UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
In re LLOYD'S AMERICAN : 92 Civ. 1262 (RWS)
TRUST FUND LITIGATION :
THIS DOCUMENT RELATES TO :
ALL ACTIONS :
MEMORANDUM OF OBJECTING NAMES IN
OPPOSITION TO THE PROPOSED SETTLEMENT
BEATIE AND OSBORN LLP
521 Fifth Avenue
New York, New York 10175
The class members listed in Attachment A to this memorandum respectfully oppose the proposed settlement filed in this case and pending before this Court. The terms are stated in the Stipulation and Agreement of Settlement ("Settlement Agreement"). It should be rejected for the following reasons:
(a) the discovery (virtually none) provided no basis for adequately assessing liability (POINT I);
(b) the consideration to be paid to the class does not adequately compensate the class for the rights it would yield, particularly the rights against the Society and Corporation of Lloyd's ("Lloyd's") (POINT II); and
(c) given the terms of the settlement, particularly the release of Lloyd's, the notice to the class after certification failed to satisfy the constitutional requirements for an informed opt-out (POINT III).
The class members listed in Attachment A respectfully request that this Court not approve the settlement.
Given the age of this case, its many lengthy opinions, and the submissions by counsel for plaintiffs and defendant, we assume knowledge of the transactional structure and the claims at issue. Hence, we provide only the following definitions of terms and a brief outline of the settlement:
(a) Lloyd's: not itself an insurer, Lloyd's is a collection of insurers called "syndicates."
(b) syndicate: a group that wrote and issued insurance policies and that lasted one year, at the end of which a Name could, in his discretion, cease to participate or renew his participation.
(c) Names: individuals (since 1994, a few corporations) who have chosen to participate in the underwriting of an insurance policy or policies issued by a syndicate and who are liable for syndicate losses to the extent of their net worth.
(d) Managing Agent: manager of a syndicate who, on behalf of the Names, has the authority to select risks, set premium rates, hold premiums, and pay claims.
(e) Members' Agent: entrusted by the Names to select syndicates in which the Name will participate and entrusted by the Names to care for their funds and affairs.
(f) The U.K. Insurance Companies Act of 1982: English statute under which the premiums paid by policyholders must be deposited in one of three trust funds, depending on the currency in which the premium was paid.
(g) Lloyd's American Trust Fund (the "LATF"): the trust fund that held all premiums and paid all claims in United States dollars (Citibank and its predecessors have served as trustee for the LATF since its creation in 1939).
(h) The Lloyd's American Trust Deed (the "Deed"): A document that governs the LATF, requires a separate fund for each Name, for each syndicate, and for each year. A Name would be responsible only for the claims which the Name underwrote. Under the terms of the Deed, Citibank received direction from the Name's "Agent", which included the Name's Managing Agent, the Name's Members' Agent, and the "representative of the Agent," (any person designated by an Agent). In practice, Citibank received directions from the "Representative of the Agent," who may be any of several Lloyd's employees in its Market Financial Services Department. The Deed provided that the Names would not direct, communicate with, or receive an accounting from Citibank.
(i) Market Financial Services Department ("MFS"): a Lloyd's entity that instructed Citibank in connection with the "London Market Scheme" and, on behalf of the Managing Agents, also instructed Citibank on investing the principal in the accounts. Citibank accounted to MFS daily, weekly, monthly, quarterly, and annually for investment, regulatory reporting, and other purposes on an account-by-account basis.
(j) London Market Scheme: the system by which Lloyd's collects premiums and pays claims to policyholders (MFS directs Citibank at the end of each week to debit or credit the proper trust accounts depending on which is greater, the total premiums (accounts are credited) or the total claims (accounts are debited)).
(k) Reconstruction & Renewal Debt ("R&R Debt"): amounts, according to Lloyd's, owed by certain Names to satisfy the Names' underwriting liabilities for claims submitted by policyholders on policies issued before 1993.
(l) Group Accounts: accounts created by Citibank in violation of the Deed by grouping trust accounts for all or some of the Names in a syndicate or trust accounts for Names from several syndicates.
