IN RE: PETITION OF FRESCATI SHIPPING COMPANY, LTD., AS OWNER OF THE M/T ATHOS I and TSAKOS SHIPPING & TRADING, S.A., AS MANAGER OF THE ATHOS I FOR EXONERATION FROM OR LIMITATION OF LIABILITY; UNITED STATES OF AMERICA v. CITGO ASPHALT REFINING COMPANY; CITGO PETROLEUM CORPORATION; CITGO EAST COAST CORPORATION
No. 16-3470, 16-3552, 16-3867 & 16-3868
United States Court of Appeals for the Third Circuit
March 29, 2018
PRECEDENTIAL
On Appeal from the United States District Court
District Court Nos. 2-05-cv-00305; 2-08-cv-02898
District Judge: The Honorable Joel H. Slomsky
Argued November 8, 2017
(Filed: March 29, 2018)
Timothy J. Bergère
Alfred J. Kuffler
John J. Levy [ARGUED]
Montgomery McCracken Walker & Rhoads
123 South Broad Street
24th Floor
Philadelphia, PA 19109
Eugene J. O‘Connor
Montgomery McCracken Walker & Rhoads
437 Madison Avenue
29th Floor
New York, NY 20022
Jack A. Greenbaum
22782 Buendia
Mission Viejo, CA 92691
Counsel for Frescati Shipping Co. Ltd. and Tsakos Shipping and Trading S.A.
Matthew M. Collette
United States Department of Justice
Civil Division
Room 7212
950 Pennsylvania Avenue, N.W.
Washington, DC 20530
Stephen G. Flynn
United States Department of Justice
Torts Branch, Civil Division
P.O. Box 14271
Washington, DC 20044
Anne Murphy [ARGUED]
United States Department of Justice
Appellate Section
Room 7644
950 Pennsylvania Avenue, N.W.
Washington, DC 20530
Counsel for United States of America
Benjamin Beaton
Jacqueline G. Cooper
Carter G. Phillips [ARGUED]
Richard E. Young
1501 K Street, N.W.
Washington, DC 20005
Counsel for Citgo Asphalt Refining Co. Citgo Petroleum Corp. Citgo East Coast Oil Corp.
George R. Zacharkow
Deasey Mahoney & Valentini
1601 Market Street
Suite 3400
Philadelphia, PA 19103
Counsel for Intervenor Respondent International Liquid Terminal Ass‘n American Fuels and Petrochemicals Manufacturers Ass‘n
OPINION
SMITH, Chief Judge.
Table of Contents
- Introduction 6
- Background 7
- Facts 7
- Procedural History 13
- Jurisdiction and Standard of Review 19
- The Safe Berth Warranty 19
- The Draft of the Athos I 21
- Frescati‘s Seamanship 27
- Wharfinger Negligence 36
- Subrogation and Equitable Recoupment 42
- Subrogation and Subrogee-Specific Defenses 45
- Equitable Recoupment 49
- Limitation of Liability under the Oil Pollution Act 55
- Prejudgment Interest Rate 58
- Conclusion 61
I. Introduction
After a 1,900-mile journey from Venezuela to Paulsboro, New Jersey, the M/T Athos I, a single-hulled oil tanker, had come within 900 feet of its intended berth when it struck an abandoned anchor on the bottom of the Delaware River. The anchor pierced the Athos I‘s hull, causing approximately 264,000 gallons of crude oil to spill into the river.
The cost of cleaning up the spill was $143 million. We are presented with the question of how to apportion responsibility for that cost between three parties. The first party comprises not only the shipowner, Frescati Shipping Company, Ltd., but also the ship‘s manager, Tsakos Shipping & Trading, S.A. (collectively, “Frescati“). Frescati, through an intermediary, contracted to deliver crude oil to the second party, which is made up of several affiliated companies—CITGO Asphalt Refining Company, CITGO Petroleum Corporation, and CITGO East Coast Oil Corporation (collectively, “CARCO“). The oil shipment was to be delivered to CARCO at its marine terminal in Paulsboro. After the oil spill, Frescati paid for the cleanup effort, and was eventually reimbursed $88 million by the third party to this litigation, the United States, pursuant to the Oil Pollution Act (OPA) of 1990,
II. Background
a. Facts1
The M/T Athos I was a single-hulled tanker ship, measuring approximately 748 feet long and 105 feet wide.2 As owner of the ship, Frescati chartered it to an intermediary which assigned it to a tanker pool.
The Athos I, carrying CARCO‘s shipment, left Venezuela in mid-November 2004 under the command of the ship‘s master, Captain Iosif Markoutsis. CARCO had instructed the Athos I to load to a draft3 of 37 feet or less in Venezuela, and provided a warranty that the ship would be able to safely reach the berth in Paulsboro as long as it arrived with a draft of 37 feet or less. When the Athos I left Venezuela, it had a draft of 36’ 6“. Over the course of the Athos I‘s journey, the ship burned fuel and the crew consumed fresh water. As the ship grew lighter, it rode higher on the water. By the time it reached the entrance to the Delaware Bay, the Athos I was drawing 36’ 4“. Because the fuel and fresh water were consumed from tanks located in the stern, or rear, of the ship, the Athos I was no longer sailing at an even keel; it was “trimmed by the bow,” meaning that the bow, or front of the ship, was deeper in the water than the ship‘s stern. To return the ship to an even keel, the Athos I took on approximately 510 metric tons of ballast to tanks in the rear of the ship. Although the parties dispute how much the Athos I was drawing as it approached CARCO‘s berth, the District Court found that the added ballast brought the ship‘s draft to 36’ 7“.
