On March 29, 2018, the United States Court of Appeals for the Third Circuit issued its ruling in In re: Petition of Frescati Shipping Co., Ltd., as Owner of the M/T ATHOS I, Nos. 16-3552, 16-3867 & 16-3868 (3d Cir. Mar. 29, 2018). ATHOS I had its genesis in a 2004 vessel allision and oil spill on the Delaware River between New Jersey and Pennsylvania. The decision has particular relevance to the types of defenses that may be maintained against reimbursement claims brought by the United States Oil Spill Liability Trust Fund (OSLTF) to recover funds expended in responding to an oil spill.
The M/T ATHOS I was a single-hulled tanker owned by Frescati Shipping Company and certain related interests (collectively, “Frescati”). The ATHOS I was contracted to deliver crude oil from Venezuela to a syndicate of CITGO interests, collectively referred to as “CARCO.” Delivery was to occur at CARCO’s marine terminal in Paulsboro, New Jersey.
The ATHOS I successfully completed the 1,900 mile journey from Venezuela to Paulsboro, but its hull was pierced by a submerged anchor within 900 meters of its intended berth. The allision resulted in a spill of approximately 264,000 gallons of crude oil into the Delaware River. As the designated responsible party under the Oil Pollution Act (“OPA”), 33 U.S.C. § 2701, et seq., Frescati spent $143 million cleaning up the river. Frescati was ultimately reimbursed $88 million by the United States pursuant to the OPA.
Following the cleanup, Fresacti initiated limitation of liability proceedings in the United States District Court for the Eastern District of Pennsylvania. Among other parties, CARCO filed a claim in the limitation proceedings for damages associated with the spill. Frescati counterclaimed against CARCO. Additionally, the United States, which had reimbursed Frescati for certain spill-related expenses, filed suit against CARCO as a partial subrogee to some of Frescati’s claims. These actions were consolidated into the ATHOS I litigation.
The case was originally tried in a forty-one day bench trial by Judge John P. Fullam, who found that CARCO was not liable for the casualty. Frescati and the United States appealed and succeeded in vacating part of Judge Fullam’s ruling. In the interceding period before remand, Judge Fullam retired, and the matter was re-assigned to Judge Joel H. Slomsky. On remand, Judge Slomsky certified his familiarity with the record and recalled more than twenty witnesses over the course of a thirty-one day proceeding to address certain issues raised by the appeal. Judge Slomsky ruled that (a) CARCO was liable to Frescati (and the United States as Frescati’s subrogee) for breach of contract (in particular, a safe-berth provision), (b) CARCO was further liable to Frescati for breach of a tort duty in its capacity as wharfinger, (c) CARCO had waived its limitation of liability defense, (d) CARCO was entitled to equitable recoupment, reducing its liability to the United States by 50%, and (e) both Frescati and the United States were properly awarded prejudgment interest.
On appeal, CARCO challenged the district court’s finding of liability, and all parties challenged the computation of damages. The Third Circuit affirmed the district court’s finding of liability on Frescati’s contractual claim, but reversed on the tort claim. The appellate court also reversed the district court’s finding that CARCO was entitled to assert an equitable recoupment defense against the United States’ subrogation claim. CARCO had also waived any limitation of liability defense by failing to timely raise it. Finally, the court affirmed the district court’s assessment of pre-judgment interest in favor of Frescati and the United States.
- Contract Liability: Breach of Safe Berth Warranty –
The Third Circuit’s holding on Frescati’s contractual claim was largely fact-driven. The Frescati/CARCO contract included a so-called “safe berth warranty”, which guaranteed that CARCO’s berth would be safe for the ATHOS I, so long as the ship had a draft of 37 feet or less. The Third Circuit affirmed the district court’s findings that, at the time of the allision, the ATHOS I had a draft of 36’7”, and Frescati did not cause the allision through bad navigation or negligent seamanship (exceptions to the warranty). Accordingly, CARCO was liable to Frescati for breach of contract.
