One of the recurring issues in handling maritime wrongful death and personal injury claims is determining what information is sufficient to start the vessel owner’s six-month deadline to file a complaint seeking exoneration or limitation of liability under the Shipowners’ Limitation of Liability Act, 46 U.S.C. § 30501 et seq. from that claim.  It is clear that a written demand for payment/settlement before suit is filed which exceeds the value of the vessel will start the running of the six-month period.  Additionally, when the petition alleges recovery of damages in excess of the value of the vessel, the vessel owner’s receipt of that petition will start the clock.  However, it is less certain when the written notice of the claim is via service of a state court petition in which the plaintiff has not alleged a specific damages amount, as is generally the case in Louisiana and Texas state courts, but thereafter makes an initial settlement demand that exceeds the vessel’s value.

The U.S. Fifth Circuit, in In re Eckstein Marine Service L.L.C., No. 10 – 20600 (Feb. 22, 2012), recently examined this issue.  Jackson, a Jones Act seaman employed by Eckstein, filed suit in Texas state court.  Eight months after it was served with Jackson’s state court suit, Eckstein filed a limitation proceeding in Texas federal court.  The Fifth Circuit affirmed the federal court’s judgment dismissing Eckstein’s limitation proceeding for lack of subject matter jurisdiction, concluding that the limitation proceeding had been filed too late.  Although Jackson’s state court petition was silent on the quantum of damages, the Fifth Circuit concluded that pleading revealed a reasonable possibility that Jackson’s claim would exceed the value of Eckstein’s vessel, and therefore the clock started running for Eckstein to file a limitation suit upon its receipt of service of the state court petition.

Jackson’s state court petition had alleged that on February 28, 2009, Jackson had sustained serious and debilitating injuries on Eckstein’s M/V ST. ANDREW when his left leg became entangled in a line and was thereafter pulled into a mooring bit, causing him to suffer serious and debilitating injuries of a permanent nature.  The petition also alleged the standard laundry list of damages categories:  past loss of earnings, future loss of earnings capacity, past and future disability, past and future disfigurement, past and future medical and hospital expenses, past and future pain and mental anguish and maintenance and cure.  Moreover, as part of Eckstein’s cure obligation, it monitored Jackson’s medical treatment, which revealed multiple surgeries during Jackson’s initial two-week hospitalization to insert hardware to treat his bone fractures, as well as to perform debridement and skin graft procedures.  Based on the foregoing information, the Fifth Circuit concluded that the service of Jackson’s petition on April 28, 2009 started the six-month period for Eckstein to file its limitation complaint.

Eckstein, who filed the limitation complaint on January 18, 2010, argued that the six-month period should have started on December 2, 2009, when Jackson made his initial settlement demand for $3 million.  Under that theory, Eckstein’s limitation complaint clearly would have been timely.

The Fifth Circuit affirmed the federal district court, concluding that service of the Texas state court complaint on April 28, 2009, coupled with Eckstein’s knowledge of Jackson’s initial two – week medical treatment, raised a “reasonable possibility” that Jackson’s damages would exceed the value of the M/V ST. ANDREW.  As the Fifth Circuit explained:

Once a reasonable possibility has been raised, it becomes the vessel owner’s responsibility to initiate a prompt investigation and determine whether to file a limitation action.  The Limitation Act provides generous statutory protections to the vessel owners who reap all of its benefits.  When there is uncertainty as to whether a claim will exceed the vessel’s value, the reasonable possibility standard places the risk and the burdens associated with that risk on the owner.  In other words, if doubt exists as to the total amount of the claims or as to whether they will exceed the value of the ship the owner will not be excused from satisfying the statutory time bar since he may institute a limitation proceeding even when the total amount claimed is uncertain.

Id. at p. 9.  Accordingly, the Fifth Circuit concluded Eckstein’s limitation complaint should have been filed by October 28, 2009 and not on January 18, 2010.

Vessel owners – as the title suggests, when in doubt, file the limitation complaint.