The Athos I reached the entrance to the Delaware Bay without incident on November 26th. All vessels traveling north from the Delaware Bay to the Delaware River are required to use a Delaware River Pilot to navigate the waters. At the appropriate time, a local river pilot, Captain Howard Teal, Jr. boarded the ship and guided it up the Delaware River until it reached a section of the river near CARCO‘s berth. At that point, a local docking pilot, Captain Joseph Bethel, replaced Captain Teal and began to navigate the ship to its berth at Paulsboro. Captains Teal and Bethel both engaged Captain Markoutsis in conversations about the Athos I, its passage from the Delaware Bay to the Paulsboro berth, water depth, underkeel clearance, and other local conditions. The substance and sufficiency of those conversations are disputed by the parties.
CARCO‘s berth is on the New Jersey side of the Delaware River, directly across from Philadelphia International Airport. To reach the berth from the main river channel, ships must pass through an anchorage immediately adjacent to the berth. The anchorage, known as Federal Anchorage Number 9 or the Mantua Creek Anchorage, is a federally-designated section of the river in which ships may anchor; it is periodically surveyed for depth and dredged by the Army Corps of Engineers, as Corps resources allow. No government agency is responsible for preemptively searching for unknown obstructions to navigation in the anchorage, although the Coast Guard, the National Oceanic and Atmospheric Administration (NOAA), and the Corps of Engineers work together to remove or mark obstructions when they are discovered. Anyone who wishes to search for obstructions in the anchorage may do so, but anyone wishing to dredge in the anchorage requires a permit from the Corps of Engineers.
Captain Bethel immediately called the Coast Guard to alert them to the spill, while Captain Markoutsis rushed to the engine room and transferred oil from the breached cargo tank into another tank. The crew of the Athos I was eventually able to stop the leak, but not before 264,321 gallons of crude oil had spilled into the Delaware River.
The cleanup effort began almost immediately. Although it was ultimately successful, it took months to complete and the efforts of thousands of workers at a cost of $143 million. The cause of the allision was not discovered until more than a month later, when an abandoned anchor was discovered on the riverbed. The search for the obstruction that caused the allision proved difficult. An experienced sonar operator using side-scan sonar conducted the first search shortly after the allision, but did not recognize the anchor.5 A second search by the same operator, conducted several weeks later, eventually discovered the anchor with the use of side-scan sonar in combination with divers and magnetometers. The anchor weighed approximately nine tons and was 6’ 8” long, 7’ 3” wide, and 4’ 6” high. It has since been removed from the river.
The parties dispute the positioning of the anchor at the time of the allision. An anchor like the one that punctured the Athos I has two stable positions. It can sit at rest in the “flukes-up” or “flukes-down” position. A flukes-up anchor stands almost upright on its crown, with the flukes pointed upward at a 65° angle, while a flukes-down anchor has essentially tipped over, with both the crown and flukes of the anchor lying horizontally on the riverbed. In the flukes-up position, the anchor sticks up approximately seven feet above the riverbed, but in the flukes-down position, it rises only about 3’ 5” above the riverbed. The District Court found that the anchor was flukes-up at the time of the allision, but CARCO asserts that the anchor was flukes-down, pointing to side-scan sonar data gathered as part of a geophysical study of the Delaware River that showed the anchor was flukes-down in 2001, three years before the allision.6 The anchor
Now, more than thirteen years after the allision, the Athos I has been scrapped, the anchor removed from the river, and the oil spill cleaned up. What remains is this case for apportionment of cleanup costs.
b. Procedural History
This case, like the Athos I, has been on a long journey. Over the past thirteen years, the matter has been to trial before two different judges and heard on appeal before two separate panels of this Court. We briefly summarize that history.
Litigation began shortly after the allision in January, 2005, when Frescati filed a “Petition for Exoneration from or Limitation of Liability.” CARCO and others filed claims for damages associated with the spill. Frescati then filed a counterclaim against CARCO for its damages. The United States eventually reimbursed Frescati for some of its cleanup expenses pursuant to the OPA, and filed suit against CARCO as a partial subrogee to some of Frescati‘s claims. The claims of Frescati and the United States against CARCO were consolidated with CARCO‘s counterclaims and defenses, forming the litigation as it exists today.
The case was first tried in a forty-one-day bench trial before the Honorable John P. Fullam. Judge Fullam found that CARCO was not liable for the casualty in contract, tort, or otherwise; Frescati and the United States appealed. On appeal, we affirmed in part, vacated in part, and remanded the case because the District Court had failed to make appropriate findings of fact and conclusions of law as required by
We determined, among other things, that Frescati was a third-party beneficiary of CARCO‘s safe berth warranty, and that the allision occurred in the approach to CARCO‘s terminal, meaning that CARCO had an unspecified duty of care to Frescati in tort. We remanded for the District Court to determine whether Frescati met the conditions for the safe berth warranty to apply. We also asked the District Court, if necessary, to determine the appropriate duty of care CARCO owed Frescati and whether CARCO breached that duty. 718 F.3d at 214-15.
