SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK: IAS PART 49
-------------------------------------x
THE SOCIETY OF LLOYD'S,
Plaintiff,
Index
No. 604065/98
-against-
LORRAINE GRAVES GRACE and
OLIVER R. GRACE,
Defendants
-------------------------------------x
Herman Cahn, J.:
Plaintiff The Society of Lloyd's
("Lloyd's") moves, pursuant to CPLR ¤ 3213 and E 5303, for an order
granting summary judgment in lieu of complaint enforcing final judgments
entered by the High Court of Justice, Queen's Bench Division, in London,
England on March 11, 1998, against defendants Lorraine Graves Grace and Oliver
R. Grace (hereinafter "Graces") in the amounts of UK œ206,685.37 and
UK œ269,293.70, respectively, based on the Graces' participation as insurance
underwriters in the Lloyd's market.
Defendants oppose the motion on the
grounds that they were fraudulently induced to participate in the Lloyd's
market and the English judgments were obtained by Lloyd's in violation of the
Graces' rights to due process. For the reasons stated below, the motion is
granted.
Defendant Lorraine Grace became a
member of a Lloyd's syndicate, i.e, a Name, on January 1, 1979. Her son,
defendant Oliver Grace Jr., became a Name on January 1, 1986. The Graces
acknowledge that the forms they signed warned them that their liability was
unlimited and that insurance underwriting was a risky venture in which they
could lose or make money in a given year or in a given syndicate. In order to
properly understand their claims and defenses, some background information as
to Lloyd's is necessary.
Lloyd's is a large and complex
insurance market composed of numerous underwriting syndicates, which, for more
than three hundred years, has offered insurance and reinsurance of risks all
over the world. Lloyd's itself is not an insurer and does not underwrite
insurance. Rather, pursuant to a succession of parliamentary Acts (the Lloyd's
Acts of 1871-1982), Lloyds regulates the competition among its member
syndicates for underwriting business. (See Richards V. Lloyd's of London 135
F.3d 1289, 1291 [9th Cir.], cert. denied, ___ US ___, 119 S.Ct. 365, 142
L.Ed.2d 301 [1998]). Lloyd's is governed by two governing bodies, the Council
and Committee of Lloyd's, which promulgate regulations and enforce compliance
therewith. (See, Roby v. corporation of Lloyd's, 996 F.2d 1353, 1357 [2d Cir.],
cert. denied, 510 US 945 [1993]).
There are currently more than three
hundred syndicates within the Lloyd's market, many of which specialize in
underwriting specific types of risks. The syndicates themselves are composed of
individuals, called "Names", who group together to underwrite the
risks and provide the capital for such underwriting. By forming syndicates, the
Names are able to underwrite larger risks than they could as individuals.
Each syndicate within the Lloyd's
market is managed by a Managing Agent, whose responsibilities include
attracting both capital and underwriting business. (See, Roby v Corporation of
Lloyd's, supra at 1357). The Managing Agent owes a contractual duty to the
Names to manage the syndicate with reasonable care and skill (See, id.)
Originally, Managing Agents were also responsible for recruiting new Names to
the market. (See The Society of Lloyd's v. Ashenden, ___ F.Supp. ___, 1999 WL
284775 [N.D. Ill. 1999] at 3). However, since the 1960's, individuals known as
"Members' Agents" have served to recruit new Names.
(See id.). The Members' Agents also assist Names in
selecting syndicates and provide certain administrative services, including
accounting, tax and investment assistance. (See, id.)
In order to become a Name, an
individual must provide proof of his or her financial means and deposit an
irrevocable letter of credit in favor of Lloyd's. (See, Richards v. Lloyd's of
London, supra, at 1292). The individual must also travel to England to
acknowledge the attendant risks of participating in a syndicate and sign a
General undertaking which, among other things, contains choice of forum
(England) and choice of law (English) clauses. (See, id.) Specifically, those
clauses state that:
2.1 The rights and
obligations of the parties arising out of or relating to the member's
membership of, and/or underwriting of insurance business at, Lloyd's and any
other matter referred to in this undertaking shall be governed by and construed
in accordance with the laws of England
2.2 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....
By signing the General undertaking, each Name also agrees,
in paragraph 1,
to comply with the provisions of
Lloyd's Acts 1871-1982, any subordinate legislation made or to be made
thereunder, and any direction given or provision or requirement made or imposed
by the Council or any person(s) or body acting on its behalf pursuant to such
legislative authority and shall become a part to, and perform and observe all
the terms and provision of any agreements of other instruments as may be
prescribed and notified to the Member or his underwriting agent by or under the
authority of the Council.
