IN THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
The Society of Lloyd's,
Plaintiff - Appellee
) Appeal from the United States District
) Court for the Northern District of Illinois
) No. 98 C 5335
James Frederick Ashenden, and
Mary Jane Ashenden,
) Hon.Harry D. Leinenweber
) United States District Judge
Defendants - Appellants
) Judge Presiding
BRIEF OF APPELLANTS AND JOINT APPENDIX
Counsel for Appellants:
357 East Chicago Avenue
Chicago, Illinois 60611
Theodore W. Grippo, Jr.
Pembroke & Brown
422 North Northwest Highway, Suite 150
Park Ridge, Illinois 60068
[Note: The Table of Contents section, Disclosure Statement, and Certificate of Compliance have been moved to the end of this document for convenience in reading.
(4) Jurisdictional Statement
(A). Jurisdiction in the United States District Court. The United States District Court had jurisdiction pursuant to 28 U.S.C. §1332(a)(2) in that the plaintiff, The Society of Lloyd's ("Lloyd's") is a citizen of a foreign state, being a corporation incorporated under the laws of England and having its principal place of business in London, England; and the defendants are both citizens of Illinois. The amount in controversy between the plaintiff and defendant James Ashenden (exclusive of interest and costs) is £186,826.81, which is equivalent to approximately $298,922.00; and the amount in controversy between plaintiff and defendant Mary Jane Ashenden (exclusive of interest and costs) is £231,144.88, which is equivalent to approximately $369,832.00.
(B). Jurisdiction in the Court of Appeals. This court has jurisdiction pursuant to 28 U.S.C. §1291 in that this is an appeal from a final decision of the United States District Court for the Northern District of Illinois.
(C). Filing dates. On April 22, 1999, the district court entered summary judgment for the plaintiff, disposing of all issues before it. On April 28, 1999, defendants filed a timely motion to alter or amend the judgment pursuant to Rule 59(e) of the Federal Rules of Civil Procedure. On August 18, 1999, the district court denied the motion to alter or amend the judgment. On August 26, 1999, the defendants filed their notice of appeal.
(D). This appeal is from a judgment that disposes of all parties' claims.
(5) Issues Presented For Review
Lloyd's filed an action under the Illinois Uniform Foreign Money Judgments Recognition Act ("UFMJRA") 735 ILCS 5/12-618 through -626 (reproduced in full at Appendix 8 hereto), seeking recognition of judgments awarded to it and against the Ashendens in England. The district court overruled the Ashendens’ due process challenge to recognition of the judgments, and granted Lloyd's summary judgment. In doing so, the district court upheld the constitutional validity of two summary disposition procedures employed in obtaining the English judgments: (1) a "conclusive evidence" procedure that prevented the Ashendens from knowing the basis of, or challenging, the calculation of the amounts of the debts that Lloyd's sought to collect, and (2) a "pay now, sue later" procedure that prevented the Ashendens from litigating any set-off or substantive defense to Lloyd’s claims – in particular, Lloyd’s fraud in connection with inducing the Ashendens initially to invest and then reinvest in syndicates at Lloyd's.
The district court correctly recognized that each of those procedures had denied the Ashendens any meaningful hearing prior to deprivation of their property. On appeal, this Court must decide:
(A). Whether the district court erred in holding that the two summary disposition procedures were justified by exigent circumstances.
(B). Whether the district court erred in holding that the Ashendens’ ability to sue Lloyd’s for fraud in the inducement in a post-deprivation action provided a meaningful hearing with regard to the amount of the debts allegedly owed by the Ashendens to Lloyd’s.
Additionally, the Court may need to resolve an argument advanced by Lloyd’s that the district court did not resolve:
(C). Whether the Ashendens waived the due process rights secured to them by the Illinois UFMJRA.
(6) Statement of the Case
In July, 1996, Lloyd's, facing massive losses primarily from policies written many years earlier and covering asbestos and pollution liability, created a new reinsurance company called Equitas, and directed that all non-life syndicates with open liability for years prior to 1993 be reinsured into Equitas. It assessed a premium for this reinsurance against all of its more than 32,000 affected members, of whom the Ashendens were two, and appointed a Substitute Agent to sign an "Equitas Reinsurance Contract" on behalf of all of them. Lloyd's then sued the approximately 650 members who refused to pay the assessed premium, and obtained judgment against them in England. The Equitas Reinsurance Contract contained two clauses which altered the usual rules of English procedure in favor of Lloyd's; a "pay now, sue later" clause barring the defendants from raising substantive defenses to the suit, and a "conclusive evidence" clause barring the defendants from having discovery of, or challenging the basis for, the calculation of the premium assessed against them. Lloyd's obtained summary judgments against all of the defendants, including the Ashendens and approximately 244 other Americans. Appeal was dismissed by the Court of Appeal in England on July 31, 1998. With judgments totalling approximately $100 million against Americans, Lloyd's brought the first two actions for recognition and enforcement of its judgments in the United States in August, 1998; this case in the United States District Court for the Northern District of Illinois against James and Mary Jane Ashenden, and a case styled The Society of Lloyd's v. Lorraine Graves Grace and Oliver Grace, in the Supreme Court of the State of New York, County of New York.
In this case, the parties filed cross motions for summary judgment, the Ashendens seeking a ruling that the English judgments should be denied recognition, and Lloyd's seeking a ruling that they should be recognized. On April 22, 1999 the district court granted Lloyd's motion and denied the Ashendens' motion. The Ashendens filed a timely motion to alter or amend judgment, which was denied on August 18, 1999. This appeal followed.
(7) Statement of Facts
Lloyd's is an English corporation of members, not shareholders, doing business in London, England. R. Doc. 18 (Ashendens' Statement of Uncontested Material Facts) at ¶2. It operates an insurance market where insurance is underwritten by individuals, who are known as Names. R. Doc. 18 at ¶3. Lloyd's also regulates all aspects of the insurance market known as "Lloyd's of London." R. Doc. 18 at ¶¶3, 9-11.
Names are of two types, those who actually work in the Lloyd's market, known as "working members," and those who are passive investors, known as "external members." R. Doc. 18 at ¶¶ 4, 20-21. Names provide the capital backing the insurance written at Lloyd's. R. Doc. 15-1, Tab 8 (Ashenden Ex. 8 - Neill Report) at §6.2. They are severally, not jointly, liable for a proportion of risk on each policy. R. Doc 15-1, Tab 8 at §2.9 While the liability of each Name is unlimited, R. Doc. 15-1, Tab 8 at §2.9, each is required to put up a specified amount of assets in England to secure the liability. R. Doc. 15-1, Tab 8 at §4.28.
External Names are required by Lloyd's to entrust their affairs to Working Names who serve as underwriting agents for the External Names. R. Doc. 18 (Ashendens' Statement of Uncontested Material Facts) at ¶20. Agents who manage syndicates are called Managing Agents, and agents who act as liaisons between the Names and Lloyd's are called Members' Agents. R. Doc. 18 at ¶¶20-21. Lloyd's is governed by a body known as the Council of Lloyd's, R. Doc. 18 at ¶5, which has the power to adopt by-laws for the corporation without vote of the members. R. Doc. 18 at ¶8. Lloyd's, the Council of Lloyd's, and the officers and employees of Lloyd's enjoy a statutory immunity under English law from liability for damages in tort to Names, except in cases of defamation, personal injury, routine or nondiscretionary function, or where bad faith is shown. R. Doc. 18 at ¶12.
James F. Ashenden and Mary Jane Ashenden, husband and wife, are residents of Illinois. R. Doc. 18 at ¶1. Mr. Ashenden, an attorney, recently retired after nearly fifty years' distinguished service at the bar. See, R. Doc. 20 (Second Aff. of James F. Ashenden) at ¶4. Mrs. Ashenden, his wife of 51 years, is a homemaker. R. Doc. 20 at ¶5. The Ashendens are now in their mid-seventies, and their sole means of livelihood is their savings. R. Doc. 20 at ¶¶6, 32.
James and Mary Jane Ashenden became Names at Lloyd's on January 1, 1977 and January 1, 1984, respectively. R. Doc. 18 (Ashendens' Statement of Uncontested Material Facts) at ¶¶13-14. They were recruited within the State of Illinois to join Lloyd's by Working Names employed at Lloyd's. R. Doc. 18 at ¶¶15-18. The Ashendens, who had no previous experience in underwriting insurance, were assured at the time of their recruitment and at all times thereafter by the Working Names who recruited them that investment in Lloyd's was sound, conservative and safe. R. Doc. 18 at ¶¶22-24.