Judge Fullam retired before the case was remanded. Upon its return to the District Court, the case was assigned to the Honorable Joel H. Slomsky as a successor judge pursuant to
The District Court also found CARCO liable in tort to Frescati,7 concluding that CARCO had a duty, as operator of the berth, to search for obstructions in the approach to its berth. Specifically, the District Court concluded that CARCO had a duty to use side-scan sonar to search for unknown obstructions to navigation in the approach to its berth, and to remove any such obstructions or warn invited ships—like the Athos I—of their presence. Because CARCO had not taken any action to search for obstructions, the District Court held CARCO liable in tort—for the same amount for which it was liable in contract. The District Court‘s contract and tort holdings independently support the judgment for Frescati.
CARCO, in a motion for partial summary judgment before the District Court, asked that its liability, like Frescati‘s, be limited under the OPA. Because CARCO did not raise the defense until after the first trial and appeal, almost a decade into this litigation, the District Court held that the defense was waived, and in the alternative, that it failed on the merits.
The District Court did, however, partially credit CARCO‘s equitable recoupment defense against the United States. CARCO argued that the conduct of three federal agencies—the Coast Guard, NOAA, and the Army Corps of Engineers—misled CARCO into believing that the United States was maintaining the anchorage free of obstructions. In addition, CARCO argued that equity requires the United States to bear the cost of the cleanup rather than CARCO. The District Court ultimately reduced the United States’ recovery against CARCO by 50%, rather than acceding to CARCO‘s request to eliminate its liability entirely.
Finally, the District Court held that Frescati was entitled to prejudgment interest at the federal postjudgment rate rather than the higher U.S. prime rate requested by Frescati.
The District Court ultimately awarded Frescati $55,497,375.958 on the claims of
All three parties now appeal. We will affirm the District Court‘s judgment in favor of Frescati on the breach of contract claim and the prejudgment interest award, as well as the District Court‘s denial of CARCO‘s motion for partial summary judgment on its limitation of liability defense. We will vacate the District Court‘s judgment in favor of Frescati on the negligence claim. We will affirm in part the District Court‘s judgment in favor of the United States with respect to CARCO‘s liability on the subrogated breach of contract claim, but because CARCO‘s equitable recoupment defense fails, we will reverse and remand for further proceedings to recalculate damages and prejudgment interest.
III. Jurisdiction and Standard of Review
The District Court had admiralty jurisdiction pursuant to
“On appeal from a bench trial, we review a district court‘s findings of facts for clear error and exercise plenary review over conclusions of law.” Norfolk S. Ry. Co. v. Pittsburgh & W. Va. R.R., 870 F.3d 244, 253 (3d Cir. 2017). “A finding of fact is clearly erroneous when it is completely devoid of minimum evidentiary support displaying some hue of credibility or bears no rational relationship to the supportive evidentiary data.” VICI Racing, LLC v. T-Mobile USA, Inc., 763 F.3d 273, 283 (3d Cir. 2014); In re Frescati, 718 F.3d at 196.
IV. The Safe Berth Warranty
CARCO promised that the Athos I would be directed to a location “she may safely get (always afloat),” a promise known as a safe port or safe berth warranty. JA at 1211. Such a promise provides, among other things, “protection against damages to a ship incurred in an unsafe port to which the warranty applies.” In re Frescati, 718 F.3d at 197.
A port is deemed safe where the particular chartered vessel can proceed to it, use it, and depart from it without, in the absence of abnormal weather or other occurrences, being exposed to dangers which cannot be avoided by good navigation and seamanship. Whether a port is safe refers to the particular ship at issue, and goes beyond the immediate area of the port itself to the adjacent areas the vessel must traverse to either enter or leave. In other words, a port is unsafe—and in violation of the safe berth warranty—where the named ship cannot reach it without harm (absent abnormal conditions or those not avoidable by adequate navigation and seamanship).
Id. at 200 (quotations and citations omitted). “[T]he safe berth warranty is an express assurance made without regard to the amount of diligence taken by the charterer.” Id. at 203. For our purposes, a safe berth warranty promises that a ship with a draft less than the warrantied depth is covered by the warranty in the absence of bad navigation or negligent seamanship.