When seeking construction financing for a proposed newbuilding, shipowners should understand and be prepared to address the particular concerns that lenders have in assessing risk and documenting vessel construction projects.

When deciding whether to approve a construction financing loan, lenders focus on certain key factors:

  • Does the shipyard have the requisite experience, manpower and financial wherewithal to complete the project?  To address this concern, shipowners should deal only with established builders with proven records of successfully completing vessel construction projects, preferably involving the type of vessel to be financed.
  • What is the credit strength of the shipowner?  If the lender will not be financing the entire cost of construction, the shipowner must be able to show that it can fund any unfinanced portion of the cost as well as any owner furnished equipment.  As with any loan, the financial strength and operating experience of the shipowner also will be important to the lender’s assessment of the shipowner’s ability to operate the vessel profitably and make debt service payments.
  • Is the shipowner overpaying for the vessel?  Shipowners should be prepared to demonstrate that the construction cost is in line with vessels of similar type. Prudent lenders consult with appraisers to help them evaluate the cost.
  • How strong will the market demand for the vessel be?  As with any business loan, the lender will want to see realistic and verifiable projections of the vessel’s earning potential after construction.  In optimal cases, a ship is constructed for a specific customer of the shipowner and committed under long-term services agreements or charters with firm competitive terms.

Once the lender has agreed to go forward with financing, it is a best practice to involve the lender in the negotiation of the construction contract so that issues that will be important to the lender can be addressed up front.   Nonetheless, in many instances, the shipbuilding contract already has been signed before the shipowner seeks financing.  In those cases, lenders will want to review the contract and may requests amendments to protect the lender’s interests.  Items of particular concern to lenders include:

  • when title passes to the shipowner;
  • the shipbuilder’s obligation to certify as to completion of milestones;
  • the scope of the shipbuilder warranties;
  • the progress payment schedule;
  • provisions relating to documentation of the vessel;
  • builder indemnities against lien claims of subcontractors as well personal injury, property damage and pollution claims arising during construction;
  • the adequacy of insurance coverage during construction; and
  • assignability of the contract as security for the loan.

In the typical construction loan transaction, the lender will take an assignment of the construction contract to secure repayment of the loan.  Under this assignment, if the shipowner defaults in repayment of the loan during construction, the lender will be entitled to take title to the vessel upon completion and sell the vessel to cover its loses on the loan.   The lender will also require that the builder consent to this assignment and agree to subordinate any lien it has in the vessel to the mortgage and other security interests taken by the lender.

As construction progresses, the lender will make advances for progress payments, which are usually repaid on an interest-only basis, until the vessel is completed.  To make these interim advances, lenders usually require supporting documentation that may include:

  • a shipbuilder’ certification that the milestone for which the progress payment is being made has been achieved;
  • invoices of the shipbuilder and other vendors or subcontractors for labor, material and equipment covered by such milestone;
  • releases of any liens in favor of any vendors, materialmen, or subcontractors the cost of whose services, work, equipment or materials is included in the advance;
  • a shipowner-certified advance request;
  • surveys, appraisals, certifications or other documents that a lender may require to establish that the advance is for a purpose authorized under the loan documents;
  • if an advance is made to reimburse the shipowner for owner-furnished equipment, proof of payment of the expenditures for which reimbursement is sought,

Once the vessel is completed, the construction-phase interim loan will convert to permanent term financing secured by a preferred ship mortgage on the vessel.  This conversion usually occurs in connection with the payment of the final milestone payment under the contract and delivery of the vessel.  At that time, the lender will require delivery of:

  • a term promissory note executed by the shipowner;
  • an Application for Documentation [form CG-1258];
  • Builder’s Certification and First Transfer of Title Document [form CG-1261] signed by the builder;
  • a Warranty Bill of Sale executed by the builder;
  • a Delivery and Acceptance Certificate, evidencing physical delivery of the vessel to the shipowner;
  • a preferred ship mortgage executed by the shipowner in favor of the lender; and
  • a certificate of insurance evidencing the coverages [hull and machinery, P&I, mortgagee’s interest] required by the preferred mortgage.

