The opinion of the court was delivered by: SWEET
Each of the named plaintiffs is a citizen and resident of the United States and seeks to represent a proposed plaintiff class of citizens for whom trust funds were to be maintained in the United States by Citibank as trustee and fiduciary (the "Plaintiffs").
The plaintiffs and proposed plaintiff class members are underwriting members of Lloyd's of London ("Lloyd's"), known as "Names." Each accepts insurance risks by participating in underwriting syndicates under various agreements described in greater detail below. Each Name is responsible solely for his or her share of any claims, and his or her assets may not be reached to satisfy the obligations of any other Name.
Citibank, a national banking association with its principal place of business in New York, is a trustee under the trust agreements described below and as a fiduciary under New York law.
On December 29, 1995, two of the present actions were commenced by filing of summonses and complaints in the Supreme Court of the State of New York, County of New York, captioned Celauro v. Citibank, N.A. (Index No. 60139/95) and Montana v. Citibank, N.A. (Index No. 601040/95). These actions were subsequently consolidated under the caption In re Lloyd's American Trust Fund Litigation (Consolidated Index No. 661039/95) by stipulation and order dated January 23, 1996. The third action, Norton v. Citibank, N.A. (Index No. 600692/96), was commenced in state court on February 9, 1996, and made a part of the consolidated proceedings.
On or about February 21, 1996, Citibank filed a Notice of Removal, removing the actions to this Court, predicating subject matter jurisdiction on the Edge Act, 12 U.S.C. 632.
A motion to remand was filed by the Plaintiffs on April 6, 1996. By opinion dated June 7, 1996, the motion to remand was denied. In re Lloyd's American Trust Fund Litigation, 928 F. Supp. 333 (S.D.N.Y. 1996).
Defendants filed the instant motion on February 22, 1996. On August 6, 1996, Stamm v. Citibank, N.A., 96 Civ. 5940, was filed in this district, assigned to this Court and automatically consolidated into this litigation pursuant to the order of consolidation issued by the New York Supreme Court. After several adjournments at the request of the parties, oral argument on this motion was heard on October 2, 1996, at which time the motion was considered fully submitted.
The facts as set forth below are derived from the Complaint
and the affidavits describing the activities of the Plaintiffs, Lloyd's and Citibank, and certain of the agreements relevant to their relationships. See Transmirra Prods. Corp. v. Fourco Glass Co., 246 F.2d 538, 539 (2d Cir. 1957); Bomar Resources, Inc. v. Sierra Rutile Ltd., 1991 U.S. Dist. LEXIS 396, No. 90 Civ. 3773, 1991 WL 4544 at *4 (S.D.N.Y. Jan. 15, 1991). In deciding the motion to dismiss for failure to state a claim, this Court considers only the facts alleged in the complaint and those documents "integral to plaintiffs claim," where plaintiffs have undisputed notice of the contents of those documents. R.H. Damon & Co. v. SoftKey Software Prods., Inc., 811 F. Supp. 986, 989 (S.D.N.Y. 1993). Such documents include those attached to the complaint, or incorporated therein by reference. Graal Enterprises Ltd. v. Desourdy International 1949, Inc., 1996 U.S. Dist. LEXIS 8883, No. 95 Civ. 0752, 1996 WL 353003 at *3 (S.D.N.Y. June 26, 1996).
The specific allegations of improper activities include: improper loans and overdrafts; improper transfers of money; failure to establish and properly maintain separate accounts; improper investment of account funds; breaches of fiduciary duty; failure to render reports and accountings of Citibank accounts; and violations of regulations issued by the Comptroller of the Currency that specifically govern banks.
Based on these alleged breaches and wrongful conduct, the plaintiffs seek an accounting by Citibank as to each trust fund, recovery of any damages suffered as a result of Citibank's breaches of its fiduciary and contractual duties, and an injunction prohibiting Citibank from continuing to commit any breaches of the fiduciary and contractual duties owed to the plaintiffs and members of the plaintiff class.