Our prior opinion called for the District Court to resolve three issues on remand: the draft limit beyond which the safe berth
As an initial matter, the District Court found that the safe berth warranty applied to ships drawing less than 37 feet, a finding neither party challenges on appeal. The remaining issues, then, are whether the Athos I had a draft of less than 37 feet, and if it did, whether bad navigation or negligent seamanship by Frescati negated the warranty.
a. The Draft of the Athos I
The District Court found that the Athos I had a draft of 36’ 7” at the time of the allision. The court based this finding on the undisputed draft of the Athos I at the time of its departure from Puerto Miranda—36’ 6“—as well as expert testimony regarding the condition of the ship and its estimated draft at Paulsboro.9
CARCO challenges the District Court‘s determination of the Athos I‘s draft, arguing that the District Court improperly based its finding on a speculative assumption about the orientation of the abandoned anchor. Specifically, CARCO disputes the District Court‘s finding that the anchor shifted from a flukes-down position to a flukes-up position sometime between 2001 and the allision in 2004, a shift that caused the anchor to intrude within the 37-foot safe depth promised by CARCO. CARCO argues that the District Court failed to make a finding as to the precise mechanism by which the anchor shifted from flukes-down to flukes-up. The anchor‘s orientation matters; if the accident occurred while the anchor was flukes-down, the Athos I necessarily would have had a draft that exceeded the scope of CARCO‘s warranty.10
Broadly speaking, the District Court made three findings of fact related to the anchor‘s orientation. First, the court and parties agree that, three years before the allision, the anchor was in the flukes-down position.11 Second, the District Court found that at some point before the allision, the anchor shifted into the flukes-up position. Finally, after the allision, the anchor was eventually discovered back in the flukes-down position—perhaps unsurprising, given the force of its encounter with the Athos I.
CARCO attacks the second finding, arguing that there was insufficient evidence in the record to support the District Court‘s suggestion that a “sweeping anchor chain” could have caught the anchor and shifted it into the flukes-up position.12
Here, the record contains sufficient evidence to support the finding that the anchor was, in fact, flukes-up at the time of the allision. How exactly the anchor changed position does not impact our sufficiency determination. As an initial matter, the movement of the Athos I at the time of the allision and the damage to its hull are sufficient to show that the anchor was flukes-up. And substantial evidence unrelated to the anchor showed that the Athos I was drawing 36’ 7” at the time of the allision—a draft at which the allision would not have occurred had the anchor been flukes-down. That is enough to support the District Court‘s finding that the anchor moved from flukes-down to flukes-up.
The movement of the ship and damage to its hull shows that the anchor must have been flukes-up. The District Court found that the Athos I was moving astern and to port at the time of the allision, a finding CARCO does not challenge. Based on that movement, the scoring left by the anchor on the hull, the size and shape of the two holes the anchor created, and the damage to the anchor itself also supported the District Court‘s finding that the anchor must have been flukes-up at the time of the allision. CARCO‘s own expert witness, on cross-examination, testified that if the Athos I were moving astern and to port, the damage to the Athos I‘s hull would necessarily require a flukes-up anchor.13 JA at 1021-22.
We conclude there was no clear error in the District Court‘s determination that the Athos I had a draft of 36’ 7” at the time of the allision. The ship was, therefore, within the scope of CARCO‘s safe berth warranty.
b. Frescati‘s Seamanship
A safe berth warranty applies only in the absence of bad navigation or negligent seamanship. CARCO argues on appeal that Frescati violated several maritime regulations related to the operation of single-hulled tankers, and that those regulatory violations serve as sufficient proof of negligent seamanship. The District Court concluded that Frescati did not violate any relevant regulations, and enforced the safe berth warranty. We agree with the District Court that Frescati did not violate any relevant regulations.
On appeal, CARCO argues specifically that Frescati violated two federal regulations:
Section 157.455 requires the owner or operator of a single-hulled tanker to provide certain written guidance to the ship‘s master for purposes of estimating the tanker‘s underkeel clearance.15
CARCO argues that Frescati was responsible for three specific violations, each of which allegedly caused the allision. First, CARCO claims that Frescati failed to adequately plan the ship‘s passage. Second, CARCO claims that Frescati failed to estimate the Athos I‘s underkeel clearance. Finally, CARCO claims that Frescati failed to ensure that an adequate master-pilot exchange occurred, and made no log entry that would reflect such an exchange.
With respect to planning the passage, CARCO argues that
The text of § 157.455 undermines CARCO‘s argument. The regulation does not itself require a written voyage plan. Paragraph (a) of the regulation requires that Frescati create “written under-keel clearance guidance,” which must contain “factors to consider” when evaluating draft, water depth, and weather conditions. Paragraph (b) requires that the master plan the ship‘s passage using those “factors to consider” in the guidance required by paragraph (a). Nowhere does this regulation require that the master‘s passage plan be in writing; the only reference to a writing in paragraph (b) comes in the requirement that some official log of the master-pilot conference be recorded. CARCO conflates the passage plan requirement of paragraph (b)—to consider certain relevant factors when planning—with the “Voyage Plan” form contained in Frescati‘s Vessel Operation Procedures Manual. See JA at 1180. The Voyage Plan form focuses on plotting the course of the vessel from berth to berth; paragraphs (a) and (b) of the regulation, on the other hand, serve to create a reference list for the ship‘s master of relevant factors to consider when estimating underkeel clearance.
Frescati satisfied the requirements of paragraph (a) by providing written underkeel clearance guidance in Section 3.417 of its Vessel Operation Procedures Manual.
