UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
April 4, 1994
In the Matter of Montauk Oil Transportation Corp., as Owner of the Barge CIBRO SAVANNAH, Plaintiff and Third-Party Plaintiff, For Exoneration from or Limitation of Liability
The Steamship Mutual Underwriting Association (Bermuda) Limited, Third-Party Defendant.
The opinion of the court was delivered by: KIMBA M. WOOD
MEMORANDUM OPINION AND ORDER
This action was brought by Montauk Oil Transportation Corporation ("Montauk") pursuant to 46 U.S.C. 183 et seq., to limit liability for damages resulting from a series of explosions and an oil spill aboard the vessel CIBRO SAVANNAH. The court has jurisdiction over the action pursuant to 28 U.S.C. § 1333. Third-party defendant Steamship Mutual Underwriting Association (Bermuda) Limited ("Steamship" or "the Club") moves to dismiss a third-party complaint filed by Montauk, which demands judgment against Steamship in favor of the United States and the States of New York and New Jersey pursuant to Federal Rule of Civil Procedure 14(c). Steamship argues that the third-party complaint fails to state a claim upon which relief may be granted. Alternatively, Steamship moves for an order staying the third-party action pending the outcome of arbitration between Montauk and Steamship in London, pursuant to the Federal Arbitration Act, 9 U.S.C. § 3 et seq., and the Convention on the Regulation and Enforcement of Foreign Arbitral Awards, 9 U.S.C. § 210 et seq.. For the reasons stated below, Steamship's motion to dismiss is granted, to the extent that the third-party complaint demands judgment against Steamship in favor of the States of New York and New Jersey; this portion of the complaint is dismissed without prejudice to Montauk's right to amend. Steamship's motion is denied, to the extent that the third-party complaint demands judgment against Steamship in favor of the United States. Steamship's motion to stay the third-party action pending arbitration is denied.
Steamship is a Bermuda-based association of shipowners known as a protection and indemnity club, providing marine protection and indemnity insurance to its members. Montauk is the owner and operator of the tank barge CIBRO SAVANNAH, which for several years was covered by Steamship for protection and indemnity risks. Montauk renewed its membership with Steamship on February 20, 1990, for the 1990-91 policy year.
Among the risks for which the CIBRO SAVANNAH was insured were risks of liability arising from pollution due to oil spills. Under the Federal Water Pollution Control Act, 33 U.S.C. § 1321 ("FWPCA" or "the Act"), all tanker owners are required to carry insurance for pollution liabilities imposed by the Act. Subsection 311(p)(1) of the Act (now repealed)
requires tanker operators to establish and maintain "evidence of financial responsibility" sufficient to meet potential liabilities. 33 U.S.C. § 1321(p)(3). Pursuant to regulations promulgated under the Act, evidence of financial responsibility may take the form of a "certificate of financial responsibility" issued by the insurer to the United States, in which the insurer certifies directly to the United States that the vessel identified in the certificate is insured up to the statutory limit. 33 C.F.R. 130.51. Subsection 311(p)(3) of the Act authorizes a direct action against the insurer for "any claim for costs" for which the insured vessel is responsible under the Act. In addition, the certificate, the form of which is dictated by the regulation, includes a statement that the insurer "consents to be sued directly in respect of any claim against any of the operators arising under subsections 311(f) and (g) of the Act." Insurance Form CG-5358-9 Furnished as Evidence of Responsibility Under Subsection 311(p) of the Water Pollution Control Act, as Amended (hereinafter Form CG-5358-9). Termination of the undertaking represented by the certificate becomes effective "30 days after the date of receipt of written notice by the U.S. Coast Guard (USCG) that the Insurer has elected to terminate the insurance evidenced by this undertaking, and has so notified the vessel operator." Id.. Steamship provided a certificate of financial responsibility ("the Certificate") to the United States on behalf of Montauk's CIBRO SAVANNAH on February 20, 1986.
