1994 WL 873350 (S.D.Tex.)
Not Reported in F.Supp.
United States District Court, S.D. Texas, Houston Division.
Charles Robert LESLIE, Plaintiff, v. LLOYDs OF LONDON, a/k/a Lloyds, a/k/a the Corporation of Lloyds a/k/a the Committee of Lloyds a/k/a the Society of Lloyds, and R. W. Sturge & Co., a/k/a R. W. Sturge Ltd., Defendants.
Civ. A. No. H-90-1907.
Nov. 2, 1994.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
RAINEY, District Judge.
[*1] Currently pending before the Court is the Motion for Preliminary Injunction [FN1] (Docket Entry #3) filed by Plaintiff Charles Robert Leslie (Leslie). After considering this motion, the pleadings, briefs, oral argument, evidence and testimony presented in regard to this motion, the Court makes the following findings of fact and conclusions of law. As an initial matter, however, the Court finds that a brief discussion of the procedural background relative to Leslies motion is in order.
Leslie moves this Court to enjoin Defendant Lloyds of London, a/k/a Lloyds, a/k/a The Corporation of Lloyds, a/k/a The Committee of Lloyds, a/k/a The Society of Lloyds (Lloyds) from presenting for payment Leslies clean irrevocable letter of credit, referred to in this action as both I-000030 and TCB 30 (hereinafter, the Letter of Credit), payable to The Committee of Lloyds in the amount of approximately $180,000.00. [FN2]
Leslie first obtained an ex parte temporary restraining order against Texas Commerce Bank, N.A., (TCB), the bank issuing the Letter of Credit, in a state district court action on March 28, 1994. That order restrained TCB from paying the Letter of Credit. On April 4, 1994, Leslie obtained an additional ex parte order restraining the confirming bank, Chemical Bank [FN3], from paying the Letter of Credit and restraining Lloyds from presenting the Letter of Credit for payment.
TCB removed the state court action to this Court on April 5, 1994, and the case was filed under Civil Action No. H-94-1148 (H-94-1148); however, the events prompting the filing of Leslies request for injunctive relief stem from the circumstances giving rise to Civil Action No. H-90-1907 (H-90-1907), also filed with this Court. In H-90-1907, Leslie seeks recovery of damages against Lloyds pursuant to the Texas Deceptive Trade Practices-Consumer Protection Act (DTPA), TEX.BUS.& COM.CODE ANN. § 17.41, et seq., actual and punitive damages at common law for breach of fiduciary duty, and statutory damages pursuant to § 10(b) of the 1934 Securities and Exchange Act, 15 U.S.C. § 78j and Rule 10b-5 of the Securities Exchange Commission. Because of the overlap of the parties, claims and issues presented in both cases, this Court consolidated the two cases into the senior civil action, H-90-1907.
The Court concurrently extended the temporary restraining order granted in state court against TCB to April 21, 1994 and against Chemical Bank and Lloyds to April 25, 1994. The parties subsequently agreed to allow the temporary restraining orders to expire as to Chemical Bank and TCB. This Court then held a hearing on Leslies Motion for Preliminary Injunction against Lloyds on April 25, 1994 and continued the hearing on May 9, 1994.
Although this Court is currently considering all of the claims asserted in H-90-1907, the following findings of fact and conclusions of law are entered solely in regard to the issue of Leslies Motion for Preliminary Injunction.
FINDINGS OF FACT
[*2] 1. Leslie is an individual residing in Houston, Texas. In the Spring of 1976, a director of Sturge [FN4], Charles E. Parnell (Parnell) solicited Leslie for participation in an investment contract to underwrite insurance risks through Lloyds. Participation required that Leslie apply and qualify for membership in Lloyds which included posting a letter of credit in Lloyds favor through a Texas bank. Leslie was also required to accept liability to the entire extent of his personal estate. Leslie completed this process by January 1, 1977 and traveled to London to execute certain necessary documents. At that time he became an underwriting member or Name.
