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U.S. OFFSHORE INC. v. SEABULK OFFSHORE

December 5, 1990

IN THE MATTER OF THE ARBITRATION BETWEEN U.S. OFFSHORE, INC., PETITIONER, AND SEABULK OFFSHORE, LTD., RESPONDENT.


The opinion of the court was delivered by: Mukasey, District Judge.

OPINION AND ORDER

This case comes before the court, on cross-motions relating to a September 7, 1990 arbitration award in petitioner's favor by a majority of a panel of three arbitrators sitting in New York, pursuant to the Arbitration Rules of the Society of Maritime Arbitrators, Inc. The award dealt with rights under a contract whereby petitioner was to manage offshore supply vessels that respondent purchased. Petitioner moves to confirm the award; respondent moves in the alternative to stay this proceeding in favor of an action it filed in the Southern District of Florida three days before petitioner filed here, or to vacate the award on any or all of three grounds: (i) the arbitrators manifestly disregarded the law; (ii) the award violates public policy; (iii) the arbitrators exceeded their authority. As set forth below, respondent's Florida action is an exercise in forum shopping and places this case well within the recognized exceptions to this Circuit's first filed rule, and the proffered bases for vacating the arbitrators' award, whether considered individually or in tandem, are meritless. Accordingly, the petition to confirm the award is granted, and the cross-motion to stay this action or vacate the award is denied. Petitioner has moved for Rule 11 sanctions, which are granted to the extent set forth below.

I.

The facts, insofar as they are relevant to this proceeding, and bearing in mind particularly that it is not a court's function to reassess arbitrators' factual findings, Andros Compania Maritima v. Marc Rich & Co., A.G., 579 F.2d 691, 703 (2d Cir. 1978), are as follows: In the fall of 1989, petitioner U.S. Offshore, Inc. ("USO"), through Drexel, Burnham, Lambert, Inc., brought to respondent's affiliate Hvide Shipping, Inc. a proposal whereby Hvide could exercise USO's options to buy eight offshore supply vessels, which would then be refurbished to service offshore oil drilling operations in the Gulf of Mexico. Hvide accepted the basic proposal and formed respondent Seahulk Offshore, Ltd., a Florida limited partnership, to purchase the vessels and enter into a five-year operating agreement with USO.

The deal was closed in November 1989 under extreme time pressure because USO's principal owner and chief executive officer, J. Michael Jones, stood to lose a $1 million deposit on the vessels if the deal did not close promptly. At Hvide's request, to provide a performance incentive, J. Michael Jones became a limited partner in Seabulk. His younger brother, George Jones, was the chief operating officer of USO, which was to supervise the refurbishing of the vessels and operate them.

Soon after the closing, the relationship between the parties deteriorated. Hvide and Seabulk carped at USO's performance, although according to the arbitrators USO accomplished the refurbishment well under adverse conditions and put the vessels into service at profitable rates in December 1989 and January 1990. (Arb.Op. 4) Apparently, J. Michael Jones contributed abrasion and acrimony to the equation. Just before a particularly bitter meeting on January 11, 1990, Seabulk learned that George Jones had been convicted in 1985 of bank fraud for inflating invoices and receivables in connection with another offshore oil supply operation, a fact that J. Michael Jones had not disclosed during the hectic negotiations that preceded the closing. George Jones had received a probationary sentence. After verifying the information, Seabulk recoiled in a horror whose genuineness may be open to debate, and sent notice on January 29 that it was rescinding the deal. George Jones offered to resign from USO, but Seabulk pressed its unilateral termination and proceeded to take over operation of the vessels. USO then demanded arbitration pursuant to the operating agreement.