As a condition of membership, the Ashendens signed a General Undertaking, a two-page document (see, App. 6) which provided, among other things, that the Names would be bound by Lloyd's by-laws and that all disputes between Names and Lloyd's would be resolved exclusively in English courts under English law. R. Doc. 18 at ¶19.
As a further condition of membership, the Ashendens deposited the required security at Lloyd's in the form of letters of credit and personal reserves, which eventually totalled approximately $304,000.00. R. Doc. 20 (Second Aff. of James F. Ashenden) at ¶25.
The Ashendens' Members' Agent at Lloyd's assured them at all times during their membership that their affairs were being handled safely and conservatively. R. Doc. 20 at ¶¶12-23.
Lloyd's reports financial results three years in arrears. R. Doc. 15-1, Tab 8 (Ashenden Ex. 8 - Neill Report) at §5.8. Beginning in 1991 and continuing through 1995, Lloyd's reported losses (for years 1988 through 1992) which were greater than at any time in its history, totalling approximately £8 billion ($12 billion). R. Doc. 18 (Ashendens' Statement of Uncontested Material Facts) at ¶¶37, 42. The Ashendens ceased underwriting at the end of 1991, R. Doc. 18 at ¶40, but remained liable for continuing losses growing out of insurance and reinsurance policies written at Lloyd's in prior years. During the next four years the Ashendens continued to experience very large losses from their years of underwriting at Lloyd's, R. Doc. 18 at ¶36, and during those years Lloyd's seized all of the $304,000.00 of the Ashendens' funds which were on deposit at Lloyd's to pay for those losses. R. Doc. 18 at ¶43.
There is evidence that certain Working Names at Lloyd's, including members of the Council of Lloyd's, were aware as far back as 1980, that policies of general liability covering losses relating to asbestos, and written many years before the Ashendens joined Lloyd's, were facing massive liabilities coming due in the next several years, and that this knowledge was concealed from the External Names. R. Doc. 18 at ¶¶25-35, 38-39.
As the losses mounted, litigation involving Lloyd's ensued, both in this country and in England. See, R. Doc. 21 (Ashendens' Memorandum in Support of Motion for Summary Judgment Denying Recognition to Foreign Money Judgment) at 17-23. Among these was an action in Illinois in which the plaintiff Names unsuccessfully argued that the choice of forum and choice of law clauses of the General Undertaking ought not be enforced in a case brought under the United States securities laws. Bonny v. Society Lloyd's, 3 F. 3d 156 (7th Cir. 1993) cert. den., 510 U.S. 1113, 114 S. Ct. 1057, 127 L.Ed. 2d 378. The Ashendens were among the plaintiffs in another case, involving claims under State law, in which the court reached the same conclusion. R. Doc. 18 at ¶45. Ashenden et al. v. Lloyd's of London, 1996 WL 717464 (N.D. Ill. Dec. 9, 1996).
In July, 1996, Lloyd's promulgated a program of reorganization, called "Reconstruction and Renewal" ("R & R") pursuant to which all open non-life syndicate business prior to 1993 was to be reinsured into one newly-created reinsurance company, called Equitas. The program was announced and explained in a Settlement Offer Document, a 300-page book sent to all Names. The Settlement Offer Document, dated July 20, 1996, gave the Names until August 28, 1996 to accept or reject the settlement proposed by Lloyd's. R. Doc. 15-2, Tab 21 (Ashenden Ex. 21 - Settlement Offer Document.)
The reinsurance was to be effected by means of what was called the "Equitas Reinsurance Contract," a document which was not provided to Names with the Settlement Offer Document. R. Doc. 18 (Ashendens' Statement of Uncontested Material Facts) at ¶53; R. Doc. 20 (Second Aff. of James F. Ashenden) at ¶30. The Settlement Offer Document stated that the Equitas Reinsurance Contract could be reviewed during regular business hours at Lloyd's in London for the 28 days the offer remained open, but that Lloyd's reserved the right to amend it and to exclude certain confidential information from the copies made available for inspection. R. Doc. 15-2, Tab 21 (Ashenden Ex. 21 - Settlement Offer Document, at its Appendix 7) at 12-13. The reinsurance was mandatory for all Names on the affected syndicates, and Lloyd's created a Substitute Agent for all such Names and instructed the Substitute Agent to sign the Equitas Reinsurance Contract on behalf of them. R. Doc. 18 (Ashendens' Statement of Uncontested Material Facts) at ¶47. The aggregate premium for the reinsurance was £14.7 billion. R. Doc. 15-2, Tab 21 (Ashenden Ex. 21 - Settlement Offer Document) at ii. The amount to be paid by each individual Name was set forth in a separate "Finality Statement" sent with the Settlement Offer Document. R. Doc. 18 (Ashendens' Statement of Uncontested Material Facts) at ¶48. The amounts set forth in the Finality Statements and demanded of the Ashendens were £179,430 for James, and £222,668 for Mary Jane. R. Doc. 18 at ¶49; see also, R. Doc. 15-1, Tabs 4 and 5 (Ashenden Exs. 4 and 5 - Ashendens' Finality Statements).
The Equitas Reinsurance Contract included two clauses upon which this litigation has focussed. One was a "pay now, sue later" clause which required the Names to pay the amount demanded of them "free and clear from any set-off, counterclaim or deduction on any account whatsoever." R. Doc. 18 at ¶59. The other was a "conclusive evidence" clause which provided that the amount owed by the Names, as calculated by Lloyd's, "shall be conclusive evidence as between the Name and [Equitas] in the absence of manifest error." R. Doc. 18 at ¶63.
The "conclusive evidence" clause was mentioned nowhere in the Settlement Offer Document. See, R. Doc. 15-2, Tab 21 (Ashenden Ex. 21 - Settlement Offer Document). The "pay now, sue later" clause was alluded to, although misleadingly. It was described in the Settlement Offer Document as being "broadly equivalent to the 'pay now, sue later' provision in the current form of managing agent's agreement" (id. at its Appendix 5, p. 4), though in fact it was quite different, because the form of the clause in the Managing Agent's Agreement required confirmation by an independent auditor's report, while that of the Equitas Reinsurance Contract did not. Cf. R. Doc. 15-3, Tab 22 (Ashenden Ex. 22 - Managing Agent's Agreement, which is Schedule 3 to Members' Agent's Agreement) at §7.1. Indeed, awareness of the "conclusive evidence" clause first came to the Ashendens via their English attorney, who was himself first provided with a copy of it after it had been signed by the Substitute Agent on behalf of the Ashendens. R. Doc. 19 (Affidavit of Michael David Freeman) at ¶6.
R & R included a settlement component, under which Names would be granted credits against the amounts on their Finality Statements if they released all their claims against Lloyd's, its officers, agents, attorneys and auditors. R. Doc. 18 (Ashendens' Statement of Uncontested Material Facts) at ¶50. The credits offered the Ashendens were £79,430 for James and £122,668 for Mary Jane, which would reduce each of their finality amounts to £100,000. R. Doc. 18 at ¶51. The release was not reciprocal, however. The Settlement Offer Document stated that the liabilities reinsured into Equitas might take 40 years to run off, and that if Equitas lacked sufficient funds to run the liabilities off, the Names would be called upon again to contribute. R. Doc. 18 at ¶52.
Under the Settlement Offer Document R & R was to become effective only if a sufficient number of Names accepted it. R. Doc. 15-2, Tab 21 (Settlement Offer Document) at iii-iv. For non-acceptors, Lloyd's would pay the premium to Equitas, R. Doc. 15-2, Tab 21 at 36, and institute legal proceedings to collect the Finality Statement amounts, undiscounted by the credits made available to settling Names. R. Doc. 15-2, Tab 21 at 65.
The Ashendens did not accept the settlement offer from Lloyd's, R. Doc. 18 (Ashendens' Statement of Uncontested Material Facts) at ¶54, for several reasons: First, they believed they had been defrauded by Lloyd's and their agents at Lloyd's. Second, they did not believe they could afford the approximately $320,000.00 net amount being demanded of them. Third, there was to be no reciprocal release of the Names by Lloyd's. Fourth, the full terms of R & R were, as a practical matter, unknowable to them, since none of the underlying documents of R & R were ever sent to them. R. Doc. 20 (Second Aff. of James F. Ashenden) at ¶31.
Approximately 32,000 Names, some 93% of the total, accepted the settlement offer. R. Doc. 15-3, Tab 28 (Ashenden Ex. 28 - Society of Lloyd's v. Fraser et al. (C. A.)) at 9. In September, 1996, the Equitas Reinsurance Contract was signed by the Substitute Agent, and Equitas began operations. R. Doc. 18 (Ashendens' Statement of Uncontested Material Facts) at ¶56. Thereafter, Lloyd's paid Equitas the amount which had been demanded from, but not paid by, several hundred non-accepting Names, and received in exchange an assignment of Equitas's claim against them under the Equitas Reinsurance Contract. R. Doc. 18 at ¶57. Following this payment and assignment, Lloyd's sued several hundred non-accepting Names, including the Ashendens, in England. R. Doc. 18 at ¶58.