2. The Letter of Credit posted by Leslie was payable on demand to either The Committee of Lloyds or the Society and Counsel of Lloyds for the purpose of securing Leslies obligations to the various syndicates in which he participated as an underwriter.
3. As a Name, Leslie was required to enter into an underwriting agency agreement through which he would participate in syndicates. The syndicates, regulated by Lloyds, assess risks and sell policies and contracts of insurance which Lloyds ultimately approves and issues. Leslie entered into an underwriting agency agreement with Sturge. Sturge arranged for Leslie to participate in six syndicates managed by Sturge, and three others managed by R. H. M. Outhwaite and Posgate & Denby Agencies Limited.
4. Leslie has periodically increased and renewed his initial Letter of Credit. As mentioned previously, currently outstanding is the Letter of Credit issued by TCB and made payable to The Committee of Lloyds in an amount approximating $180,000.00.
5. During the time Leslie was considering becoming a Name, Parnell represented to him that membership in Lloyds was a sound and attractive investment and that Leslies underwriting involvement would be focused on low-risk insurance. Parnell further indicated that Leslie could limit his risk by simply resigning from a syndicate after the close of its three-year accounting period. Parnell warned Leslie that, as a Name, he would have unlimited liability; however, Parnell also reassured Leslie that the risk was negligible and nothing more than a technical requirement. In response to his direct question, Leslie was told that the most he could actually expect to lose in a bad year was approximately 10 percent.
6. The representations made to Leslie that he resign his underwriting membership after three years without any real fear of further liability proved to be a false statement of Leslies obligations as a Name. Sturge director Nigel Hanbury admitted to Leslie in April 1989 that although he could resign from a syndicate, his liabilities continue indefinitely as long as he is a Name in syndicates with open year accounts.
7. Syndicates generally close for underwriting purposes after three years; however, long-tail coverages and liabilities prevented some syndicates from closing claims for indeterminate periods. At the time he became a Name, Leslie was placed into syndicates in Lloyds that contained high-risk, long-tail claims exposure, such as asbestosis and other pollution risks. Accordingly, Leslie, like numerous other Names, is faced with limitless, continuing liability a consequence clearly contrary to the representations used to entice Leslie to invest. Leslie asserts that he would never have become a Name at Lloyds had he been informed of this situation in 1976.
[*3] 8. At the preliminary injunction hearing, Leslie called five other Names as witnesses. All five witnesses testified that similar representations were made to them regarding membership at Lloyds. [FN5]
9. As of 1989, Lloyds was not disclosing pertinent information regarding the asbestos risks and was instead representing to Names that unlimited liability was a technicality, in spite of the information Lloyds then had regarding asbestos claims.
10. During 1989-90, at the same time that Lloyds first informed Leslie that, in fact, he could not effectively resign from Lloyds, a Sturge representative told Willa Martin of Albuquerque, New Mexico, that she could resign after three years. Lloyds later encouraged the Martins to increase their underwriting limits despite Lloyds knowledge of the hidden risks and without any disclosure of these risks.
11. In fact, by 1986, Lloyds had knowledge of potentially staggering losses already incurred, but not yet reported and not yet attributable to any particular Lloyds syndicates, for asbestosis and other pollution claims. Furthermore, during the same time period, Lloyds had extensive knowledge that many syndicates were grossly under-reserved given the magnitude of these impending asbestosis claims. In particular, the Court notes the following:
a. In 1969, the Cromer Report noted that many syndicates were under-reserved because the extent of losses was not fully appreciated and that those losses were passed on in later years to other syndicates through the reinsurance-to-close mechanism. This information was not made available to Leslie at the time he was solicited to become a Name. In fact, the Cromer Report itself was not made available to Names until October 1986, almost 17 years after its submission to The Committee of Lloyds.
