Bob Stefani practices in the areas of marine finance and other financial, corporate transactions and maritime and commercial litigation and government regulation.
A judge’s recent decision on where legal liability lies for a maritime accident which released thousands of gallons of oil into the Mississippi River illustrates the benefits of being proactive in vetting operator quality when chartering vessels. The case involved a July 2008 collision near New Orleans between an oil barge and the vessel TINTOMARA. The collision damaged the ship and resulted in the barge splitting, sinking and spilling 282,000 gallons of oil into the river. The oil barge and her tug were both owned by American Commercial Lines (ACL). However, ACL had bareboat chartered its tug to DRD Towing, who in turn time chartered the tug back to ACL.
In Gabarick, et al. v. Laurin Maritime (America) Inc., et al., Case No. 08-04007, the U.S. District Court for the Eastern District of Louisiana found that the collision was caused solely by the negligence and statutory violations of the tug, for which DRD was liable. The owners of the TINTOMARA argued that ACL also was at fault because it failed to exercise proper control over DRD, which allegedly had a bad safety record. While the Court suggested that ACL’s liability could be premised on proof that ACL knowingly placed an unsafe vessel into the hands of an unsafe operator and such placement caused the collision, the Court found that the shipowner failed to meet its burden of proof on this issue.
Instead, the Court found that ACL’s vetting of DRD’s licensing, accident history and compliance with the Federal 12-hour watch rule, while imperfect, was nonetheless reasonable. There was evidence that DRD was involved in 17 accidents in the 18 months leading up to the collision and that ACL reviewed the accidents involving its vessels in order to determine the need for corrective action. ACL’s oversight also included a management audit of DRD, as well as quarterly meetings. These actions never revealed evidence that DRD was either using unlicensed operators or working crews in violation of the 12-hour watch rule. However, the Court specifically found evidence that DRD concealed this information from ACL, and held that ACL was not accountable for such concealment. Based on these findings, the Court dismissed the TINTOMARA’s claims against ACL, and ordered DRD to pay ACL all of its stipulated recoverable damages, plus interest and costs.
The case serves as a reminder that screening chartered vessels and their operators for quality and safety, and including and adhering to quality and safety standards in time charters, can reap benefits both in protecting against accidents and defending the charterer from legal liability if accidents occur.
On May 14, 2012, the Bureau of Ocean Energy Management (BOEM) announced a finding of “no competitive interest” with regard to a proposed right-of-way grant area off the Mid-Atlantic coast for construction of an offshore wind energy transmission line. While BOEM’s decision represents a key step forward for this federal offshore wind farming project, two fast-moving projects off the coast of Texas suggest that development in waters under state jurisdiction may well have the inside track over federal projects, due to a more streamlined regulatory process. In addition, offshore wind projects along the Gulf Coast benefit from a general population more welcoming to offshore industry, as well as a high concentration of marine and offshore industrial fabricators and service companies that give the Gulf Coast a competitive advantage with lower construction, operation, transportation and maintenance costs.
The Coastal Point Energy project has been licensed for testing by the Texas General Land Office and contemplates installation (planned for the end of 2011 but apparently delayed) of a test wind turbine on a platform in shallow Texas waters of the Gulf of Mexico. Ultimately, Coastal Point plans to spend $720,000,000 on a 300 megawatt wind farm 8.5 miles off Galveston on 12,350 leased acres. Additionally, the Army Corps of Engineers is developing an environmental impact statement, anticipated to be completed in 2014, for a second project under development by Baryonyx Corporation, Inc. Baryonyx holds leases in Gulf of Mexico state waters, offshore Willacy and Cameron Counties, and proposes to construct an approximately 300-turbine wind farm.
As the Gulf Coast offshore wind industry continues to develop, it brings with it supply chain manufacturing and related job growth. An example of the potential for such economic development is the manufacturing facility established by UK-based Blade Dynamics at the Michoud Assembly Facility in New Orleans East. Incentivized by state tax credits and worldwide demand for wind turbine parts, the company is hiring hundreds of workers. This type of green energy industrial development bodes well for the economic future of a region whose prospects were severely compromised by the Obama Administration’s drilling post-BP spill drilling moratorium and general hostility to the oil and gas industry that traditionally has been the backbone of the area economy.
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.