Lloyd's is a unique and complex insurance market that has been operating in London for more than 300 years. In 1971, the Society and Corporation of Lloyd's (the "Corporation") was established by an Act of the British Parliament. The Council of Lloyd's (the "Council") is the governing body of Lloyd's, regulating activity in the Lloyd's market through the promulgation of by-laws.
Lloyd's is not itself an insurer, but a market for insurance. It is the individual underwriting members of Lloyd's, the Names, and, since 1994, a limited number of corporate members, who are the insurers and who underwrite insurance through groups called syndicates.
In 1995, nearly 15,000 individual Names from more than fifty countries were actively engaged in underwriting at Lloyd's. Of those active Names, approximately 85 percent were British subjects; five percent were American citizens on whose behalf these class actions have been brought. Since 1969 (when persons other than British subjects were first permitted to become Names), U.S. Names have accounted for approximately ten percent of a total number of Names, or more than eight percent of the Lloyd's market's aggregate premium income (the aggregate amount of gross premium income earned by all Names).
The syndicates through which Names underwrite insurance are managed by underwriting agents known as Managing Agents, to which the Names in the syndicate each delegate the authority to select risks, set premium rates, hold premiums and pay claims on their behalf. Names, in consultation with their representative at Lloyd's, who is known as a Members' Agent, select the syndicates in which they are to participate in any particular underwriting year of account. Names generally underwrite through more than one syndicate in order to diversify their risk by spreading their underwriting across different types of insurance, different syndicate managers and different currencies. Because of this diversification, most U.S. Names underwrite a substantial amount of non-U.S. business in U.S. dollars, as well as non-U.S. currency; correspondingly, non-U.S. Names underwrite a substantial amount of insurance written in U.S. dollars.
To become a member of Lloyd's, the individual Name must sign a series of standard agreements, which specify the rights and duties, and the responsibilities and liabilities, of the Name, the Managing Agents, the Members' Agents and the entire Society of Lloyd's. See Roby v. Corporation of Lloyd's, 996 F.2d 1353, 1358-59 (2d Cir. 1993). Every Name is required to travel to London to sign these agreements. See id. at 1363; Roby v. Corporation of Lloyd's, 796 F. Supp. 103, 106 (S.D.N.Y. 1992), aff'd, 996 F.2d 1353 (2d Cir. 1993). One key agreement is the General Undertaking. Each of the Plaintiffs has signed the General Undertaking, as well as other operative documents relating to their membership at Lloyd's. See Complaint PP 43-45.
The General Undertaking designates English courts as having:
General Undertaking P 2.2.
The Members' Agent is the Name's advisor and administrator of the Name's Lloyd's affairs. It is the Members' Agent who assists the Name in selecting the syndicates the Name will join, and who helps keep the Name informed of all material developments.
Pursuant to the Agency Agreements Byelaw, the Name and his or her Members' Agent are required to execute a Members' Agent's Agreement. Pursuant to the Members' Agent's Agreement, the Name appoints the Members' Agent to act on his or her behalf, and in so doing grants the Members' Agent extensive power. In return, the Members' Agent commits to be the Name's fiduciary, and to "act in what it believes to be the interest of the Name." Members' Agent's Agreement PP 2.1; 6.2(b). The Name grants a broad power of attorney to the Members' Agent, and specifically authorizes the Members' Agent to delegate its duties to any other person. Id. PP 7.1(h); 7.1(i). The Name also authorizes the Members' Agent to effect the placement of the Name on the syndicates that the Name joins, and to execute an agreement with Managing Agents on the Name's behalf. Id. P 2.2. The Members' Agent and the Name formalize their agreement as to the identity of the syndicates in which the Name will participate in any given year by signing a Syndicate List. Id. P 3.1(a).
