Article

Note: Pursuant to applicable Bermudian legislation in connection with the creation of a one year off-shore so-called "rent-a-captive" reinsurance program, WEB Management LLC (Applicant) obtained a standby LC in favor of Arrowood Indemnity Co. (Beneficiary). As described by the opinion, the purpose of the LCs was "to secure the loss fund and risk assumption layer" of the rent-a-captive program. Instead of creating its own program, Beneficiary contracted for reinsurance with Universal Reinsurance Co., Ltd., (Reinsurer) with whom it had entered into six other programs to which Applicant was not a party. In addition, Reinsurer also provided a standby in favor of Beneficiary.

Under the captive reinsurance program, Beneficiary had the exclusive authority to release Applicant's LC and was required to do so at the end of the program term after deducting sufficient funds to cover its liabilities. At the end of the program term, Beneficiary determined that there were no outstanding claims or liabilities and that Applicant had satisfied its contract obligations. However, Beneficiary asserted that it was legally entitled to use Applicant's LC to indemnify itself against losses incurred in its other reinsurance programs with Reinsurer in which Applicant was not involved. Beneficiary refused Applicant's repeated requests for the return of its LC.

Applicant then sued Beneficiary, asserting breach of contract, violation of a fiduciary duty, and various statutory claims. Beneficiary moved to dismiss for failure to state a claim. The United States District Court for the District of Connecticut, Bryant, J., applying Connecticut law, denied Beneficiary's motion.

The Judge ruled that Applicant had adequately pled a violation of the applicable state unfair trade practices statute. She stated, "[Applicant] alleges that [Beneficiary] is wrongfully withholding its letter of credit despite acknowledging that [Applicant] fulfilled its obligations under the RAC program. Further, [Beneficiary] is withholding the funds to satisfy the debts of unrelated parties incurred in the course of unrelated business transactions. The court finds that, as pled, this admittedly wrongful commandeering of property is immoral, unethical, oppressive, or unscrupulous. It also invokes a number of valid public policies such as [Applicant's] ability to use and control its property and a sense of fair dealing inherent in every business relationship."

[JEB/as]

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