Spring 2015

IN THIS ISSUE:

MV ATHOS I UPDATE - MARINE TERMINAL'S ATTEMPT TO BORROW VESSEL'S OPA LIMIT FAILS THANKS TO SUCCESSFUL OPPOSITION BY THE VESSEL OWNER AND THE U.S. GOVERNMENT

 

On April 9, in the case In re Petition of Frescati Shipping Company Ltd. Civil Action 05 civ. 305 (JHS), the U.S. District Court for the Eastern District of Pennsylvania denied Defendant CITGO Asphalt Refining Company ("CARCO") Motion for Partial Summary Judgment Granting Limitation of Liability under the Oil Pollution Act ("OPA").,        Following the MV ATHOS I oil spill in the Delaware River on November 26, 2004, Plaintiffs, Frescati, the owner, and Tsakos Shipping & Trading , S.A. the manager of the vessel, both represented by the law firm of Montgomery McCracken Walker & Rhoads, LLP, and the United States commenced an action to recover a total of $133,305,668.00 in damages and clean-up costs from Defendant CARCO. Frescati had already successfully limited its liability under the OPA to $45,474,000.00 (i.e., $1,200 per gross tons of the vessel) in damages and removal costs. Under the OPA, 33 U.S.C. § 2702(d), CARCO also sought to limit its liability to the same $45M amount as Frescati in its Motion for Partial Summary Judgment.

 

At the outset, the District Court held that CARCO had waived its OPA limitation of liability defense by failing to specifically plead it in its Answer to the Complaint back in 2005. Favoring the argument put forth by Frescati, the District Court further held that allowing the Defendant to assert a new defense after nearly 10 years of litigation would have "substantially" prejudiced Frescati and the United States.

 

Finally, even if CARCO's limitation of liability of defense was not waived, its motion would still be denied under the OPA. Citing In re Alex C Corp., 2011 A.M.C. 157, 2010 WL 4292328 (D. Mass. Nov. 1, 2010), the District Court held that the provisions of 33 U.S.C. § 2702(d) was limited to third parties who did not have a contractual relationship with the responsible party. In an earlier appeal in this case, the Third Circuit had already held that CARCO was contractually related party to Frescati (See In re Frescati Shipping Co., Ltd., 718 F. 3d 184 (3 Cir. 2013), so CARCO did not get the benefit of the OPA limitation that would apply to an "non-contractually related" third-party.    

 

Therefore, CARCO's attempt "to limit its liability by assuming the position of the responsible party under section 2702(d)" fails. See In Re Petition of Frescati Shipping Company, Ltd., Civil Action No. 05-cv-305 (JHS), Doc 816 (E.D.Pa. April 9, 2015) Lastly, under the OPA, the United States is permitted to go forward as subrogee against Frescati and is further subrogated to all rights of Frescati.

UNDER U.S. CABOTAGE LAWS, MERELY CHANGING THE GRADE OF A PRODUCT IS NOT ENOUGH

 

Pursuant to U.S. Cabotage Laws, 46 U.S.C § 55102, a vessel may not provide transportation of merchandise, between points in the United States, unless the vessel has a coastwise endorsement. However, under 19 C.F.R. § 4.80b(a) a coastwise endorsement is not required "if at an intermediate port or place other than a coastwise point" the merchandise is processed into a "new and different product, and the new and different product thereafter is transported to a coastwise point."

 

In August 2014, the U.S. Customs and Border Protection ("CBP") issued ruling H254877 in response to an inquiry about adding Conventional Regular Gasoline Blendstock ("CBOB") and Reformulated Blendstock for Oxygenate Blending ("RBOB") to Undenatured Ethanol to produce fuel grade denatured ethanol for the purpose of creating a new and different product as described under 19 C.F.R. § 4.80b(a). In considering this question, the CBP relied on advice from the Laboratories and Scientific Services Directorate ("LSSD"), the scientific arm of the CBP, which determined that the undenatured ethyl alcohol and the fuel grade denatured ethyl alcohol are simply different grades of the same product and were not of a "chemical or structural difference."

 

More specifically, the LSSD found that the undenatured ethyl alcohol and the fuel grade denatured ethyl alcohol: 1) only differed in the type and amount of impurity in the product; 2) had chemical structures identical to the chemical structure of the predominant component; 3) only differed in the amount of denaturant added; and 4) were both classified as ethyl alcohol by the Harmonized Tariff Schedule. Therefore, the transportation of essentially the same product, on a non-coastwise-qualified vessel, were in violation of 46 U.S.C § 55102.