Furthermore, Frescati satisfied the planning requirement of paragraph (b) because the Athos I‘s master, Captain Markoutsis, considered factors like the sea state, tidal condition, and the effect of squat. Even though CARCO provided a safe berth warranty for a draft up to 37 feet, Captain Markoutsis loaded the ship to only 36’ 6” because he was “afraid” of a 37-foot draft, and eventually entered the Delaware River with a draft of 36’ 7“. In re Frescati, 718 F.3d at 204. The charts in the Athos I were marked with the 38-foot controlling draft in the anchorage. JA at 992. Captain Teal, the river pilot, testified that he and Captain Markoutsis discussed the draft, wind, visibility, and tides. We agree with the District Court that Frescati fully complied with the planning requirement of § 157.455(b)—that is, to use the factors listed in the Vessel Operation Procedures Manual when planning the passage.
CARCO‘s second argument is that Frescati violated § 157.455(b) because Captain Markoutsis failed to estimate the Athos I‘s underkeel clearance. The District Court did not err in finding that Captain Markoutsis had estimated underkeel clearance. Captain Markoutsis discussed the draft, tidal conditions, and anticipated underkeel clearance with Captain Teal. JA at 801-802. They estimated that the ship would have at least 1.5 meters’ clearance—nearly five feet. Id. Captains Bethel and Markoutsis also discussed the draft and believed they would have sufficient clearance. JA at 833, 837. CARCO highlights that there is no evidence of written underkeel clearance estimates, but § 157.455 does not require written estimates.
Finally, CARCO argues that the master-pilot exchange required by § 157.455 and § 164.11 was inadequate. In general, master-pilot exchanges are intended to allow the master to share the navigational characteristics of his ship with the pilot who will be guiding it, and for the pilot to share local conditions such as weather, depth, and the tide with the master. Section 157.455(b) requires that “[t]he tankship master and the pilot shall discuss the ship‘s planned transit including the anticipated under-keel clearance. An entry must be made in the tankship‘s official log or in other onboard documentation reflecting discussion of the ship‘s anticipated passage.”
[i]f a pilot other than a member of the vessel‘s crew is employed, the pilot is informed of the draft, maneuvering characteristics, and peculiarities of the vessel and of any abnormal circumstances on the vessel that may affect its safe navigation. . . . [and that the] [t]idal state for the area to be transited is known by the person directing movement of the vessel.
Captain Markoutsis was responsible for discussing the draft, underkeel clearance, maneuvering characteristics, and tidal
Frescati operated the Athos I with neither bad navigation nor negligent seamanship. Nevertheless, the allision occurred. The District Court did not err in concluding that the allision resulted from a breach of CARCO‘s safe berth warranty.
V. Wharfinger Negligence
CARCO wore two hats in its dealings with Frescati, as a shipping customer and as a wharfinger. These dual roles exposed CARCO to liability under two independent legal theories. CARCO‘s first role, as a shipping customer that contracted with Frescati for delivery of a shipment of crude oil, resulted in CARCO‘s liability under the contractual safe berth warranty, discussed above. The second, as the wharfinger for the Paulsboro berth that was the Athos I‘s intended destination, resulted in the District Court‘s finding of negligence and CARCO‘s corresponding liability in tort.
Both theories of liability independently support the District Court‘s judgment against CARCO. As a result, our decision to affirm the judgment based on CARCO‘s contractual liability means that we are not required to delve into the District Court‘s tort analysis. However, having reviewed that analysis, we harbor serious doubts about the appropriateness of the court‘s proposed duty of care. For that reason, we are compelled to make clear that we will affirm the District Court‘s judgment based solely on CARCO‘s breach of contract.
A wharfinger‘s duty is more limited than that of a shipping customer who has provided a safe berth warranty. As we previously wrote:
In the tort context, . . . a wharfinger is not a guarantor of a visiting ship‘s safety, but is bound to use reasonable diligence in ascertaining whether the berths themselves and the approaches to them are in an ordinary condition of safety for vessels coming to and lying at the wharf. This is not an unconstrained mandate to ensure safe surroundings or warn of hazards merely in the vicinity. Instead, a visiting ship may only expect that the owner of a wharf has afforded it a safe approach. In being invited to dock at a particular port, a vessel should be able to enter, use and exit a wharfinger‘s dock facilities without being exposed to dangers that cannot be avoided by reasonably prudent navigation and seamanship.
In re Frescati, 718 F.3d at 207 (quotations and citations omitted). In short, and as a general matter, a wharfinger‘s duty is to use reasonable diligence to ascertain whether the approach to its berth is safe for an invited vessel.19
We remanded for the District Court to determine in the first instance what reasonable diligence required of CARCO under the circumstances of this case, and whether CARCO breached that standard. Id. On remand, the District Court concluded that
a reasonably prudent terminal operator should periodically scan the approach to its dock for hazards to navigation as long as ships are being invited there. In this case, the standard would require that side-scan sonar be used to search the approach for obstructions that are potential hazards to navigation. If an obstruction is located, a terminal operator is then required to remove it, and if the terminal operator cannot remove it, notice of the hazard must be given to incoming ships by marking it as a hazard and/or warning ships of its presence.
JA at 132. Because CARCO did nothing to look for obstructions, the District Court held that it had breached its duty.
The District Court chose its standard by determining what the “demands of reasonableness and prudence” required. JA at 129. Citing Judge Learned Hand‘s famous formula from United States v. Carroll Towing, 159 F.2d 169 (2d Cir. 1947), the court concluded that the precaution of a preemptive side-scan sonar search would be less burdensome than the probability of an allision multiplied by the serious harm caused by a spill of toxic substances like crude oil.