In a judgment on preliminary issues, the English court ruled that by virtue of the "pay now, sue later" clause, the Names had no non-fraud defenses whatsoever to the claim of Lloyd's. R. Doc. 15-3, Tab 23 (Ashenden Ex. 23 - Society of Lloyd's v. Leighs (Q.B. Feb. 20, 1997)). In a second judgment on preliminary issues, the English court ruled that the same clause also barred any defense based upon fraud, and was effective against the Names even assuming Lloyd's were guilty of fraud. Doc. 15-3, Tab 24 (Ashenden Ex. 24 - Society of Lloyd's v. Wilkinson (Q.B. Apr. 23, 1997)). The two judgments were affirmed on appeal. R. Doc. 15-3, Tab 25 (Ashenden Ex. 25 - Society of Lloyd's v. Lyons (Ct. App. Jul. 31, 1997)).
In an order entered on March 12, 1998, the English court also enforced to the "conclusive evidence" clause and entered summary judgment for Lloyd's against the Names, in the amounts claimed. R. Doc. 15-3, Tabs 26 and 27 (Ashenden Exs. 26 and 27 - Society of Lloyd's v. Fraser (Q.B. March 4, 1998 and March 12, 1998)). Because of this clause, Names were given no opportunity to discover the basis for the amount demanded in the Finality Statement, no opportunity to cross-examine those who had derived the figures, and hence no opportunity to challenge the figures. Appeal from this judgment was dismissed. R. Doc. 15-3, Tab 28 (Ashenden Ex. 28 - Society of Lloyd's v. Fraser (C.A. Jul. 31, 1998)). The English courts held that the whole of the R & R scheme, including the Equitas Reinsurance Contract, was within the "scope of the venture" of Lloyd's, and therefore, within Lloyd's power to impose on the Names. R. Doc. 15-3, Tab 23 (Leighs) at 24-57.
The points the Ashendens and the other defendants were permitted to litigate in England were strictly limited to the following:
a. Lloyd's authority to impose Equitas reinsurance on them involuntarily, R. Doc. 15-3, Tab 23, (Leighs) at 1;
b. Lloyd's title to sue as assignee of Equitas, Id;
c. Whether clause 5.5 was effective to bar all defenses including the defense of fraud in the inducement; Id. at 2; R. Doc. 15-3, Tab 24, (Wilkinson) at 2;
d. Whether Lloyd's had proved the amount of its claim (under the standard of clause 5.10 applicable to its proof) and whether the Names could show "manifest error" (under the standard of clause 5.10 applicable to the Names' challenge); R. Doc. 15-3, Tab 26 (Fraser) at 1.
The points the Ashendens and the other defendants were not permitted to litigate in England were all points not mentioned above, including, most importantly, the following:
a. All other defenses, including substantive defenses, such as fraud in inducing them initially to invest and then periodically to reinvest in Lloyd's'; and,
b. All discovery of the basis of, and challenge to, the amount claimed due, outside of the possibility of "manifest error."
Given the Names' claims of fraud, the English courts considered whether the right of rescission provided the Names relief from the involuntary imposition of the Equitas regime on them, and concluded that since it would be impossible to effect a rescission without affecting the rights of third parties, rescission was not available to the Names. R. Doc. 15-3, Tab 24 (Wilkinson) at 3-35; R. Doc. 15-3, Tab 25 (Lyons) at 10-16. Having so held, the courts approached the clauses on the basis of construction of contract, to determine their meaning and extent. R. Doc. 15-3, Tab 24 (Wilkinson) at 35-49; R. Doc. 15-3, Tab 25 (Lyons) at 16-28; R. Doc. 15-3, Tab 26 (Fraser (Q.B.)); R. Doc. 15-3 (Fraser (C.A.)).
Some English Names have sued Lloyd's in three cases consolidated under the name Jaffray, in which they allege fraud in the inducement to join and to remain members of Lloyd's. R. Doc. 33 (Lloyd's Statement of Uncontested Material Facts) Tab "Exhibit B" at Exhibit JWEN 1. They make no allegations of miscalculation of the Equitas Premium, but do ask, as part of their fraud damages, for recovery of that premium. R. Doc. 33, Tab "Exhibit B" at Exhibit JWEN 1. The case is scheduled to go to trial within the next several months. R. Doc. 33, Tab "Exhibit B" at ¶¶23-24.
Were it not for the "pay now, sue later" clause, the Ashendens would have been able to plead in their defense the fraudulent misrepresentations made to induce them to invest in Lloyd's syndicates. Under the English rules of procedure, if the Ashendens established an arguable case by affidavit, the action would have proceeded to a full trial, with witnesses. R. Doc. 19 (Affidavit of Michael David Freeman), passim.
Were it not for the provisions of the "conclusive evidence" clause, the Ashendens would have had the right to challenge the accuracy of the amounts claimed by Lloyd's, including, through discovery and cross-examination, the completeness and quality of the records relied upon and the nature and soundness of the assumptions employed. R. Doc. 15-3, Tab 26 (Fraser Q.B.) at 6-9. The "conclusive evidence" clause continues to prevent the Ashendens, even in a Jaffray-style case, from exercising those rights, as the judgment rendered upon it is "final, conclusive and binding" in England. R. Doc. 33 (Lloyd's Statement of Uncontested Material Facts) at ¶22.
(8) Summary of Argument
This is an action under the Illinois Uniform Foreign Judgments Recognition Act ("UFMJRA"), which bars recognition of any foreign judgment if it is "rendered under procedures [in]compatible with the requirements of due process of law." 735 ILCS 5/12-621(a)(1). The Equitas "contract" involuntarily imposed on the Ashendens, if a contract at all, is one of adhesion. Included in its provisions were "pay now sue later" and "conclusive evidence" clauses that the English courts found as a matter of English law were binding on the Ashendens and precluded 1) their assertion of any defense of fraud in the inducement to invest in Lloyd’s syndicates, and 2) discovery of the basis for, or meaningful challenge to, the calculation of the amount claimed against them. Enforcement of these provisions through a contract of adhesion amounts to a classic deprivation of due process, barring recognition in Illinois of the judgments obtained thereby.
The "root requirement" of procedural due process is that absent some "extraordinary" situation, "an individual be given an opportunity for a hearing before he is deprived of any significant property interest." Fuentes v. Shevin, 407 U.S. 67, 82, 92 S. Ct. 1983, 1995, 32 L. Ed. 2d 556 (1972), quoting Boddie v. Connecticut, 401 U.S. 371, 378-79, 91 S. Ct. 780, 786, 28 L. Ed. 2d 113 (1971). The English judgments would clearly deprive the Ashendens of "significant property interests," approximately $727,000 (on top of $304,000 of their assets already taken in England and not subject to the Illinois UFMJRA strictures). The district court recognized that the English proceeding had not provided the Ashendens with the "meaningful pre-deprivation hearing" normally required by due process. App. 3 ("Memorandum Opinion and Order") at 15. It held nonetheless that there had been no due process deprivation, because 1) exigent circumstances justified postponing a meaningful hearing and 2) an adequate post-deprivation hearing is available to the Ashendens.
Neither of these crucial findings has any support in the summary judgment record on the basis of which the court acted. There were no exigent circumstances, because, contrary to the district court’s assumption, no interest of any third parties would be affected one way or another had the English courts provided the Ashendens with normal discovery and a pre-deprivation opportunity to present fraud in the inducement and other defenses. The only interests at stake were those of the private litigants in this case, Lloyd’s of London and the Ashendens.
Nor is there any meaningful post-deprivation hearing available to the Ashendens in which they can raise important defenses. The district court’s conclusion to the contrary seems to be based exclusively on the English Jaffray action, in which English investors in Lloyd’s are claiming fraud in the inducement. But neither Jaffray nor any other available English proceeding would give the Ashendens an opportunity to raise other defenses, including fraudulent or, most importantly, non-fraudulent error in the amount claimed and now reduced to English judgment.
Lloyd's judgments against the Ashendens cannot be recognized in this Illinois recognition action because they were not rendered under procedures that comport with American requirements of due process of law.
This is an appeal from summary judgment granted to Lloyd’s under the Illinois UFMJRA to enforce money judgments rendered against the Ashendens in the courts of England. This court reviews the grant or denial of summary judgment de novo, resolving all disputed facts in favor of the non-moving party. Sweat v. Peabody Coal Co., 94 F.3d 301, 304 (7th Cir. 1996).