 

Subsequently, in its January 2015 ruling H259293, the CBP ruled that blending Alkylate, Reformate, Light Naphtha, Heavy Naphtha, Raffinate, Butane, Catalytic-Cracked Gasoline and Heavy Aromatics to produce CBOB, RBOB, 87 Octane Index Conventional Gasoline, and 93 Octane Index Conventional Gasoline would result in a new and different product within the meaning of 19 C.F.R. § 4.80b(a) and would not violate 46 U.S.C § 55102.

 

Therefore, unlike simply changing grades of a product by adding already formulated CBOB and RBOB, producing CBOB and RBOB from various "raw" materials is an acceptable reformulation of products so that the resulting new products can be transported between US ports by a non-coastwise-qualified vessel in compliance with U.S. Cabotage Laws.

PROVING EXPOSURE TO ASBESTOS REQUIRES SPECIFIC EVIDENCE POINTING TO THE VESSEL OWNER OR OPERATOR

 

Claims for asbestos-related diseases resulting from service aboard vessels for years are being raised by seamen filing suits under the Jones Act and alleged unseaworthiness under general maritime law. Since exposure to asbestos is claimed to have occurred aboard vessels, maritime law applies.

 

In Bartel v. A-C Products Liability Trust, the United States District Court for the Eastern District of Pennsylvania considered a motion for summary judgment filed by United Fruit Company to dismiss the claims of the estate of a former employee who sailed aboard one of its vessels. See Bartel, Civ. Action No. 2:10-37528-ER, Doc 109 (E.D.Pa. Sept. 3, 2014). In opposition to the motion, the plaintiff offered a variety of general arguments and records, including: (a) US Coast Guard records confirming the decedent sailed aboard a vessel in 1944; (b) medical and scientific literature confirming that asbestos was widely used on vessels since 1918 and extensively on vessel built before 1975; (c) expert testimony as to how merchant mariners were regularly exposed to asbestos; and (d) testimony of various merchant mariners who testified that their fellow seamen were exposed regularly to asbestos while aboard ships.

 

In the end, the plaintiff provided no witness disclosure or other evidence confirming that the decedent was exposed to asbestos while serving aboard a United Fruit owned or operated vessel. Despite the fact that the burden of proving causation under the Jones Act is "slight causation" as opposed to "substantial factor causation," because the Jones Act's burden was incorporated from the "featherweight" standard of the Federal Employers Liability Act, the plaintiff must still prove a causal link between service on an owners vessel and exposure to asbestos.

 

Under these circumstances, the District Court determined that no "fair minded juror" could "with reason" draw the conclusion that the "negligence of the employer played any party at all in the injury of death." As such, United Fruit's motion for summary judgment dismissal of the plaintiff's claims was granted.

CREDITORS OF INDUSTRIAL CARRIERS, INC. AFFORDED SOME RELIEF IN AMERICAN COURTS  

 

The fallout from Industrial Carriers Inc.'s ("ICI") unsuccessful application for the granting of a petition for bankruptcy in Greece in 2008 continued to play out in the United States District Court for the Eastern District of Virginia recently. In Flame S.A. v. Indus. Carriers, Inc., 39 F.Supp.3d 769 (E.D. Va. 2014), the District Court was called upon to determine whether plaintiffs, judgment creditors who brought fraudulent conveyance claims against ICI and related companies, could recover against the defendants as alter egos of one another.  

 

Plaintiffs Flame S.A.'s ("Flame") and Glory Wealth Pte Ltd.'s ("Glory Wealth") claims arose out of unrelated breaches of contract by ICI sometime in 2008-09. Flame obtained a judgment against ICI in London's High Court of Justice, Queen's Bench Division, Commercial Court Registry for $19,907,118.36. Glory Wealth obtained a London Arbitration Award against ICI in the amount of $46,382,772.91. Both were able to domesticate those awards in the United States District Court for the Southern District of New York.

 

In October 2013, Flame registered its judgment in the Eastern District of Virginia and sought to recover against ICI and alleged related entities, Freight Bulk Pte, Ltd. ("FBP") and Vista Shipping Ltd. ("Vista"). On November 22, 2013, Flame asked the Court to enter an Order of Attachment under Supplemental Admiralty Rule B to attach the M/V CAPE VIEWER ("CAPE VIEWER"), ostensibly owned by FBP, which the Court granted the same day. In December 2013, Glory Wealth sought relief against the same entities in the Eastern District of Virginia and attachment of the CAPE VIEWER under Rule B. The Court issued Glory Wealth's Order of Attachment and consolidated Flame and Glory Wealth's actions.