In addition to executing the General
Undertaking, each prospective Name enters into a "members' Agent's
Agreement" which establishes a fiduciary relationship between the members'
Agent and the Name. This agreement contains a choice of forum clause (England),
as well as arbitration and choice of law (English) clauses. (See Roby v
Corporation of Lloyd's, supra at 1358) Additionally, the Members Agent's
Agreement specifically authorizes the Members' Agents to enter into a third
agreement on behalf of the Name, called the "Managing Agent's Agreement."
(See, id.) That agreement, which is apparently not signed by the Names
themselves, "defines the rights and obligations of the Managing Agent of a
syndicate and that syndicate's Names, and also contains choice of forum
(England), arbitration and choice of law (English) clauses." (Id.).
"In turn, the Managing Agent's Agreement authorizes the Managing Agents to
enter, on behalf of themselves, the Names and the Members' Agents, into a
'Syndicate and Arbitration Agreement' which requires disputes related to the affairs
of the particular syndicate to be arbitrated in London." (Id.)
Once an individual becomes a Name,
he or she is permitted to participate in more than one syndicate and many Names
do so in order to spread their risk over several different types of insurance.
(See, Richards v. Lloyd's of London, supra at 1292). As of 1996, Lloyd's had
approximately 34,000 Names, from 80 different countries. (See, Allen v. Lloyd's
of London, 94 F.3d 923, 927 [4th Cir. 1996]) This included more than 3000
Americans who represented more than one billion dollars in capital. (See, id.;
Roby v. Corporation of Lloyd's, E, at 1357).
Names can potentially receive
profits from two sources: 1) underwriting profits, i.e. the amount by which the
premiums exceed the claims; and 2) investment profits on a premium trust fund. (See, The Society of
Lloyd's v. Ashenden, supra, at 2). Names earn profits in proportion to their
capital contributions. (See, Roby v. Corporation of Lloyd's, supra at 1357).
However, Names also bear unlimited liability for the proportionate losses of
each syndicate they join. "Their liability is several, not joint; no Name
is ever responsible for the losses of those fellow Names who comprise the
syndicate." (Id.). Thus, "When a Name undertakes an underwriting obligation,
that Name is responsible only for his share of an agency's losses; however, his
liability is unlimited for that share." (Richards V. Lloyd's of London,
supra at 1292). It has been stated that Names are committed to cover losses
from their personal assets "down to their last cufflinks". (Allen v.
Lloyd's of London, supra at 926).
In addition to the Names' assets,
the stability of the Lloyd's market is also assured by a Central Fund, which is
created from assessments of Names. The market's managing body, the Council of
Lloyd's, controls and maintains these funds to disburse to insureds when Names
default. (See, id.)
Each syndicate in the Lloyd's market
is a one year venture. During that year, the syndicate accepts premiums and
issues policies. On December 31st the syndicate stops accepting new business.
Although the syndicate is a one year venture, it operates under a three year
accounting cycle. (see, id. at 927). At the end of the third year after a given
syndicate is formed, its underwriting profits and losses for the given year are
calculated. (see id.). Customarily, the syndicate's estimated liabilities are
then reinsured by another syndicate. (See, id.) This procedure allows Lloyd's
to reinsure undischarged risks in order to close the account for the given
year. (See, id.) - However, "when the magnitude of potential liabilities
for a syndicate cannot reasonably be estimated at the end of three years, the
syndicate cannot reinsure them, and the participating Names remain liable on
their undertaking." (id.).
It is undisputed that Lloyd's has
been profitable for most of its long existence. (E, Haynsworth v. The
Corporation, 121 F.3d 956, 960 [5th Cir.1997), cert. denied ___ us ___ , 118
S.Ct. 1513, 140 L.Ed.2d 666 [1998) However, at some point during the late
1980's and early 1990's, Lloyd's began experiencing unusually large losses
stemming from asbestos and pollution claims, as well as claims from a series of
catastrophic events, including Hurricane Hugo and the bombing of Pan Am Flight
103. (See, Haynsworth v. The Corporation, supra at 960; Allen v. Lloyd's of
London, supra at 927). The losses caused by these events was far greater than
the amounts of premiums that had been collected. In fact, Lloyd's has estimated
that its losses for the years before 1993 will likely exceed $22 billion. (See,
Haynsworth v. The Corporation, supra at 960; Allen v. Lloyd's of London, supra
at 927).