b. The Cromer Report also cautioned that Lloyds syndicates were particularly unsuitable for the underwriting of a catastrophe business as compared to corporate reinsurers, who could accumulate reserves in a tax-effective manner. Lloyds was advised that it was in need of a special fund to deal with catastrophes. This advice was based upon the size of Lloyds North American business and the number of catastrophic claims filed in North America; the fact that much of its business was the reinsurance of catastrophe risks; the inadequate size of its available reserves; and in view of the presumption that surpluses would be distributed to Names.
c. Throughout the 1970s and 1980s, Lloyds sought to enlarge its underwriting membership. In particular, Lloyds embarked upon a campaign to attract new Names from the United States and Canada. The recruitment drive was, in part, in response to recommendations in the Cromer Report that Lloyd should increase its membership of Names to increase its capacity in the industry. Membership rose from 1970 to 1986; however, there was no corresponding rise in underwriting. The apparent effect was a transfer of exposure to various volatile risks from insiders to external Names.
[*4] d. By at least 1980, Lloyds had recognized the scale of the asbestosis problem as having serious implications for Lloyds on a market-wide basis and potential implications for the solvency of the market as a whole. Lloyds therefore set up an Asbestos Working Party to consider and advise upon appropriate action to be taken in a coordinated approach to respond to the asbestos problem. The Asbestos Working Party met several times and gathered a variety of information and reports.
e. Between 1979 and 1981, Lloyds American lawyers were continually advising Lloyds of the growing asbestosis risks.
f. By letters dated February 10 and June 9, 1981, Lloyds and the Asbestos Working Party wrote to all active underwriters, advising them to obtain as much information as possible about developments in the United States regarding asbestosis litigation. In this regard, Lloyds wrote [i]t cannot be emphasized too strongly that you should make yourself aware of the contents of these reports. Nevertheless, Lloyds did not require the managing agents or members agents to inform passive Names such as Leslie of the widespread growth of asbestosis litigation.
g. As of November 1981, Lloyds Advisory Panel of Auditors began to address the asbestos problem in preparation for the year-end 1981 audit. The Advisory Panel of Auditors consisted of the auditors specifically approved and authorized by Lloyds to prepare the audit reports for the syndicates. At a meeting of Lloyds panel auditors on November 10, 1981, chaired by R.J. Kiln (Kiln), Kiln indicated that he did not wish to see mention of certain asbestosis claims in the audit instructions. The audit instructions are issued by Lloyds to the auditors for the auditors use in evaluating the premium and reserves necessary to reinsure and close syndicates.
h. According to notes taken at the November 10, 1981 meeting of Lloyds Panel Auditors, some members of the Panel felt that a warning letter on the asbestosis subject would be beneficial and that the letter should emphasize how serious the losses would be. Murray Lawrence, the Co-Deputy Chairman of Lloyds and a member of The Committee of Lloyds, warned that the scale of losses might be sufficient to bankrupt the reinsurers.
i. Nonetheless, at Kilns direction, the asbestosis claims were not mentioned in the audit instructions. The exclusion of the asbestosis claims from the audit instructions strongly indicates that Lloyds forwarded past liabilities to new syndicates without disclosure to the Names. This omission is further indicative of Lloyds efforts to hide the asbestosis problem.
j. By letter dated February 24, 1982, Neville Russell, the auditor for a number of syndicates, recommended that the 1979 year should not, in the exercise of reasonable care, be closed because of the inability to quantify the claims to be expected. The Neville Russell letter recognized the wide-spread nature of the asbestos problem in the insurance market and the fact that a substantial proportion of Lloyds syndicate clients had such losses or potential losses, arising from asbestosis and related diseases, that they would be unable to quantify their final liability with any reasonable degree of accuracy.