 

The only link between ICI and the Commonwealth of Virginia was the presence of the CAPE VIEWER. In order to recover, Flame and Glory Wealth would have to prove that ICI, FBP, Vista, and Viktor Baranskiy ("Baranskiy"), the person allegedly at the helm of all of these companies, were alter egos of one another, and that ICI fraudulently transferred funds and contracts to Baranskiy, Vista and FBP in order to avoid its creditors.  

 

After "many, many" motions and a bench trial, Flame and Glory Wealth succeeded in their efforts. In order to reach a conclusion favorable to Plaintiffs, the Court considered complex evidence showing, among other things, that: (a) ICI was controlled by Baranskiy and his father; (b) ICI established companies to avoid its creditors; (c) ICI conveyed the charter of a ship to Vista when ICI was insolvent and tried to hide that Vista profited from the charter; (d) ICI funded Vista; (e) ICI transferred assets out of its accounts immediately before its rejected bankruptcy in order to hide funds from creditors; (f) ICI and Vista shared the same employees performing substantially the same tasks; (g) Baranskiy was the conduit for ICI to the Vista Group and another entity; (h) Vista and other entities intermingled cash and did not conduct arm's-length transactions all of which mirrored ICI's actions; (i) Vista and other entities commingled funds, disregarded the corporate form, and used financial transfers to avoid creditors; and (j) Vista's CFO was totally dominated by Baranski, Baranskiy used Vista's funds as his own, and Baranskiy disregarded the corporate forms of his companies to avoid the problems of any one entity.  

 

Significantly, although Plaintiffs were unable to obtain certain additional discovery, they were aided by Baranskiy's desertion in the middle of his trial testimony. His testimony before his departure had been inconsistent and poor. On the second morning of it, Baranskiy abandoned the case by not appearing in Court, and taking his in-house, lead trial attorney with him. The Court noted that this is, "the first case in which the undersigned participated where a critical defense witness and representative of the main defendant abandoned his case in the middle of his cross examination at trial . . . ." These circumstances led the Court to find that had Baranskiy stayed for the remainder of the trial, his testimony would have been substantially against his own interests in relation to Vista, ICI and another entity.

 

In another twist, Flame attempted to obtain personal jurisdiction over Baranskiy, and thus all of his alter egos, by serving him while he attended trial. This could have allowed Flame and Glory Wealth to recover against the defendants directly, and not merely up to the value of the CAPE VIEWER, as permitted under Rule B. However, the District Court did not permit service upon a witness in this manner. Baranskiy's presence at trial was based on his position was the corporate representative of FBP, which he controls, and was not a personal appearance. To permit service upon Baranskiy here would have a chilling effect on witness appearances, and justice would suffer. Moreover, the Court noted that permitting personal jurisdiction over ICI and Vista when neither entity had any contact with Virginia with the exception of the CAPE VIEWER would obviate due process and would open American corporations to similar far-reaching attempts by foreign courts to exercise sweeping power.  

LESSEE OF PIPELINE BARRED BY ECONOMIC LOSS RULE

 

In Plains Pipeline, L.P. v. Great Lakes Dredge & Dock Company, 46 F.Supp.3d 632 (E.D. La. 2014), plaintiff Phillips66 Pipeline, LLC, an owner of crude oil that was being transported via pipeline, brought a maritime tort action against the pipeline's owner to recover economic losses sustained as a result of the pipeline's shutdown for repairs. The defendants moved for summary judgment on the ground that the plaintiff crude oil owner lacked the proprietary interest in the pipeline required to recover for such economic losses. While the plaintiff argued that its service and operating agreements with the pipeline owner created a sufficient proprietary interest to overcome the Economic Loss Rule, the district court disagreed, noting that it was the owner that bore the ultimate obligation to repair, maintain, and insure the pipeline.     

The pipeline at issue - an underwater oil pipeline running from Bay Marchand, Louisiana, to Alliance, Louisiana - was originally constructed in 1953 before being sold to BP Oil Pipeline Company. In May of 2007, plaintiffs Plains Pipeline L.P. ("Plains") and Phillips66 Pipeline, LLC ("Phillips"), were assigned the rights, duties, and obligations of BP and TPC Pipeline Company, as set forth in those parties' service and operating agreements. Specifically, BP assigned 100% of its rights as "Pipeline Owner" or "Operator" to Plains, while TPC Pipeline Company, assigned its rights as "Pipeline Lessee" and "Refinery Owner" to Phillips.