Syndicates that had underwritten policies covering asbestos and environmental risks began to suffer losses. Neither Lloyd's nor Citibank told the Names about their losses when they renewed participation in the syndicates or at any other time, and many unauthorized financial activities by Citibank concealed the losses. Once the asbestos and environmental syndicates began to sustain huge losses, Lloyd's assessed the Names for the deficiencies in their syndicates and when they did not pay, sued them to recover the deficiencies. Declaration of Richard Rosenblatt ("Rosenblatt Decl."), ¦ 14. These suits, in the United States and other countries, have caused approximately four hundred bankruptcies and forty suicides. Id. ¦¦ 16-17. Many suits are ongoing. Id. ¦ 15. More have been threatened.
In December, 1995, plaintiffs filed a class action against Citibank alleging various legal and equitable claims and seeking a preliminary injunction. After motion practice, plaintiffs continued with their breach of fiduciary duty claim. In re Lloyd's Am. Trust Fund Litig. ("Lloyd's I"), 954 F. Supp. 656, 679-681 (S.D.N.Y. 1997). The court certified a class, In re Lloyd's Am. Trust Fund Litig. ("Lloyd's II"), No. 96 Civ. 1292 (RWS), 1998 WL 50211, at *21 (S.D.N.Y. Feb. 6, 1998); and the opt-out period expired . . . long ago (1998). Members of the class involved in the prosecution of this case estimate class damages at approximately one billion dollars, which include two components:
(a) all administrative and related fees charged by Citibank for its services as Trustee of the LATF (a relatively nominal amount); and
(b) losses sustained by Names when they, not being told by their Trustee Citibank or by Lloyd's that their syndicates were losing large amounts of money, agreed to participate or to renew their participation in the syndicates annually (the vast majority of the damages).
See Rosenblatt Decl. ¦ 21. Counsel for the class performed no discovery except examination of some but not all relevant documents in the possession of Citibank. Counsel for the class sought no non-party documents, took no depositions during discovery, and neither performed nor commissioned a damage analysis. See Rosenblatt Decl. ¦ 8.
Counsel for the class and defendant then submitted a proposed settlement agreement; counsel for the class took one "confirmatory" deposition, see Rosenblatt Decl. ¦ 9; and the Court preliminarily approved the proposed settlement. It is now scheduled for a hearing on final approval on September 10, 2002. Under the Settlement Agreement, the Names release:
any and all claims, rights or causes of action or liabilities of any kind whatsoever . . . that any [Name] ever had, now has or hereafter may have against the Released Parties, or any of them, whether or not asserted in this [case] and whether known or unknown, based on or arising out of any matter, cause, thing, act or failure to act whatsoever by any of the Released Parties in relation to the establishment, conduct, administration, operation, supervision, direction or oversight of the LATF . . . .
See Settlement Agreement ¦ 1(tt). Counsel for defendant make much of the point that the Names do not give a "General Release." See Memorandum of Defendant Citibank, N.A., in Support of Approval of Class Action Settlement ("Def. Br.") pp. 4, 17, 30. As the definition of the released claims makes clear, they would, in effect, give a "Lloyd's Mess" release because the Names' disputes all relate to the "establishment, conduct, administration, operation, supervision, direction, or oversight of the LATF," i.e., they would release all claims and defenses conceivably relevant to their disputes. The Settlement Agreement defines the "Released Parties" as Citibank and anyone or anything employed by, affiliated with, or owned by Citibank in the past or the present. See Settlement Agreement ¦ 1(ss). In a surprising twist for which the class received no notice and receives no compensation, the Settlement Agreement also releases Lloyd's (and anyone or anything employed by, affiliated with, or owned by Lloyd's), MFS, the Managing Agents, and the Members' Agents. The Settlement Agreement also covers other litigation and damage issues, particularly those relating to Lloyd's suits to recover the Names' deficiencies in their syndicates, and claims that might be made against Lloyds in the United Kingdom. The release proposed for Lloyd's in the Settlement Agreement would terminate, with insignificant exceptions, all defensive and offensive rights for the Names in the class.