[*5] k. On March 9, 1982, members of Lloyds Audit Committee, Asbestos Working Party, and Lloyds Underwriting Agents and Audit Department met to discuss the Neville Russell letter. Specifically discussed was the issue of liability quantification and the fact that Names could still be asked to put up substantial sums of money.
l. Lloyds eventually wrote all active underwriters and underwriting agents on March 18, 1982, leaving it to each managing agent to determine whether to close their syndicates and whether to inform the Names; however, they were not required to do so. Names, including Leslie, continued to invest without adequate notice of the exposure.
12. None of the above-mentioned information that was available to Lloyds was disclosed to Leslie when he became an underwriting member or at the time he made annual decisions to continue underwriting at Lloyds. Nor was such information made available to him when he selected the particular syndicates in which he would be underwriting and the amount of such underwriting.
13. In a June 1985 statement to the members of Lloyds, the Chairman of Lloyds Counsel, Peter Miller (Miller), reassured Names that recent reforms reduced the likelihood of scandals that had produced the need for reform. He stated his belief that the new regulatory system instituted by Lloyds is one in which the current members of Lloyds and those seeking membership can fully place their trust. He described the new regulatory scheme as a compelling reason to participate in the insurance market, and he further claimed that Lloyds is insisting upon very full disclosure in connection with the accountability of agents to Names. Importantly, these statements were made to members of Lloyds at a time when Lloyds was aware of the asbestos risks heretofore described.
14. In June 1986, Lloyds sent Leslie a new General Undertaking agreement to replace the original 1977 contract between the parties. The 1986 General Undertaking was part of Lloyds new regulatory scheme, and it contained choice-of-law and forum-selection clauses that were not included within the original 1977 contract.
15. Neither Lloyds nor Sturge provided to Leslie any sufficient explanation of the reasons for or the effect of the new General Undertaking. Sturge did send Leslie a letter on March 10, 1986 to inform him of the important changes in membership requirements and procedures and to explain the consequential changes Sturge would be introducing; however, the purported forum-selection/choice of law clauses were not mentioned in this letter.
16. In regard to the new General Undertaking, Sturge indicated that all Names were required to accede to the modifications and terms of the General Undertaking as a condition of continuing right of membership in Lloyds.
17. According to Leslies allegations, he believed that he was required to sign the 1986 General Undertaking if he was to continue his underwriting activity with Lloyds, and he further believed that Lloyds would call his Letter of Credit if he did not.
*6 18. The choice-of-law and forum-selection clauses contained in the 1986 General Undertaking contract designate England as the place and English law as the means for settling disputes arising out of or relating to the members membership. The initial inclusion of these clauses apparently coincided with the Lloyds awareness of the potential for massive litigation involving Lloyds Names in the United States wherein the American Names sought to invoke United States laws.
19. When the 1986 General Undertaking was sent to Leslie, four syndicate years of account on which he had underwritten remained open beyond the normal three-year period.
20. As a Name, Leslie received returns from his first eight years through the underwriting year 1984. Thereafter, he has incurred substantial losses. As long as he is a Name on the four syndicate years of account that remain open, Leslie is subject to lingering and unquantifiable liability, which is potentially unlimited.
21. Leslie has refused to pay in regard to calls for losses from various syndicates in which he has participated as a Name. He has instead filed a lawsuit, H-90-1907, against Lloyds, asserting the various claims previously mentioned. Because of Leslies refusal to pay, Lloyds claims that it has the contractual right to draw down his Letter of Credit and forward the funds to the syndicates that have issued calls to Leslie. Lloyds informed Leslie no later than February 11, 1994, that it intends to proceed with the compulsory drawdown on the complete amount of the Letter of Credit at the earliest possible date.
21. [sic] Lloyds is presently solvent according to its 1993 Report of Account, and it is an on-going business. Leslie has presented speculative testimony that Lloyds may not have sufficient assets to pay a future judgment in Leslies favor if Leslie and other similarly situated Names are successful in law suits against Lloyds; however, Leslie has not established that Lloyds is presently insolvent nor has he presented competent evidence that Lloyds could not pay a judgment for monetary damages in Leslies favor in this action.