If the property that Lloyd's is here seeking to reach were situated in England, the UFMJRA would interpose no obstacle. That was the case with the letter of credit and other assets of the Ashendens on deposit as security at Lloyd's, and which Lloyd's has now taken in England. R. Doc. 20 (Second Aff. of James F. Ashenden) at ¶25. But Lloyd's is now in pursuit of property of the Ashendens located in Illinois and in the United States. Lloyd's must thus satisfy Illinois law, including Section 621 of the UFMJRA, which provides that:
(a) A foreign judgment is not . . . [enforceable in Illinois] if
(1) the judgment was rendered under a system which does not provide . . . procedures compatible with the requirements of due process of law.
The judgments below were thus appropriate only if there was prior compliance in the English courts with American standards of due process.
The Ashendens’ were effectively foreclosed in the English litigation from challenging Lloyd’s claims against them, a foreclosure traceable to the use of two summary disposition provisions in the Equitas "contract" allowed by English courts. First, under clause 5.10 – the "conclusive evidence" provision – the court barred the Ashendens from discovering and testing the basis for the amount that Lloyd’s was claiming. As the English court put it, "it is for the [defendant] Name to identify and demonstrate some clear error," without benefit of discovery, disclosure, or cross-examination of those who came up with the figures. Society of Lloyd’s v. Fraser (C.A.) R. Doc. 15-3, Tab 28 (Ashenden Ex. 28) at 46. Because of this clause, the Ashendens could not learn about, and hence challenge, errors that may have been committed in calculation of the amounts claimed, whether through fraud, sloppiness, or simple inadvertence. And second, the Ashendens were precluded by clause 5.5 - the "pay now, sue later" provision – from asserting a defense of fraud in inducing them initially to enter into and then periodically to renew their relationship with Lloyd’s.
Lloyd’s, of course, does not dispute the significance of the property that they seek from the Ashendens. The judgments in England are for roughly $720,000 of the Ashendens’ property. That amount is especially significant because it represents a substantial part of the Ashendens’ life savings, which they cannot replace due to their age. R. Doc. 20 (Second Aff. Of James F. Ashenden) at ¶32. As retirees, the Ashendens must live off their savings. In the due process context the Supreme Court – and this court – have protected private property interests of far less value, such as rents from real estate of $900 per month, United States v. James Daniel Good Realty, 510 U.S. 43, 47, 114 Sup. Ct. 492, 498, 126 L. Ed. 2d 490 (1993); and strips of abandoned railroad land having no current use, Penn Central Corp. v. Railroad Vest Corp., 955 F.2d 1158 (7th Cir. 1992). Indeed, the Supreme Court has "frequently recognized the severity of depriving a person of the means of livelihood." Cleveland Bd. of Ed. v. Loudermill, 470 U.S. 532, 543, 105 Sup. Ct. at 1487, 1494, 84 L. Ed. 2d 494 (1985).
Given this property interest, "[t]he fundamental requirement of due process is the opportunity [for the property holder] to be heard ‘at a meaningful time and in a meaningful manner.’" Mathews v. Eldridge, 424 U.S. 319, 333, 96 S. Ct. 893, 902, 47 L. Ed. 2d 18 (1976); Armstrong v. Manzo, 380 U.S. 545, 552, 85 Sup. Ct. 1187, 1190, 14 L. Ed. 2d 62 (1964). A meaningful hearing must include the ability to raise meritorious defenses; see, Rosewood Corp. v. Chester, 46 Ill 2d 249, 257, 263 N.E.2d 833, 838 (1970) (foreclosure from raising defenses including fraud "could be . . . a direct denial of constitutional rights").
The reason for the requirement of a meaningful hearing is, of course, to provide a "check against mistaken decisions." Brock v. Roadway Express, Inc., 481 U.S. 252, 261-62, 107 Sup. Ct. 1740, 1747 (1987); see also, Balmoral Racing Club, Inc. v. Illinois Racing Board, 151 Ill. 2d 367, 408, 603 N.E.2d 489, 506 (1972) "Fairness can rarely be obtained by secret, one-sided determination of facts decisive of rights. . . . No better instrument has been devised for arriving at truth than to give a person in jeopardy of serious loss notice of the case against him and an opportunity to meet it." James Daniel Good Realty, 510 U.S. at 55, 114 Sup. Ct. at 502 (internal citation omitted). Particularly in the case of fact-laden inquiries, - like just how much money is owed as a result of a complex series of insurance transactions - "the risk of erroneous deprivation is high" if assessment is allowed on the basis only of ‘one-sided, self-serving, and conclusory submissions.’" Connecticut v. Doehr, 501 U.S. 1, 14, 111 S. Ct. 2105, 2114, 115 L. Ed. 2d 1 (1991).
To be "meaningful" the hearing must normally come before deprivation of property, James Daniel Good Realty, 510 U.S. at 48, 114 S. Ct. at 498, but exceptions to the pre-deprivation requirement are permissible when dictated by the balance of competing interests articulated in Mathews v. Eldridge:
First, the private interest that will be affected by the official action; second, the risk of an erroneous deprivation of such interest through the procedures used, and the probable value, if any, of additional or substitute procedural safeguards; and finally, the Government's interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirement would entail.
424 U.S. at 335, 96 S. Ct. at 903. Postponement of a hearing until after deprivation is justified under Mathews when "an examination of the competing interests at stake along with the promptness and adequacy of later proceedings" reveals "'an extraordinary situation... where some valid governmental interest is at stake that justifies [postponement] ...." James Daniel Good Realty, 510 U.S. at 53, 114 S. Ct. at 501 (quoting Fuentes, 407 U.S. at 82, 92 S. Ct. at 1995, and Boddie, 401 U.S. at 379, 91 S. Ct. at 786).
Applying the applicable legal framework, the district court first concluded that "[i]t is clear that the Ashendens have been denied a meaningful pre-deprivation hearing." App. 3 (Memorandum Opinion and Order) at 15. But, according to the court’s opinion, there was nonetheless no due process deprivation for two separate reasons. Noting that English law does provide a cause of action for fraud in the inducement, id., the district court further assumed that "English law [does not] prevent ... the Ashendens from bringing separate suits in England to contest the amount claimed . . . ." Id. And with regard to both calculation of the amount claimed and the Ashendens’ claim of fraud in the inducement, the court assumed that there were exigent circumstances justifying the relegation of the Ashendens’ to post-deprivation procedures assumed to be available. App. 3 at 17-19.
If either of these two assumptions is false, the judgment must be reversed, as both the district court’s Opinion and governing due process standards make clear that the Ashendens were denied due process. In fact neither finds any support in the evidentiary record below, and each is in fact false. With regard to a post-deprivation hearing to challenge Lloyd’s "conclusive" calculation of the amount owed, Lloyd’s repeatedly remained mute in the proceedings below in the face of the Ashendens’ assertions that there is no further hearing available in England. With regard to the exigent circumstances, Lloyd’s similarly remained mute in response to assertions that there were no exigent circumstances, and the record establishes that there were none.
The district court also mentioned, but did not rely upon, a second possible basis for dispensing with a pre-deprivation hearing. Lloyd’s urged that the Ashendens had waived their right to a hearing before their property was taken. R. Doc. 35 (Lloyd's Brief in Opposition to Defendants' Mot. for Summ. Judgmt. and in Support of its Cross-Mot. for Summ. Judgmt.) at 8-14. In response to the Ashenden’s Motion to Alter or Amend the judgment, the district court characterized the waiver question as "more difficult," and rested instead on its finding of exigent circumstances and the adequacy of post-deprivation process. App. 5 (Transcript of Aug. 18, 1999) at 3-5. We take up the court’s holding of exigent circumstances and adequate post-deprivation process first and then the possibility of waiver.
B. There were neither exigent circumstances nor the availability of a meaningful post-deprivation process that could possibly justify dispensing with a pre-deprivation hearing.
1. There were no exigent circumstances. The district court found that Lloyd’s was justified in postponing a meaningful hearing until after deprivation for three reasons, amounting to "exigent circumstances": first, "[t]o prevent the Names from continuing to burden Lloyd’s with the quantity of litigation that was threatening to destroy it as a viable institution"; second, "to safeguard the Lloyd’s insureds . . . by providing reinsurance protection"; and third, "to provide reinsurance protection to the . . . names . . . ." App. 3 at 18-19. Each of these three depends crucially on the interests of third parties other than Lloyd’s. It is presumably such third-party interests that constitute the "government's interest" under the Mathews balance, where, as here and unlike Mathews, there are no government resources directly involved.
