http://www.washingtonpost.com/wp-dyn/articles/A48588-2001Mar9.html
Bankruptcy Bill Benefits Chosen Few
Well-to-Do Investors Sought Special Provision
By Kathleen Day
Washington Post Staff Writer
Saturday, March 10, 2001; Page A01 A bill designed to make it harder for
Americans to wipe out their debts through bankruptcy contains a special
clause that helps shield a group of well-to-do Americans from a debt of at
least $15 million owed to insurance giant Lloyd's of London.
The provision is one of the few in the bankruptcy legislation now being
debated in the Senate that would benefit a small targeted group: about 300
Americans, including 20 millionaires such as Lorraine Grace and her son,
Oliver Grace -- relatives of deceased industrialist J. Peter Grace.
The amendment was added last fall by Republican congressional leaders when
they met privately to craft a final version of the bankruptcy legislation,
which was passed last week in the House.
The provision is an attempt by American investors to win a long-running
battle with Lloyd's that they have lost in British courts. Lloyd's depends on
tens of thousands of wealthy individuals and companies to provide funds for
underwriting its insurance. When Lloyd's suffered enormous losses in the late
1980s and 1990s, investors were expected to use their assets to cover the
claims.
Many investors originally balked at the billions in losses, but most
eventually settled, including many of the 3,000 American investors. But about
10 percent of the Americans refused, contending that they were misled about
the risk and accusing Lloyd's of fraud.
The provision in the bankruptcy bill, which the Senate expects to vote on
next week, would prevent Lloyd's from collecting money from those American
investors, unless the insurer could prove its case in a U.S. court. U.S.
courts have thus far refused to hear these cases, saying that British courts
have jurisdiction over British contracts.
"This is another example of how hopelessly skewed the bankruptcy bill is,"
said Travis Plunkett of the Consumer Federation of America, a nonprofit
advocacy group. "Wealthy investors get a bailout from their financial
obligations, while Americans of modest means must confront harsh new
bankruptcy barriers." Consumer groups say the bankruptcy bill will hurt
middle and lower-income families struggling with debts because of divorce,
ill health or job loss.
Lloyd's investor Thomas Lind, a lawyer for Canal Barge Co., a small
transportation company in New Orleans, disagreed, saying the British courts
failed to fully consider the fraud allegations investors raised, as U.S. law
would require. "All we're asking is that we be allowed to have our day in
court," he said.
"I don't see any irony or conflict with that amendment being in the bill. As
I understand [it], the purpose of the bill as a whole is to allow fair and
legal debts to be collected. And there's nothing fair and legal about the
debt I and hundreds of others are being asked to pay," said Lind, who
described himself as "a middle-class citizen."
The protracted legal battle with Lloyd's forced him in 1995 to prepare for
the possibility of bankruptcy, he said. He has dropped out of "all the social
clubs I belonged to." And he said he transferred half of his assets, which he
said are worth $400,000 including his house, to his wife's name to protect
them.
The Graces and the rest of the 300 investors fund an organization called the
American Names Association, which they formed in 1993 to represent them.
(Lloyd's refers to individual investors as "Names.")
The 300 have already paid $150 million in claims to Lloyd's over the past
decade, or about $700,000 each on average, said Jeffrey Peterson, a spokesman
for the association.But as losses mounted, they decided to challenge Lloyd's.
The American Names Association lobbied Democrats and Republicans in Congress
for over a year in favor of the amendment. Republican members of Congress
crafting a bankruptcy bill last fall added the measure at the request of Rep.
Henry J. Hyde (R-Ill.) and Sen. Jeff Sessions (R-Ala.), Sessions and a
spokesman for Hyde said yesterday.
The meeting was closed to Democrats and to consumer group lobbyists.
In an interview yesterday, Sessions said that several Democrats, including
Sens. Mary Landrieu of Louisiana and now-retired Bob Kerrey of Nebraska, also
pushed for the amendment. Republicans decided to include it in the final bill
partly to try to gain their votes for the bill, Sessions said.
Congress passed the bankruptcy bill last year, but President Bill Clinton
called it unfair to consumers and vetoed it. In January, Republicans
reintroduced a virtually identical bill that included the Lloyd's clause.
President Bush is expected to sign the measure if Congress passes it.
The British government and the State Department oppose the Lloyd's provision,
saying it undermines court rulings and international treaties that require
contract disputes to be settled in courts in the country in which the
contracts were written.
The Justice Department and the California attorney general are investigating
Lloyd's on allegations of fraud and bribery. Lloyd's officials say they are
cooperating and do not expect the investigation to uncover any wrongdoing.
Sessions and spokesmen for Hyde and Landrieu defended the amendment, saying
the lawmakers were asked for help by constituents. "The only question that
was important to me was if investors in the United States had been defrauded
and if they had been denied the opportunity to have a defense," Sessions said.
"The appropriateness of their trying to get this exemption in this bill is
that it appears to be the only road to their being treated fairly in the
United States courts," said Charles B. Updike, the Graces' lawyer.
"In this country, if I buy a Mercedes on the Internet and it's shipped to me
without an engine, I wouldn't have to pay for it because that would be
considered fraud," said Robert Royer, lawyer and lobbyist for the American
Names Association.
The overall bankruptcy bill was intended to make it harder for individuals
with assets to wipe out their debts using bankruptcy courts. Peterson said
that about 24 of the 300 Lloyd's investors, including two millionaires, have
filed for bankruptcy in the past two years to have their debts erased or
diminished.
U.S. bankruptcy courts granted 18 of the bankruptcy petitions but rejected
those of the two millionaires -- Houston businessman Charles Robert Leslie
and Pasadena patent attorney R. William Johnston -- and several other wealthy
investors on the grounds that the requests were inappropriate or an abuse of
the bankruptcy system, according to court papers and Peterson.
Court papers show that when Leslie filed for bankruptcy in Texas in 1998, he
had assets in excess of $4.8 million, including over $3.6 million in
securities. At the time he owed Lloyd's less than $1 million. Peterson said
Leslie was unavailable for comment.
R. William Johnston, 77, said he tried to file for bankruptcy to force
Lloyd's to disclose how much it thought he owed them, beyond the $500,000
claimed against him in British court. He had pledged all his assets in case
he had to pay out on an insurance claim.
