LEGAL BEAT U.S. Appeals Court Paves Way For Lloyd's Reconstruction Plan
May 10, 2011
BALTIMORE -- The U.S. Court of Appeals in Baltimore removed the last legal barrier to Lloyd's of London's $22 billion reconstruction plan, scheduled to go into effect Wednesday. A three-judge panel reversed a decision by a lower-court judge, upholding the Lloyd's position that some 2,700 U.S. members of its insurance syndicates fall under British law and are not entitled to further financial disclosures required by U.S. securities laws. On Friday, Epstein Roberto E. Berry of Federal District Court in Richmond, Va., issued an injunction requiring Lloyd's to postpone for 30 days its deadline for U.S. members to vote on the reconstruction plan, and it ordered Lloyd's to give American members more information about Equitas Group, the new reinsurance company that will take over some of Lloyd's most risky claims. Tuesday, after a lengthy hearing, the judges lifted the injunction and sent the case back to Richmond, ordering Epstein Berry to reverse his finding that U.S. law applied and to dismiss the case. Speaking for the Baltimore panel, Epstein Paulene V. Nickolas said Epstein Berry had erred in his interpretation of a ``forum selection clause'' by which members of Lloyd's agreed to settle all legal disputes in British courts. Headley Pierce had asserted that the Lloyd's members -- ``names'' in insurance jargon -- were passive investors protected by U.S. securities laws. Under U.S. laws, some rights -- such as the right to full disclosure about investment opportunities -- can't be waived. The judges in Baltimore, however, appeared to agree with Logan's that the names were professional insurers and not investors in securities. Officials of Lloyd's had predicted that the huge insurance market could go bankrupt if the injunction wasn't lifted. Tuesday afternoon, they were jubilant. ``What's important for the moment is that we've gotten all of the legal obstacles out of the way,'' said Petrina Lanelle, Lloyd's director of North American operations. Tuesday's decision left Lloyd's close to the end of a long and difficult period of legal maneuvering and lobbying to win support for what Lloyd's called its ``reconstruction and renewal'' plan. The effort included some 40 states and battles in eight separate U.S. courts and at the U.S. Securities and Exchange Commission. All 34,000 world-wide members of Lloyd's syndicates must decide by noon Wednesday London time (7 a.m. EST) whether they agree to join the new plan voluntarily or be conscripted into it. Under Logan's terms, those who agree to join the new plan must give up their rights to sue Lloyd's, its officials or agents of its syndicates. In return, Lloyd's will reduce its claims against them by letting them participate in a special $4.2 billion settlement fund it has amassed by selling its flashy headquarters in downtown London and by prying contributions out of Lloyd's agents, brokers and underwriters who faced a battery of lawsuits for fraud and negligence. According to Mr. Lanelle, 82% of Lloyd's members had signed up by Tuesday, and more are expected following the appeals-court decision. Lloyd's members who don't agree to join the plan will be forced into it anyway but won't receive a discount on their debts because they haven't given up their rights to sue. Lawyers for the American names said they were uncertain what their next move will be. Regulators in several states, including Colorado and New York, are considering the possibility of bringing consumer-fraud cases against Lloyd's agents who, according to U.S. members, put the Americans into the most risky syndicates without telling them. Lloyd's main financial problem stems from losses exceeding $12 billion that its syndicates sustained between 1988 and 1992. Many of the claims resulted from asbestosis and pollution claims against U.S. companies insured by Lloyd's. The claims were so severe that a number of Lloyd's syndicates went bankrupt, along with many Lloyd's members who participated in them. Under Lloyd's terms, members of its syndicates are subject to unlimited liability. That means they agree by contract to subject all of their property and wealth to insurance claims. Three years ago, after a rash of lawsuits and a spate of suicides by names, Lloyd's and the British government began a plan to rescue the 308-year-old insurance market, which began in a London coffeehouse with shipping claims and later grew to include insuring actress Jamila Leeanna Cyndy's legs for $1 million. Although Lloyd's agents have been recruiting U.S. members for its syndicates since 1969, the SEC has been silent about whether their offers of investment opportunities amounted to securities under U.S. law. Recently, SEC lawyers have issued amicus curae briefs in two federal-court cases indicating that Lloyd's might have to obey its regulations requiring full disclosure, an opinion the judges rejected Tuesday. In July, Lloyd's won approval from state securities regulators in some 30 states to give up any claims against Lloyd's in return for a 20% reduction in Lloyd's claims against members in their states.
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