On March 6, 1990, a series of explosions took place on the CIBRO SAVANNAH, causing an oil spill into the waters of the Arthur Kill between New York and New Jersey. Shortly thereafter, Steamship informed Montauk that Montauk's insurance was void as of its renewal on February 20, 1990, due to Montauk's alleged failure to disclose a material fact at that time. Steamship notified the Coast Guard of the termination on June 13, 1990.
On June 4, 1990, Montauk brought suit against Steamship in the United States District Court for the Southern District of New York, contesting the retroactive cancellation of its insurance and seeking recovery under the policy for clean-up costs incurred as a result of the March oil spill. 90 Civ. 3792 (DNE). In response, Steamship filed a motion to stay the action pending arbitration, arguing that Montauk was bound by a Club rule requiring that disputes between Steamship and its members be submitted first, to Steamship's directors, and then to arbitration. Judge Edelstein granted Steamship's motion on March 20, 1991. Montauk Oil Transportation Corp. v. Steamship Mutual Underwriting Ass'n (Bermuda) Ltd., 1991 U.S. Dist. LEXIS 3452, 1991 WL 41657 at * 1-2 (S.D.N.Y.).
On September 5, 1990, Montauk initiated this limitation of liability proceeding, pursuant to 46 U.S.C. § 183 and Rule F of the Supplemental Rules Governing Admiralty and Maritime Claims. Section 183 authorizes the owner of a vessel to limit its liability for losses incurred without its "privity or knowledge" to an amount equal to its interest in the vessel. Pursuant to Rule F(4), an Order was issued by this court on September 5, 1990, giving notice of the proceeding to potential claimants and ordering them to file their claims. Among the parties filing claims were the United States and the States of New York and New Jersey. On February 19, 1993, with the permission of the court,
Montauk impleaded Steamship in the proceeding pursuant to Rule 14(c) of the Federal Rules of Civil Procedure. Steamship then filed the instant motion to dismiss or stay.
Federal Rule of Civil Procedure 14(c) provides:
When a plaintiff asserts an admiralty or maritime claim within the meaning of Rule 9(h), the defendant or a claimant, as a third-party plaintiff, may bring in a third-party defendant who may be wholly or partly liable, either to the plaintiff or to the third-party plaintiff, by way of remedy over, contribution, or otherwise on account of the same transaction, occurrence, or series of occurrences. In such a case the third-party plaintiff may also demand judgment against the third-party defendant in favor of the plaintiff . . . and the action shall proceed as if the plaintiff had commenced it against the third party defendant as well as the third-party plaintiff. (Emphasis added).
Here Montauk, defendant and third-party plaintiff, argues that imp leader is proper because Steamship may be wholly or partly liable to the United States and to the States of New York and New Jersey (the "government claimants"). Montauk's theory of liability rests on both subsection 311(p)(3) of the FWPCA, which authorizes a direct action against an insurer for liabilities incurred by the shipowner, and the Certificate provided by Steamship to the United States, which states that the insurer "consents to be sued directly in respect of any claim against any of the operators arising under subsections 311(f) and (g) of the Act." Form CG-5358-9. Steamship responds that the third-party complaint fails to state a claim on which relief may be granted. First, Steamship argues that neither the FWPCA nor the Certificate creates a cause of action against Steamship on behalf of the States of New York and New Jersey. Thus the existence of claims by these States cannot serve as a basis for a third-party complaint pursuant to Rule 14(c). Even if the FWPCA and the Certificate do give rise to a cause of action on behalf of the States, Steamship argues, both sources of law give Steamship the right to assert any defense against the government claimants that it could assert against Montauk. 33 U.S.C. § 1321(p)(3); Form CG-5358-9. Because the arbitration clause that formed the basis for Judge Edelstein's Order is a "defense" Steamship may assert against the government claimants, Steamship reasons, the third-party complaint fails to state a claim on which relief may be granted. In the event that its motion to dismiss is denied, Steamship moves to stay the third-party proceedings pending the outcome of the arbitration between Montauk and Steamship pursuant to the Federal Arbitration Act, 9 U.S.C. § 3, and the Convention on the Regulation and Enforcement of Foreign Arbitral Awards, 9 U.S.C. § 210 et seq., Such a stay is necessary, Steamship argues, because it is entitled to assert against the government claimants in the third-party proceeding any defense that it could assert against Montauk -- and whether such a defense is available will be determined by the arbitration.