There is no basis for the court’s assumption that at the time Lloyd's sued the Ashendens the continued existence of Lloyd’s as "viable" institution was at stake; but even if there were, a litigation burden on a threatened Lloyd’s can hardly be thought to create an exigency entitling it to take the property of others, unless some third-party interests are at stake. If only Lloyd’s and the Ashendens are in the picture, the continued existence of the Ashendens as a "viable" set of functioning individuals was much more clearly at stake than any jeopardy to Lloyd’s. Ante at 5.
The district court relied on procedures employed in tax collection cases, invoking Phillips v. Commissioner, 283 U.S. 589, 51 S. Ct. 608, 75 L.Ed. 1289 (1931). App. 3 at 15. The court misunderstood those procedures (as we elaborate below, post at 25) but those procedures are arguably relevant precisely because, as Phillips puts it, the government needs "promptly to secure its revenues." Id. at 596, 51 S. Ct. at 611. See App. 3 at 15. Without government needs responsive to the interests of third parties, such as "education, fire protection, police protection, and other necessary governmental functions," Mathers v. County of Mason, 232 Ill. App. 3d 1094, 598 N.E.2d 387, 390 (4th Dist. 1992), "no more than private gain . . . [would be] at stake." Fuentes 407 U.S. at 92, 92 S. Ct. at 2000. That is why tax is "different." U.S. v. Forma, 42 F.3d 759, 763 (2nd Cir. 1994).
In the case of Lloyd’s, there are two different types of third parties whose interests could legitimately be taken into account. These are the insureds of syndicates reinsured by Equitas, and other Names whose own liability might conceivably be increased if money due was not collected. But at the time Lloyd’s invoked the pay now sue later and conclusive evidence provisions, no interest of any third party would or could have been affected by a pre-deprivation hearing, because Equitas had been fully funded before the lawsuits against the Ashendens and other Names were instituted. Most of the designated premium for Equitas had been paid by settling Names. For those, like the Ashendens, who decided not to settle, Lloyd's advanced their premium to Equitas and took back assignments from Equitas. R. Doc. 15-2, Tab 21 (Settlement Offer Document) at 36. This means that neither Equitas’ insureds nor settling Names would have been affected one iota by whether or not Lloyd’s ever recovered from the Ashendens.
Nor will it do to say that while the property of no single Name was necessary for Equitas, the combined property of all Names was. In the case of tax collections, there comes no time at which the government’s need of funds for the protection of third parties is at an end. In the case of Equitas, however, that time arrived as soon as Equitas was fully funded. After that, any emergency that might have existed had passed, for no judgment collected against the Ashendens or other non-settling Names could affect third parties. Lloyd’s continues to have an interest in collecting money owed it, of course, but it could claim no exigent circumstances for taking that property through summary procedures. To suggest otherwise is to denigrate entirely the requirement of real emergency for cutting short the requirements of due process.
A similar situation arose under the "emergency" exception to the Fourth Amendment’s warrant requirement in Michigan v. Tyler, 436 U.S. 499, 98 Sup. Ct. 1942, 56 L. Ed. 2d 486 (1978). In that case, the fire department collected some evidence of arson while on still smoldering premises in the immediate aftermath of a fire. The Court recognized that such evidence could be admissible in a criminal trial, because "[a] burning building . . . presents an exigency . . . to render a warrantless entry ‘reasonable.’" Id. at 509, 98 S. Ct. at 1950. Warrantless searches conducted weeks later, however, "were clearly detached from the initial exigency," id. at 511, 98 S. Ct. at 1951, and for that reason invalid under the Fourth Amendment.
The district court attempted to address this argument in denying the Ashendens’ Motion to Alter or Amend the Judgment. The totality of its rationale is as follows:
The problem with the Ashendens’ position is that they are looking at the situation ex post rather than ex ante. True at the time the judgments were entered Lloyd’s had been ‘saved’ by the Equitas reinsurance program. However the reason it was saved was because sufficient names had signed on so as to enable it to go into effect. If the program initially offered had been designed so that any name could have litigated its premium prior to payment it is hardly likely that sufficient names would have signed on to put it into effect. Thus Lloyd’s would have been forced to spend years litigating the ultimate liability of the names which would be the exact result that the R & R Program sought to avoid. 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 substituted agent, to get relief through litigation and delay, while others who were more agreeable forewent such actions.
App. 5 at 5-6. This reasoning depends crucially on an assumption of a causal connection between the inclusion of the two summary disposition clauses in the Equitas contract and the willingness of sufficient Names to accept the settlement offer to allow it to proceed. The court did not, however, cite an evidentiary basis for such an assumption, and there is none.
The Names who accepted the settlement could have done so on the basis of the two clauses only if they knew of those clauses. Clause 5.10, however, the "conclusive evidence clause," was nowhere mentioned in the Settlement Offer Document on the basis of which the Names were required to make their decisions on settlement. And while the pay now sue later clause was mentioned in the Settlement Offer Document, that mention was oblique, misleading and buried deep in a 300-page document. Thus even if the district court’s attention had not erroneously focused solely on the pay now sue later clause, that clause was given no special salience in the only document that the settling Names had effectively available to them as they were considering the settlement question. See ante at 8-9.
Even if the settling Names had been fully informed about the two summary disposition clauses, moreover, the district court’s causal assumption is unjustified. The court seemed to assume that the only variables affecting the Names’ decisions about whether to settle (aside from their personal situations) were the two clauses. This is what the court must have had in mind in saying that if "any name could have litigated its premium prior to payment it is hardly likely that sufficient names would have signed on." App. 5 at 4. But nothing could be further from the truth. The Settlement Offer Document offered very substantial "credits" to settling Names that would not be available to holdouts. The Ashendens, for instance, were offered credits exceeding 50% of the total demanded of them. See ante at 9. And unlike the summary disposition clauses, those credits were given special salience in the documentation available to the Names as they considered what to do. Each Name's Finality Statement, a short document which accompanied the Settlement Offer Document, including that of the Ashenden's, showed the credits prominently on the first page. R. Doc. 15-1, Tabs 4 and 5 (Ashenden Exs. 4 and 5 - the Ashendens' Finality Statements). Such overwhelming financial incentives are much more likely to have induced settlement than clauses that, in the one case was buried deep within, and in the other was omitted entirely from, the documents the Names were provided.
The district court’s reasoning in justification of a conclusion of "exigency" is thus based on a wholesale misunderstanding of the record. Under those circumstances, there could hardly be any justification for the deprivation. At a minimum the district court’s conclusion of a causal relationship between the two summary disposition clauses and the viability of Equitas was something that required testing in a factual hearing, rather than decision on summary judgment. At such a hearing, Names who settled could easily be asked if 1) they knew of the two summary disposition clauses; and 2) if they did know, were their decisions to settle based on those clauses.
The other two factors in the Mathews balance, moreover, cut entirely in the Ashendens' favor. Their private interest is obvious and enormous. Equally clear is that the procedures used raised a disastrous danger of "erroneous deprivation" of their property. Under the conclusive evidence clause, the Names were provided with Lloyd's bottom line of a claim of money owed, but without any indication of the complex substrate of claims experience, projected liabilities, and actuarial assumptions that supposedly formed the basis for that bottom line. "The exercise" was obviously, as the English Court put it, "a highly complex one." Fraser (C.A.) at 45. On the basis of such "one-sided, self-serving, and conclusory submissions," Doehr, 501 U.S. at 14, 111 S. Ct. at 2114, it "is self-evident" that not even a "relative assessment concerning the likelihood of ... success" was possible. Id.
In this respect too, the tax collection context on which the district court relied is worlds apart from what the English court allowed Lloyd's to do. Tax collections are not summary in the fashion of the "pay now, sue later" clause. In defense of an action by the IRS, a taxpayer may invoke the equitable doctrine of recoupment. Under this doctrine, a taxpayer may bring a counterclaim for so much of the tax as he has paid, and so reduce the government's judgment, even to zero. Forma, 42 F.3rd at 764. In addition, a taxpayer who wishes to avoid the payment of tax before going to federal court may challenge an assessment in the Tax Court. 26 U.S.C. §6213. He may sue there without having already paid the tax, and while the suit is pending the IRS may neither assess nor collect the tax. 26 U.S.C. §§6213(a), 6215(a).
In Phillips itself, the petitioner had the right to an immediate redetermination by the Board of Tax Appeals before payment. He was entitled to a full de novo hearing before the Board. He had the further right to preliminary examination of books, records and other evidence forming the basis of the claim against him. The burden of proof was on the Commissioner, moreover, to show that the petitioner was liable for the payment of the tax. Phillips, 283 U.S. at 597-98, 51 S. Ct. at 612. Nothing comparable to these protections was afforded the Ashendens.
