Court: Court of Appeals for the Ninth Circuit; March 5, 1997; Federal Appellate Court
Alan Richards and 573 other plaintiffs filed a lawsuit against the Corporation of Lloyd's and Lloyd's of London, alleging securities fraud under the Securities Act of 1933 and the Securities Exchange Act of 1934, along with violations of the Racketeer Influenced and Corrupt Organizations Act, breach of state Blue Sky laws, breach of fiduciary duty, and common law fraud. The district court dismissed the action based on a motion from the defendants, citing forum selection and choice of law provisions in the contracts signed by the plaintiffs, which required English law and restricted claims to English courts. The appellate court found these Choice Clauses void due to their violation of the 1933 and 1934 Acts, reversing the dismissal of the federal claims while affirming the dismissal of claims under Blue Sky laws and common law. The court remanded the case for further consideration regarding the Unincorporated Association's amenability to suit. The plaintiffs allege that the Unincorporated Association operates insurance and reinsurance businesses, primarily based in London, with the Corporation of Lloyd's exercising extensive control over its operations. Members of the underwriting syndicates, known as Names, are categorized into Working Names, who actively manage the business, and External Names, who are passive investors with unlimited liability and restricted from participating in underwriting.
Between 1970 and 1993, Lloyd’s launched a significant recruitment initiative in the United States to expand its underwriting capacity by attracting American residents to become External Names. This involved offering investment contracts and distributing promotional materials via U.S. mail, including questionnaires and applications, with recruitment support from U.S. brokerage firms that received commissions. Existing Names were also incentivized to recruit new members. However, the information provided did not comply with SEC prospectus standards, and the investment contracts were classified as securities that were unregistered under federal or state law. As a result, Lloyd’s successfully raised over $600 million and significantly increased its underwriting capabilities through the participation of 3,196 U.S. residents.
The plaintiffs, part of this recruited group, allege they were defrauded by Lloyd’s in two main ways: they were placed in syndicates reinsuring pre-existing long-tail asbestos and toxic waste claims without being informed of the associated risks, and they were involved in syndicates with high-risk concentrations linked to a problematic reinsurance scheme known as the LMX Spiral. Lloyd’s allegedly prioritized the interests of Working Members and insiders while concealing significant liabilities from the External Names.
In 1986, plaintiffs were required to sign a "General Undertaking" contract that included choice clauses mandating that disputes be governed by English law and resolved in English courts. These clauses were not present in earlier contracts, yet both groups of plaintiffs—those who signed the 1986 form and those who had previously signed without the clauses—were compelled to accept the new terms to maintain or obtain their membership. The plaintiffs assert that Lloyd’s did not disclose its knowledge of the frauds committed against them, claiming that the inclusion of the choice clauses was itself fraudulent.
On October 9, 1994, plaintiffs filed an amended complaint in the Southern District of California against an Unincorporated Association, which did not respond, prompting plaintiffs to seek a default judgment. Lloyd’s moved to dismiss the case, citing improper venue based on Choice Clauses, as well as forum non conveniens and res judicata. The court received various declarations and documents from both parties. On April 28, 1995, the district court dismissed the complaint, emphasizing the presumptive validity of forum-selection clauses unless proven "unreasonable." The court determined that the plaintiffs did not demonstrate such circumstances and relied on the precedent set in Roby v. Corporation of Lloyd's, confirming that the remedies available in England were sufficient for American investors. The court further noted that the SEC's inaction against Lloyd's weakened the plaintiffs' arguments regarding insufficient deterrence. The plaintiffs' claims of fraud in obtaining the Choice Clauses were found to lack sufficient evidence, and their subsequent motion for reconsideration was denied on August 4, 1995, resulting in the dismissal of the complaint in its entirety. The plaintiffs appealed the decision.
In the analysis, the plaintiffs argued the Choice Clauses were procured by fraud. However, the court clarified that the burden of proof lies with the opposing party to demonstrate fraud or undue influence, which the plaintiffs failed to do. Consequently, the court upheld the validity of the Choice Clauses for the appeal, assuming the truth of the plaintiffs' allegations regarding Lloyd’s involvement in the sale of securities, while noting that further factual development would be necessary in the district court.
Section 14 of the 1933 Act and Section 29a of the 1934 Act establish that any provision requiring a person acquiring securities to waive compliance with statutory obligations or SEC rules is void. Consequently, the "Choice Clauses" that mandate such waivers are also void under these statutes. The district court erred in concluding that these clauses were unenforceable only if found unreasonable, as Congress had already deemed them void without regard for judicial assessment of reasonableness or policy implications. The case referenced, Scherk v. Alberto-Culver Co., involved an international arbitration agreement upheld by the Supreme Court despite a challenge under Section 10b of the 1934 Act. However, the facts and reasoning in Scherk differ significantly from the current case, as the contracts in question were largely tied to U.S. activities, involving recruitment, payments, and execution within the U.S. Furthermore, the Supreme Court in Scherk had to choose between federal statutes, specifically favoring the Arbitration Act without weighing reasonableness against legislative commands. The distinction between policy objections and statutory barriers is emphasized as significant in this context.