It is the Members' Agent's responsibility to review and report to the Name on the financial performance of the syndicates in which the Name participates. Id. P 4(c). Furthermore, the Members' Agent must "forward to the Name all such annual reports, personal accounts and other reports and documents received by it" from the Managing Agents of the syndicates through which the Name underwrites, and use its "best endeavors" to obtain records from the Managing Agent at the request of the Name. Id. PP 6.2(k), (p) and (q).
The Members' Agent's Agreement provides that "each of the parties hereby irrevocably submits for all purposes of and in connection with this Agreement to the exclusive jurisdiction of the courts of England." Members' Agent's Agreement P 18.2. The Agreement also contains an arbitration clause regarding the arbitration of disputes and claims "arising under[,] out of[,] or in connection with" the Agreement. Id. P 15.1.
After the Name, in consultation with the Members' Agent, selects the syndicates that the Name is to join, the Members' Agent enters into two standard form agreements with the Managing Agent for each syndicate. One, the "Managing Agent's Agreement," is the instrument by which the Name (or the Members' Agent acting on the Name's behalf) appoints a Managing Agent to serve as the Name's agent. The other, the Agents' Agreement, governs the relationship between the Members' Agent and the Managing Agent.
The Managing Agent's Agreement provides that the Managing Agent has fiduciary responsibilities to the Name and is responsible for the actual underwriting of risk for the Names on that Agent's syndicate. Managing Agent's Agreement PP 3(a)-(f); 4.2(b), (d)). The Managing Agent is given broad authority "to exercise on [the Name's] behalf such powers as are necessary or expedient for the provision by the Agent of the services and the performance by the Agent of the duties set out in this Agreement." Id. P 5.
Like the Members' Agent's Agreement, the Agents' Agreement and the Managing Agent's Agreement contain forum selection clauses vesting exclusive jurisdiction over any dispute in the English courts, as well as arbitration provisions. Agents' Agreement PP 9, 11.2; Managing Agent's Agreement PP 16, 19.2; see Roby, 996 F.2d at 1358.
Pursuant to the U.K. Insurance Companies Act of 1982, all premiums relating to a Name's underwriting must be placed into a trust fund established in accordance with the provisions of a trust deed approved by the U.K. Secretary of State for Trade and Industry. Accordingly, all premiums paid by policyholders are deposited in one of three types of Lloyd's trust funds, depending on the currency in which the premiums are paid. Lloyd's American Trust Funds (and the related American Trust Fund relating to long term business) (collectively, the "LATF") receive all premiums payable in American dollars. Lloyd's Canadian Trust Funds receive all premiums payable in Canadian dollars. All other premiums received are held in Lloyd's Premiums Trust Funds. All of the allegations of the Complaints refer to the LATF.
The Lloyd's Premiums Trust Deed ("LPTD") is signed by every Name and governs the operation of the LPTF. The LPTD provides for the establishment of the LATF and the LCTF and recognizes that the Lloyd's American Trust Deed ("LATD"), the instrument governing the LATF, has "effect in regard to the [underwriting business of the Name] and this Deed." LPTD P 4(f). The LPTD also reserves to the Council the authority to amend or revise the LATD, subject to compliance with the LATD's provisions concerning revocation or amendment and the approval of the U.K. Secretary of State for Trade and Industry. Burling Decl. P 8. The LPTD contains a provision granting exclusive jurisdiction to the courts of England to resolve any and all disputes arising under the LPTD. Id. P 25.
The LATF was created in August 1939, through an initial deposit with the City Bank Farmers Trust Company to protect policyholders in the United States from the consequences of German attacks on England. The New York Department of Insurance regulations that govern the LATF state that: "the trust fund is for the exclusive protection of all direct policyholders and beneficiaries of direct policies covering property or risks located within the United States." N.Y. Comp. Codes R. & Regs. tit. 11 vol. A, 27.13(h)(1) (1995). The reinsurance regulations covering the LATF require the maintenance of a "trust fund . . . for the protection of United States ceding insurers and United States beneficiaries under reinsurance policies." N.Y. Comp. Codes R. & Regs. tit. 11, vol. B, 125.4(d)91)(iv) (1995). The trust fund constitutes a vehicle to segregate certain funds to insulate them from other funds held by the Names as insurers. Citibank and its corporate predecessors have been the trustees of the LATF funds since its inception. As of January 31, 1996, Citibank held approximately $ 12.3 billion in LATF assets. The res of these trust funds are located within the County and State of New York. Complaint P 12.