There is, finally, nothing in the tax cases comparable to risk of error created by the conclusive evidence clause. The district court assigned little or no weight to this risk, noting that "the Equitas premium was based on the collaborative work of the best actuarial and accounting expertise [available] to Lloyd's," and further, that the Ashendens "do not offer any evidence that their portion of the premium is too high." App. 3 at 20. But the Ashendens' inability to offer such evidence was the result of the imposition of the conclusive evidence clause upon them, and does not mean that there is none. We recur to the fundamentals of James Daniel Good Realty: "Fairness can rarely be obtained by secret, one-sided determination of facts decisive of rights .... No better instrument has been devised for arriving at truth than to give a person in jeopardy of serious loss notice of the case against him and an opportunity to meet it." James Daniel Good Realty, 510 U.S. at 55, 114 S.Ct. at 502 (internal citation omitted).
2. There is no post-deprivation relief by which the Ashendens could challenge the amount of the Equitas premium assessed against them. With no emergency, there was no justification for employing either the pay now sue later clause to foreclose the Ashendens' defense of fraud in the inducement or the conclusive evidence clause to foreclose discovery, cross-examination and contest of the amount Lloyd's asserted was due. But having erroneously found that there was an emergency, the district court went on to find that adequate post-deprivation procedures were available to raise defenses of fraud in the inducement and of erroneous calculation. This finding of adequate post-deprivation procedures is confused, however, by the failure to distinguish the two kinds of defenses that the Ashendens were foreclosed from asserting. The district court relied heavily on the availability of a Jaffray-type action which is available to pursue claims of fraud in the inducement initially to invest and then reinvest in Lloyd's. But the court also assumed that that action - or another - was available to contest erroneous calculation. There is absolutely no basis for this latter assumption.
Part of the confusion seems to have been due to the possibility of two very different actions for fraud. The Ashendens have plenty of basis for a claim of fraud in the inducement to invest and reinvest in Lloyd's. See, e.g., R. Doc. 21 (Ashendens' Mem. in Support of their Mot. for Summ. Judgmt.) at 12-17. But in granting summary judgement, the district court assumed that the Jaffray action would also be available to raise the possibility of fraudulent calculation of the Ashendens' Equitas premium. App. 3 at 20. In response to that possibility, the Ashendens argued in their Motion to Alter or Amend that they had no basis for pleading fraud in the calculation because they had no information at all about how the calculation was done. R. Doc. 83 (Ashendens Reply Mem. in Support of their Mot. to Alter or Amend Judgmt.) at 7. To this the district court responded that Illinois pleading restrictions leave "the Ashendens ... no worse off in England in being able to sue for fraud than they would be in Illinois." App. 5 at 6. This is probably accurate, but irrelevant, because it is Lloyd's refusal to divulge information that creates the pleading handicap in both England and Illinois. In any event, the confusion of the two actions for fraud is a diversion. The glaring inadequacy in post-deprivation procedures is the total unavailability of any action by which the Ashendens might raise and contest erroneous calculation. Even if the Ashendens could somehow learn of and then raise a question of fraudulent calculation in a Jaffray-type proceeding, that would provide no vehicle for raising questions of erroneous calculation through computer error, bad actuarial advice, inadvertence or simple sloppiness. Non-fraudulent calculation could only be pursued through some separate action, and no such action is available.
Because of the confusion over different types of fraud, the district court never addressed the central question of the availability of an action for non-fraudulent miscalculation by Lloyd's. If no such action is available, the district court's due process rationale dissolves, for the Ashendens would then never have an opportunity to learn the basis of the amount of money demanded of them and to contest it - no opportunity before deprivation or after. And the record is quite clear that there is no such action.
First, the plain meaning of the conclusive evidence provision forecloses any such separate suit:
For the purposes of calculating the amount of any Name’s Premium . . . the records of and calculations performed by . . . [Lloyd’s] shall be conclusive evidence as between the Name and [Lloyd’s], in the absence of manifest error.
R. Doc. 15-3 (Fraser, March 4, 1998) at 1. This language is not limited to Lloyd’s initial suit in England. In an attempted separate action, the Names would have been met by the same argument previously accepted by the English courts–that the Names have no recourse on the calculation question, in the absence of "manifest error" which they must show without being told how the figures were derived.
Second, and not surprisingly given the language of Section 5.10, the English court decisions in this matter gave not the slightest hint of the availability of a subsequent and separate action for "money due" on account of erroneous calculation. The English courts talked freely of the possibility of a subsequent fraud action. Wilkinson (R. Doc. 15-3, Tab 24) at 46. The absence of any comparable discussion of some subsequent action at which the conclusive evidence provision would not have been a barrier is explicable only because there is no such action.
Third, Lloyd’s acknowledged below that "[t]he [English] Judgments [against the Ashendens] . . . are final, conclusive and fully enforceable in England. . . ." R. Doc. 33 (Lloyd's Statement of Uncontested Material Facts) at ¶22. The Ashendens admitted the truth of this assertion. R. Doc. 44 (Ashendens Reply to Lloyd's Statement of Uncontested Material Facts) at ¶22. Of course this acknowledgement was prompted by the Illinois UFMJRA requirement that a foreign judgment be "final and conclusive and enforceable where rendered," 735 ILCS 5/12-619, but there is no ambiguity that finality and conclusiveness preclude further litigation in England about the amount of the judgment.
Fourth and finally, the Ashendens repeatedly asserted in their submissions to the court below that no further hearing was available to contest the amount due. See, e.g., R. Doc. 45 (Ashendens' Reply Memorandum In Further Support of their Motion for Summary Judgment and In Opposition to Lloyd's Motion for Summary Judgment) at 21; ("There is no further process available to the Ashendens at all in England on the question of the amounts of their Equitas premiums. . . . [T]hey have received no meaningful hearing on those matters thus far and have no prospect at all of ever doing so--even in theory . . . .") (emphasis supplied). See also R. Doc. 46 (Ashendens' Mem. in Opposition to Lloyd’s Mot. for Leave to File Sur-Reply) at 6. Despite this, there was not the slightest hint in any of Lloyd’s submissions that such a subsequent and separate cause of action was available.
The record is thus quite clear that there is no separate cause of action available in England to the Ashendens through which they might have obtained any hearing–let alone a meaningful one–on the question of the amount due. With no such action available, the district court’s opinion is deprived of its essential support. For the district court clearly recognized that the conclusive evidence provision was tolerable only on its assumption that someone subjected to it "retained" a cause of action for "money due" in which that provision would not be a barrier. App. 3 at 20. The imagined cause of action is a product of imagination only, but if for any reason there was doubt on whether such a cause of action and hearing was available, a factual hearing rather than summary judgment was required.
C. There was no waiver of the Ashendens' rights to a meaningful pre-deprivation hearing.
Lloyd’s argued below that the Ashendens had waived their due process rights. The district court’s opinion had not relied on any finding of waiver, but the court did explicitly raise the possibility in its oral ruling on the Ashendens’ Motion To Alter or Amend Judgment. App. 5 at 3. Having raised the matter, however, the court found it "a more difficult question" than the exigent circumstances question, and declined to reach it. App. 5 at 3. Given this posture, the Ashendens address the waiver possibility here. The word "difficult" does not begin to capture the problems with any assertion that the Ashendens waived their due process rights in the context of this litigation. Waiver is possible in an appropriate case, but this is not such a case.
Fundamental constitutional rights can be waived, but the waiver must be "voluntary, knowing and intelligent" or "an intentional relinquishment of abandonment of a known right or privilege." D. H. Overmyer Co. v. Frick Co., 405 U.S. 174, 185-86, 92 S. Ct. 775, 782, 31 L. Ed. 2d 124 (1972). There is, moreover, a decided presumption against "the loss of fundamental rights," Ohio Bell Tel. Co. v. Public Utilities Comm'n of Ohio, 301 U.S. 292, 307, 57 S. Ct. 724, 731, 81 L. Ed. 1093 (1937) Aetna Ins. Co. v. Kennedy, 301 U.S. 389, 393, 57 S. Ct. 809, 812, 81 L. Ed. 1177 (1937).
In D. H. Overmyer Co., etc. v. Frick Co., 405 U.S. 174, 92 S. Ct. 775, 31 L. Ed. 2d 124 (1972), the United States Supreme Court took up the question of waiver of due process rights in the context of a commercial dispute. Frick had obtained a judgment against Overmyer on a cognovit note. Overmyer argued that the Ohio law that governed the cognovit judgment procedure violated its constitutional right to due process. The court held that the requirements for waiver were met in Overmyer, but they were decidedly not met here.