Statutes embody specific policy decisions made by elected representatives, and they take precedence over judicial policy objections. When no statute obstructs the enforcement of choice-of-forum and choice-of-law clauses, their application becomes less contentious. The Supreme Court's ruling in Mitsubishi Motors v. Soler Chrysler-Plymouth suggests that such clauses, if they waive rights to statutory remedies for antitrust violations, would be deemed against public policy. The Choice Clauses in question are seen as prospective waivers of plaintiffs' rights under the 1933 and 1934 Acts. The Supreme Court has indicated that even if arbitration procedures change, arbitrators must apply substantive U.S. securities law where relevant, as highlighted in cases like Rodriguez de Quijas and Shearson/American Express. The implication is clear: substantial contacts with the U.S. mean that the Arbitration Act cannot allow waivers of substantive protections under these Acts. The substantive protections that may be waived include critical provisions such as the burden of proof for fraud claims. Therefore, the Choice Clauses are rendered void. While Lloyd's cites other circuit decisions as persuasive, these cases do not address the statutory bars at issue and thus are not relevant precedents. The ruling creates a conflict with interpretations of Lloyd's Choice Clauses in other cases, indicating a divergence in legal interpretations across different jurisdictions.
The document asserts that previous circuit court rulings improperly overlooked the anti-waiver provisions of the Securities Acts concerning enforceable choice-of-forum clauses. A review of these cases indicates a consensus that the application of such clauses, evaluated under the "reasonableness" test from The Bremen v. Zapata Off-Shore Co., is flawed. The Bremen established that choice-of-forum clauses are enforceable unless proven unreasonable, unjust, or invalid due to fraud. Courts have interpreted this to mean that if enforcement conflicts with strong public policy, the clause becomes unenforceable.
Despite other circuits deciding that U.S. securities laws do not inhibit choice-of-forum clauses, the document argues that the Securities Acts’ anti-waiver provisions render these clauses void, negating the need to assess their reasonableness. In particular, the analysis distinguishes The Bremen's context, which did not involve statutory anti-waiver provisions. The document emphasizes that The Bremen does not imply a general disfavor toward choice-of-forum clauses, but rather that the clauses' enforceability must be evaluated within the framework of the specific legal provisions in question.
Clauses related to choice-of-forum are generally presumed valid, with a "reasonableness" test available to rebut this presumption. However, in cases where Congress has enacted specific anti-waiver provisions, such as in the Securities Acts, the "reasonableness" test is not applicable. The Bremen case established a reasonableness test for evaluating choice-of-forum clauses only when Congress has not addressed the issue. The Supreme Court’s Carnival decision further clarifies this by refusing to apply The Bremen's analysis when evaluating a statute's impact on a choice-of-forum clause in cruise ship passenger contracts, ultimately ruling that the clause did not violate the statute.
Congress recognized the international nature of securities transactions and amended the 1933 Act accordingly. Courts should not apply the reasonableness test or question whether clauses conflict with U.S. policy when Congress has made explicit determinations. The dissent raises concerns about the implications for American law and international transactions, but the majority argues that legal jurisdiction over securities is limited to those offered within the U.S. market. The division between the majority and dissent centers on whether courts or Congress set national policy after legislative action. The SEC, participating as a friend of the court, highlights deficiencies in the remedies available under English law for plaintiffs, which includes three significant shortcomings.
No remedy exists in England for failure to register securities under Section 12(1) of the 1938 Act, nor for negligent misrepresentation against Lloyd's under Section 12(2), due to immunities provided by the Lloyd’s Act of 1982 unless bad faith is proven. Unlike the U.S., where liability for controlling persons exists under Section 15 of the 1938 Act and Section 20(a) of the 1934 Act, such liability is absent in England, indicating significant gaps in English securities fraud law. Available remedies in England are deemed inadequate compared to U.S. securities law protections. A dissenting opinion suggests a remedy might exist if plaintiffs sued other potentially insolvent defendants, but these alternatives are not viable for the defendants chosen. The dissent also critiques federal court venues as overly favorable to plaintiffs without considering the challenges American investors face in seeking remedy against the powerful Lloyd's in London, which has legislative immunities.
The plaintiffs’ Tenth Claim for Relief involves RICO violations, including multiple acts of fraud related to securities under the 1933 and 1934 Acts and mail fraud under 18 U.S.C. §§ 1341 and 1343. While securities fraud claims inform the RICO allegations, the waiver of rights under the Securities Acts does not extend to RICO rights, necessitating a separate analysis. The record lacks clarity on remedies available for RICO claims in England, prompting a remand to assess the reasonableness of the Choice Clauses concerning RICO obligations.
Lloyd's requested affirmation based on forum non conveniens, but the court declined, emphasizing the need for a thorough evaluation by the district court. The court noted defendants bear a heavy burden due to the ruling that Lloyd's cannot evade federal securities statutes by contract.
Claims under Blue Sky Laws are insufficiently pleaded without specific state law references regarding the Choice Clauses. However, consistent with circuit court rulings, the court upheld the enforceability of these clauses in the absence of statutory annulment. Common law fraud and breach of fiduciary duty claims are also subject to the Choice Clauses, with no conflicting U.S. statute, suggesting that English remedies may be adequate.
Under Fed. R. Civ. P. 17(b), a corporation's capacity to sue or be sued is determined by its organizing law, while for other entities, including unincorporated associations, the capacity is governed by the law of the state where the district court is located. However, partnerships or unincorporated associations lacking such capacity under state law may still sue or be sued in their common name to enforce substantive rights under U.S. law. The district court did not address the plaintiffs' motion for default against the Unincorporated Association, which failed to respond to the complaint. On remand, the district court is instructed to consider this motion in accordance with Rule 17(b) and based on findings from a hearing. The district court's dismissal of claims related to Blue Sky law, common law fraud, and breach of fiduciary duty is affirmed. However, the dismissal of federal securities and RICO claims, as well as the plaintiffs' default motion against the Unincorporated Association, is reversed, and the case is remanded for further proceedings.