The massive losses sustained
eventually spawned large numbers of lawsuits, including many in the united
States. Many of these suits were commenced by Names, including the Graces, who,
among other things, accused managing agents arid Members' Agents of
mismanagement in assessing risks and of fraud in assessing and disclosing the
risks to Names when they were choosing syndicates. (See, Allen V. Lloyd's of
London, supra at 927). The Names claimed that they had been fraudulently
induced to join syndicates without being warned that they would be exposed to
potentially massive liability for so-called "long-tail" claims such
as asbestos and pollution claims.
One of the central issues in these
cases was the viability of the forum selection and choice of law clauses
contained in the General Undertaking which required the Names to litigate all
their claims in England, subject to English law. The Names argued, among other
things, that enforcement of these clauses would violate united States public
policy because it would constitute a waiver of their rights to protection under
the anti-fraud provisions of the United States' securities laws.
Despite the Names' objections, the
forum selection and choice of law clauses have withstood repeated scrutiny in
United States courts In tact, these clauses have already been upheld in seven
federal circuits. (see, e.g. Stamm V Barclays Bank of New York, 153 F.3d 30 [2d
Cir. 1998]; Roby v. Corporation of Lloyd's, 996 F.2d 1353, [2d Cir.], cert.
denied, 510 US 945 [1993] Richards v. Lloyd's of London, Z35 F.3d 1289, [9th
Cir.], cert. denied, ___ US ___, 119 S.Ct. 365, 142 L.Ed.2d 301 [1998]; Haynsworth
v. The Corporation, 121 F.3d 956, 969 [5th Cir.l997], cert. denied, --- U.S.
----, 118 S.Ct. 1513, 140 L.Ed.2d 666 (1998); Allen v. Lloyd's of London, 94
F.3d 923, 929-30 [4th Cir. 1996]; Shell v. R.W. Sturge, Ltd., 55 F.3d 1227,
1230- 31 [6th Cir.1995]; Bonny v. Society of Lloyd's, 3 F.3d 156, 160-62 [7th
Cir.1993], cert. denied, 510 US 1113 [1994]; Riley v. Kingsley Underwriting
Agencies. Ltd., 969 F.2d 953, 958 [10th Cir.], cert. denied, 506 US 1021
[1992]).
In each case, the court rejected the
Names' assertion that enforcement of the clauses would violate United States
public policy. Central to these decisions were the courts' conclusions that
English law provided the Names with a suitable forum in which to bring their
fraud claims and a sufficient remedy in the event that their claims were
successful. For instance, in Allen, the court stated
We do not believe that enforcing the
parties' forum selection and choice of law provisions in this case will subvert
the United States securities laws' policy of prohibiting fraud. British law not
only prohibits fraud and misrepresentations as do the United States securities
laws, but also affords Names adequate remedies in the United Kingdom. Under
British law, the Names could bring claims based on the tort of deceit, breach
of contract, negligence, and breach of fiduciary duty, and could obtain
injunctive, declaratory, rescissionary, and restitutionary relief.
(94 F.3d at 929) - Significantly, the court noted that the
mere fact that an international transaction is subject to laws and remedies
different or less favorable than those of the United
States is insufficient to deny enforcement of the
transaction. (Id.) Thus, "To permit the Names to escape their agreements
to be bound by the law and rules of the British market just at a time when they
face losses would... violate the most fundamental precepts of international
comity." (Id. at 930).
In Haynsworth, the court reached a similar conclusion, stating,
"[w]e refuse to accept the notion.. that the sheer scope of U.S.
securities law automatically renders that of other countries inferior or should
provide American investors a means to escape their contractual obligations when
they begin to prove too costly." (121 Fad at 969). "The view that
every foreign forum's remedies must duplicate those available under American
law would render all forum selection clauses worthless and would severely
hinder Americans' ability to participate in international commerce."
(Id.). The court went on to state that
Indeed, in some respects English law
appears to provide even greater protections than does U.S. law. See Roby, 996
F.2d at 1365 (noting the "low scienter requirements" of English
misrepresentation law). The plaintiffs' remedies in England are adequate to protect
their interests and the policies
behind the statutes at issue. Having previously enjoyed the benefits of Lloyd's
contractual obligations to them, the plaintiffs must now live up to theirs as
well.
(Id. at 969-70).
As noted above, the Graces
themselves have previously challenged the validity of the forum selection and
choice of law clauses. In 1996, the Graces commenced an action in the U.S.
District Court for the Southern District of New York, asserting claims for
violation of the New York State consumer protection laws, common law fraud,
breach of fiduciary duty, and breach of the duty of utmost good faith. The
district court dismissed the complaint on the grounds that the forum selection
clause required the Grace's claims to be brought in England, under English law
and the Graces had failed to demonstrate any reason why those clauses should
not be enforced. (Grace v. Corporation of Lloyd's, 1997 WL 607543 (SDNY 1997).