Depending on the structure of the deal, the lender may require other security documents such as a security agreement, assignment of charter hire and earnings and/or assignment of insurance policies.  The lender will require that the shipowner and shipbuilder coordinate the documentation of the vessel with the Coast Guard with the lender’s contemporaneous filing of its preferred ship mortgage, so that mortgage interest attaches at the time of documentation.

 

The United States Supreme Court, in Pacific Operators Offshore, LLP v. Valladolid, concluded that the widow of an employee who suffered fatal injuries on shore may still recover LHWCA benefits pursuant to OCSLA if her husband’s death had a “substantial nexus” to his employer’s oil and gas operations on the OCS.  This is an unexpected decision based upon loose Congressional language in 43 U.S.C. § 1333(b), which adopts the LHWCA as the workers’ compensation scheme for the “disability or death of an employee resulting from any injury occurring as the result of operations conducted on the outer Continental Shelf” for the purpose of extracting its natural resources.

The Court disagreed with the Third Circuit’s test which was based on a “but for” standard.  The Court also rejected the Solicitor General’s proposal to adopt a Chandris-esque test that the employee have a substantial relation in duration and nature to OCS operations in order to qualify for LHWCA benefits under OCSLA.

Moreover, the Court discarded the en banc Fifth Circuit’s test for coverage that had focused solely on whether the incident occurred on an OCS situs.  The Court consigned to dicta inferences or statements to the contrary in its earlier decisions of Herb’s Welding, Inc. v. Gray and Offshore Logistics, Inc. v. Tallentire that had been interpreted to focus on the situs of the underlying accident as determining whether the employee was entitled to LWHCA benefits pursuant to OCSLA.

Rather, the Court agreed with the Ninth Circuit’s “substantial nexus” test in determining LHWCA coverage for OCSLA purposes.  Although the accident giving rise to this claim occurred on shore, 98% of Valladolid’s work activities were based on platforms and other oil and gas production structures affixed to the OCS.  Accordingly, Valladolid’s widow could recover LHWCA death benefits, pursuant to OCSLA.

Unlike the 30% test set forth in by the Court in Chandris, Inc. v. Latsis, the Supreme Court in Vallalodid left it to the lower courts to develop the boundaries of the “substantial nexus” criteria.  As Justice Scalia pointed out in his concurrence that agreed a “causation-like” standard was appropriate, but disagreed with the “substantial nexus” standard adopted by the Court – “What a tangled web we weave.”

The U.S. Fifth Circuit, in Brown v. Offshore Specialty Fabricators, Inc., No. 10-40936 (Nov. 23, 2011), recently addressed the confluence of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), the Outer Continental Shelf Lands Act (“OCSLA”), the Immigration and Nationality Act (“INA”), and “foreign control” exemptions from the OCSLA manning requirements that had been issued by the Coast Guard in affirming the district court’s dismissal of a lawsuit filed by U.S. citizens alleging, in part, violations of RICO arising from an alleged scheme to employ foreign workers on the Outer Continental Shelf thereby depressing wages and degrading working conditions.  The defendants were classified as belonging to two principal groups:  the Service Defendants, companies engaged in the offshore oil and gas exploration industry, and the Manning Defendants, companies engaged in providing contract labor services for offshore oil and gas projects.

All of Plaintiffs’ claims were ultimately dismissed by the district court.  The Plaintiffs appealed the dismissal of three of their claims, one of which involved the civil RICO claims against the Service Defendants.  The Fifth Circuit affirmed the dismissal of all claims.  The Court’s reasoning concerning the dismissal of the RICO claim is briefly discussed.