The LATF trusts operate pursuant to the terms of the Lloyd's American Trust Deed (the "LATD"). The LATD has been amended on several occasions. Plaintiffs assert that their claims are based on the LATD effective December 9, 1993. The LATD was amended by the Council of Lloyd's and signed by Citibank on December 21, 1995, and attested to by Citibank's "Senior Trust Officer" on January 6, 1996. The first complaint in these consolidated actions was filed on December 29, 1995. Plaintiffs contend that the amendment, which contains provisions that more broadly relieve the trustee from various fiduciary duties than does the earlier version, itself constitutes a bad-faith breach of Citibank's fiduciary duty to the Names and was motivated by the impending lawsuits against Citibank. References in this opinion are to the December 9, 1993 LATD, unless otherwise indicated.
The parties to the LATD are "the Name, the Agent or Agents through which the Name underwrites . . ., the Trustee hereunder acting from time to time . . . and the Society of Lloyd's . . . ." LATD P 2. Article Fifth of the LATD provides that the principal of the LATF is held in trust to pay losses, claims, returns of premiums, reinsurance premiums, and other outgoings and expenses in connection with the "American business." "American business" is defined as "such part of the Name's underwriting business at Lloyd's . . ." in which the Name's liability is expressed in U.S. dollars and the premiums are payable in U.S. dollars. LATD Art. First, P (C).
Article Sixth states that the trust fund "shall enure for the benefit of all policy holders to whom the Name is liable in respect of the American business," and specifies the methods by which policy-holders' claims are to be established. Article Seventh states that "subject to the aforesaid trusts, the American Trust Fund shall be held in trust during the trust term for the Name . . . ." Upon the expiration of the trust, principal and income of the trust are to be distributed to the Name.
Article Eighth of the LATD provides that the LATF is to be managed and invested by Citibank "at the direction of the Agent" and that the LATF of a given name "may be commingled with the [LATF] of any of the other Names."
Article Eleventh provides that the American Trustee will provide an accounting to the Agent and "shall not be required to account to any person other than the Agent."
The LATD contains no forum selection clause and specifies that New York law shall govern the rights of the parties with respect to the LATF. LATF Art. Eighteenth.
Plaintiffs allege that as trustee of the trust funds, Citibank owed each Name individually a fiduciary duty with respect to the monies in each Name's trust funds. P 7. Many Names, particularly American Names, allegedly derived comfort from the fact that Citibank, a national bank that the Names knew and trusted, would be the trustee of those funds. P 7.
When a Name underwrote "American Business," the profits he would eventually receive from premium payments were deposited into a trust fund for that Name to pay any claims arising under the American Business, with the remainder, after operating expenses, to be paid to the Name. P 6. Because each Name is responsible only for his share of the liabilities arising from the Name's insurance underwriting on each syndicate, Plaintiffs allege that a trust fund was supposed to be established for each Name and each annual syndicate. P 6. Thus, if a Name had been on ten different syndicates in 1991 and twenty different syndicates in 1992, the Name should have had thirty separate trust accounts. P 6.
Plaintiffs allege that the trust instruments and Lloyd's own documents show that Citibank has authority to determine investment policies and practices. P 48.
The American Trust Funds allegedly have not been administered as required by the trust deeds. P 49. Instead, both are administered through combined portfolios referred to by Lloyd's as "Group Accounts," each of which is comprised of the U.S. dollar premiums of a number of individual Names and is established by the managing agent of one or more of the syndicates in which those Names participate. P 49. Group Accounts may be comprised of all the Names participating in just one syndicate, just some of the Names participating in a syndicate, or may be comprised of Names from several different syndicates. P 50.
