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Central States, Southeast and Southwest Areas Pension Fund v. Phencorp Reinsurance Co.

January 11, 2008

CENTRAL STATES, SOUTHEAST AND SOUTHWEST AREAS PENSION FUND, AND HOWARD MCDOUGALL, TRUSTEE PLAINTIFFS,
v.
PHENCORP REINSURANCE COMPANY, INC., A BARBADOS CORPORATION, DEFENDANT.



The opinion of the court was delivered by: Magistrate Judge Morton Denlow

MEMORANDUM OPINION AND ORDER

Plaintiff Central States, Southeast and Southwest Areas Pension Fund ("Central States" or "Plaintiff") filed a complaint against Defendant Phencorp Reinsurance Company, Inc. ("Phencorp" or "Defendant") to recover payments allegedly owed to Central States by Phencorp's parent company, Philip Services Corporation ("PSC") pursuant to the Employee Retirement Income Security Act ("ERISA"). Phencorp filed a motion to dismiss for lack of personal jurisdiction under Federal Rule of Civil Procedure 12(b)(2). By agreement of the parties, the Court conducted a bench trial on the papers to decide the issue of jurisdiction on the merits to which a preponderance of the evidence standard applies. Oral argument was held on December 17, 2007. For the reasons stated below, the Court finds that personal jurisdiction exists over Phencorp and denies Phencorp's motion to dismiss for lack of personal jurisdiction.

I. PROCEDURAL HISTORY

On August 27, 2004, Central States filed its complaint against Phencorp. Central States served a former employee of Phencorp with its complaint. On February 3, 2005, this action was dismissed on the ground that Central States had failed to establish personal jurisdiction over Phencorp. Central States, Southeast and Southwest Areas Pension Fund v. Phencorp Reinsurance Co., 2005 WL 4814180 (N.D. Ill. 2005). On appeal, the Seventh Circuit remanded the case so that Phencorp could be properly served and jurisdiction-based discovery could be extended over Phencorp. Central States, Southeast and Southwest Areas Pension Fund v. Phencorp Reinsurance Co., 440 F.3d 870 (7th Cir. 2006). In October 2006, this Court directed that Phencorp could be served through its attorneys of record, and accordingly its attorneys were properly served. The Court also allowed the parties to conduct jurisdiction-based discovery, with the parties agreeing to produce information for up to five years prior to the filing date of this action. D.R. at 4.*fn1

This ruling is based on a trial on the papers in which the parties have submitted briefs and supporting exhibits which constitute the record in this case. See Sullivan v. Bornemann, 384 F.3d 372, 375 (7th Cir. 2004) (noting that a district court decision, rendered after reviewing the stipulated facts of the parties, was more akin to a bench trial than summary judgment, and was thus governed by Federal Rule of Civil Procedure 52(a)); Hess v. Hartford Life & Associates Ins. Co., 274 F.3d 456, 461 (7th Cir. 2001) (entering a judgment based upon a stipulation of facts that made up an administrative record that was treated as a bench trial governed by Fed. R. Civ. P. 52 (a)); Brach's Confections, Inc. v. McDougall, 320 F. Supp. 2d 726 (N.D. Ill. 2004) (conducting a trial on the papers in an ERISA case); Morton Denlow, Trial on the Papers: An Alternative to Cross-Motions for Summary Judgment, Fed. Lawyer, Aug. 1999, at 30. The parties agreed to proceed in this manner and to waive their right to present oral testimony. The parties agree that the Court may decide contested issues of fact based on the declarations and give them such weight as the Court may deem appropriate. The following constitute findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a).

II. FACTUAL BACKGROUND

A. Phencorp and PSC

Phencorp is a reinsurance company organized under the laws of Barbados. D.M. ¶ 7. Its principal place of business is located in St. Michael, Barbados. Id. Insurance business is defined as the issuing of insurance or reinsurance policies, the payment of claims and the investment of funds related to insurance activities. P.R. at 13 n.9. Phencorp is a wholly owned subsidiary of PSC. D.M. ¶13. PSC is a Delaware corporation with its principal place of business located in Houston, Texas. Id.; P.S.R. at 4. PSC's principal place of business was located in Ontario, Canada, but in 2001, PSC moved its corporate headquarters to Texas. P.S.R. at 4. Phencorp was formed primarily as an insurance option for PSC's environmental risks and to save money. P.R. at 3. Phencorp's business was managed by First Management Corporation ("FMC"), which ran Phencorp's day-to-day operations. P.R. at 3; P.S.R. at 7.

The relationship between Phencorp and PSC is as follows: PSC, on behalf of itself and its subsidiaries and affiliates, would contract with an insurance company ("Fronting Company") to issue a policy to cover various business risks, including automobile, workers' compensation, environmental, and general liability risks in the United States. P.R. at 4. PSC would bill its subsidiaries and affiliates for their respective portion of the premiums or losses paid by PSC. Id. Phencorp and the Fronting Company would then enter into a reinsurance agreement by which the Fronting Company would transfer the risk to Phencorp, as well as the insurance premium corresponding to the risk ceded to Phencorp. Id. Phencorp would negotiate the reinsurance agreements by reviewing the draft insurance agreements and suggested premiums and ask for a better premium if it believed the suggested one was inadequate. P.R. at 3. The reinsurance agreements provide that the Fronting Company will undertake the duties of adjusting claims arising under the agreements, and that Phencorp shall pay the expenses associated with those activities. P.S.R. at 5. Thus, the reinsurance agreements designated the Fronting Company as its agent for the adjusting of claims. Id. Through this arrangement, Phencorp insured or reinsured only PSC's operations (and the operations of PSC's subsidiaries and affiliates), regardless of geographic location, including operations in the United States ("U.S."). P.R. at 4-5. Phencorp maintains its legal liability under the reinsurance policy until it is commuted. P.R. at 5. Thus, absent a commutation agreement between Phencorp and the Fronting Company, an indefinite legal obligation under the reinsurance agreement exists. Id.