In an action that may signal future changes to vessel documentation requirements for publicly traded companies, the U.S. Coast Guard published a Notice in the Federal Register November 3 seeking comments on mechanisms currently employed by such companies in order to assure compliance with U.S. citizenship requirements.
At least 75% of the stock or other equity interest in companies owning vessels operating in the coastwise [aka Jones Act] trade must be held by citizens of the United States as defined in 46 U.S.C. § 50501. These citizenship requirements apply at each tier of ownership. In other words, if stock or equity interests in a vessel-owning company are in turn held by other entities which are not individuals, “each entity contributing to the stock or equity interest qualifications of the entity holding title [to the vessel] must be a citizen eligible to document vessels in its own right with the [coastwise] trade endorsement sought.” 46 CFR § 67.36(d).
The Coast Guard relies on the self-certification as to a vessel documentation applicant’s qualification for coastwise trading endorsements. However, as indicated in the Coast Guard’s notice, if evidence of possible non-compliance is found, the vessel-owning company has the burden of establishing that it satisfies the applicable U.S. citizenship requirements. The question is: How do publicly traded companies do this?
The Coast Guard’s focus on the issue arises out of its recent investigation into the citizenship of Trico Marine Services, Inc, and its affiliates. The results of the Coast Guard’s investigation into Trico’s citizenship and its memorandum setting forth the agency’s final action can be viewed at the following link: http://www.uscg.mil/hq/cg5/nvdc/nvdcreport.asp. The Coast Guard’s investigation of Trico was prompted by allegations by a shareholder of the company who was engaged in a dispute with management. In analyzing the information provided by the company to support its citizenship, the Coast Guard emphasized that, unlike the Maritime Administration, the Coast Guard does not adhere to the “fair inference rule,” under which seventy-five percent beneficial ownership by U.S. citizens is inferred for publicly traded companies with more than 30 stockholders if the company can show that 95% of the registered addresses of the company’s shareholders are located in the United States. 46 CFR § 355.3(b). The Coast Guard cited its longstanding rationale for rejecting this rule, which is that the documentation laws are restrictive and intended to limit the persons eligible to document vessels under U.S. laws and acquire certain trading privileges. Therefore, “[t]he Coast Guard will not be bound by any presumptions or inferences in making eligibility determinations for documentation purposes.” 58 FR 60,256, 60,259 (Nov. 15, 1993).
In the Trico matter, the Coast Guard found that despite repeated opportunities, Trico was unable to establish that 75% of its stock was owned by U.S. citizens. The agency was unsympathetic to the company’s contention that its status as a publicly traded company restricted its ability to provide evidence of U.S. citizenship. The Coast Guard instead stated that if the company chose to engage in coastwise trade under the Jones Act, it was required “to structure itself and its equity securities in such a way, and to put in place procedures and mechanisms by which it can satisfy its obligations under the Jones Act.”
Based on its analysis, the Coast Guard determined that the Certificates of Documentation for Trico’s vessels were improperly issued and recommended that those certificates be cancelled. The Coast Guard further recommended penalties totaling $5,978,000. The Coast Guard reserved decision on whether to recommend seizure and forfeiture of Trico’s vessels pending further findings on whether Trico acted with intention to violate the law. The specific recommendations regarding Trico were largely mooted by Trico’s Chapter 11 bankruptcy and sale of its vessels.
However, the Coast Guard also recommended that the agency consider seeking comment from the industry as to how publicly traded companies comply with the Coast Guard’s U.S. citizenship requirements, and that recommendation led to the agency’s November 3, 2011 notice.
Specifically, the agency seeks comment on:
- the mechanisms that publicly traded companies have employed, including but not limited to restricting sale of their stock to U.S. citizens or using a transfer agent to administer a dual stock certificate system, to assure compliance with U.S. citizenship requirements; and
- the manner in which such mechanisms function to assure and provide proof of compliance with U.S. citizenship requirements.
The agency adds that it “will not retaliate against commenters that question or complain about citizenship requirements or any policy or action of the Coast Guard.” Comments are due February 1, 2012.