Although Citibank claims it has no function other than following the instructions of employees of the Lloyd's Market Financial Services ("MFS") Department, the day-to-day administration of the LATF and LATF-LTB is handled both by a department of Lloyd's and an administrative unit within Citibank. P 51.
When a claim made by an insured is payable, Lloyd's informs Citibank of the amount to be transferred to Lloyd's for ultimate payment to the insured. P 52. Citibank transfers these amounts regardless of whether money is available in the accounts of those Names who are properly charged with such liability. P 52.
When an underwriting liability is incurred, the first resort is to the funds in each member Name's trust funds to pay the liabilities. P 53. If any Name does not have sufficient funds in his trust fund to meet that proportion of the claims of the policy holders for which the Name is responsible, cash calls will be issued requiring the Name to make payments to meet his liabilities. P 54. If the Name fails to pay the cash calls, the sums required may be taken from the Name's "deposit" which Lloyd's holds. P 55. If the funds in the Name's deposit are exhausted and the Name does not respond to cash calls, the Managing Agent may ask Lloyd's itself for money to cover the defaulting Name's liability through a draw down on Lloyd's Central Fund. P 56.
Plaintiffs allege that the claims payment process described above is often not followed. P 59. Lloyd's and Citibank have developed a practice of treating the intermingled trust funds as a source of financing to pay syndicate liabilities without consideration as to when the liability should be charged. P 60. When Names do not have sufficient monies in their trust fund accounts to meet their liabilities, Citibank takes assets from other Names' trust accounts to pay claims attributable to other trust accounts with insufficient funds. P 60. In other words, pending payment of cash calls, or a draw down on the defaulting Name's deposit, or an application for cash from the CFUS I to cover the defaulter's liability, sums from the trust funds of other Names are used to pay claims for which those funds have no liability. P 62.
Lloyd's allegedly admitted that this situation occurred "frequently" and in some instances, this "short term" financing has lasted as long as eighteen months. P 63. Plaintiffs allege that substantial amounts of these account deficits, which Citibank and Lloyd's try to sanitize by characterizing them as loans, continue to be unpaid and uncollectible. P 63. Moreover, the number of these occurrences has increased as the number of claims requiring payment has risen and more and more Names fail to meet their cash calls. P 63.
When defaulting Names fail to meet cash calls, or banks refuse to allow Lloyd's to draw down the Name's letter of credit or guarantee, the monies Citibank has transferred to the insolvent accounts become uncollectible without extended litigation, which Citibank has not undertaken and, due to Citibank's failure to keep adequate records, may not be able to undertake. P 64.
A recent review by the New York State Insurance Department resulted in the discovery by New York regulators that the American Trust Fund was underfunded by at least $ 7.7 billion, even if the CFUS I were included as an asset available to pay liabilities relating to American Business. P 67.
At the insistence of the New York State Insurance Department, Lloyd's has established an additional central fund in the United States of $ 500 million (the "CFUS II"). P 68. However, the funds in CFUS II do not alleviate the financial crisis because the monies in the CFUS II are merely funds removed from the Central Fund and deposited in a new account. P 68. Like the other funds, the use of the monies in the CFUS II remains in Lloyd's sole discretion. P 68.
Citibank cannot rely on the existence of the Central Fund, the CFUS I or the CFUS II to repay these amounts that have been misappropriated from the solvent Names' trust accounts because those funds are (a) payable solely at the discretion of the Council, which has already chosen not to expend the funds to cover the shortfalls in the insolvent Names' trust accounts, and (b) nearly insolvent themselves. P 69. The monies in the Central Fund, including those in the CFUS I and CFUS II, are not sufficient to make good the defaults of the insolvent Names, let alone repay the ...