An Analysis of Maritime Liens in the Fifth Circuit post-Valero Marketing & Supply

The focus of this post is maritime liens, which are a common commercial claim asserted against a vessel in rem, meaning the claimant sues the vessel directly.  Usually this happens in Federal Court under Rule 9(h), but some states, such as Florida, allow for assertion of maritime liens in state court.

An Overview of What Constitutes a Maritime Lien

Maritime liens are both a creature of common law judicial custom and statute.  Thomas Schoenbaum, a noted admiralty commentator, lists the most common maritime liens in his treatise Admiralty and Maritime Law as follows:

1. Wages for the ship master/crew
2. Salvage
3. General Average
4. Claims for breach of a charter party/vessel lease
5. Preferred ship mortgages
6. Claims under maritime contracts for repairs and other necessaries
7. Maritime tort claims, including claims for personal injury, death, or collision
8. Cargo damage or loss
9. Unpaid freight/demurrage
10. Pollution Claims

Schoenbaum, Thomas J., Admiralty and Maritime Law §9-1 pp. 687-689 (5^th Ed. Practitioner Treatise Series 2011).

In my experience, claims for necessaries provided to the vessel form the basis of many lien claims.  In order to make such a claim, a party must demonstrate they provided (a) necessaries (b) to a vessel (c) upon request or order of a person or entity authorized to bind the vessel.  See Lake Charles Stevedores, Inc. v. Professor Vladimir Popov, MV, 199 F.3d 220 (5^th Cir. 1999).

Once proved, those elements establish a right to recover the value of the lien, plus attorney’s fees and, in many instances, court costs, from the vessel or the in personam owner.

Who’s in Charge Here?

There is an ample body of case law concerning what does or does not constitute a necessary to a vessel.  That is another post for another day.  Instead, we turn our focus to the last element of a maritime lien claim: is the necessary provided on request of someone with authority to bind the vessel?  Guidance in this area comes from the Commercial Instruments and Maritime Liens Act (“CIMLA”), which is a federal statute outlining the procedure to obtain a maritime lien, including who has authority to procure necessaries for a vessel.  See 46 U.S.C. § 31341.  Those persons are:

• The owner
• The master or captain
• A person entrusted with the management of the vessel at the port of supply; or
• An officer or agent appointed by:
• The owner
• A charterer
• An owner pro hac vice
• An agreed buyer in possession of the vessel

46 U.S.C. § 31343(a)(1-(a)(4).  In 1999, the Fifth Circuit read the CIMLA (then called the MCILA) to create a presumption that those individuals listed in 31341(a) had authority to act on behalf of the vessel. Lake Charles Stevedores, 199 F.3d at 224-225.   However, the presumption can be rebutted.  Id.

When there is an absence of a contract between the vessel/vessel owner and the party asserting the maritime lien (which, due to the nature of the shipping business, is quite common), the jurisprudence, according to the Fifth Circuit in Lake Charles Stevedores, breaks down into 2 lines of cases:

1. The general contractor/subcontractor line, an example of which is Crescent City Marine, Inc. v. M/V Nunki, 20 F.3d 665 (5^th Cir. 1994); and
2. The principal/agent line, applied in Belcher Co. v. M/V Martha Mariner, 724 F.2d 1161 (5^th Cir. 1984).

In a general contractor situation, the subcontractor cannot assert a maritime lien against a vessel – only the general contractor, acting in privity with the vessel or the vessel’s agent, can do so.  See 199 F.3d at 229.  The only time a subcontractor can have a maritime lien is when “it can be shown that an entity authorized to bind the ship controlled the selection of the subcontractor and/or its performance.”  Id.  In Lake Charles Stevedores, the entity that hired the stevedores did not cede any control of the selection of the stevedore group, and the general contractor accepted all of the risk.  199 F.3d at 230.

The principal/agent theory is also referred to as the “middle-man” line of cases.  A good example of this, according to the Fifth Circuit, is found in Marine Fuel Supply & Towing, Inc. v. M/V Ken Lucky, 869 F.2d 473 (9^th Cir. 1988).  Therein, the subcharterer of a vessel ordered fuel from its managing agent, who, in turn hired a fuel trader, who in turn hired a bunkering service who then bought fuel from a physical supplier, Marine Fuel Supply & Towing.  869 F.2d 473, 475.  On those facts, the Ninth Circuit found that since the order originated with the subcharterer, it originated from an entity having authority to bind the vessel.