In addition to commencing fraud
suits, many Names found themselves unable or unwilling to satisfy their
underwriting obligations and they began to incur debts to the Central Fund,
which led to additional litigation between Lloyd's and the Names. (See, Allen
v. Lloyd's of London, supra at 927). The end result of all these events was
that the integrity and viability of the entire Lloyd's market was placed in
jeopardy.
Lloyd's thereupon developed a
massive restructuring and settlement plan in 1996 which it called the Plan for
Reconstruction and Renewal ("R&R Plan"). The plan was designed to
provide reinsurance to the over-taxed syndicates within the market and to
resolve the increasing intra-market litigation which was hindering the market's
ability to function.
The R&R Plan had two essential
components. First, the intra-market litigation would be settled by having
Lloyd's and all the Names who accepted the Plan grant each other mutual
releases. (See, The Society of Lloyd's v. Ashenden, ___ F.Supp. ____, 1999 WL
284775 [N.D. Ill. 1999) at 5). In exchange, the settling Names would receive a
total of approximately $4.8 billion in credits. (Allen v. Lloyd's of London, E
at 927). The settling Names would also agree to pay all outstanding obligations
for years of account after 1992. (E, The Society of Lloyd's v. Ashenden, supra
at 5).
The second feature of the Plan was
the reinsurance of the Names' pre-1993 underwriting obligations by a newly
formed independent company called Equitas Reinsurance Ltd. Equitas was funded
by several sources, including payments from the Central Fund and a premium
payment assessed by Lloyd's on the Names. Each Name was sent a "finality
statement" which set forth the amount of the premium they had to pay in
order to receive reinsurance from Equitas. Lloyd's calculated this amount on
the basis of the exposure of each Name's syndicates to pre-1992 risks. (See,
The Society of Lloyd's v. Ashenden, supra at 6).
One of the main goals of the R&R
Plan was to enable the Lloyd's market to function without being stalled by
litigation. In order to accomplish this, the Plan included several key features
which are germane to the instant action. First, paragraph 5.5 of Plan contained
a so-called "pay now, sue later" clause which barred the Names from
claiming any set-offs to the Equitas premium, including any claims for damages
for fraud. (See Id at 7) - This clause stated, inter alia that:
Each Name shall be obliged to and
shall pay his Name's Premium in all respects free and clear from any set-off,
counterclaim or other deduction on any account whatsoever including in each
case, without prejudice to the generality of the foregoing, in respect of any
claim against ERL, the Substitute Agent, any Managing Agent, his Members'
Agent, Lloyd's or any other person whatsoever...
This clause further contained a
waiver of any stay of execution in connection with a judgment for the Equitas
premium obligation.
Paragraph 5.10 of the Plan contained
a so-called "conclusive evidence" clause, which provided that the
Lloyd's calculation of the premium owed by the Name would constitute
"conclusive evidence as between the Name and [Equitas) in the absence of
manifest error." (See, AM- at 7). Finally, at the same time that the
R&R Plan was adopted, Lloyd's enacted a bylaw which specifically authorized
a substitute agent to enter into the Plan on the Names' behalf Thus, a Name
could be bound by the Plan even if he or she originally rejected it: Lloyd's
based its authority to enact this bylaw on a 1983 bylaw which empowered the
Lloyd's Council to appoint substitute agents in general, and the 1982 Act which
authorized the Council to "'make such bylaws as from time to time seem
requisite or expedient' to further the
objects of the Society" (See, id. at 6-7)
According to Lloyd's, less than 5%
of the Names rejected the R&R Plan and an even smaller number refused to
make premium payments. However, a certain number of Names, including the
Graces, did reject the plan and refused to make payments. Lloyd's responded by
appointing a substitute agent to accept the plan on behalf of those Names.
Thereafter, on November 18, 1996, Lloyd's commenced proceedings against the
non-accepting Names, including the Graces, in the High Court of Justice,
Queen's Bench Division, in London. These proceedings sought payment of each
Name's respective Equitas premium plus unpaid interest thereon.
These proceedings essentially became
test cases of each of the aforementioned clauses. The first case held that
Lloyd's was authorized to create Equitas and to appoint substitute agents to
bind non-settling Names to the reinsurance plan. This ruling was affirmed on
appeal. (See, Id. at 7). The second case upheld the validity of the "pay
now, sue later" clause. This ruling was also affirmed on appeal. (E, AM.).
Finally, a third test case upheld the validity of the "conclusive evidence"
clause. Leave to appeal this ruling was denied. See, id.).