B. Contacts with the U.S.

Phencorp does not have any employees in the U.S., nor does it maintain a physical place of business or own real estate in the U.S. D.M. ¶ 8-10. Phencorp does not maintain an internet site, nor does it conduct business over the internet. D.M. ¶ 10; D.R. at 6. However, Phencorp has entered into several reinsurance agreements with U.S. companies prior to the filing of this lawsuit. It has also had various other contacts with the U.S., such as its communication with PSC and its election to be considered a domestic corporation under the United States Tax Code. Central States also asserts that Phencorp has maintained a post office box and bank account in the U.S.

1. Phencorp's Reinsurance Agreements with U.S. Companies

Between March 1996 and October 29, 2003, Phencorp entered into at least five reinsurance agreements with different Fronting Companies having operations in the U.S. P.R. at 6, 8.*fn2 Most of these agreements were executed more than five years prior to the filing date of this action, however three amendments to these agreements were executed within a year of the filing date.*fn3 D.R. at 7. Phencorp did not execute a commutation agreement with respect to any of these reinsurance policies, thus its obligations under these agreements continue to the present day. P.R. at 6, 8. Each of the reinsurance agreements contained similar provisions. P.R. at 7. Each provided for a "loss deposit fund" to ensure Phencorp's compliance with the agreement. Id. Each also provided that the Fronting Company would adjust, settle or compromise all claims arising, and Phencorp would abide by those loss settlements. Id. Each Fronting Company was required to periodically provide Phencorp with a report showing, among other things, the gross premium written, ceding commission, and losses paid. Id.

Phencorp agreed to submit disputes under the agreements to binding arbitration to be held in New York, and that U.S. courts would have jurisdiction to enforce an arbitration award.*fn4 Id. For its agreement with the Kemper Fronting Company, Phencorp designated a Superintendent, Commissioner or Director of Insurance located in the U.S. to accept service of process on its behalf.*fn5 P.R. at 7.

Phencorp was also obligated to provide collateral, in the form of a letter of credit or cash, to secure its obligations under the reinsurance agreements. P.R. at 7. Accordingly, Phencorp posted a letter of credit with respect to two of the agreements, while two other Fronting Companies withheld funds belonging to Phencorp. P.R. at 7-8. All of these letters of credit, however, were made and held entirely outside of the U.S. D.R. at 9. Phencorp also executed a Deposit Custody Agreement with one of the Fronting Companies. P.R. at 6.

Phencorp earned substantial ceded premiums from the Fronting Companies. P.R. at 11. For example, in 2000, Phencorp expected to earn ceded premiums with respect to the following U.S. risks: $945,000 for pollution legal liability, $575,654 for contractor's operations liability, $629,745 for auto liability, and $693,618 for general liability. Id. It also earned $204,845.25 under its agreement with CNA, and was entitled to even more. P.R. at 11-12. Phencorp earned ceded premiums from the Fronting Companies from 1999 through 2004. Id.

In addition, a substantial number of claims for significant amounts were made against the policies Phencorp reinsured. P.R. at 12. For example, Phencorp reported losses of $655,000 for 2001. Id. Also, 3,458 workers' compensation claims were reported in 1998, of which 2,403 were paid and 1,055 remained outstanding as of December 31, 2004. Id. 1,034 general liability claims were reported in 2000, of which 748 were paid and 286 remained outstanding as of December 31, 2004. Id.

Phencorp is no longer reinsuring any policies beyond 2004. P.R. at 8. Phencorp asserts the agreements set forth above have been in a "run-off" state, meaning that they are all expiring and have not been, and will not be, renewed as they expire. D.R. at 7. It does, however, expect to experience additional losses for pollution legal liability, contractors operations and property risks after 2004. P.R. at 8. Phencorp also paid claims during 2004 that were allocated to policies issued in years prior to 2004. Id. In addition, Phencorp has reserved funds to pay losses it expects to incur after 2004 under policies it previously reinsured. Id.

2. Post Office Box in Miami, Florida

Central States asserts that Phencorp maintained a post office box in Miami, Florida to which Fronting Companies sent requests for payment. P.R. at 5. A service provider at the post office box would gather the claims information relating to Phencorp's reinsurance obligations into large bundles before forwarding it to Phencorp's office in Barbados. Id. However, Phencorp's President and Chairman testified this post office box "did not belong to Phencorp," and was either one he personally rented or it belonged to a third party management company. D.R. at 11. Phencorp asserts the post office box was used by a third-party service provider merely to expedite mail delivery from Canada to Barbados. Id. This service provider, however, was under contract to manage the operations of FMC, which in turn managed Phencorp's daily operations. P.R., Ex. A at 31. Thus, although the post office ...


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