We have doubts about the District Court‘s balancing of the cost of preventative measures on one hand and the cost of potential accidents on the other. The court found that a general scan of the approach to CARCO‘s berth and the berth itself would have cost between $7,500 and $11,000, and would have prevented the allision. Yet in this very case, the targeted scan of the area where the allision occurred, conducted only eight days after the allision, did not identify the anchor. The first set of 93 side-scan sonar passes conducted by Frescati‘s expert, John Fish—at a cost of $38,577—identified a pump casing on the river bottom. The anchor, however, went unrecognized.20 We do not share the District Court‘s confidence that a general $11,000 scan of the approach and berth would have “recognized” the anchor with sufficient clarity to prevent the allision, given that a targeted $38,000 scan for obstructions failed to do so.
Beyond the questionable utility of side-scan sonar as applied to this case, we doubt whether imposing a specific duty to require side-scan sonar would be useful for wharfingers in the ordinary course of their business. Single-hulled vessels like the Athos I present unique risks, and have been treated with special care by regulators. See, e.g.,
We are not unsympathetic to the position in which we placed the District Court by asking it to specify the duty of care at play in this case. The District Court has conscientiously complied. And we stand by our previous holding that CARCO had some duty to use reasonable diligence to provide the Athos I with a safe approach to its obstructions might accomplish the same purpose. It noted that “side-scan sonar . . . is not the only method available in the industry to search for hazardous debris. . . . Since the standard of care involves factual issues, the methods may vary when the conditions in the approach to each terminal are examined.” JA at 132 n.109.berth—a duty it may or may not have breached. In re Frescati, 718 F.3d at 211. Nevertheless, given CARCO‘s independent liability in contract and our decision to affirm on that basis, we will once again decline to outline precisely what CARCO‘s duty of reasonable diligence entailed.
VI. Subrogation and Equitable Recoupment
This litigation does not implicate the interests of only Frescati and CARCO. The United States reimbursed Frescati for $88 million in cleanup expenses above the liability limit established by the
Frescati initially paid for the oil spill cleanup costs as a “responsible party” under the
Pursuant to the partial settlement agreement, the United States limited itself to the same contractual claims Frescati asserted. Because CARCO was liable to Frescati in contract, it was also liable to the United States for the amount the Trust Fund had reimbursed Frescati: nearly $88 million. But CARCO asserted a defense against the United States it did not assert against Frescati—equitable recoupment—and in response, the District Court reduced the United States’ judgment by 50%. Both CARCO and the United States appealed. CARCO argues that the District Court erred by not eliminating the United States’ recovery, while the United States argues that the District Court should have left the contract judgment untouched and denied CARCO any equitable remedy. We conclude that the District Court erred by reducing the United States’ judgment by 50%. The United States is entitled to a full recovery.
a. Subrogation and Subrogee-Specific Defenses
As an initial matter, we note that the dispute between CARCO and the United States presents an unusual question about the nature of subrogation. Subrogation itself is not unusual; in general terms, it “simply means substitution of one person for another; that is, one person is allowed to stand in the shoes of another and assert that person‘s rights against a third party.” US Airways v. McCutchen, 569 U.S. 88, 97 n.5 (2013). Most often, it arises in the insurance context as a procedural mechanism to allow an insurer (the subrogee) to step into the shoes of its insured (the subrogor) after it has compensated the insured for harm caused by a third party. The subrogee, having stepped into the shoes of the subrogor, is entitled to assert all of the subrogor‘s rights and claims against the responsible third party. Likewise, the third party—now defending an action brought by the subrogee—is entitled to assert every defense it otherwise could have raised against the subrogor. In that vein, the third party‘s liability to a subrogee cannot be greater than it would have been to the subrogor. Restatement (Third) of Restitution & Unjust Enrichment § 24.
All that is unexceptional. The unusual question presented here is whether a third party may assert a defense against a subrogee that it could not assert against the subrogor. As we discussed above, CARCO is liable to Frescati, the subrogor, in contract. Consequently, CARCO is liable to the United States, the subrogee, under that very same contract. But CARCO wishes to assert a defense against the United States—namely, that equitable recoupment requires the United States to bear the loss rather than CARCO because of the allegedly misleading conduct of three federal agencies—that it could not assert against Frescati.