Significantly, the English courts
rendered the judgments in favor of Lloyd's despite their finding that the Names
had put forth some evidence which supported the allegations that they had been
fraudulently induced to participate in the Lloyd's market (see, e.g., The
Society of Lloyd's v. Fraser & Ors, at 7 [Court of Appeal, July 31, 1998).
In fact, the English courts assumed for the purpose of the proceedings that
there were arguable allegations of fraud and misfeasance on Lloyd's part. (See,
id. at 16). Despite this, the courts entered judgment in favor of Lloyd's on
the grounds that, among other things, the pay now, sue later clause" was
legitimately enacted and it prohibited the Names from relying on fraud as a
defense or a set-off to Lloyd's claims, notwithstanding the possibility of such
fraud. Thus, the Names were required to pursue any claims for fraud in a
separate, later action.
As noted above, the English
proceedings resulted in final judgment against Lorraine Grace and Oliver Grace,
Jr. in the amounts of UK œ206,685.37 and UK œ269,293.70, respectively. Lloyd's
now moves to enforce those judgments. The Graces oppose the motion on the
grounds that: 1) the judgments were rendered in violation of the Graces' rights
to due process; and 2) the judgments violate New York public policy.
Generally, a judgment: which is duly
entered in a foreign country is enforceable in New York pursuant: to the
Uniform Foreign Country Money Judgments Recognition Act (See, CPLR ¤¤ 5301-07).[1]
[1] The provisions in the CPLR are based upon the
Restatement of the Foreign Relations Law of the United States, 3d, ¤482. (See,
Robinson v. Robinson, 120 AD2d 415).
Such a judgment is enforceable by motion for summary
judgment in lieu of complaint, provided that the judgment: is final, conclusive
and enforceable in the forum in which it was rendered. (E, CPLR ¤ 5302,
5303). As a general rule, New York courts will recognize foreign judgments
under the doctrine of comity, provided those judgments are based upon
recognized
principles of jurisdiction and due process. (Greschler v.
Greschler , 51 NY2d 368; Robinson v. Robinson, 120 AD2d 415; Porsini v.
Petricca, 90 AD2d 949; Wehbe v. Continental Insurance Co., 1995 WL 619936 [NY
Sup. 1995, Cahn, J.]). This policy serves the purpose of protecting the
interests of New York citizens in foreign countries by encouraging reciprocal
accommodation in enforcing judgments. (Wehbe v. Continental
Insurance Co., supra at: 3). "Accordingly, one who has appeared in a
foreign action is ordinarily precluded from attacking the foreign judgment
through the commencement of a collateral action in New York, unless a showing
is made that the judgment may not or should not be recognized pursuant to the
provisions of CPLR ¤ 5304." (Id.).
The Graces argue that the judgments
entered against: them in England are not enforceable in New York because the
English judicial system did not follow procedures which are compatible with due
process of law, CPLR 5304 (a) (1). specifically, the Graces argue that they
were deprived of due process because they were not afforded a hearing on the
merits of their fraud claims prior to the entry of the judgments against them.
(See U.S. v. James Daniel Good Realty, 510 U.S. 43 [1993]; Mathews v. Eldridge,
424 US 319 (1976)) They also claim that they were denied due process because,
based on the "conclusive evidence" clause, they were denied the
opportunity to challenge the amounts sought from them by Lloyd's which formed
the basis for the ultimate judgments against them.
In support of their argument, the
Graces rely on U.S. v. James Daniel Good Realty, supra and Mathews v. Eldridge,
supra, which hold that, absent extraordinary circumstances, due process
requires that property may not be seized without prior notice and a meaningful
opportunity to be heard. (See, 510 US at 53; 424 US at: 335). In determining
whether due process has been satisfied, the court must consider: 1) the private
interest affected by the official action; 2) the risk of an erroneous
deprivation of that interest through the procedures used, as well as the
probable value of additional safeguards; and 3) the government's interest in
seizing the property, including the administrative burden that additional
procedural requirements would impose. (U.S. v. James Daniel Good Realty, 510
U.S. 43, 53; Mathews v. Eldridge, 424 US 319, 335; see, Mental Hygiene Legal
Service ex rel. Aliza K. v. Ford, 92 NY2d 500). [In the case of a dispute
between private parties rather than between an individual and the government,
the court must consider the interest of the party seeking the prejudgment
remedy, with 'due regard for any ancillary interest the government may have in
providing the procedure or forgoing the added burden of providing greater protections.'"