CONCLUSIONS OF LAW
1. To enjoin the operation of a letter of credit, Leslie must prove the following:
a. a substantial threat he will suffer irreparable injury and will not have an adequate remedy at law if the injunction is not issued;
b. that the threatened injury to him outweighs any damage the injunction might cause to innocent third parties;
c. that the injunction will not disserve the public interest; and
d. a substantial likelihood of success on the merits.
Doe v. Duncanville Independent School District, 994 F.2d 160, 163 (5th Cir. 1993); Sierra Club, Lone Star Chapter v. FDIC, 992 F.2d 545, 551 (5th Cir. 1993); Apple Barrel Productions, Inc. v. Beard, 730 F.2d 384, 386 (5th Cir. 1984).
2. In addition to these traditional common law requirements, other courts contemplating letters of credit have required that a plaintiff prove fraud in the transaction as a prerequisite to obtaining such injunctive relief. See Ground Air Transfer, Inc. v. Westates Airlines, Inc., 899 F.2d 1269, 1273 (1st Cir. 1990); Airline Reporting Corp. v. First Natl Bank of Holly Hill, 832 F.2d 823, 827 (4th Cir. 1987); KMW Intl v. Chase Manhattan Bank, N.A., 606 F.2d 10, 16 (2nd Cir. 1979); Phillipp Bros., Inc. v. Oil Country Specialists, Ltd., 787 S.W.2d 38, 40 (Tex. 1990); Gatx Leasing Corp. v. DBM Drilling Corp., 657 S.W.2d 178, 182 (Tex.App.San Antonio 1983, no writ). See also Tex.Bus.& Com.Code § 5.114(b) (allows a court of appropriate jurisdiction to enjoin payment under a letter of credit in fraud in the transaction fact patterns).
[*7] 3. Fraud in the transaction has been interpreted to mean fraud in which the wrong doing of the beneficiary has so vitiated the entire transaction that the legitimate purposes of the independence of the issuers obligation would no longer be served. GATX Leasing Corp., 657 S.W.2d at 182 (quoting Intraword Industries, Inc. v. Girard Trust Bank, 461 Pa. 343, 336 A.2d 316, 324-25 (1975). See also Phillip Bros., Inc. v. Oil Country Specialists, Ltd., 787 S.W.2d at 40. The underlying transaction must have been a complete sham, from which no value was derived by the customer and with no purpose other than obtaining the customers money through the letter of credit. See GATX Leasing Corp., 657 S.W.2d at 183. See also Sztejn v. J. Henry Schroder Banking Corp., 177 Misc. 719, 31 N.Y.S.2d 631, 634-35 (1941) (cited as leading case on the injunction of letters of credit due to fraud by GATX Leasing Corp., 657 S.W.2d at 183). Furthermore, proof of actionable fraud has been held insufficient to justify an injunction. See Paris Sav. & Loan Assn v. Walden, 730 S.W.2d 355, 365 (Tex.app.Dallas 1987, writ dismd)(We do not hold there is no actionable fraud in either transaction. We hold only that there is no fraud in the transaction of the type required to fall within section 5.114(b)).
4. Leslie has failed to show the type of fraud in the underlying transaction that would destroy the legitimate purpose of the independent Letter of Credit. Leslie is a sophisticated investor who knowingly undertook the risks inherent in causing the issuance of a letter of credit in return for the rewards of international business. See Enterprise Intl, Inc. v. Corporacion Estatal Petrolera Ecuatoriana, 762 F.2d 464, 474 (5th Cir. 1985). The evidence indicates that he has sustained substantial losses as a Lloyds Name and will no doubt continue to incur further losses; however, Leslie admitted that he derived value from his membership in Lloyds for several years, both in earning overall profits and in using profits from certain syndicates to offset losses from unprofitable syndicates. Furthermore, the great weight of the evidence presented by Leslie indicates potentially fraudulent actions on the part of Lloyds subsequent to Leslies solicitation as a Name and the initial posting of the Letter of Credit. The evidence simply does not support a finding that Lloyds did not intend for Leslie to benefit at all from the transaction underlying the Letter of Credit. This is not to say that there exists no actionable fraud on the part of Lloyds; rather, the Court finds that Leslie has failed to establish the fraud in the transaction requirement necessary to enjoin the Letter of Credit.