 

On March 17, 2012, the Dredge TEXAS, a cutter head and suction dredge owned by defendant Great Lakes Dredge & Dock Co., allegedly damaged the pipeline while lowering its cutter head onto the seafloor to fix the dredge's position. Plaintiff Phillips was the owner of the crude oil transported in the pipeline at the time of the incident, and lost a total of 204 barrels of crude oil. The pipeline was shut down for repairs, and as a result of the shutdown Phillips incurred expenses related to the alternative transportation of its crude oil during the repair period. During the litigation, Phillips submitted an expert report detailing the company's damages, which included inventory fees, freight charges, inspection charges, fuel charges, and lost product.

 

The defendants argued that, excluding the claim for damages for lost product, Phillips' other claims were purely for economic damages resulting from the damage to the pipeline. The defendant further argued that, because Phillips did not own the pipeline, it could not recover for such damages under the Economic Loss Rule enunciated in Robins Dry Dock and Repair Co. v. Flint, 275 U.S. 303 (1927). Phillips countered that while it did not own the pipeline, its rights as pipeline lessee and refinery owner created a proprietary interest in the pipeline sufficient to overcome the

Robins Dry Dock economic loss bar. 

 

The District Court noted that under Robins Dry Dock a plaintiff may not recover in an unintentional maritime tort suit for economic loss if that loss resulted from physical damage to property in which the plaintiff had no proprietary interest. The District Court further noted that in the Fifth Circuit, there exists three requirements for establishing a proprietary interest: (1) actual possession or control; (2) responsibility for repair; and (3) responsibility for maintenance.

The District Court found that, while Phillips may have had the sole right of use of the pipeline and agreed to reimburse Plains for certain pipeline repair and maintenance costs, it was Plains that had the actual responsibility and obligation to maintain, repair, and insure the pipeline. As such, the court noted that Phillips' interest in the pipeline was akin to that of a time-charterer, where the owner retains most of the incidents of ownership, such as providing the crew, maintenance, and insurance. Consequently, the court found that Phillips remained a pipeline lessee, and therefore any alleged negligence causing damage to the pipeline only interfered with Phillips' contractual right to the use of the pipeline.

 

In sum, the Economic Loss Rule is alive and well in the Fifth Circuit, and lessees of vessels and transportation facilities must fully understand their specific contractual rights and obligations. Particularly, parties should note that an exclusive right of use and a maintenance agreement may not be enough to overcome the economic loss bar.

UNDER THE FOREIGN SOVEREIGN IMMUNITIES ACT, A U.S. LAW FIRM REPRESENTING A FOREIGN COUNTRY IS NOT NECESSARILY IMMUNE FROM DISCOVERY, BUT A NON-GOVERNMENTAL CORPORATION MAY BE

In the case of Mare Shipping, Inc. v. Squire Sanders (US) LLP, 574 Fed.Appx. 6 (2014), the Second Circuit stated that a U.S. law firm representing Spain in a lawsuit in the Southern District of New York was not immune from a discovery request brought under 28 U.S.C. § 1782. Whereas, in In re Aluminum Warehousing Antitrust Litig., 2014 WL 5801607, (S.D.N.Y. Nov. 7, 2014), a Southern District Judge determined that a privately owned "non-governmental corporate party" was protected by the Foreign Sovereign Immunities Act (FSIA), 28 U.S.C. §§ 1130, 1602 et seq., from discovery.

 

United States Statute 28 U.S.C. § 1782 allows an actual, or potential, party in a foreign litigation to bring a motion in U.S. Federal Court to compel discovery for use in the foreign action. The U.S. Supreme Court has set forth several factors that a court should consider in exercising its discretion to allow the requested discovery. These considerations are: (1) whether "the person from whom discovery is sought is [not] a participant in the foreign proceeding," which militates in favor of granting the request; (2) "the nature of the foreign tribunal, the character of the proceedings underway abroad, and the receptivity of the foreign government or the court or agency abroad to U.S. federal-court judicial assistance;" (3) "whether the § 1782(a) request conceals an attempt to circumvent foreign proof gathering restrictions or other policies of a foreign country or the United States;" and (4) whether the request is "unduly intrusive or burdensome." Intel Corp. v. Advanced MicroDevices, Inc., 542 U.S. 241, 264-65, 124 S.Ct. 2466, 159 L.Ed.2d 355 (2004).