(Tri-State Development. Ltd. v. Johnson, 160 F.3d 528, 531 [9th Cir. 1998],
quoting, Connecticut v. Doehr, 501 US 1, 11 [1990]
The Graces assert that their private
interest is readily apparent, i.e the amount of the judgments against them.
They further assert that because it is a "virtual certainty" that
they were defrauded by Lloyd's, the risk of erroneous deprivation of this
interest is enormous. Finally, they argue that there is no reason here for them
to be deprived of the opportunity to challenge the amount of the judgments
before having to pay them. They assert that there is no longer any need to make
Names pay now and sue later in order to protect policyholders because Equitas
became fully funded when Lloyd's paid it the premiums of all the non-settling
Names and received an assignment of the claims against those Names. Therefore,
any exigent circumstances which might have once existed, e.g. the need to fund
Equitas so that reinsurance would be immediately available, no longer exists,
and the money paid by the Graces would go to Lloyd's, not to policyholders with
claims.
The same arguments were recently
considered in another action commenced by Lloyd's to enforce judgments against
non-settling American Names. In The Society of Lloyd's v. Ashenden, ___ F.Supp.
____, 1999 WL 284775 [ND. Ill. 1999), Lloyd's brought an action in the district
court for the Northern District of Illinois against certain Names, seeking
recognition of the English judgments, based on the Illinois Uniform Foreign Judgments
Recognition Act, 735 ILCS 5/12-618, et seq.
In Society of Lloyd's v. Ashenden,
the defendant Names had rejected the R&R Plan and had instructed their
Members' Agent not to execute it on their behalf, In the meantime, Lloyd's paid
the insurance premium on the Names' behalf and received an assignment from
Eguitas of its claims against the non-paying defendant Names. Lloyd's then
obtained judgments against the Names in England and commenced the federal court
action in Illinois, seeking to enforce those judgments.
The Names opposed the action on the
grounds that: 1) "the judgment were rendered under a court system that
allowed procedures incompatible with our requirements of due process"; and
2) "the contractual provisions on which the judgments are based is
repugnant to the public policy of Illinois." (Society of Lloyd's V.
Ashenden, supra at 11).
The district court granted Lloyd's
motion for summary judgment. First, the court noted that, indeed, it appeared
that the judgments had been obtained without the Names being permitted to
seriously challenge Lloyd's claims. (Id. at 15). This had occurred because,
based on the "pay now, sue later" clause and the "conclusive
evidence" clause, the Names were not permitted to pursue their claims for
a set-off based on their claims of fraud, and they were not allowed to contest
the amount of the premiums set. (Id.). The court concluded, however, that based
on the factors set forth in U.S v. James Daniel Good Realty, supra and Mathews
v. Eldridge supra, the Names due process rights were not violated merely
because they had to delay their claims against Lloyd's.
In its analysis, the court noted
that the private interest at risk in the English procedure would be the Names'
"right to a judgment based on an accurate claim by Lloyd's and their right
to offset from the judgment any damage done to them as a result of fraud."
(Society of Lloyd's v. Ashenden, supra at 17). Moreover, the risk of erroneous
deprivation "is of course the chance that the [Names will be faced with a judgment
in excess of what they rightfully owe, considering the accuracy of the claim
against them and the amount of set-off they may be entitled to." (Id.).
The court noted that "[d]enial
of a pre-deprivation hearing or remedy does not automatically render procedures
violative of the due process clause if there is a provision for an effective
post-deprivation remedy and there is good cause to put off the hearing."
(Id. at 15, citing Bowles v. Willingham 321 US 503, 519; Phillips v.
Commissioner, 283 US 589). "Since the court procedures to determine the
amount actually owed and the setoff are essentially the same, whether in the
collection suit or later in a separate suit, there would be no greater risk to
an ultimately correct resolution of the Names' rights vis a vis Lloyd's, if
they are required to wait to resolve these rights in a post-deprivation
lawsuit." (Society of Lloyd's v. Ashenden, supra at 15). Although the
Names might have to pay Lloyd's the entire amount claimed before their own
claims were adjudicated, such a delay was warranted based on the necessity of
allowing Lloyd's to implement the R&R Plan without having to litigate the
amount of each Name's payment and their fraud claims. (Id. at 18) The court
specifically noted the importance of the Lloyd's market to the British economy
as well the need to protect Lloyd's insureds and the Names themselves by making
sure that reinsurance protection was available. (14. at 18-19). Finally, the
court rejected the Names' argument that the appointment of a substitute agent
violated Illinois public policy. (14. at 22).
The Names subsequently moved the
district court to alter or amend the judgment. However, that motion was denied.