Meanwhile, in Jaffray v. Society of Lloyd's, 1996 Folio 2032 (Queen's Bench Division Nov. 3, 2000), aff'd, 2002 EWCA Civ. 1101 (Court of Appeal, July 26, 2002), several Names sued Lloyd's on a variety of theories, among other things, that through brochures and annual reports called "globals," Lloyd's represented to them for the purpose of securing new investments or renewing current investments in asbestos syndicates that Lloyd's had accounting controls which showed the syndicates underwriting asbestos policies to be solvent in the present and estimated them to remain solvent in the future. The appellate court held that Lloyd's made the representations and that they were false. See Affidavit of Russel H. Beatie ¦ 4.
To protect the rights of the absent class members, who will be bound by the settlement, the court should ensure that the proposed settlement is "fair, reasonable and adequate." Weinberger v. Kendrick, 698 F.2d 61, 73 (2d Cir. 1982); TBK Partners, Ltd. v. Western Union Corp., 675 F.2d 456, 462 (2d Cir. 1982); City of Detroit v. Grinnell Corp., 495 F.2d 448, 463 (2d Cir. 1974). To determine whether a settlement is "fair, reasonable and adequate," courts in this circuit evaluate the following factors specified in Grinnell, supra:
(1) the complexity, expense and likely duration of the litigation;
(2) the reaction of the class to the settlement;
(3) the stage of the proceedings and the amount of discovery completed;
(4) the risks of establishing liability;
(5) the risks of establishing damages;
(6) the risks of maintaining the class through the trial;
(7) the ability of the defendants to withstand a greater judgment;
(8) the range of reasonableness of the settlement fund in light of the best possible recovery; and
(9) the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation.
The Names object to the proposed settlement primarily on grounds (3) and (4) together, (8) and (9), and constitutionally deficient notice. Specifically, class counsel have not undertaken sufficient discovery to assess the risk of establishing liability (3 and 4). For factors (8) and (9), a comparison of the settlement fund and the possible recovery (best and/or in light of circumstances) shows that the consideration does not adequately compensate the class for the claims and defenses the class will release against Citibank alone. It certainly does not justify the participation of Lloyd's in this settlement and does not compensate the Names for the release of their claims and defenses against Lloyd's. Nor were the members of the class given any notice at class certification and opt-out that the litigation would dispose of rights against Lloyd's.
DISCOVERY AND ASSESSMENT OF LIABILITY (3 AND 4)
Counsel for the class have reviewed some but not all documents at Citibank relevant to the case. See Joint Affidavit of Sanford P. Domain and Kenneth Lapatine in Support of (A) the Proposed Class Settlement with Defendant Citibank and (B) Plaintiffs' Counsel's Joint Petition for Fees and Reimbursement of Expenses ("Pltf. Aff.") ¦ 54. They claim to have interviewed an unspecified number of people in the United Kingdom but do not identify any of them. Id. at ¦ 28. During the discovery period, they took not one deposition even though the defendant's principle place of business stood in their front yard. Later, in the course of settlement, they took one "confirmatory" deposition. See Def. Br. p. 13. This would probably be insufficient discovery to assess liability in a right-turn-rear-end-bang case. It is certainly insufficient in a one billion dollar case in which the defendant violated its record-keeping obligations, thus making analysis and assessment of the claims and damages even more difficult.
Counsel for the class states that severe cross-examination at a trial in the United Kingdom discredited the main witness against Lloyd's, Roger Bradley. The English system of witness preparation, witness presentation, and discovery has not progressed much from the Star Chamber of the 1500's, Levy, Leonard W., Origins of the Fifth Amendment: the Right against Self-Incrimination, 181-183 (Oxford, 1968), and cannot compare to the American adversarial system. But whatever value Mr. Bradley may have as a witness in the future, other arguments about, and approaches to, the issues exist. These appear not to have been explored at all.
Without regard for the testimony of Roger Bradley and others about Citibank's knowledge or the sparse discovery, if the syndicates were solvent, they would have had premium income in them and profits for the Names. Why, then, did Citibank make inter-account loans under which an insolvent account "borrowed" funds from a solvent account to make the Names' syndicates appear solvent and to pay claims by the insureds? See Consolidated Amended Complaint ("Complaint") ¦¦ 106-109. Believing their accounts were solvent, the Names renewed their underwriting participation after the insolvencies had occurred. Given the information they had, their belief that they were participating in a successful, profitable enterprise was reasonable but wrong and was induced by the improper silence of their fiduciary. Id. at ¦ 103.