The United States makes a related argument. Its position is that the equitable recoupment defense, predicated as it is on the conduct of federal agencies rather than the contractual relationship between Frescati and the United States, violates the
We agree. CARCO may only assert defenses against the United States’ subrogated claims which it could have asserted against Frescati—including any equitable recoupment defense it could have asserted against Frescati. In its capacity as a subrogee, the United States should be subject to the same treatment as Frescati. Just as the United States, as subrogee, may only assert Frescati‘s claims, CARCO, as defendant, is not entitled to extra defenses because the United States asserts Frescati‘s claims rather than Frescati itself. Of course, no party is exempt from the
In this case, the only claim asserted by the United States is Frescati‘s contract claim. In re Frescati, 718 F.3d at 189; JA at 390. It follows that CARCO‘s equitable recoupment defense must be directed toward the United States’ contract claim. See In re Frescati, 718 F.3d at 214 (declining to preclude CARCO from raising “equitable defense[s] to the Government‘s subrogation claims“). If CARCO had other cognizable claims against the three federal agencies involved in regulating the Delaware River and the anchorage, sounding in tort or otherwise, it was free to assert them in a third-party complaint or counterclaim, just as the United States was free to pursue other claims against CARCO.26 In that light, we proceed to analyze CARCO‘s equitable recoupment
b. Equitable Recoupment
Equitable recoupment is a “principle that diminishes a party‘s right to recover a debt to the extent that the party holds money or property of the debtor to which the party has no right.”27 In re Frescati, 718 F.3d at 214 n.35. For an equitable recoupment defense to succeed, the defendant must possess a claim against the plaintiff arising from the same transaction or occurrence as the plaintiff‘s suit, seeking relief of the same kind as that sought by the plaintiff, in an amount no greater than that sought by the plaintiff. See Livera v. First Nat‘l State Bank of New Jersey, 879 F.2d 1186, 1195 (3d Cir. 1989).
CARCO‘s equitable recoupment defense faces at least two serious obstacles. As an initial matter, the United States questions whether CARCO possesses a “claim” against it, rather than a generalized request for the court to balance the equities. Second, the United States questions whether CARCO seeks relief of the same kind as the United States. On both points, CARCO fails to meet its burden.
CARCO‘s claim, such as it is, appears to be that the equities favor CARCO, and require the United States to bear the cost of the spill. CARCO argues that the United States, through the Coast Guard, NOAA, and the Army Corps of Engineers, had responsibility for maintaining the anchorage where the allision occurred free of obstructions. In the alternative, if the agencies were not responsible to preemptively search for obstructions, CARCO argues they should have more explicitly made clear that they were not conducting such searches. CARCO asserts that it reasonably believed, based on the agencies’ conduct, that the agencies were maintaining the anchorage free of obstructions. Additionally, CARCO argues that equity requires the Oil Spill Liability Trust Fund to bear the cost of the cleanup rather than CARCO
Equitable recoupment requires more than just a request to balance the equities. CARCO points out that although equitable recoupment most often arises in the context of offsetting monetary claims, as in tax or bankruptcy cases, it is not necessarily limited to those situations. See, e.g., Oneida Indian Nation of New York v. New York, 194 F. Supp. 2d 104, 136–37 (N.D.N.Y. 2002) (allowing an equitable recoupment defense in the context of offsetting requests for declaratory judgments in a land rights case). But CARCO still must assert some cognizable claim, rather than simply a request for the Court to reduce the United States’ damages in the interest of equity. Here, CARCO has failed to do so.
Neither does CARCO seek the same kind of relief as the United States. The United States seeks contractual relief, to which it is entitled by operation of statute. See
The requirement that a defendant seek the same kind of relief as has been sought in the plaintiff‘s claim is a fundamental requisite for recoupment. The defense is not intended to be a catch-all to allow any claims otherwise barred by time, settlement, or statute to be heard as equity seems to require. Equitable recoupment is intended to allow only truly similar claims arising from the same transaction to offset one another in the interest of equity between the parties. As noted, equitable recoupment is well-suited for disputes in which two claims arise out of the same taxable event or the same contractual obligation, as often seen in tax or bankruptcy cases. When, as here, the plaintiff seeks relief on a contract, the defendant may not resort to equitable recoupment as a means to assert a non-contractual claim, whether sounding in an equitable-balancing analysis, in tort, or otherwise.
CARCO has failed to meet its burden of establishing an equitable recoupment defense. It is liable to the United States in full.
CARCO argues that a provision of the
A District Court‘s holding that an affirmative defense has been waived is reviewed for abuse of discretion. Cetel v. Kirwan Financial Group, Inc., 460 F.3d 494, 506 (3d Cir. 2006). Waiver is appropriate if the party raising the defense did not do so at a “pragmatically sufficient time” and if the opposing party would be prejudiced if the defense were allowed. Charpentier v. Godsil, 937 F.2d 859, 864 (3d Cir. 1991).
Whether CARCO raised its defense at a pragmatically sufficient time requires us to determine when CARCO first raised the
CARCO relies on the averment listed as its “Seventh Separate Defense,” which reads simply: “The claims and causes of action set forth in the plaintiffs’ Amended Counterclaim are barred in whole or in part by the provisions of the Oil Pollution Act of 1990, 33 U.S.C. § 2701, et seq.” JA at 355. Noticeably absent from this general averment is any specific citation to the limitation of liability defense or even a description of the nature of the defense. This is significant, because the
Furthermore, Frescati would be prejudiced if the defense were allowed. As the District Court found, if CARCO had asserted its defense in a timely fashion, fifteen days of depositions and trial testimony from seven witnesses could have been avoided, along with the
VIII. Prejudgment Interest Rate
The District Court awarded Frescati prejudgment interest of just over $16 million. Frescati, in its cross-appeal from the District Court‘s judgment, argues that the District Court erred by using the federal postjudgment interest rate set by
An award of prejudgment interest is reviewed for abuse of discretion. Ambromovage v. United Mine Workers of Am., 726 F.2d 972, 981–82 (3d Cir. 1984); see also Sun Ship, Inc. v. Matson Nav. Co., 785 F.2d 59, 63 (3d Cir. 1986). When selecting an interest rate, the District Court must keep in mind that the rate and corresponding award “must be compensatory rather than punitive.” Del. River & Bay Auth. v. Kopacz, 584 F.3d 622, 634 (3d Cir. 2009).