A. Whether section 311 of the FWPCA provides a cause of action against Steamship to the States
Steamship's first argument for dismissal of the third-party complaint is that neither section 311 of the FWPCA nor the Certificate, on which the complaint is based, creates a cause of action against Steamship on behalf of the States of New York and New Jersey. Steamship asks the court to dismiss the third-party complaint with prejudice to the extent it demands judgment in favor of those States. The court agrees that, insofar as the third-party complaint relies on Steamship's liability to the States pursuant to section 311 and the Certificate, it fails to state a claim upon which relief may be granted. However, the court grants Steamship's motion to dismiss the complaint as to these claims without prejudice to Montauk's right to amend.
The ambiguous language of the FWPCA has led to confusion as to whether the statute creates a right of action on behalf of the States. See In re Ballard Shipping Co., 772 F. Supp. 721, 722 (D.R.I. 1991). Confronting this issue recently in Ballard Shipping, the District Court for the District of Rhode Island conducted a careful analysis of the statute's text and legislative history. I adopt that court's reasoning here. In Ballard, the court turned first to subsection 311(f)(1) of the Act, which provides:
Except where an owner or operator can prove that a discharge was caused solely by (A) and act of God, (B) an act of war, (C) negligence on the part of the United States Government, or (D) an act or omission of a third party without regard to whether any such act or omission was or was not negligent, or any combination of the foregoing causes, such owner or operator of any vessel from which oil or a hazardous substance is discharged in violation of subsection (b)(3) of this section shall, notwithstanding any other provision of law, be liable to the United States Government for the actual costs incurred under subsection (c) of this section for the removal of such oil or substance by the United States Government. . . .
The court concluded that this subsection "plainly makes shipowners and operators liable only 'to the United States Government' for costs incurred during the removal of oil," and not to the States. 772 F. Supp. at 723. See also In the Matter of Oswego Barge Corp., 673 F.2d 47, 48 (2d Cir. 1982) (stating, in dictum, that section 311's "only purpose is to create a precise remedy solely for the United States to recover specified damages pursuant to a carefully devised formula").
In response, Montauk points to subsections 311(f)(4) and (f)(5) of the Act, which it claims evince an intent to create a right to action on the part of the States.
These subsections provide:
(4) The costs of removal of oil. . . for which the owner or operator of a vessel. . . is liable under subsection (f) of this section shall include any costs or expenses incurred by the Federal Government or any State government in the restoration or replacement of natural resources damaged or destroyed as a result of a discharge of oil . . . in violation of subsection (b) of this section.
(5) The President, or the authorized representative of any State, shall act on behalf of the public as trustee of the natural resources to recover for the costs of replacing such resources. Sums recovered shall be used to restore, rehabilitate, or acquire the equivalent of such natural resources by the appropriate agencies of the Federal Government, or the State government.
As the Ballard court noted however, these provisions are not inconsistent with the view that the Act creates no right of action on behalf of the States. Subsection (k)(1) of the Act provides for the creation of a revolving fund in which sums recovered by the United States are to be deposited. States may be reimbursed from this fund pursuant to subsection (c)(2)(H). Read in the context of this statutory scheme, the Ballard court reasoned, subsection (f)(4)
merely defines the shipowner's measure of liability to include certain expenses incurred by state governments. It does not expressly or by implication grant a right of action to states. An aggrieved state must rely on the appropriate federal agency to bring suit against the shipowner and recover the state's damages under this statute.
772 F. Supp. at 724. Subsection (f)(5) also creates no right of action on the part of the States, the court concluded. Rather, its purpose is to "restrict the purposes to which the state may direct any awards it collects by way of reimbursements from the federal government." Id. I agree with the court in Ballard that the States have no right of action under the FWPCA.