A New Decision Offers Guidance

On June 19, 2018, the Fifth Circuit Court of Appeals issued a 2-1 panel decision in the case of Valero Marketing & Supply Co. v. M/V Almi Sun, et al., ____ F.3d _____, 2018 U.S. App. LEXIS 16525, No. 16-30194 (5^th Cir. 2018). 

Verna Marine Co., Ltd. (“Verna”) owned the Almi Sun.  Verna’s agent for the Almi Sun was Almi Tankers, S.A. (“Tankers”), and Tankers hired a fuel trader named O.W. Bunker Malta, Ltd. (“O.W.”) to procure fuel bunkers for the Almi Sun while she was in Corpus Christi, Texas.  Tankers later inquired of O.W. who the actual supplier would be for the fuel, and O.W. advised Tankers it was Valero Marketing & Supply Company (“Valero”).

Valero provided the fuel, at O.W.’s instruction, directly to the Almi Sun.  The vessel agents verified the bunker quality, and an officer of the Almi Sun signed the bunkering certificate.  Valero then submitted an invoice to O.W., who did not pay it and instead later filed for bankruptcy.  2018 U.S. App. Lexis 16525 at *2-3.

Valero then sued in rem, asserting a maritime lien against the Almi Sun.  Verna appeared for the vessel and contested the validity of the lien, arguing that Valero did not have a contract with Tankers (the vessel’s agent) but rather O.W., who Verna claimed did not have authority under the CMILA to bind the vessel.  Id. at *3.

The district court ruled in favor of Verna, holding O.W. did not have the required authority for a maritime lien to exist.  In a 2-1 decision, the Fifth Circuit upheld the district court’s reasoning, ultimately holding that this case fell into the general/subcontractor genre.  Id. at *8. 

Judge Higginbotham, writing for the majority, noted that the facts of the case did not establish that O.W. was “a ‘person presumed to have authority to procure necessaries’” because, among other things, Valero “dealt with O.W., not Verna or Tankers, and the record does not establish” O.W. acted as Verna or Tankers’ agent.  With this observation, the majority found the facts did not reach the necessary level of privity so as to invoke the principal/agent line of cases.

There was some evidence that the vessel interests knew of O.W.’s retention of Valero.  Obviously, the vessel crew signed paperwork and certified the quality of the fuel.  Also, at some point in time Tankers expressed concern about O.W.’s ability to pay Valero.  2018 U.S. App. LEXIS 16525 at *7-8.

The dissent, from Judge Haynes, asserted two basic arguments.  First, the Lake Charles Stevedores decision adopted a two-tiered analysis on whether a subcontractor could have a maritime lien: either a § 31341(a) person/entity directed the general contractor to hire a particular subcontractor OR the subcontractor was identified and accepted by a §31341(a) person/entity prior to performance.   2018 U.S. App. LEXIS 16525 at *16.  Second, Judge Haynes argued the facts of this case fell into the second line of subcontractor cases, and the majority did not follow Lake Charles Stevedores, creating “an unnecessary circuit split with the Eleventh Circuit.”  2018 U.S. App. LEXIS 16525 at *15.  Unfortunately, for Judge Haynes, these arguments could not persuade Judge Jones, who sided with Judge Higginbotham in the majority.

Lessons Learned

What lessons can a vessel owner take from Valero Marketing & Supply to minimize the potential existence of a maritime lien in the Fifth Circuit? 

First, I think this decision could encourage vessel owners and their designated managing agents/local agents to remove themselves from any decision-making as to who provides the necessaries for their vessels.  On the one hand, this already seems to occur, especially with foreign vessel owners who rely upon

On the other hand, some safety concerns (fuel quality, the source of food for the crew members, etc.) may require persons or entities with § 31341 authority to learn more about the origin point of the vessel’s necessaries.

Second, I think this decision may encourage persons with § 31341 authority to avoid exclusivity agreements.  In the insurance industry, many large insurance companies have such agreements with law firms, legal support providers, private investigation firms, etc. wherein, in exchange for being the sole and exclusive provider of those services, the service providers accept below-market rates for their services.  These savings ostensibly either serve as part of the profit margin or are passed back to the ultimate consumers. 