5. In considering whether to grant or deny preliminary injunctive relief, a district court must remember that a preliminary injunction is an extraordinary and drastic remedy. Enterprise Intl, Inc. v. Corporacion Estatal Petrolera Ecuatoriana, 762 F.2d 464, 472 (5th Cir. 1985) (quoting Canal Authority v. Callaway, 489 F.2d 567, 573 (5th Cir. 1974)). Accordingly, the movant bears a heavy burden of persuading the court that all the requisite elements are satisfied. Id. If the movant does not succeed in carrying its burden on any one of the four prerequisites, a preliminary injunction may not be issued. Id.
[*8] 6. Leslie has failed to establish that, absent an injunction, irreparable injury will result. An injury is irreparable only where it cannot be undone through monetary remedies. Enterprise, 762 F.2d at 472; Deerfield Medical Center v. City of Deerfield Beach, 661 F.2d 328, 338 (5th Cir. 1981); Spiegel v. City of Houston, 636 F.2d 997 (5th Cir. 1981). See also Interox America v. PPG Indus., Inc., 736 F.2d 194, 202 (5th Cir. 1984). Applying these principles to the present case, this Court finds that it would be improper to enjoin the presentment and honoring of Lloyds international Letter of Credit when, in the absence of injunctive relief, Leslie would only suffer monetary loss. Leslie has failed to persuade this Court that Lloyds financial position is so dire at present that it would not be able to satisfy any judgment for monetary damages in Leslies favor if Leslie prevails on the merits in this action. The speculative testimony offered by Leslie as proof that Lloyds liabilities might preclude collection of any future judgment is not sufficient to satisfy Leslies burden that no other adequate remedy at law exists in lieu of the requested injunction. The possibility that adequate compensatory or other corrective relief will be available at a later date, in the ordinary course of litigation, weighs heavily against a claim of irreparable harm. Sampson v. Murray, 415 U.S. 61, 90 (1974) (quoting Virginia Petroleum Jobbers Assoc. v. Federal Power Commn, 259 F.2d 921, 925 (D.C. Cir. 1958). Proof more substantial than Leslies speculation is required before this Court may award injunctive relief.
7. Because Leslie has not demonstrated that he will suffer irreparable injury if the Letter of Credit is honored by TCB and because Leslie has not established that any fraud on the part of Lloyds so vitiates his entire transaction with Lloyds that he was denied any value from his participation in the transaction, it is not necessary to address the remaining elements required before a preliminary injunction issues. Based on the foregoing, this Court concludes that Leslies Motion for Preliminary Injunction should be DENIED. It is therefore
ORDERED, ADJUDGED and DECREED that the Motion for Preliminary Injunction (Docket Entry #3) filed by Plaintiff Charles Robert Leslie is DENIED.
FN1. Formally captioned Plaintiffs Verified Motion to Extend Temporary Restraining Order and for Preliminary Injunction.
FN2. Defendant R. W. Sturge & Co., a/k/a R. W. Sturge Ltd. (Sturge) was dismissed by Leslie on May 3, 1994 (Docket Entry #108).
FN3. A confirming bank agrees to either honor a credit issued by another bank or guarantees that the issuer or another bank will honor it. TEX.BUS.& COM.CODE &secvt; 5.103(a)(6).
FN4. Sturge is a syndicate managing agency and members agent operating on behalf of both Lloyds syndicates and Lloyds members or Names.
FN5. This testimony was presented both in the form of live testimony and deposition excerpts.