This is a matter that will be of particular interest to publicly traded companies that are either already engaged in coastwise trade or are looking to invest in companies so engaged. The vessel documentation requirements at issue apply not only to equity investors but also to lenders in lease-financing transactions in which financing companies hold title to vessels engaged in coastwise trade. The comments received by the Coast Guard, and any subsequent regulatory action taken by the Coast Guard, will hopefully provide publicly traded companies with guidance as to how to comply with the law so as to facilitate continued investment in the Jones Act fleet.
Rep. Jeff Landry (R-LA) has added a provision to the Coast Guard and Maritime Transportation Act of 2011, currently under consideration in Congress, which would require the owner/operator of any offshore rig or vessel engaged in drilling, plugging and abandoning or workover operations to maintain a standby rescue vessels within 3 nautical miles.
The provision is being applauded by those who believe it is an appropriate safety measure in the wake of the Deepwater Horizon blowout that resulted in the deaths of 11 workers and the rescue of 115 others by a supply boat that happened to be alongside the rig at the time. The requirement also could also create additional work for vessel operators in the Gulf of Mexico. But there is opposition to the measure, even by other legislators in Rep. Landry’s own state. Rep. Charles Boustany (R-LA) has criticized it, saying “It would create excessive regulations on energy producers and hinders the progress we have made in order to restart Gulf energy production.” Additionally, the measure would allow the use of one standby vessel for more than one manned facility or vessel, and the use of standby vessels for purposes other than rescue.
Vessel operators interested in providing the rescue services called for in the bill therefore could face some difficult operational decisions and even liability concerns. Accordingly, close attention to risk-allocation, indemnity and insurance provisions in agreements to provide these rescue services would be highly recommended.
For further coverage on Landry’s proposal:
Lawmakers in the House and Senate have taken the first steps toward enactment of legislation that will allocate 80% of fines assessed against BP under the Clean Water Act to Gulf States. On September 21, 2011, the Senate Environment and Public Works Committee reported
out S. 1400 – The RESTORE the Gulf Coast Act of 2011. The bill would allocate the fines collected in connection with the spill, which could total in excess of 21.4 billion, as follows: 35% would be divided among the five Gulf states; 30% would be given to a federal-state council dedicated to Gulf coast ecosystem restoration; another 30% would be assigned to states according to an impact formula based on oiled shoreline miles, proximity to the spill and coastal population; and 5% would be used to establish a long-term science and fisheries endowment.
On October 5, 2011, the House counterpart [H.R. 3096] was introduced and referred to the House Committee on Science, Space, and Technology.
While the legislation enjoys the support of the Obama administration, ultimate passage is far from certain. If the law is enacted, depending on the amount of fines collected, it could create significant economic activity in the Gulf region through coastal restoration projects and the promotion of tourism in the Gulf Coast region.
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.
As this article indicates, a veritable “bonanza” is taking place in Brazil as a result of recent offshore oil discoveries by Petrobras: “The result is that every company and group is piling into the country to set up their shopfront to show their wares.” The booming demand for oilfield and related marine and construction services is driving both acquisition activities and redeployment of vessels and equipment to the country, presenting opportunities and challenges for the companies involved and their lenders.
Opportunities in Brazil are also being promoted through the Brazilian government’s Growth Acceleration Program (PAC, based on Portuguese spelling), under which the government announced in 2010 a $526 billion investment in infrastructure between 2011 and 2014, including opportunities for over $220 billion in foreign investments. Foreign companies yet established in Brazil are already seeing business growth as a result of the PAC.
But, companies considering opportunities in Brazil should be aware of and plan for the challenges ahead, which include:
- A complicated regulatory regime that can be difficult for foreign companies to navigate;
- A legal system that is based on the Napoleonic code rather than the common law system employed in the U.S. [other than Louisiana];
- A complex tax code which demands a significant investment of time and effort to ensure compliance and to plan for an exit that minimizes tax implications;
- An extensive and comprehensive labor code;
- An overloaded judicial system that does not rely on precedents, in which cases can languish for many years and there is little predictability as to outcome;
- Crime and security problems that impact the safety of employees, protection of company property and goods being delivered to customers;
- Government corruption that can create exposure for U.S. companies under the Foreign Corrupt Practices Act; and
- Domestic lender restrictions on relocation of collateral overseas.
It is important that companies conduct extensive due diligence to ascertain and address issues on the front end. Putting together a team of trustworthy local individuals and seeking counsel of U.S. and local attorneys are essential elements of this effort.