Third, as the operative standard in the general contractor line of cases is control (according to the Valero Marketing & Supply majority), the decision could lead to a conscious decision by vessels and persons/entities empowered by § 31341 to remove themselves not only from the selection of their necessaries providers, but also control of any operations related to the provision of those necessaries before performance occurs.  Obviously, the vessel has to certify fuel quality and confirm that the right amount of containers were loaded.  However, these things occur during or after performance.  Could a safety meeting between the Master of the vessel or the ship’s agent and a stevedoring company hired by the terminal constitute an exercise of control? 

An arbitration clause is, essentially, a forum selection clause on steroids.  While the latter merely selects the court or forum ( EX: …” any claims arising out of this contract shall be brought in the United States District Court for the Southern District of Texas, Houston Division …”), the former replaces the existing public judicial system for, in essence, a private one.  

This post provides a basic overview of the legality and applicability of arbitration clauses in Admiralty law, and is relevant because of a Supreme Court of the United States (“SCOTUS”) decision, Epic Systems Corp. v. Lewis, issued about a month ago.

Epic Systems

On May 21, 2018, SCOTUS issued a 5-4 decision in Epic Systems Corp. v. Lewis, 584 U.S. _____, No. 16-285 (2018), a case wherein several employers and employees entered into employment contracts providing for an individual arbitration in the event of any employment disputes between them. 

To generalize, the contracts at issue in Lewis prohibited class action lawsuits, juries, or even the use of the state or federal court system as the primary mechanism for resolving a dispute.  Rather, any employment-related dispute (including over wage/hour claims under the Fair Labor Standards Act [“FLSA”]) would be resolved by a neutral arbitrator under pre-determined rules.   The employees had to sign these contracts to begin working for their employers.

Leading up to this decision, the National Labor Relations Board (“NLRB”) determined in 2012 that the National Labor Relations Act (“NLRA”) nullified any such arbitration agreements.  As SCOTUS noted in its syllabus of the Lewis decision, “since then other courts have either agreed with or deferred to the [NLRB’s] position.”

The majority in Lewis held the arbitration agreements were enforceable, and the NLRA did not nullify them as the NLRB previously held. Moreover, the Lewis Court held the Federal Arbitration Act (“FAA”) does not preclude arbitration agreements between an individual employee and their employer, but rather the FAA actually mandates that such agreements be enforced.

Many labor and employment attorneys already provided commentary on Lewis.  That is not the purpose of this post.  Instead, Lewis provides an excellent transition into the applicability of arbitration clauses in a saltier context.  There are several different scenarios under Admiralty law in which arbitration agreements/forum selection clauses are permissible to limit the options of an aggrieved or injured party, should that party wish to institute litigation.

Scenario 1 – Maritime Breach of Contract

It is routine for any maritime commercial contract (i.e., a charter party or contract to provide food/water to a vessel) to now contain either a forum selection clause or an arbitration clause.  These clauses are normally enforced, as there is a triumvirate of SCOTUS cases supporting the general enforceability of such clauses:

-a-        M/V Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972) (forum selection clause between Texas company and German company is enforceable because, inter alia, the parties were sophisticated and negotiated at arm’s length);

-b-       Carnival Cruise Lines v. Shute, 499 U.S. 585 (1991)(forum selection clause mandating a Washington resident must sue in Florida courts is enforceable, even though the clause was part of a form contract);

-c-        Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528 (1995)(a forum selection/arbitration clause in a bill of lading does not necessarily offend or violate the Carriage of Goods by Sea Act [“COGSA”], allowing for arbitration of a dispute in Japan as opposed to a federal lawsuit in Massachusetts).

If the clauses are worded appropriately to each particular transaction, it is likely the clause will be enforced by a court in the United States, given that the SCOTUS views the FAA as a Congressional instruction “that arbitration agreements … must be enforced as written.”  See Lewis, 584 U.S. ____, No. 16-285, p. 25 (2018).

Scenario 2 – Personal Injury or Death involving a passenger

The second case mentioned above, Carnival Cruise Lines v. Shute, allows for limitation of the available forum to passenger claims for personal injury or death.  This is so even though the contract terms usually arrive after the customer books the voyage (i.e., has paid for the cruise), and in most instances can only recover some of their money in a refund.