In its present form, the settlement would be fair only if it satisfied one or more of three conditions: (1) the breach of fiduciary duty claim against Citibank would fail as a matter of law or as a matter of proof (that has been neither investigated nor shown); (2) Lloyd's were not a Released Party (it is); and/or (3) the compensation to the class were many hundreds of millions of dollars (it is not).
Damages for the breach of fiduciary duty claim against Citibank are approximately one billion dollars. Damages for the fees are approximately three million dollars. If the breach of fiduciary duty claim would fail, a settlement of twenty million dollars would not be unfair. However, given its duties as Trustee and its management over the trust accounts, Citibank could not have been ignorant of the insolvent status of the Names' trust accounts. Thus, a settlement for twenty million dollars does not fairly compensate the class for releasing its breach of fiduciary duty claim against Citibank.
BEST AND UNDER THE CIRCUMSTANCES RECOVERY (8 AND 9)
The settlement will terminate all claims and defenses every class member has against Lloyd's in litigation over the losses and deficiencies in the asbestos and environmental syndicates. Counsel for Citibank claims that Lloyd's must be a Released Party because it will allow "safe passage" of the cash from Citibank to the plaintiffs and will allow the Credit Notes to pay R&R Debt. Although counsel submit no written proof of these commitments by Lloyd's, we concede promises could be benefits; but the amounts, etc., are a band-aide on an axe-wound. They certainly are not commensurate with the claims and defenses being released and the risk of liability to Citibank. Counsel for defendant also argue that Lloyd's must be released in order for Citibank to be given "true repose." This problem involves potential disputes between Citibank and Lloyd's, not the Names. Peace for Citibank provides no benefit to the class.
Lloyd's has promised, we are told, that it will grant "safe passage" of the cash portion of the settlement from Citibank to the plaintiffs by not seeking to attach the cash as part of its claims for nonpayment of R&R Debt and syndicate deficiencies, see Def. Br. pp. 2-3, 14, a meaningless promise. Lloyd's will pursue the Names regardless of any settlement in this case and will seek any money or assets the Names possess whether the money is in transit through the Settlement or independent of it. Nor does the promise by Lloyd's to honor the Credit Notes benefit the Names in an appropriate amount. See Def. Br. p. 15.
Finally, counsel for defendant claims that Lloyd's must be released because any litigation against Lloyd's over the management of the LATF would involve Citibank as another defendant. See Def. Br. pp. 33-35. Even if that were the case, it is, once again, not the Names' problem. If Citibank wanted to be released by Lloyd's from any future litigation brought by the Names against Lloyd's, it should have impleaded Lloyd's as this Court suggested. Lloyd's I, 954 F. Supp. at 677. Citibank never chose to bring Lloyd's into this case, and the consequences of that decision should fall on Citibank, not the Names.
The Names are further prejudiced because the release would bar them from asserting counterclaims and defenses to Lloyd's claims as plaintiff for syndicate deficiencies and R&R debt. N.Y. C.P.L.R. 203(d); Manhattan Life Ins. Co. v. A.J. Stratton Syndicate (No. 782), 132 F.R.D. 139, 141 n.3 (S.D.N.Y. 1990). The following counterclaims and defenses, among others, would be lost.
Under New York law, a trustee, as part of its absolute duty of loyalty, must distance itself from situations in which its interest may conflict with its duty. In re Bankers Trust Co., 636 N.Y.S.2d 741, 745 (N.Y. App. Div. 1995); Albright v. Jefferson County National Bank, 53 N.E.2d 753, 756 (N.Y. 1944). The class alleges that Citibank breached its fiduciary duty as Trustee of the LATF by not informing the Names that their syndicates were insolvent and by commingling the funds of solvent and insolvent syndicates. See Complaint ¦¦ 99-103, 106-110. Counsel for the class suggests that no evidence shows Citibank knew the syndicates were insolvent, see Pltf. Aff. ¦ 41. Neither counsel for the class nor counsel for the defendant deny that Citibank commingled the accounts and knew the trust accounts were insolvent.