Moreover, the Certificate affords the States no greater rights of action than they have under the provisions interpreted above.
I conclude that, to the extent that the third-party complaint relies on the FWPCA and the Certificate to create a right of action on behalf of the States of New York and New Jersey against Steamship, it fails to state a claim upon which relief may be granted.
Montauk contends for the first time in its reply brief that impleader of Steamship as to the States of New York and New Jersey is proper because Steamship may be wholly or partly liable to the States under state law. Montauk's Opp. Mem. at 15-16. Steamship responds that this basis for impleader was not included in the third-party complaint, and that only the complaint is properly before the court. Steamship is correct. Goldman v. Belden, 754 F.2d 1059, 1065-66 (2d Cir. 1985). However, a complaint should not be dismissed without leave to amend unless it is clear that there is no basis for relief. See Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974). I therefore dismiss the third-party complaint, to the extent it demands judgment against Steamship on behalf of the States and New York and New Jersey, without prejudice to Steamship's right to amend.
B. Whether the third-party complaint is barred by the arbitration clause and Judge Edelstein's stay
In support of its argument that Montauk's third-party complaint is barred by the arbitration clause and by Judge Edelstein's stay, Steamship points to language in both the FWPCA and the Certificate that expressly entitles an insurer sued under the Act "to invoke all rights and defenses which would have been available to . . . [the insurer] if an action had been brought against him by the owner or operator" of the insured vessel.
33 U.S.C. § 1321(p)(3). Steamship argues that the arbitration clause is a "defense" it is entitled to invoke against the government claimants. Although its line of reasoning is somewhat unclear, Steamship appears to contend that if Steamship is not liable to Montauk, there is no basis on which Steamship could be liable to the government claimants. Steamship's Mem. at 4. Therefore, Steamship contends, the third-party complaint fails to state a claim on which relief may be granted.
The court disagrees.
Steamship's argument displays a misunderstanding of the procedural posture of a third-party action pursuant to Federal Rule of Civil Procedure 14(c), as well as of the FWPCA's statutory scheme.
Rule 14 was modeled on Admiralty Rule 56. An important feature of Admiralty Rule 56 was that it allowed impleader not only of a person who might be liable to the defendant. . . but also of any person who might be liable to the plaintiff. The importance of this provision was that the defendant was entitled to insist that the plaintiff proceed to judgment against the third-party defendant.
Fed. R. Civ. P. 14 advisory committee's note (1966). The Rule provides that, after impleader, the action "shall proceed as if the plaintiff had commenced it against the third-party defendant as well as the third-party plaintiff." Fed. R. Civ. P. 14(c). A complaint such as Montauk's, then, which impleads a third-party defendant on the ground that it is liable to a plaintiff, fails to state a claim for which relief may be granted only if the plaintiff has no cause of action against the third-party defendant under the facts alleged in the complaint.
Here, Steamship would present a strong argument that the third-party complaint failed to state a claim if (1) the third-party complaint turned on the validity of Montauk's policy with Steamship at the time of the accident and (2) arbitration had determined that the policy was invalid.
However, neither proposition is true. First, the complaint filed on behalf of the government claimants is not based on the argument that Montauk's policy with Steamship was valid at the time of the accident. Rather, the third-party complaint states an action on behalf of the government claimants based on Steamship's provision of a certificate of financial responsibility to the United States, and on its consent to be sued directly pursuant to subsection 311(p)(3) of the FWPCA and the Certificate. This action depends at least in part on issues separate from the validity of the policy, such as the timing of Steamship's notice of termination to the United States.
Second, to the extent that the third-party claim does turn on the validity of the policy, arbitration has not yet decided the issue, and thus any "defense" it might supply is purely speculative. The function of a district court in considering a 12(b)(6) motion to dismiss is "not to weigh the evidence that might be presented at trial, but merely to determine whether the complaint itself is legally sufficient." Goldman, 754 F.2d at 1067 (2d Cir. 1985), citing Ryder Energy Distribution Corp. v. Merrill Lynch Commodities Inc., 748 F.2d 774 (2d Cir. 1984). The mere fact that arbitration is pending is insufficient to show that the third-party complaint fails to state a claim. The court concludes that Montauk has stated a viable third-party claim against Steamship that is independent of arbitrable issues.