 

In Mare Shipping, the owner and the captain of a tanker involved in a casualty off the coast of Spain sought discovery from a US law firm that acted on behalf of Spain. In particular, the owner and captain of the tanker wanted evidence relating to certain Declarations submitted on behalf of Spain in a legal action in the US and to use this evidence in separate legal actions in Spain relating to the same casualty. While the underlying motion to compel discovery was ultimately denied based on a review of the Intel Corp. considerations, the Second Circuit agreed with the District Court holding that the FSIA itself did not prevent discovery. Relying on the U.S. Supreme Court decision in Republic of Argentina v. NML Capital, Ltd., 134 S.Ct. 2250 (2014), the Second Circuit confirmed that FSIA only grants sovereign immunity to a foreign sovereign, or its "agency or instrumentality," which is "an organ of a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof," not a hired law firm. 28 U.S.C. § 1603(b)(2). As the Second Circuit acknowledged that certain circumstances could change in time and allow discovery under Intel Corp., the law firm for Spain was ordered to preserve the sought after materials for a period of five years.

 

Only a few months later, in In re Aluminum Warehousing Antitrust Litig., 2014 WL 5801607, (S.D.N.Y. Nov. 7, 2014), another Southern District Judge held, among other things, that the London Metal Exchange Limited (LME) was immune to limited discovery pursuant to the FSIA. Even though the LME is a "non-governmental corporate party" privately owned by a Hong Kong listed corporation, the U.K. judiciary considers the LME as an organ of the U.K. Government benefiting from immunity when the LME is fulfilling its regulatory functions. As no exception to the FSIA applied under the circumstances, the District Court dismissed the LME from the action and, inter alia, denied the requested discovery.

 

In short, in New York, information held by a law firm hired directly by a foreign sovereign is only protected by common law privileges. But, a privately-owned company recognized by a foreign sovereign as a regulatory body can enjoy the full protection of the FSIA. The distinction may be subtle, and maybe even contradictory, at first blush, yet it is there nevertheless.

THE TERMS AND CONDITIONS OF THE CONTRACT OF CARRIAGE AND CUSTOMARY PRACTICE MATTER WHEN IT COMES TO ON-DECK STOWAGE ON A RORO VESSEL

 

In Engineered Arresting System Corp. v. M/V SAUDI HOFUF, 2014 WL 4756420 (S.D.N.Y. Sept. 5, 2014), the Southern District of New York granted partial summary judgment in favor of a Roll on / Roll off ("RoRo") carrier Defendant to limit liability based on applicable package and held that the on-deck stowage of a shipment of six wheeled trailers containing aircraft arresting systems was not a deviation. 

 

Under U.S. law, a carrier may not have the benefit of a limitation of liability clause if it materially deviated from the terms of the contract of carriage. The deviation can be geographic or a quasi-deviation for unauthorized on-deck stowage. In either case, the deviation or quasi-deviation must cause the resulting damage to cargo. The presumption that a bill of lading containing a stowage option clause implies below-deck stowage is rebuttable. For instance, in absence of actual notice, a stowage option clause is enforceable where a party has notice through prior custom and practice that on-deck stowage is allowed.

 

In opposition to the carrier's motion, the shipper Plaintiff argued that it did not receive notice that the shipment would have been carried on-deck and that there was no custom at the port of loading that allowed for on-deck stowage of the shipment. As to the first point, the District Court noted that the stowage option clause in the operable bill of lading expressly stated that cargo could be stowed on or below deck without notice to the shipper.

 

Notwithstanding this clause, the District Court went on to hold that, based on the testimony of the parties' experts, not only was it customary at the loading port to load shipments on-deck on a RoRo, but that it was also common practice to allow for on-deck stowage of the particular kind of cargo at issue. Thus, the District Court determined that there was no merit to the Plaintiff's  lack of notice argument.

 

As the Second Circuit has already established, in the context of containerships, technological innovation and vessel design has made the on-deck stowage of a container a reasonable deviation. Barrowing from this concept, in light of the fact that a RoRo is specially designed to handle the on-deck stowage of cargo, the District Court held that even assuming that on-deck stowage of the shipment was a contractual deviation, it would not have been an unreasonable one.  In the end, the shipper Plaintiff did not present evidence that the RoRo carrier Defendant substantially increased the risk of danger to the shipment by stowing it in the same manner as to other RoRo cargo.


Montgomery McCracken's Maritime and Transportation practice serves all sectors of the maritime industry including ship owners, charterers, pilots, cargo owners, shipyards, terminals, commodities traders, non-vessel operators and non-vessel operating common carriers. The multifaceted practice includes cargo and products claims; bankruptcy and restructuring; corporate and finance matters; sustainable growth; and defense of criminal investigations, including corporate compliance matters.
 
For additional information, please contact any of the attorneys within the firm's  Maritime and Transportation  practice group.

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