American Endeavour Fund, Ltd. v. Trueger, 112 F.3d 1017 (9th Cir. 1997)

In civil RICO action by Jersey corporation against U.S. citizens, Ninth Circuit declines to enforce contract clause choosing Jersey law that does not recognize RICO claims thus barring federal subject matter jurisdiction

The following matters derive from allegations in the pleadings. Arthur I. Trueger is an American national, residing in California. He was one of six directors of American Endeavour Fund, Ltd. (Endeavour) who played a primary role in certain corporate investments. Trueger was also board chairman of Berkeley Govett International Ltd. (BGIL). He also dominated the operations of Berkeley International Capital Corporation (Berkeley) as well as Govett and Co., Ltd. (Govett).

A financial service group, Govett is incorporated under the laws of the Bailiwick of Jersey, Channel Islands. Trading its shares on the London exchange and in the U.S. on NASDAQ, Govett engages in substantial business activity in California directly and via its affiliates and subsidiaries. BGIL is a wholly owned Jersey subsidiary of Govett. Berkeley is also a wholly-owned California subsidiary of Govett having its principal place of business in that state. Endeavour is a Jersey corporation set up as a closed-end investment fund with its principal place of business on that island. Though its shares are traded on the London exchange, it has invested 90% of its assets in the securities of American companies.

In 1988, Endeavour and BGIL entered into a management agreement (MA). Under it BGIL would handle the day-to-day investment of Endeavour’s assets. The MA exonerated BGIL from liability for anything done in good faith except in case of “wilful default or negligence.” Paragraph 23 of the MA stated: “This Agreement shall be governed by and construed in accordance with the laws of Jersey and the parties hereby submit to the non-exclusive jurisdiction of the Royal Court of Jersey.” At the same time, Trueger had BGIL hire Berkeley as investment advisor pursuant to a Consultancy Agreement (CA). In addition to a choice-of-law provision similar to Para 23 of the MA, the CA contained Berkeley’s assurances that it would comply with U.S. federal and state laws as far as practicable.

Trueger, Berkeley and BGIL, however, jointly caused Endeavour to invest in various American companies which then paid them kickbacks and secret fees going into the millions of dollars. In February 1995, Endeavour filed suit against Trueger, Berkeley, Govett and BGIL, charging violations of RICO, wire and securities fraud, and bribery under California law. Plaintiff alleged these as predicate acts under RICO. Plaintiff also claimed common law fraud and breach of fiduciary duties toward Endeavour and various breaches of contract. The complaint sought treble damages in the amount of not less than $60,000,000. Defendants moved to dismiss and presented expert evidence that Jersey law applies to the entire relationship and that it does not recognize a cause of action under RICO. The district court agreed and dismissed the action for lack of subject matter jurisdiction.

In a two-to-one vote, a panel of the U.S. Court of Appeals for the Ninth Circuit reverses and remands. It acknowledges the civil effects of the various clauses selecting Jersey law, but declines to recognize that a contract waiver can avoid the application of American law to alleged tortious acts that also amount to federal crimes. Noting that Jersey is an island off the coast of France of 44 square miles with a population of 84,000, the Court declares: “If contracts made in Jersey could grant immunity from the criminal laws of the United States, Jersey would indeed be the Mouse that Roared. But we do not premise our decision on the size of this island. The principle is the same as to any attempt by contract referring to foreign law to save from criminal or tort liability acts performed in the United States by citizens of the United States involving investments in companies in the United States. Contract just doesn’t do the job.” [1022]

As to the allegations of fraud under the 1933 and 1934 Securities Acts, the Court cites its recent opinion in Richards v. Lloyd’s, 107 F.3d 1422 (9th Cir. 1997), 1997 Int’l L. Update 39, holding that the Acts expressly void any contract that would prospectively waive the protections of the Securities laws. Thus, the alleged acts of securities fraud are valid predicates for a RICO cause of action and hence for federal jurisdiction. On the other hand, the district court should apply familiar principles of pendent jurisdiction to the California and common law claims. In the Court’s view, there seemingly would no bar to applying Jersey law to the conduct set out in these allegations.

A dissenting judge agrees with the district court. In his view, defendants could not have engaged in any of their alleged misconduct but for the relationships among the various parties created by their contracts. Applying § 187(2) of the Restatement of Conflicts (2nd), the judge argues that Jersey has just as much interest in preventing foreign citizens from defrauding Jersey citizens as does the United States in precluding U.S. citizens from defrauding a foreign plaintiff. Moreover, effectuating this contract clause can in no way prevent the U.S. Justice Department from prosecuting defendants for any alleged criminal acts. Finally, Endeavour can still pursue its non-federal claims under Jersey law in American state courts or in the tribunals of Jersey.

Citation: American Endeavour Fund, Ltd. v. Trueger, 112 F.3d 1017 (9th Cir. 1997).



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