For example, the 57 Americans injured or killed in the Costa Concordia disaster off the coast of Italy in 2012 were required to sue in Italy, as opposed to Florida. 

http://www.miamiherald.com/news/business/tourism-cruises/article56902318.html

Given the strong SCOTUS precedent on this issue, I do not anticipate much changing with the validity of forum selection clauses and/or arbitration agreements as it relates to passengers. 

Scenarios 3 and 4 – Personal Injury or Death Involving Seamen

The next two scenarios involve seamen, as that term is understood under the General Maritime Law (“GML”) of the United States.  There is no statutory definition of “seaman” in the Jones Act (although there is such a definition in other U.S. Statutes).  Instead, one must look to the SCOTUS decision of Chandris, Inc. v. Latsis, 515 U.S. 347, 368 (1995), which contains a two-part test holding a person is a seaman if:

-a-        Their duties at the time of the incident contributed to the function of the vessel or accomplishment of its mission; and

-b-       Their connection, if any, to the vessel (or fleet of vessels) at the time of the incident was substantial in terms of both its duration and nature.

Foreign seamen for the purposes of this analysis are those who are not U.S. citizens or legal U.S. residents. 

Scenario 3 – Injury or Death to a U.S. Seaman

U.S. seamen receive greater protection than their foreign counterparts as to arbitration clause in employment contracts.  The FAA, specifically 9 U.S.C. § 1, carves out the employment contracts of seamen and railroad employees from the auspices of the FAA.  Thus, if an employer tries to insert an arbitration clause into the seaman’s articles (or an employment contract or other documents used as part of a hiring package), it likely would be found void.  Thus, the holding of Epic Systems wouldn’t apply to a U.S. seaman’s employment contract if the U.S. seaman worked for a U.S. company primarily in U.S. waters.

However, the FAA does allow for seamen to enter into post-injury arbitration agreements, meaning a seaman agrees to arbitrate his dispute with his employer and/or a vessel owner after the seaman is injured in the course and scope of their employment.  The ability to engage in such a transaction is not absolute, instead depending on the language used and the consideration given in return for the seaman waiving his right to file litigation.  An example of a post-injury arbitration agreement surviving court scrutiny is Terrebonne v. K-Sea Transportation Co., 477 F.3d 271 (5^th Cir. 2007).

Scenario 4 – Injury or Death to a Foreign Seaman

In 1970, Congress incorporated the Convention on the Recognition and Enforcement of Foreign Arbitral Agreements (commonly referred to as “the Convention” or “the New York Convention”) to United States statutory law as Chapter 2 of Title 9 of the U.S. Code (the same locale as the FAA).  See 9 U.S.C. § 201.  The important text of this Chapter is found in 9 U.S.C. § 202, which reads as follows:

An arbitration agreement or arbitral award arising out of a legal relationship, whether contractual or not, which is considered as commercial, including a transaction, contract, or agreement described in section 2 of this title, falls under the Convention. An agreement or award arising out of such a relationship which is entirely between citizens of the United States shall be deemed not to fall under the Convention unless that relationship involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states. For the purpose of this section a corporation is a citizen of the United States if it is incorporated or has its principal place of business in the United States.

Since 1970, various appellate courts held the Convention applies not only to foreign seamen contracted to work for foreign employers or foreign flagged vessels, but also to U.S. citizens contracted to work as a seaman for a U.S. based company when the work was to be performed outside U.S. territorial waters.

Examples of the application of the Convention to allow arbitration or forum selection clause agreements in foreign seaman contracts of employment are:

Marine Chance Shipping v. Sebastian, 143 F.3d 216 (5^th Cir. 1998) – forum selection clause mandating personal injury claims of Filipino seaman must be enforced even when injuries occurred in the United States.

Francisco v. Stolt Achievement MT, 293 F.3d 270 (5^th Cir. 2002) – The Convention required arbitration of any claims made by Filipino seaman injured on the Mississippi River due to the language of his employment contract.

Freudensprung v. Offshore Technical Services, Inc., 379 F.3d 327 (5^th Cir. 2004) – The Convention and employment contract language mandated arbitration of any personal injury claims made by U.S. seaman hired by U.S. company to work offshore in Nigeran waters.

Thus, there are options for the use of arbitration agreements in Admiralty law, even in the context of personal injury claims.  If you wish to learn more about options in this regard, please feel free to contact me.