In Overmyer, both parties were large corporations; their dispute had been negotiated numerous times over a period of almost a year; counsel for both parties participated in the negotiations over the waiver; and in those negotiations, Overmyer's counsel had attained for Overmyer several concessions from Frick. Id., passim. For these reasons, the Court found that the waiver did not partake of a contract of adhesion and was effective. To be sure that it was not misunderstood, however, the Court cautioned that "facts are important," 405 U.S. at 178, 92 S. Ct. at 779, and that its holding would not apply "where the contract is one of adhesion, where there is a great disparity in bargaining power, and where the debtor receives nothing for the cognovit provision." Id. at 188; 92 S. Ct. at 783. The Court’s note of caution seems presciently to have been directed to the present case, for each of those three disabling conditions was met here. The supposed "contract" in which the summary disposition clauses were imposed on the Ashendens was (at best) one of adhesion; the situation was one in which Lloyd’s had not just a "disparity" in bargaining power, but virtually all of it; and the Ashendens lost rather than gained by having the "waiver," imposed upon them.
The Illinois courts define a contract of adhesion as:
a standardized contract prepared entirely by one party, and which, due to the disparity in bargaining power between the draftsman and the second party, must be accepted or rejected by the second party on a 'take it or leave it' basis without opportunity for bargaining and under such conditions that the second party or 'adherer' cannot obtain the desired product or service save by acquiescing in the form of the agreement.
Star Finance Corp. v. McGee, 27 Ill. App. 3d 421, 426, 326 N.E.2d 518, (1st Dist. 1975). The Equitas contract was, at best, a contract of adhesion under this definition. It was prepared by Lloyd's, presented to the Ashendens on a take it or leave it basis, R. Doc. 15-2, Tab 21 (Ashenden Ex. 21 - Settlement Offer Document) at ii-iii, as an absolute condition to settlement. There was an equally obvious disparity (to put it mildly) of bargaining power, as Lloyd's is a 300-year old institution making an enormous contribution, for instance, to the British balance of payments, R. Doc. 15-1, Tab 8 (Ashenden Ex. 8 - Neill Report) at §2.16, while the Ashendens are individual, passive investors. Lloyd's had, and kept to itself, crucial information on which the settlement demand might have been evaluated. And finally, the Ashendens not only received nothing for the two summary disposition clauses, they were further penalized for being subjected to them. Had the Ashendens acceded to the Equitas scheme, they would have received very substantial credits against the amounts that it was claimed they owed. By refusing to accept the settlement, they both lost all opportunity for those credits and were subjected to the summary disposition clauses.
But "contract of adhesion" is much too mild a characterization of the Equitas Contract, for in reality it was no contract at all. The purported agent was not, in fact, an agent. That "agent" was the creature of, and obedient to, Lloyd’s, and through its use Lloyd’s was "bargaining" with itself. From the descriptions of the agent provided in the Settlement Offer Document and the judgment in Leighs, we learn that Lloyd's created the "Substitute Agent" because, (1) by 1996, with the collapse of so many Members' Agencies, there was some uncertainty as to who, in fact, were the agents for a significant number of Names at Lloyd's, and because (2) Lloyd's wanted to avoid the problem, where the agent could in fact be identified, of agents who might refuse or might hesitate to sign the Equitas Contract out of a sense that to do so would be a violation of duties owed to their principals--the Names--a conclusion that was in some cases being advanced by attorneys for the agents. R. Doc. 15-3, Tab 23 (Leighs (Q.B.)) at 34-35. The "Substitute Agent" was created, then, not so much to act as an agent for the Names, but to provide the appearance of agency, to vest the signing of the Equitas "contract" in the trappings of an act done legally on behalf of the Names, when in reality it was no more than Lloyd's itself signing on behalf of the Names.
To trace the Equitas "contract" to some real agreement on the part of the Ashendens, Lloyd's may rely on the provision of the parties' original "General Undertaking" by which Ashendens and other Names agreed to resolve their disputes with Lloyd's in English courts under English law, and, more specifically:
to comply with the provisions of Lloyd's Acts 1971-1982, 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 party to, and perform and observe all the terms and provisions of any agreements or other instruments as may be prescribed and notified to the Member or his underwriting agent by or under the authority of the Council.
App. 6. But the reference to English law is quite general, and the language quoted above not much less so. By no stretch of the imagination could either be thought to put the Ashendens on some fair notice that at a future time an "agent" would be appointed to act on their behalf, but without consulting them or caring about their interests. To the contrary, the quoted language contemplates the continuing operation of real agents ("notified to the Member or his underwriting agent").
It is, moreover, an Illinois statute that interposes the constitutional due process requirement between an English judgment and enforcement in Illinois. Lloyd's was able to, and did, require of the Ashendens that they deposit security in England, and that security deposit has been taken. In this action Lloyd's is pursuing property through enforcement procedures in Illinois. A mere choice of foreign law cannot constitute a waiver of the right of due process, or that right would be illusory.
This court's earlier decision in Bonny does not govern this case. In Bonny the court found that a waiver of the uniquely American statutory tort remedies in the securities laws by virtue of the choice of foreign law in a contract would be upheld, in light of the court's finding that the policies of investor protection embodied in that statute were adequately advanced by provisions of the foreign law. 3 F.3d 156, 161. In this case, by contrast, the constitutional rights embodied in the Illinois UFMJRA bar enforcement of all foreign judgments not comporting with due process. The contractual language gives no hint that due process itself is to be waived, or that waiver would be later unilaterally imposed on the signers.
In Ohio Bell Telephone, it was argued that the telephone company had waived its due process objection to certain procedures which arguably deprived it of a fair hearing by stipulating to the introduction of certain kinds of evidence for one purpose, later used for another, and by consent to the consolidation of two kinds of hearings into one. 301 U.S. at 287, 57 S. Ct. at 727. But the court rejected that contention. "As there was no warning of such a course, so also there was no consent to it." Id. at 300, 57 S. Ct. at 728. The undisputed record in this case shows that the Ashendens likewise had no warning, when they signed the General Undertaking or at any other time prior to the imposition of the Equitas regime on them, that they would lose their due process right to interpose defenses, to discover the basis of the amounts claimed, and to challenge the calculation of those amounts. Under these circumstances, it is clear that the possibility of waiver by the Ashendens of their due process rights is not so much a "difficult question" as it is an absurdity.
For the foregoing reasons, the Appellants, James and Mary Jane Ashenden, respectfully pray that the judgment of the district court be reversed, and that the case be remanded to the district court with instructions to enter summary judgment for the Ashendens and against Lloyd's, or in the alternative, to hold a factual hearing, with the right to present witnesses and submit evidence, on the existence of exigent circumstances and adequate post-deprivation remedy.
Dated: November 29, 1999
Theodore W. Grippo, Jr.
One of Appellants' Attorneys
Counsel for Appellants
357 East Chicago Avenue
Chicago, Illinois 60611
Theodore W. Grippo, Jr.
Pembroke & Brown
422 N. Northwest Highway, Suite 150
Park Ridge, Illinois 60068
(2) Table of Contents
I. Brief of Appellants
Disclosure Statement preceding
Table of Authorities ii
Jurisdictional Statement 1
Issues Presented for Review 1
Statement of the Case 3
Statement of Facts 4
Summary of Argument 13
Lloyd's judgments against the Ashendens cannot be recognized in this Illinois recognition action because they were not rendered under procedures that comport with American standards of due process of law. 15
A. Introduction 15
B. There were neither exigent circumstances nor the availability of a meaningful post-deprivation process that could possibly justify dispensing with a pre-deprivation hearing. 20
1. There were no exigent circumstances. 20
2. There is no post-deprivation relief by which the Ashendens could challenge the amount of the Equitas Premium assessed against them. 26
C. There was no waiver of the Ashendens' right to a meaningful pre-deprivation hearing. 30
Certificates of Compliance and of Service after Conclusion
II. Joint Appendix
1. Judgment of the district court dated April 22, 1999. (Granting Lloyd's motion for summary judgment and denying Ashendens' motion for summary judgment.)
2. Docket entry dated April 22, 1999.
3. Memorandum Opinion and Order dated April 22, 1999.
4. Docket entry dated August 19, 1999 reciting Minute Order dated August 18, 1999. (Denying Ashendens' motion to alter or amend judgment.)
5. Transcript of oral ruling delivered August 18, 1999. (Stating the reasons for denial of Ashendens' motion to alter or amend judgment.)
6. Copies of General Undertakings signed by James F. Ashenden and Mary Jane Ashenden as members of the Society of Lloyd's.