C. Whether the third-party action should be stayed pending the outcome of the London arbitration
Finally, Steamship argues that if its motion to dismiss the third-party complaint is not granted, the third-party proceeding must be stayed pending the outcome of arbitration pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 9 U.S.C. 201 et seq.. In addressing Steamship's arguments, I consider only the portion of the third-party proceeding that has not been dismissed -- that is, the demand for judgment against Steamship in favor of the United States.
The FAA provides, in pertinent part:
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.
9 U.S.C. § 3 (emphasis added). As I understand Steamship's argument, it runs as follows: (1) Steamship's defense against Montauk -- its claim that Montauk's policy is void ab initio because of a material misrepresentation -- is an arbitrable issue; (2) because Steamship is entitled to invoke this defense against the United States pursuant to the FWPCA and the Certificate, any claim seeking judgment in favor of the United States on the basis of the FWPCA or the Certificate must be one that is "brought upon an issue referable to arbitration" under a written arbitration agreement; (3) therefore, a stay of the third-party action must be granted. I disagree.
Once again, Steamship's argument is grounded in confusion as to the posture of a third-party claim pursuant to Federal Rule of Civil Procedure 14(c). As noted supra, the third-party complaint is based, not on the claim that Montauk's policy with Steamship was valid at the time of the March oil spill, but on Steamship's provision of a certificate of financial responsibility to the United States pursuant to the FWPCA. Whether Steamship in fact provided such a certificate, the validity of the certificate in light of Montauk's alleged misrepresentation, and when the termination of the undertaking represented by the certificate became effective, are not arbitrable issues under either the Certificate or the FWPCA. Therefore the third-party complaint is not an action "brought . . . upon an issue referable to arbitration under an agreement in writing for such arbitration." 9 U.S.C. § 3.
To be sure, both the FWPCA and the Certificate allow Steamship to assert the claim that the policy was void ab initio as a defense against the United States. And Steamship's agreement with Montauk provides that, as between those two parties, this question must be settled in arbitration. But the United States is not a party to the arbitration agreement. In Nederlandse Erts-Tankersmaatschappij, N.V. v. Isbrandtsen Co., Inc., 339 F.2d 440 (2d Cir. 1964), the Second Circuit Court of Appeals held that the FAA does not entitle a defendant who is not a party to written arbitration agreement to stay proceedings in federal court pending arbitration under an agreement between plaintiff and a third party. The court held that "granting the stay cannot be justified under the terms of the Arbitration Act. Defendants are not parties to the arbitration agreement. The issues of the present action are not referable to arbitration between the parties." 339 F.2d at 440. See also Sierra Rutile, Ltd. v. Katz, 937 F.2d 743, 750 (2d Cir. 1991) (reaffirming Nederlandse); Citrus Marketing Board v. J. Lauritzen A/S, et al., 943 F.2d 220, 224-25 (2d Cir. 1991) (same). Here, unlike in Nederlandse, the party seeking a stay is a signatory to an arbitration agreement. The logic of Nederslandse still applies, however, because the party against whom the stay is sought has not agreed to arbitrate or to defer its action while arbitration takes place between other parties. Sierra Rutile, 937 F.2d at 748, 750 (2d Cir. 1991) (FAA inapplicable where parties involved in action are not parties to an arbitration agreement under which issues are referable to arbitration); In re Talbott Big Foot, Inc., 887 F.2d 611, 614 (5th Cir. 1989) (mandatory stay provision of FAA does not apply to those not contractually bound by arbitration agreement); cf. Coastal (Bermuda) Ltd. v. E.W. Saybolt & Co., 761 F.2d 198, 203 n.6 (5th Cir. 1985). The purpose of the FAA is "to ensure judicial enforcement of privately made agreements to arbitrate." Dean Witter Reynolds, Inc., v. Byrd, 470 U.S. 213, 219, 84 L. Ed. 2d 158, 105 S. Ct. 1238 (1985). This goal is not advanced by forcing a litigant that has not agreed to arbitrate to delay the prosecution of its claims.