In that ruling, the court reiterated its finding that the Names, through their
membership in Lloyd's, had agreed to be bound by the laws and by-laws which
governed it, which laws and by-laws included the creation of the R&R Plan
and which provided for substituted consent by a substitute agent. (Society of
Lloyd's v. Ashenden, 98 C 5335 [N.D. Ill., 8/18/99 at 2). Thus, the Names had
received all the process that was due to them by being permitted to participate
in the English actions to determine whether Lloyd's actions comported with
English contractual and statutory law. (14.). In its ruling, the court
specifically rejected the Names' argument that exigent circumstances no longer
existed because Equitas was fully funded. (14. at 3). The court noted that
Lloyd's was "saved" only because most Names were willing to accept
the R&R Plan and delay the litigation of their claims against Lloyd's.
(Id.). "It would not be appropriate to change the rules in mid-stream,
allowing the Ashendens and others who were placed into the plan through the
actions of the substitute agent, to get relief through litigation and delay,
while others who were more agreeable forewent such actions." (Id.)
For reasons that the court in
Society of Lloyd's v. Ashenden, supra, found that the Ashendens were not
deprived of their due process rights by having judgment entered against them
before they had the opportunity to litigate their fraud claims and to challenge
the amounts of the judgments, this court arrives at a similar decision in this
case. The defendants herein have not been denied of their due process rights, even
though they may well eventually be able to prove their fraud claims.
First, it is undisputed here that
the Graces were notified of the English proceedings commenced by Lloyd's and
that the Graces participated in those proceedings before judgment was entered
against them. Therefore, the court is not persuaded by the Graces' argument
that the pay now, sue later" and "conclusive evidence" clauses
are the functional equivalent of a cognovit, pursuant to which an obligor
consents in advance to a creditor's obtaining a judgment without notice to the
obligor or a hearing. (See, Fiore v. Oakwood Plaza, 78 NY2d 572, 578, cert.
denied, 506 US 823 [1992)). The Graces participated in a hearing in England
which resulted in the entry of judgment against them and in the postponement of
their challenges to the amount of the judgment. Thus, they were not deprived of
notice and an opportunity to be heard.
The gravamen of the Graces' argument
is that they are being required to pay the judgment prior to litigating their
challenges to that judgment in a subsequent action. Unquestionably, the Graces
have an interest at risk here, i.e. their rights to a proper judgment and to
offset from the judgment any damage sustained by them as the result of
fraudulent conduct: by Lloyd's. (See, Society of Lloyd's v. Ashenden, supra at
17). However, the Graces knowingly and willingly agreed, in the General
Undertaking, to litigate their claims against Lloyd's in the English courts,
under English law. Now, the English courts have determined that the "pay
now, sue later" and "conclusive evidence" clauses were validly
enacted by Lloyd's and that those clauses bar the Names from litigating their
claims against Lloyd's before paying their Equitas premium. While this is not a
procedure which the Graces, or any similarly situated Name, is likely to
prefer, it is one which Lloyd's had a valid reason for enacting and the English
courts had a sufficient reason to uphold, i.e. to ensure that the R&R Plan
would be immediately implemented, so that Lloyd's could continue to function.
Although Lloyd's is not a
governmental entity, there is no question that it is a vital part of the
British economy and the British government has taken steps, via the various
Lloyd's Acts, to ensure the continuing viability of the Lloyd's market.
Most importantly, the Names still
have viable remedies in the English courts. The courts of this country have
repeatedly held that English law is adequate to discourage fraud and
misrepresentation, and the English courts can provide the Names with a
sufficient remedy should a fraud be proven. (See, e.g. Stamm v. Barclays Bank
of New York, supra; Roby v. Corporation of Lloyds's, supra; Haynsworth v. The
Corporation, supra; Allen v. Lloyd's of London, supra; Shell v. R.W. Sturge.
Ltd., supra; Bonny v. Society of Lloyd's, supra). English law provides causes
of action against both the Member and Managing Agents for, among other things,
fraud, breach of fiduciary duty, and negligent misrepresentation. (See,
Richards v. Lloyd's of London, supra at 1296) Also, some English courts have
already awarded substantial judgments to other Names. (Id, citing Arubuthnott
v. Fagan and Feltrim Underwriting Agencies Ltd., 3 Re LR 145 (H.L.1994); Deeny
V Gooda Walker Ltd., Queen's Bench Division [Commercial Court], The Times 7
October 1994).