Here, the District Court awarded Frescati prejudgment interest at the one-year Treasury rate—the same rate used as the federal postjudgment interest rate. See
Frescati argues that, in the absence of evidence of borrowing costs, we should require the use of the U.S. prime rate. We grant that, had the District Court chosen to use the prime rate, it would not have abused its discretion even without extensive proof of borrowing costs. Taxman v. Bd. of Educ., 91 F.3d 1547, 1566 (3d Cir. 1996) (en banc). Indeed, the prime rate is commonly used to approximate the cost the defendant would have paid to borrow in the market, and at least one court appears to require it. See, e.g., Gorenstein Enters., Inc. v. Quality Care-USA, Inc., 874 F.2d 431 (7th Cir. 1989) (requiring use of the prime rate in certain circumstances); see also Forman v. Korean Air Lines Co., 84 F.3d 446, 450–51 (D.C. Cir. 1996) (“[T]he prime rate is not merely as appropriate as the Treasury Bill rate, but more appropriate . . . .“). In this Circuit, however, a district court is not constrained to the use of only the prime rate: “[i]n exercising [its] discretion, . . . the court may be guided by the rate set out in
The District Court determined that the federal postjudgment rate “fairly and adequately compensate[s] Frescati for its losses.” JA at 183. Under our Court‘s precedent, the District Court acted within its discretion.
IX. Conclusion
The District Court‘s order dated August 17, 2016 will be affirmed in part, vacated in part, and reversed in part. The District Court‘s judgment in favor of Frescati on the breach of contract claim and the prejudgment interest award will be affirmed. The District Court‘s judgment in favor of Frescati on the negligence claim will be vacated. The District Court‘s judgment in favor of the United States will be affirmed in part with respect to CARCO‘s liability on the subrogated breach of contract claim, but the judgment will be reversed and remanded for further proceedings in light of our equitable recoupment ruling for the purpose of recalculating damages and prejudgment interest. The District Court‘s order dated April 9, 2015, denying CARCO‘s motion for partial summary judgment on its limitation of liability defense, will be affirmed.
Notes
(a) The owner or operator of a tankship, that is not fitted with a double bottom that covers the entire cargo tank length, shall provide the tankship master with written under-keel clearance guidance that includes—
- Factors to consider when calculating the ship‘s deepest navigational draft;
- Factors to consider when calculating the anticipated controlling depth;
- Consideration of weather or environmental conditions; and
- Conditions which mandate when the tankship owner or operator shall be contacted prior to port entry or getting underway; if no such conditions exist, the guidance must contain a statement to that effect.
(b) Prior to entering the port or place of destination and prior to getting underway, the master of a tankship that is not fitted with the double bottom that covers the entire cargo tank length shall plan the ship‘s passage using guidance issued under paragraph (a) of this section and estimate the anticipated under-keel clearance. The tankship master and the pilot shall discuss the ship‘s planned transit including the anticipated under-keel clearance. An entry must be made in the tankship‘s official log or in other onboard documentation reflecting discussion of the ship‘s anticipated passage.
The owner, master, or person in charge of each vessel underway shall ensure that:
. . . .
(k) If a pilot other than a member of the vessel‘s crew is employed, the pilot is informed of the draft, maneuvering characteristics, and peculiarities of the vessel and of any abnormal circumstances on the vessel that may affect its safe navigation.
. . . .
(n) Tidal state for the area to be transited is known by the person directing movement of the vessel . . . .
JA at 391.each and every substantive and procedural right available to a defendant . . . including but not limited to the right to raise affirmative defenses under any theory or doctrine of law or equity, the right to assert setoff or recoupment and the right to assert compulsory or non-compulsory counterclaims other than a Claim for Contribution or Indemnity . . . .
Additionally, to the extent—if at all—that the Coast Guard, NOAA, and the Army Corps of Engineers were responsible for the Athos I oil spill, reducing the recovery of the United States in this case would not be equitable. Beyond our concerns relating to subrogation (equity would certainly not favor reducing Frescati‘s recovery under these circumstances), such a decision would impose liability on the Oil Spill Liability Trust Fund, not the responsible agencies. Any recovery based on the United States’ subrogated claim flows back to the Trust Fund, out of which the United States originally reimbursed Frescati.
As a final point, the purpose of the Trust Fund is not to absorb the cost of cleaning up oil spills; indeed, almost the opposite is true. The
Robinson v. Johnson, 313 F.3d 128, 137 (3d Cir. 2002).Affirmative defenses must be raised as early as practicable, not only to avoid prejudice, but also to promote judicial economy. If a party has a successful affirmative defense, raising that defense as early as possible, and permitting a court to rule on it, may terminate the proceedings at that point without wasting precious legal and judicial resources.