- Tort Liability: Potential Breach of Wharfinger Duty –
Although the contractual liability finding independently supported the district court’s judgment, the Third Circuit separately addressed the district court’s conclusion that CARCO breached a tort duty in its capacity as wharfinger to prospectively search for and clear, or provide notice of, obstructions in the approach to its berth. The district court had ruled that CARCO’s wharfinger duty required it to periodically scan the approach to the dock for hazards of navigation using side-scan sonar technology and to remove, or provide notice of, any identified obstructions to approaching vessels. The Third Circuit reversed, noting that this same technology had initially failed to locate the sunken anchor in the post-allision investigation. Further, the court noted the unique risks presented by single-hulled vessels like the ATHOS I, which are no longer permitted in U.S. waters. Because the district court’s proposed standard was unlikely to provide potential benefits outweighing its costs, the Third Circuit reversed the district court’s finding regarding breach of CARCO’s wharfinger duty. Nevertheless, the court held that CARCO had “some duty to use reasonable diligence to provide the Athos I with a safe approach to its berth—a duty it may or may not have breached.” Id. at 42. The takeaway is that while a wharfinger has some duty to ensure a safe approach to incoming vessels, the Third Circuit was uncomfortable mandating the particular method selected by the district court.
- Wharfinger’s Equitable Recoupment Defense –
As noted above, the OSLTF reimbursed CARCO for $88 million in cleanup costs. Under the OPA, the United States therefore became statutorily subrogated to “all rights, claims, and causes of action” that Frescati had against CARCO. In response, CARCO asserted the defense of equitable recoupment to argue that the United States’ recovery against it should be barred. In short, CARCO argued that because various federal agencies monitored and maintained a federal anchorage immediately adjacent to CARCO’s berth, CARCO had been misled into believing that the Government was actively maintaining the approach to the berth in a safe condition.
On this claim, the Third Circuit noted that a subrogee (the United States) is entitled to assert all claims its subrogor (Frescati) may have against a third party (CARCO). Likewise, the third party defending a claim brought by a subrogee may assert every defense it otherwise could have raised against the subrogor. Thus, the third party’s liability to a subrogee cannot be greater than it would have been to the subrogor. The particular issue raised by Athos I, however, was whether a third party may raise a defense against the subrogee it could not have maintained against the subrogor. As noted above, the Third Circuit ruled that CARCO was liable to Frescati (and the United States by virtue of subrogation) only on the breach of contract theory. CARCO’s purported defense relating to the conduct of third party federal agencies was an equitable defense unrelated to the contractual relationship between Frescati and CARCO (or Frescati and the United States). The Third Circuit held that CARCO could “only assert defenses against the United States’ subrogated claims which it could have asserted against Frescati[.]” Accordingly, CARCO was barred from raising the equitable recoupment defense against the United States, and the district court’s judgment was reversed in this respect.
Importantly, however, the Third Circuit noted that CARCO might have successfully raised the equitable recoupment defense by way of a direct third-party complaint or counterclaim against the United States. In the context of the United States’ claim as subrogee after stepping into Frescati’s shoes, however, the defense was unavailable. This raises a dire warning to defendants in cases involving subrogated claims. It is critical to carefully distinguish in what capacity a certain party brings a claim in order to determine whether certain issues must properly be raised as defenses as opposed to offensive third-party or counterclaims. Failure to assert a defense through the proper procedural mechanism may result in waiver (in CARCO’s case, significantly increasing the amount owed on the judgment).
- OPA Limitation of Liability Defense –
In addition to its equitable recoupment defense, CARCO argued that a provision of the OPA, 33 U.S.C. § 2607(d)(2)(B), limited its liability in the case to the same extent as Frescati’s (which had been limited to approximately $45 million). The district court had held that CARCO waived the defense by failing to raise it with requisite clarity until nearly ten years after the start of the litigation. Reviewing the record, the Third Circuit agreed, noting that CARCO relied on a provision in its original answer to Frescati’s suit which simply read, “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.” Id. at 56. According to the Third Circuit, a general reference to the OPA in its entirety was inadequate to permit Frescati to determine that CARCO was raising a limitation of liability defense under § 2702(d)(2)(B). Here again, Athos I serves as a cautionary reminder to parties regarding particularity of pleading. A party seeking to avail itself of a particular statutory defense should specifically identify the defense, rather than merely citing to the authorizing statute as a whole.
Athos I, which spanned more than a decade, demonstrates the extent to which OPA litigation may become protracted. Additionally, it provides a warning to defendants in OPA litigation to carefully identify the claims and defenses at issue. A subrogated claim by the Government may only be met by defenses that would have been available to the defendant in response to the original claims of the subrogor. Any claims or defenses the defendant might have against the subrogee directly (but not in the context of the subrogated claim) must be raised in a third-party claim or counterclaim at the risk of forfeiture. Moreover, any defenses a defendant seeks to raise under the OPA should be clearly identified in the answer – it is not sufficient to cite the OPA generally. CARCO’s liability went from roughly $120 million (inclusive of significant pre-judgment interest) to a yet-to-be determined (on remand) sum greatly in excess of that amount by virtue of waived defenses.
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