The argument has been made that
enforcement of the English judgments would violate the public policies of the
United States, and New York in particular, of protecting citizens against fraud
in the sale of securities. The Graces argue that recognition of the judgments
would violate these policies because the Graces were fraudulently induced to
invest in the Lloyd's market and they have no adequate means by which to pursue
their fraud claims in England. At oral argument, the New York State Attorney
General's office also asserted that New York State public policy would be
violated by allowing the English judgments to be enforced in New York before
the Graces, or any other New York Names, are permitted to litigate their fraud
claims in England.
"While it is generally the rule
in this State that where the basic public policy of the forum would be offended
a court can refuse to recognize the validity of a foreign judgment, the public
policy exception to the doctrine of comity is usually invoked only in the rare
instance 'where the original claim is repugnant. to fundamental notions of what
is decent and just in the State where enforcement is sought." (Greschler
V. Greschler, 51 NY2d 368, 377), Thus, for the court to refuse full recognition
to a lawful foreign judgment, it must be demonstrated that the decree violates
'some fundamental principle of justice, some prevalent conception of good
morals, some deep-rooted tradition of the common weal.'" (Greschler v.
Greschler, supra, quoting, Loucks v. Standard Oil Co., 224 NY 99, 111). Thus,
"[i]t follows that foreign judgments generally should be upheld unless
enforcement would result in the recognition of a 'transaction which is
inherently vicious, wicked or immoral, and shocking to the prevailing moral
sense.'" (Greschler v. Greschler supra quoting, Intercontinental Hotels
Corp. V. Golden, 15 NY2d 9, 13).
In the instant action, the Graces
have not demonstrated that the enforcement of the English judgments will
violate any public policy of either this state or of the united States
generally. The court does not doubt that it would be preferable or the Graces,
or any other Names, in the first instance, to litigate their fraud claims, and
to challenge the method by which Lloyd's calculated the amounts owed by each
Name under the R&R Plan, since this would allow them to reduce or perhaps
even eliminate the amount of money they would otherwise have to pay to Lloyd's.
However, the fact that this method is preferable does not mean that a different
method is violative of public policy.
The Graces knowingly and willingly
entered into the General Undertaking, which required them to litigate their
claims in England, pursuant to English law. The validity of the forum selection
and choice of law clauses has repeatedly been upheld in the courts of this
country, which have found that they did not violate United States policy of
protecting citizens against fraud. The English courts have now concluded that,
based on the pay now, sue later" and "conclusive evidence"
clauses, the Names must wait to pursue their claims against Lloyd's. Clearly,
this decision was based, at least in part, on the legitimate need to allow the
Lloyd's market, which is a vital part of the British economy, to continue to
function. However, the Graces will still have an opportunity to pursue their
claims against Lloyd's at a later date. Therefore, the court cannot find that
the Graces have been denied due process in violation of New York's public
policy. Moreover, the Graces have not demonstrated any other basis on which
this court could find that the decisions of the English courts violate the
public policy of New York.
The Graces have also failed to
demonstrate that they will not have an adequate remedy in England should they
be able to prove their fraud allegations. English law remains adequate to
discourage fraud and misrepresentation, and the English courts can provide the
Graces with a sufficient remedy should a fraud be proven. (See Stamm v.
Barclays Bank of New York, supra; Roby v. Corporation of Lloyds's, supra;
Haynsworth v. The Corporation, supra; Allen v. Lloyd's of London, E; Shell v.
R.W. Sturge Ltd., supra; Bonny v. Society of Lloyd's, supra). Therefore, it
cannot be said that the Graces will be deprived of a forum in which to pursue
their claims, in violation of New York public policy.
Finally, the court notes the Graces'
objection to the procedure by which a substitute agent was able to bind the
non-settling Names to the R&R Plan. However, it is undisputed
here that such a mechanism has been upheld under English
law, a law by which the Graces willingly agreed to be bound. Moreover, the
Graces have not been deprived of an opportunity to challenge that finding or to
ultimately present their claims in the English courts. Therefore, this court
cannot say that the English courts' decision to uphold the substituted agent
bylaw was inherently vicious, wicked or immoral, or shocking to the prevailing
moral sense. (Greschler v. Greschler, supra, quoting, Intercontinental Hotels Corp.
v. Golden, 15 NY2d 9, 13). Accordingly, it is
ORDERED that plaintiff's motion for summary judgment is
granted and the Clerk is directed to enter judgment in favor of plaintiff and
against defendants Lorraine Graves Grace and Oliver R. Grace in the amount
sought in the complaint, together with interest as prayed for allowable by law
until the date of entry of judgment, as calculated by the Clerk, and thereafter
at the statutory rate, together with costs and disbursements to be taxed by the
Clerk upon submission of an appropriate bill of costs.
DATED: November 1999