In order to prevail in a civil RICO claim against the Service Defendants, the Plaintiffs had to establish that the Service Defendants engaged in racketeering activity.  The Plaintiffs argued that the Service Defendants had violated the INA by employing foreign workers on their vessels.  The Plaintiffs further argued that the INA applied to the Service Defendants’ vessels by operation of the OCSLA, which extends federal law to installations that were permanently or temporarily attached to the seabed of the United States Outer Continental Shelf.  However, because the Service Defendants’ vessels were free floating and not attached to the seabed, as a matter of law, the OCSLA did not apply to those vessels where the alleged wrongful conduct occurred.

The Service Defendants alternatively argued that they received exemptions from the Coast Guard from the manning requirements of OCSLA, which exemptions allowed the Service Defendants to lawfully employ foreign workers on the Service Defendants’ vessels and thus shield them from potential RICO liability.  Under OCSLA, vessels, rigs, platforms and other structures must be “manned or crewed by” U.S. citizens or “aliens lawfully admitted to the United States for permanent residence.”  43 U.S.C. § 1356.  One of the statutory exemptions from OCSLA’s manning requirements are vessels “over 50 percent of which is owned by citizens of a foreign nation or with respect to which the citizens of a foreign nation have the right effectively to control.”  43 U.S.C. § 1356(c)(2).  The Coast Guard can determine whether the statutory standards for a foreign control exemption have been satisfied, and if so, whether to issue a exemption to a given vessel.

Two of the Service Defendants had obtained a foreign control exemption from the Coast Guard, which the Plaintiffs argued had been procured through alleged deceit by those Service Defendants.  Those Service Defendants bare boat chartered their vessels to a foreign controlled company, which in turn manned, equipped and operated the vessels on the U.S. Outer Continental Shelf.  The bare boat charter agreement permitted the operator to sub-charter the vessels to other companies.

The foreign controlled bare boat charterer / operator thereafter time chartered the vessels to the Service Defendants and other companies.  Those Service Defendants presented evidence that they had fully disclosed to the Coast Guard in the exemption application process the foregoing chartering arrangements, including the foreign bare boat charterer’s ownership, financial and organizational structure as well as the Service Defendants’ relationship to the foreign bare boat charterer.

The Fifth Circuit was “loath to second-guess the Coast Guard’s judgment in issuing foreign control exemptions,” and accorded judicial deference to the Coast Guard in those decisions.  Based on the full disclosure by the Service Defendants to the Coast Guard in the application process for the foreign control exemptions, the Fifth Circuit rejected the Plaintiffs arguments that the exemptions had been obtained through deceit.

The Fifth Circuit’s opinion underscores the need for full disclosure of all vessel interests seeking to obtain a foreign control exemption from the Coast Guard.  The information provided should include the applicable ownership breakdown of the vessel operator, the organizational and financial structure of the company, as well as the relationship of the vessel operator to the vessel owners and potential customers.

The EPA issued drafts of two vessel general permits seeking to regulate discharge from commercial vessels (military and recreational vessels are excluded) on November 30. The draft permits (1) Vessel General Permit for Discharges Incidental to The Normal Operation of Vessels (VGP) and (2) Small Vessel General Permit for Discharges Incidental to The Normal Operation of Vessels Less Than 79 Feet (sVGP) address environmental risks relating to ship-borne pollutants and invasive species from ballast water discharges. The new standards, if approved, will require commercial vessels to install technology strong enough to kill at least some of the fish, mussels and other organisms in ballast water before it’s dumped into harbors after ships arrive in port. The EPA’s brief overview of the two draft permits can be found here.

The draft VGP, if approved, will replace the current VGP (effective February 6, 2008) and will impose numeric ballast water discharge limits for most vessels. The draft VGP also contains more stringent effluent limits for oil to sea interfaces and exhaust gas scrubber washwater.

The draft sVGP, which is an entirely new permit, would authorize discharges incidental to the normal operation of non-military and non-recreational vessels less than 79 feet in length. Currently, a Congressional moratorium (initiated by Public Law 110-299 and subsequently extended by Public Law 111-215) exempts all incidental discharges, with the exception of ballast water, from commercial fishing vessels and non-recreational, non-military vessels less than 79 feet in length from having to obtain a Clean Water Act permit until December 18, 2013.  When the moratorium expires, the draft sVGP, if approved, would provide permit coverage for such vessels.  However, vessel owners/operators will be required to complete the sVGP Permit Authorization and Record of Inspection form, which must be signed and maintained onboard the vessel for the entire permit term.  Moreover, vessel owners/operators will be required to conduct an annual self-inspection and certify that he or she has done so by signing the form each year.