The arbitration was held in New York under the rules of the Society of Maritime Arbitrators. Before the hearings commenced, the arbitrators disclosed various business and personal relationships between and among themselves and both parties. Seabulk raised no objection to the panel. Thereafter, following six evidentiary sessions, principal and reply post-hearing briefs and summary oral argument, a majority of the panel found for USO in a thoughtful 23-page opinion. The majority conclusion most vigorously assailed by Seabulk is that nondisclosure of George Jones's criminal record did not justify rescission because Seabulk proved no damage from the nondisclosure, particularly in view of USO's offer to replace George Jones. The majority found that J. Michael Jones had not sought to conceal his brother's record, but simply had not disclosed it, and cited in support of this conclusion that he had proffered as a reference a person who was aware of George Jones's conviction, something he would not have done if he had been intent on concealment. Although the majority stated in one sentence that the conviction was material (Arb.Op. 14-15), its subsequent page and one-half discussion casts some doubt on whether that was in fact its conclusion, or whether it simply reached no conclusion on that issue because it believed there could be no rescission absent damages, as follows:

  In summary, it is a judgment call as to whether disclosure of
  George Jones' background would have squelched the transaction.
  Therefore, the degree of materiality and reliance on the
  undisclosed information, i.e., the centrality of George Jones'
  background in relation to the other inducing factors, remains a
  matter upon which the Panel differs. This disagreement is,
  however, without consequence regarding the final decision,
  since it is only one of the factors needed to sustain
  [Seabulk's] position. But speculation as to Hvide's likely
  response had it prior knowledge of the George Jones conviction
  leads to the ultimate irony of this arbitration: the
  non-disclosure, to the extent it may have been of supreme
  materiality to SOL, resulted in their becoming party to a
  transaction that has considerably enriched Hvide. That
  paradoxical result is a fitting introduction to a discussion of
  the pivotal issue governing the Panel's conclusion, that being
  whether the non-disclosure caused damage to [Seabulk], a fact
  that must be

  established if [Seabulk's] action of vitiating the contract is
  to be sustained." (Arb.Op. 15-16)

The majority also concluded, inter alia, that Seabulk had purchased no security in connection with its entry into the transaction, and accordingly that the standards governing securities transactions did not apply.

The majority determined that Seabulk's unilateral termination of the contract was unjustified, and awarded USO various items of damage, adding interest and attorneys' fees.

On September 24, 1990, Seabulk and its general partner filed an action in U.S. District Court for the Southern District of Florida against USO and certain of its affiliates, charging violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and RICO, and seeking to vacate the arbitration award and dissolve the partnership. The action at bar was filed in this court three days later. USO's counsel has averred, and Seabulk has not denied, that as of October 17, 1990, when USO submitted its opposition to Seabulk's motion, Seabulk had served neither the summons and complaint nor the motion it said it had filed in the Florida action seeking to enjoin this action. As of the date of this opinion I have not been advised that USO has been enjoined from proceeding in this action.

II.

Seabulk relies on this Circuit's well settled first filed rule to request that I stay or dismiss this action in favor of the earlier filed action in the Southern District of Florida. Fort Howard Paper Co. v. William D. Witter, Inc., 787 F.2d 784, 790 (2d Cir. 1986), and cases cited therein. However, that well settled rule, ordinarily requiring the second action to yield to the first, has equally well settled exceptions when the second action may be favored by a balance of convenience or by "special circumstances," the most special of which is the institutional interest of courts in discouraging forum shopping. Motion Picture Laboratory Technicians Local 780 v. McGregor & Werner, Inc., 804 F.2d 16, 19 (2d Cir. 1986), and cases cited therein.

As to convenience, McGregor & Werner endorses the Ninth Circuit's decision in Central Valley Typographical Union, No. 46 v. McClatchy Newspapers, 762 F.2d 741 (9th Cir. 1985) holding that the location where an arbitration was held is presumptively the convenient forum for settling the dispute. 804 F.2d at 18. Here, the arbitration was held in the Southern District of New York. Moreover, Seabulk's Florida action, brought in a jurisdiction where its headquarters are located but otherwise having no significant connection with the underlying events, and pursued in only desultory fashion if at all after it was filed, gives off the unmistakable ...


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