Appeal from a summary judgment of the United States District Court for the Southern District of New York (Sand, J.) dismissing complaint on the merits for lack of diligent prosecution. Vacated and remanded.
Before: VAN GRAAFEILAND, MESKILL and NEWMAN, Circuit Judges.
VAN GRAAFEILAND, Circuit Judge.
On April 7, 1986, summary judgment was entered in the United States District Court for the Southern District of New York (Sand, J.) dismissing on the merits the action of Ali A. Tamini, a foreign corporation, against the ship M/V JEWON and the vessel's owner, Ahjin Shipping Co., Ltd., for lack of diligent prosecution. Fed. R. Civ. P. 41(b). Tamini appeals only the dismissal as against the ship. We vacate and remand.
The litigation arises out of damage to a rotary drill rig which occurred on October 30, 1981 while the JEWON was being loaded in Houston, Texas. After the drill rig had been placed on board the ship, it sustained substantial damage when the loading stevedore dropped a three-ton piece of equipment on it. At the time of the accident, Salen Dry Cargo AB was operating the vessel under a subcharter. Salen Projects/Liner Services, Inc. was a related corporation which apparently had arranged for the shipment of the drill rig to Tamini in Saudi Arabia. "Salen", as hereafter used, will refer to Salen Dry Cargo AB.
After settlement negotiations between Tamini and Salen provided unproductive, Tamini commenced this action on December 8, 1983 with the filing of a complaint. A copy of the summons and complaint was mailed to the attorney for Salen, but none of the defendants was served. On February 28, 1984, the attorneys for Salen and Tamini agreed that Judge Sand might issue an order staying the action and placing it on the suspense docket pending completion of the arbitration which Salen and Tamini had agreed to conduct. Arbitration hearings commenced on July 19, 1984 and, on July 16, 1985, the arbitrators awarded Tamini $111,884.54 plus post-award interest. However, because Salen had filed for bankruptcy in Stockholm, Sweden prior to the arbitration award, Tamini won only a hollow victory.
Tamini therefore found it necessary to pursue its claim against the JEWON. Tamini was able to locate the ship in Port Elizabeth, South Africa. On August 16, 1985, responding to Tamini's threat to arrest the JEWON in that port, the United Kingdom Mutual Steam Ship Assurance Association (Bermuda) Ltd., the protection and indemnity association in which the JEWON was entered, issued a letter of undertaking pursuant to which it agreed to appear on behalf of the vessel and to satisfy a judgment against it not in excess of $130,000. On September 27, 1985, the JEWON entered an in rem appearance and, on October 2, 1985, the action was restored to the active docket. Tamini never effected service on Ahjin, the shipowner, and it has not appeared in the action.
On October 2, 1985, Tamini moved for summary judgment against the JEWON, predicating its motion upon the arbitration award. On November 14, 1985, a cross-motion for summary judgment was made on behalf of the JEWON on the grounds that the action was time-barred and that Tamini had no valid maritime lien. The cross-motion also sought partial summary judgment limiting the ship's ability to $500 in accordance with the package limitation available under the United States Carriage of Goods By Sea Act, 46 U.S.C. § 1304(5), or in the alternative that the action be transferred to the Southern District of Texas so that jurisdiction over the Houston stevedore might be obtained.
On April 3, 1986, the district court issued an opinion dismissing Tamini's complaint against the JEWON and the shipowner pursuant to Fed. R. Civ. P. 41(b). In the same order, the court granted Tamini's motion for confirmation of its arbitration award against Salen. We are asked to consider only the dismissal of Tamini's in rem action against the JEWON, whose interests hereafter will be designated for convenience as "appellee".
Appellee does not seriously dispute that Tamini's claim for cargo damage created a maritime lien which might have been enforced by a libel in rem against the JEWON . See, e.g., Demsey & Associates, Inc. v. S.S. Sea Star, 461 F.2d 1009, 1014 (2d Cir. 1972). Appellee's motion for summary judgment was based on the contention that Tamini lost its lien because it was guilty of laches. However, because laches is an equitable doctrine, it may not be based on lapse of time alone. Holmberg v. Armbrecht, 327 U.S. 392, 396, 90 L. Ed. 743, 66 S. Ct. 582 (1946); Larios v. Victory Carriers, Inc., 316 F.2d 63, 66-67 (2d Cir. 1963); Fidelity & Casualty Co. v. Cì Mr. Kim, 345 F.2d 45, 50-51 (5th Cir. 1965). In view of the desirability of disposing of claims by way of arbitration, it would have been error to grant appellee relief on the ground of laches if appellee had suffered no prejudice because of the relatively modest delay attributable to the arbitration in the instant case.
Although the district court based its holding on Rule 41(b) rather than the laches asserted by appellee, it followed a somewhat similar line of reasoning. It held that, because Tamini was attempting to arbitrate a settlement with Salen, see 9 U.S.C. § 3 and Supplemental Rules of Admiralty E(3)(b), Tamini's delay in "effecting service" on the JEWON was only "moderate". The district court then turned to the question whether appellee was prejudiced by the delay. Without holding any hearing and without resolving disputed legal issues, the district court held that appellee was sufficiently prejudiced by the "moderate" delay to warrant a Rule 41(b) dismissal on the merits. We disagree.
This Court has long been committed to the proposition that dismissal of an action with prejudice is a drastic remedy which should be applied only in extreme circumstances. See, e.g., Meehan v. Snow, 652 F.2d 274, 277 (2d Cir. 1981); Peterson v. Term Taxi, Inc., 429 F.2d 888, 891 (2d Cir. 1970); Independent Productions Corp. v. Loew's Inc., 283 F.2d 730, 733 (2d Cir. 1960); Lyford v. Carter, 274 F.2d 815 (2d Cir. 1960); Syracuse Broadcasting Corp. v. Newhouse, 271 F.2d 910, 914 (2d Cir. 1959); Gill v. Stolow, 240 F.2d 669, 670 (2d Cir. 1957). The fact that the district court's dismissal of Tamini's claim involved an exercise of discretion does not place it beyond the scope of appellate review. A discretionary order may be reversed for a clear error either of fact or of law. Power Test Petroleum Distributors, Inc. v. Calcu Gas, Inc., 754 F.2d 91, 95 (2d Cir. 1985); Coca-Cola Co. v. Tropicana Products, Inc., 690 F.2d 312, 315 (2d Cir. 1982).
The error in the instant case appears to have resulted in large measure from Tamini's misguided attempt to base its motion for summary judgment against the JEWON upon the award entered in the arbitration proceedings in which JEWON was not a party. Without specifically holding that the arbitration award was binding on appellee, the district court appeared to base a finding of prejudice on an assumption that it was. The court said:
Assuming for these purposes that plaintiff has a maritime lien for cargo damages giving it a right to proceed in rem against defendant vessel and that this Court would enter judgment against the vessel in the amount of Tamini's arbitration award, Salen's bankruptcy between filing and service of defendant vessel would result in prejudice. Despite the involvement of "the same insurer which would have paid the arbitration award against Salen," this alternative [sic] payment would have distinct consequences for defendants. Most importantly, if they were compelled to pay the arbitration award under circumstances precluding them from asserting defenses to plaintiff's claim, [United Kingdom's] indemnity payment still would be placed on Ahjin's loss record. ...