Undoubtedly, the drafts will be subject to much debate during the 75-day public comment period and beyond.  Comments can be submitted during the comment period online at http://www.regulations.gov (instructions are provided), by email to ow-docket@epa.gov, or by mail to Water Docket, U.S. Environmental Protection Agency, Mail Code: 2822T, 1200 Pennsylvania Avenue NW Washington DC 20460 Attention Docket ID No: EPA-HQ-OW-2011-{place appropriate number here} (0141 for VGP; 0150 for sVGP).  Additionally, the EPA will hold two public meetings and one webcast to give an overview of the proposed permits and to take comment. The webcast date and time has not been established, but the meetings are scheduled as follows:

1. January 11, 2012, 9:00 am – 5:00 pm (EST) or until all comments have been heard at EPA East 1153, 1201 Constitution Ave NW, Washington DC 20460;

2. January 23, 2012, 10:00 am – 5:00 pm (CST) or until all comments have been heard at Ralph H. Metcalfe Federal Building, Room 331, 77 West Jackson Blvd, Chicago IL 60604.

Following the public comment period, the EPA anticipates releasing a final draft of the permit in November 2012.

The U.S. Coast Guard has proposed significant changes to the regulations concerning the Inspection of Towing Vessels and arguably eliminating the class of vessels formerly known as uninspected towing vessels.  The Coast Guard has established a deadline of December 9, 2011, to receive public comments, which can be made at the following link:  www.regulations.gov and by inserting “USCG–2006–24412” in the box marked “Keyword” or “ID.”

The proposed regulations cover a number of industry sensitive topics, including:

(1)   adoption of Towing Safety Management System approved by licensed third party auditors, surveyors or classification societies or annual inspections by the Coast Guard

(2)   propulsion / steerage redundancy requirements as well as stability and electrical design requirements

(3)   crewing/manning training requirements including record keeping functions

As of this writing, several industry stake-holders have posted comments concerning the anticipated costs of compliance on small operators, the inconsistencies between the proposed regulations of towing vessels and the absence of similar regulations for passenger vessels, as well as the absence of any “grandfather” provisions as had been provided when previously “uninspected” vessel classes were thereafter subject to regulation.

In the recent CityBusiness article “Revenue Neutrality Keeps Shipping Tax Credit on Shelf,” Ben Meyers examines the reasons behind the State of Louisiana’s refusal to implement a $5 per-ton tax credit passed into law two years ago. The Ports Tax Credit Program provides for export‐import cargo credit of $5 per ton for cargo emanating from or destined to a Louisiana manufacturer, warehouse, distributor, or other value-added enterprise that is destined to or emanates from an international destination. Cargo must pass through a Louisiana public port to qualify for the credit.

The State’s argument for declining to put the credit into effect is that the law requires that the credit be revenue neutral in that it must generate as much as it surrenders.  But, there is clear disagreement between Louisiana Economic Development and port officials as to what constitutes revenue neutrality.  LED Secretary Stephen Moret takes the position that cargo volumes in Louisiana ports would have to triple in 18 months for the credit to be revenue neutral, and port officials must be able to show that that can happen before the credit can be implemented. Industry leaders argue that current cargo levels already all but cover the cost of the credit, and that LED’s analysis fails to take into account the “catalytic effect” that implementation of the credit would have by attracting new shipping lines to the region.

While each side continues to cite their own revenue figures to support their respective positions, there appears to be no end in sight to this battle of statistics.  In the meantime, ports that are significant engines of economic development in the state are left without a promised incentive program designed and enacted to help them attract new international shipping lines and develop new business.