the enforcement
of foreign judgments, either in general or in the specific case of judgments that
might contravene English public policy. The court is thus compelled to conclude
that the funds plaintiffs seek to freeze are the only funds likely to be
available to satisfy a judgment in plaintiffs’ favor. In the court’s view,
losing all possibility of monetary recompense is substantial irreparable
injury. The court has
previously discussed the balance of harms and public policy interests that
weigh in the balance here. (See transcript of September 4 at 104-106;
transcript of September 6 at [**20]
158-159). Briefly summarized, while Lloyd’s will not be seriously injured by a
delay in the transmission of the approximately $ 400,000 in question, the
injunction sought by plaintiffs, if granted, would render uncertain Lloyd's
ability to call on its names’ funds, an essential aspect of its venerable way
of doing business. [*1360] The introduction of delay and
uncertainty into Lloyd’s ability to call upon the funds required to make good
on its obligations would be extremely damaging to its manner of doing business.
In addition,
there are significant public policy interests which militate against injunctive
relief in this case. They were well-stated by the Supreme Court in Mitsubishi,
see page 4, supra, and need not be repeated here. This court, however, concludes
that these interests must yield to Congress’ explicit directive that a
contractual provision which has the effect of binding plaintiffs to waive
compliance with the 1933 Securities Act is void. 15 U.S.C. § 77n. Further, the
Supreme Court in Mitsubishi, even in the absence of such an explicit
congressional directive, made clear that where choice of forum and choice of
law clauses operate in tandem as a prospective waiver [**21] of a party’s right to pursue statutory remedies
under American law, such clauses must be condemned as contrary to American
public policy. On the basis
of the issues presented to this court, it is accordingly recommended that
plaintiffs’ motion for a preliminary injunction be granted. If, however, the
court is assured that the status quo will be maintained pending the hearing of
defendants’ arguments relating to limitations, it would be this court's
recommendation that any decision on plaintiffs’ motion be deferred pending the
resolution of the limitations issue. n5 - - - - - - -
- - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - n5 While the
court is sympathetic to defendants’ desire to avoid entry of an injunction if
there is a legitimate basis for that result, defendants’ request that the court
proceed to consider issues not initially presented is potentially unfair to the
plaintiffs. If defendants wish to put the plaintiffs to their proof on issues
other than the choice of forum and choice of law clauses, contrary to what the
court understands to have been the parties’ initial mutual understanding,
plaintiffs must have notice of defendants’ change of position and an
opportunity to be heard. In the present posture of the case, the court would
have to address defendants’ limitations argument without any input from
plaintiffs. - - - - - - -
- - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - [**22] Counsel are
given ten days from the date hereof to file objections to this Report and
Recommendation with the Honorable Nicholas J. Bua. Failure to object
constitutes waiver of the right to appeal. n6 - - - - - - -
- - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - n6 The
district court should be aware that the district court in Colorado recently
reached a contrary decision. Riley v. Kingsley Underwriting Agencies, Ltd., et
al., No. 91 C 1411 (Aug. 30, 1991). This court has read the transcript of those
proceedings. It does not appear that the court considered the conflict between
the Lloyd’s Act immunity and the non-fraud causes of action of the 1933 Act. - - - - - - -
- - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - |