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US litigation

Lloyd's litigation

The American chapter of litigation involving the financially distressed Lloyd's of London has been active. American Names who have opted not to participate in the settlement contained in the Lloyd's Reconstruction and Renewal Plan recently sued Lloyd's for fraudulent misrepresentation in two cases filed in the federal court in New York: Stamm v Lloyd's and Grace v Lloyd's.

The Names contend that Lloyd's failed to disclose the staggering exposure to asbestos and pollution claims under Lloyd's occurrence-based policies, which potentially allow claims to be filed indefinitely into the future. American Names further contend that Lloyd's committed this fraud with the intent of transferring exposure from Lloyd's 'insiders' (original investors in Lloyd's syndicates) to the newly-recruited American investors. In these suits, the Names seek a rescission of all agreements between the Names and Lloyd's, restitution of all sums paid to Lloyd's, plus compensatory and punitive damages.

In the first round of proceedings in November and December 1996, the Names sought to enjoin payments to Lloyd's by banks on behalf of the Names under letters of credit and guarantees. To ensure that all valid policyholder claims are compensated, Lloyd's requires that each Name maintain adequate funds to meet future losses arising from their individual underwritings.

The Names in these cases satisfied this requirement by posting either an irrevocable letter of credit or a guarantee in favour of Lloyd's. The banks — Barclays, Chase, Citibank, Morgan Guaranty and IBJ Schroder — were made defendants in the cases for the purpose of enjoining their payments under the letters of credit and guarantees.

Both the federal District Court and the Court of Appeals for the Second Circuit refused to enjoin payment under the letters of credit and guarantees. The courts applied the so-called independence principle established in a long line of US cases, which holds that a letter of credit is independent of the underlying transaction.

In the next round of proceedings, the courts will consider motions from Lloyd's to dismiss the cases on the ground that the General Undertaking signed by each plaintiff on becoming a Name contains a forum selection clause requiring resolution of any disputes in London.

Jurisdiction on-line

Courts in the US are beginning to grapple with novel jurisdictional arguments based on the explosion of the commercial use of computers. The central question in these cases thus far is whether a company that establishes a home page on the Internet's World Wide Web exposes itself to jurisdiction in any state in which an Internet user can gain access to the Web site. While it is too early to discern any hard and fast rules, three recent decisions offer some guidance.

In Bensusan Restaurant Corporation v Richard B King, the federal District Court in New York recently found that it had no jurisdiction over Richard King, owner of The Blue Note club in Columbia, Missouri, who had been sued for trademark infringement and dilution by the owners of The Blue Note jazz club in New York city. King had established a Web site on a computer server in Missouri on which he listed his club's telephone number and posted information about upcoming performances.

In considering whether King was subject to the jurisdiction of a New York court, the Court first sought to determine where the alleged trademark infringement occurred. The Court reaffirmed the principle that a trademark infringement occurs where the 'passing off' takes place, and held that, because the Internet user must view the Web site, obtain the Missouri telephone number from the site, call the Missouri club to purchase tickets and travel to Missouri to obtain them, any passing off would necessarily occur in Missouri. In addition, the Court found that King did not make a 'discernable effort' to create a New York market, did not derive substantial money from interstate or international commerce, and did not expect any allegedly tortious acts to have consequences within New York.

By contrast, in two other recent cases courts have found jurisdiction over parties on the basis of Web sites. In Inset Systems v Instruction Set, a federal District Court in Connecticut held that the defendant's continuous Internet advertisement was a 'sufficiently repetitive solicitation' in Connecticut to confer jurisdiction. There, however, the defendant offered a toll-free number on its Web site, which in the Court's view made jurisdiction appropriate. Similarly, in Maritz Inc v Cyber Gold a federal District Court in Missouri found that jurisdiction could be asserted over a California company whose Web site informed Internet users about mailing list services it planned to provide and accepted responses from Internet users who wished to be included on its lists.

Taken together, these rulings suggest that courts will be more inclined to find jurisdiction where the Web site is interactive. Similarly, the greater the amount of non-Internet promotion and solicitation, the more likely the balance will tilt toward a finding of jurisdiction. However, the establishment of a local Web site, without more, should not be considered conduct directed sufficiently toward other states to subject the Web site operator to suit in all places in which the Web site is accessible.

Orange County action

In the first of what is expected to be a series of similar lawsuits, the Securities and Exchange Commission (SEC) has brought an action against CS First Boston for securities fraud violations in connection with the 1994 underwriting of US$110 million in pension bonds for Orange County, California. After suffering a crushing US$1.6 billion in losses as a result of the collapse in the value of its investment pool (which contained many high-risk securities) Orange County filed the largest municipal bankruptcy in US history. The SEC has stated that it intends to file related actions against other brokerage firms that underwrote bonds and notes for the County.

The crux of the SEC's case is that the brokerage firms failed to disclose to investors the deteriorating condition of the County's investment pool, whose financial health was related to the debt offering. The SEC alleges that CS First Boston had knowledge of the County's risky investment pool but failed to take steps to ensure that disclosures to investors were not false or misleading. The SEC also alleges that the brokerage firm prepared disclosure documents which cast the County investment pool in a false light by conveying the impression of safety and security.

CS First Boston disputes these claims, contending that the County — including former Orange County Treasurer Robert L Citron — provided it with misleading information about the investment pool and that CS First Boston was 'victimized' as a result. Recently Citron was sentenced to one year in jail and ordered to pay US$100,000 in fines as punishment for six felony charges to which he pleaded guilty in April 1995.

John J Kerr, Jr and Elizabeth A Fuerstman
Simpson Thacher & Bartlett
New York

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