7. Copies of the judgments entered against James F. Ashenden and Mary Jane Ashenden in favor of Lloyd's in England.
8. Copy of the Illinois Uniform Foreign Money Judgments Recognition Act. 735 ILCS 5/12-618 through -626 (West 1999).
(3) Table of Authorities
Aetna Ins. Co. v. Kennedy, 301 U.S. 389, 57 S. Ct. 809, 81 L. Ed. 1177 (1937) 31
Armstrong v. Manzo, 380 U.S. 545, 85 S. Ct. 1187, 14 L. Ed. 2d 62 (1964) 17
Ashenden v. Lloyd's of London, 1996 WL 717464 (N.D. Ill. Dec. 9, 1996) 7
Balmoral Racing Club, Inc. v. Illinois Racing Board, 151 Ill. 2d 367, 603 N.E.2d 489 (1972) 17
Boddie v. Connecticut, 401 U.S. 371,91 S. Ct. 780, 28 L. Ed. 2d 113 (1971) 14, 18
Bonny v. Society of Lloyd's, 3 F. 3d 156 (7th Cir. 1993) cert. den., 510 U.S. 1113, 114 S. Ct. 1057, 127 L.Ed. 2d 378 7, 34
Brock v. Roadway Express, Inc. 481 U.S. 252, 264, 107 S. Ct. 1740, 95 L. Ed. 2d 239 (1987) 17
Cleveland Bd. of Ed. v. Loudermill, 470 U.S. 532, 105 S. Ct. 1487, 84 L. Ed. 2d 494 (1985) 17
Connecticut v. Doehr, 501 U.S. 1, 111 S. Ct. 2105, 115 L. Ed. 2d 1 (1991) 18, 25
D. H. Overmyer Co. v. Frick, 405 U.S. 174, 92 S. Ct. 775, 31 L. Ed. 2d 124 (1971) 31
Fuentes v. Shevin, 407 U.S. 67, 92 S. Ct. 1983, 32 L. Ed. 2d. 556 (1972) 14, 18, 21
Mathers v. County of Mason, 232 Ill. App. 3d 1095, 598 N.E.2d 387 (4th Dist. 1992) 21
Mathews v. Eldridge, 424 U.S. 319, 96 S. Ct. 893, 47 L. Ed. 2d 18 (1976) 17, 18, 20, 25
Michigan v. Tyler, 436 U.S. 499, 98 S. Ct. 1942, 56 L. Ed. 2d 486 (1978) 22
Ohio Bell Tel. Co. v. Public Utilities Comm'n of Ohio, 301 U.S. 292, 57 S. Ct. 724, 81 L. Ed. 1093 (1937) 31, 35
Penn Central Corp v. Railroad Vest Corp., 955 F. 2d 1158 (7th Cir. 1992) 17
Phillips v. Comm'r, 283 U.S. 589, 51 S. Ct. 608, 75 L.Ed. 1289 (1931) 21, 26
Rosewood Corp. v. Chester, 46 Ill. 2d 249, 263 N.E. 2d 833 (1970) 17
Society of Lloyd's v. Grace, No. 604065/98, slip op. (N.Y. Sup. Ct. Nov. 12, 1999) (submitted as supplemental authority pursuant to F.R.A.P. 28(j)) 3
Society of Lloyd's v. Leighs (Q.B. Feb. 20, 1997) (reproduced in full as Ashenden Ex. 23 at R. Doc. 15-3, Tab 23) 11, 12, 33
Society of Lloyd's v. Wilkinson (Q.B. Apr. 23, 1997) (reproduced in full as Ashenden Ex. 24 at R. Doc. 15-3, Tab 24) 11, 12, 29
Society of Lloyd's v. Lyons (C.A. Jul. 31, 1997) (reproduced in full as Ashenden Ex. 25 at R. Doc. 15-3, Tab 25) 11, 12
Society of Lloyd's v. Fraser (Q.B. March 4, 1998) (reproduced in full as Ashenden Ex. 26 at R. Doc. 15-3, Tab 26) 11, 12, 13, 28
Society of Lloyd's v. Fraser (Q.B. March 12, 1998) (reproduced in full as Ashenden Ex. 27 at R. Doc. 15-3, Tab 27) 11
Society of Lloyd's v. Fraser (C.A. Jul. 31, 1998) (reproduced in full as Ashenden Ex. 28 at R. Doc. 15-3, Tab 28) 10, 11, 12, 16, 25
Star Finance Corp. v. McGee, 27 Ill. App. 3d 421, 326 N.E.2d 518 (1st Dist. 1975) 32
Sweat v. Peabody Coal Co., 94 F.3d 301 (7th Cir. 1996) 15
U. S. v. Forma, 42 F. 3d 759 (2nd Cir. 1994) 21, 25
United States v. James Daniel Good Realty, 510 U.S. 43, 114 S. Ct. 492, 126 L. Ed. 2d 490 (1993) 17, 18, 26
Constitutional Provisions (passim)
U.S. Const., amend. V: "No person shall be . . . deprived of . . . property, without due process of law."
U.S. Const., amend. XIV, §1: "No State shall . . . deprive any person of . . . property, without due process of law."
Illinois Uniform Foreign Money Judgments Recognition Act, 735 ILCS 5/12-618 through -626. (Reproduced in full in Appendix 8 hereto.)
[Receipt-stamped as follows:] U.S.C.A. - 7th Circuit - R E C E I V E D SEP - 2 1999, GINO J. AGNELLO, CLERK
Appellate Court No: 99-3195
Short Caption: Society of Lloyd's v. Ashenden
To enable the judges to determine whether recusal is necessary or appropriate, an attorney for a non-governmental party or amicus curiae, or a private attorney representing a government party, must furnish a disclosure statement stating the following information in compliance with Fed. R. App. P. 26.1 and Circuit Rule 26.1 NOTE: Counsel is required to complete the entire statement and to use N/A for any information that is not applicable.
(1) The full name of every party, any parent corporation, and any publicly held company that owns 10% or more of the party's stock that the attorney represents in the case:
James F. Ashenden
Mary Jane Ashenden
(2) If such party or amicus is a corporation:
i) Its parent corporation, if any; and N/A
ii) A list of stockholders which are publicly held companies owning 10% or more of the stock in the party or amicus: N/A
(3) The names of all law firms whose partners or associates have appeared for the party in the case or are expected to appear for the party in this court:
Pembroke & Brown (Park Ridge, Illinois)
Robert Bennett (solo)
McFadden & Dillon (Chicago, Illinois)
This disclosure statement shall be filed with the principal brief or upon the filing of a motion, response, petition, or answer in this court, whichever occurs first. The attorney furnishing the statement must file an amended statement to reflect any material changes in the required information. The text of the statement (i.e. caption omitted) shall also be included in front of the table of contents of the party's main brief.
Attorney's Signature: [signed] Theodore W. Grippo, Jr.
Date: Sept. 2, 1999
Attorney's Printed Name: Theodore W. Grippo, Jr.
Address: Pembroke & Brown
422 N. Northwest Highway, Suite 150
Park Ridge, Illinois 60068
Phone Number: 847-696-0060
Fax Number: 847-696-0950
Amended 5/99 AK
Certificate of Compliance with Rule 32(a)(7)(B) and (C)
The undersigned, an attorney, hereby certifies that the foregoing brief is in compliance with Rule 32(a)(7)(B) and (C) regarding type-volume limitation. The word processing program used to prepare this document has counted 11,939 words.
Date: November 29, 1999
Theodore W. Grippo, Jr.
Theodore W. Grippo, Jr. Robert Bennett
Pembroke & Brown 357 East Chicago Avenue
422 N. Northwest Highway - Suite 150 Chicago, Illinois 60611
Park Ridge, Illinois 60068 (312) 503-8430
Attorneys for James Frederick Ashenden and Mary Jane Ashenden
Certificate of Service
The undersigned, an attorney, hereby certifies that he served two copies of the foregoing Brief of Appellants and Joint Appendix, together with a disk containing the text of the brief pursuant to Circuit Rule 31(e) upon:
Michael T. Hannafan, Esq.
Michael T. Hannafan & Associates, Ltd.
One East Wacker Drive, #2710
Chicago, IL 60601
by hand this 29th day of November, 1999.
Theodore W. Grippo, Jr.
Theodore W. Grippo, Jr. Robert Bennett
Pembroke & Brown 357 East Chicago Avenue
422 N. Northwest Highway - Suite 150 Chicago, Illinois 60611
Park Ridge, Illinois 60068 (312) 503-8430
Attorneys for James Frederick Ashenden and Mary Jane Ashenden
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