To prevail on the merits of this claim, the class must prove that Citibank, as trustee for the LATF (and, therefore, for the Names), placed its interests and the interests of Lloyd's ahead of the Names' interests. In fact, we believe that adequate discovery would show Citibank: (1) knew that it was involved in the inter-account lending scheme; (2) knew that the Names' accounts had become insolvent; and (3) placed the interests of itself and Lloyd's ahead of the Names by loaning funds from solvent accounts to insolvent accounts instead of informing the Names that their accounts were insolvent.
The Names have a claim against Lloyd's for its mismanagement of the LATF through MFS in violation of the Deed. Lloyd's certainly knew that MFS was directing Citibank to loan funds from solvent accounts to insolvent accounts and that the inter-account loans were not authorized by the Deed. Lloyd's I, 954 F. Supp. at 679-680. Lloyd's would be liable for breaching the terms in the Deed or causing Citibank to breach the terms in the Deed. In defense of the demands by Lloyd's that the Names pay R&R Debt and syndicate deficiencies, the Names could argue that Lloyd's improperly managed the trust accounts in violation of the Deed and, therefore, would be estopped from demanding payment.
The appellate court in Jaffray held that Lloyd's made false statements in the brochures it sent to the Names. Because Lloyd's sent these brochures to Names in the United States (by the mail or other means of interstate commerce) and the investment in the syndicate is a security, the Names have a defense based on violation of the Securities Act of 1933 or the Securities Exchange Act of 1934. The language of the release would bar all these defenses.
CONSTITUTIONALLY DEFICIENT NOTICE OF CLASS CERTIFICATION
Compared to the terms of the Settlement Agreement, the Notice of Pendency of Class Action does not satisfy the constitutional requirement that the members of the class know the rights that are at risk in the lawsuit and that could be involved in its resolution. Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314-315 (1950); In re Nissan Motor Corp. Antitrust Litig., 552 F.2d 1088, 1104-1105 (5th Cir. 1977); Twigg v. Sears, Roebuck & Co., 153 F.3d 1222, 1227 (11th Cir. 1998). Under the claims in the Consolidated Amended Complaint and all prior proceedings in this case, the Names could not have anticipated that they would be expected to release their claims and defenses against Lloyd's when they received notice of class certification. The plaintiff class filed its case against Citibank only, and Citibank did not implead Lloyd's when it could have. As this Court said in its decision:
Thus, even if Citibank is correct that it cannot bring a third party claim pursuant to Rule 13(h), it is still obliged to eliminate the asserted prejudice to Lloyd's and the Agents by impleading them pursuant to Rule 14. Citibank does not contend that it is unable to do so, but only that it should not be compelled to do so, since the need to join the absent parties is not dependent on a claim by Citibank for contribution or indemnity. However, the fact that Lloyd's and the Agents have interests that could be impaired even absent a claim against them by Citibank does not relieve Citibank of its obligation to pursue this avenue of eliminating the prejudice to the absent parties.
Id. at 677. The parties circulated the Notice of Pendency of Class Action, which gave no notice that the claims and defenses against Lloyd's would be involved in the suit. Unfortunately, the Notice only described the claims against Citibank and never mentioned the possibility that Lloyd's would be a party to the claims or to the settlement. The opt-out period that followed the Notice long ago expired (1998). That was the Names' last chance to protect themselves against a release of Lloyd's if they objected to it... as many of them now do strenuously. But they had no notice that they should consider those issues.
The settlement of the claims against Citibank is unfair, unreasonable, and inadequate. If Lloyd's is released, regardless of the viability of the breach of fiduciary duty claim against Citibank, the settlement is even more unfair, unreasonable and inadequate. Lloyd's contributes nothing of substance to the settlement. In return, the Names release their claims and defenses against Lloyd's. For all these reasons, we respectfully request that the Court refuse to approve the proposed settlement and order the case to proceed.
Dated: New York, New York
May 12, 2004
BEATIE AND OSBORN LLP
Russel H. Beatie, Esq. (RB-4439)
521 Fifth Avenue, 34th Floor
New York, New York 10175
Attorneys for Plaintiff Objectors
 Anticipating widespread hostility to the settlement, counsel for the class cite a number of cases in which class members, even plaintiffs and class representatives, objected to a settlement. See Def. Br. p. 26. The number of objectants is larger and the strength of their grounds for opposition is greater here than anyone in our office has ever seen.