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State Court Sides With Americans on Lloyd's Forum

The Los Angeles panel issues what is believed to be the first such victory for U.S. investors.

San Francisco Daily Journal

Tuesday, October 28, 1997

By Pamela A. MacLean Daily Journal Staff Writer

On the same day last week that a federal appellate panel pondered whether 300 American investors could bring securities fraud claims in this country against Lloyd's of London, a state appellate court issued its own unpublished ruling, based on California law, siding with the Americans.

The decision by the 2nd District Court of Appeal in Los Angeles on Thursday is believed to be the only state court victory in the United States by investors in their long-running battle to bring Lloyd's into an American court to face claims the giant insurance underwriter defrauded them. West v. Lloyd's, B095440.

If the ruling is not overturned on appeal, David West of Montecito and his two daughters, who all invested in Lloyd's insurance syndicates, would be the first Americans to get their day in court against Lloyd's.

The West family brought purely state-law claims of common-law fraud and violations of California corporation and insurance codes. Lloyd's is accused of the alleged sale of unregistered securities in California.

In the state court decision, Justice Mildred L. Lillie concluded that "strong public policy" considerations of California state law outweighed the Lloyd's contract provisions requiring English choice of law and an English forum to resolve disputes.

Lillie was joined by Justices Earl Johnson and Norvell F. Woods.

The only other court to rule similarly, but based on federal law, is a three-judge panel of the 9th U.S. Circuit Court of Appeals, Richards v. Lloyd's of London, 95-955747. The Richards ruling was taken up for review by an 11-judge panel of the court and argued Thursday.

Meanwhile, at least four other federal circuits have ruled in Lloyd's favor that the U.S. claims must be heard in English courts, under English law.

Justice Lillie brushed this aside, noting the Wests cause of action is based on California securities law, not federal law. She did not base her ruling on the federal cases. The Wests' attorney, Richard Zeilenga of DeCastro West & Chodorow Inc. of Los Angeles, said Monday a conscious decision was made long ago in the case to pursue California state claims only because other federal claims cases had been blocked.

William Pitt, a spokesman for Lloyd's American Ltd., said the company likely will appeal the ruling to the state Supreme Court.

Pitt acknowledged that because the ruling is unpublished, its applicability is limited to the case at hand. "Still," he said, "the decision is one we regard as surprising and against the flow of other courts. We would certainly appeal."

Lloyd's argued to the 2nd District that promotion of international commerce is a more important public policy that the protection of California investors and that "the expansion of American business and industry will hardly be encouraged if, notwithstanding solemn contracts, we insist on a parochial concept that all disputes must be resolved under our laws and in our courts," according to the opinion. The Wests were among the nearly 3,200 Americans who signed up to become ‘names' in the Society of Lloyd's, taking on insurance risks in certain syndicates, part of a 300-year tradition of insurance underwriting at Lloyd's. As names, the investors agree to unlimited potential liability and sign letters of credit to Lloyd's that may be drawn in the event that insurance claims exceed income. Many of the American names began to receive huge bills from Lloyd's and some even lost their homes once the bills for asbestos liability and toxic pollution cleanup began to be known. The Wests, and the other American investors, contend they were never told that Lloyd's allegedly funneled the money-losing asbestos claims and environmental pollution claims into their syndicates, essentially dumping losses on the unsuspecting Yanks.

Zeilenga said earlier questioning of current and past chairmen at Lloyd's showed that in 1982 they were discussing the large asbestos problem at a time when they were encouraging Americans to invest. He said the Wests will push to take the case to court as soon as possible to ‘put an end to the uncertainty over the amount of the loss."

This dispute had never been fought out in a state or federal court in America because in 1982 Lloyd's asked all the names to sign agreements designating English choice of law and English courts as the forum. At the same time, Lloyd's got Parliament to approve the Lloyd's Act of 1982, which bars any tort cause of action against Lloyd's except personal injury, libel or slander, unless it is a wrong committed in bad faith, which requires a very difficult burden of proof, according to Lillie.

No name has ever successfully sued Lloyd's for damages or rescission in England under that law, according to the ruling. Lillie noted that the court's review of U.S. Supreme Court cases showed that choice of law "may not prevail in a conflict with a strong public policy favoring the application of a specific statutory scheme." She noted of the five circuits to interpret the same issue, only the 9th Circuit recognized the same principles.

"The protection of its investors is a fundamental policy of this state, and by making the choice of foreign law void, the Legislature has deemed that California has a materially greater interest than other forums in the determination of issues involving the violation of its laws designed to protect its investors," Lillie wrote.

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