I conclude that the FAA does not mandate a stay of the third-party proceeding in this case.
As the Nederlandse court noted, even if the FAA does not entitle a party to a stay as a matter of law, this court has discretion to grant a stay pursuant to "the power inherent in every court to control the disposition of the cases on its docket with economy of time and effort for itself, for counsel, and for litigants." Nederlandse, 339 F.2d at 441 (quoting Landis v. North American Co., 299 U.S. 248, 81 L. Ed. 153, 57 S. Ct. 163 (1936) (Cardozo, J.)). Such a discretionary stay "may . . . be appropriate where the pending proceeding is an arbitration in which issues involved in the case may be determined." 339 F.2d at 441. Steamship appears to urge a discretionary stay on page six of its brief, in the interest of "judicial and administrative economy."
In Chang v. Lin, 824 F.2d 219 (2d Cir. 1987), the Court of Appeals for the Second Circuit considered whether a district court erred in granting a discretionary stay of claims under the Securities Act of 1933 pending the arbitration of state law claims. The court of appeals reversed the district court, holding that, at least where claims under the Securities Act of 1933 are concerned, "arbitration and federal litigation should proceed simultaneously absent compelling reasons to stay the litigation." 824 F.2d at 223. The court emphasized that "[a] plaintiff has the right to litigate a '33 Act claim in a federal court notwithstanding any arbitration agreement with the defendant. This right is substantially diminished if such claims must lay [sic] dormant until other claims arising out of the same series of events have been arbitrated." Id. at 222. See also Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 225, 84 L. Ed. 2d 158, 105 S. Ct. 1238 (1985) ("Once it is decided that the two proceedings are to go forward independently, the concern for speedy resolution suggests that neither should be delayed. While the impossibility of the lawyers being in two places at once may require some accommodation in scheduling, it seems to me that the heavy presumption should be that the arbitration and the lawsuit will each proceed in its normal course.") (White, J., concurring); Creative Securities Corp. v. Bear Stearns & Co., 671 F. Supp. 961 (S.D.N.Y. 1987); Castro v. Marine Midland Bank, N.A., 695 F. Supp. 1548 (S.D.N.Y. 1988). This reasoning is all the more compelling where, as here, the independent federal claim is brought on behalf of the United States, the United States is not a party to the arbitration agreement, and the claim involves the vindication of an public right of broad social importance: pollution-free waterways. See, e.g., Sam Reisfeld & Son Import Co. v. S.A. Eteco, 530 F.2d 679, 681 (5th Cir. 1976) (district court properly ordered that antitrust claims proceed to trial and that remaining claims be submitted to arbitration); Horne v. New England Patriots Football Club, Inc., 489 F. Supp. 465, 470 (D.Mass. 1980) ("Where the arbitration proceeding cannot dispose of or even deal with the [federal age] discrimination claims, and where the policy of vindicating an individual's independent statutory right of protection against age discrimination is implicated, . . . a stay of judicial proceedings is improper.") (footnote omitted). Because I find Steamship has offered no "compelling reason" that outweighs the "heavy presumption" against a stay, Chang, 824 F.2d at 223, its request for a stay is denied.
For the reasons stated above, Steamship's motion to dismiss the third-party complaint is hereby granted, to the extent that the complaint demands judgment in favor of the States of New York and New Jersey. The Clerk of the Court is hereby ordered to dismiss this portion of the third-party complaint without prejudice to Montauk's right to amend.
Steamship's motion to dismiss the third-party complaint is hereby denied, to the extent that the complaint demands judgment in favor of the United States. Steamship's motion to stay the third-party proceeding pending arbitration is hereby denied. All remaining discovery is to be completed by May 1, 1994. A motion to amend the pleadings must be filed on or before April 15, 1994. Any other motions must be filed on or before May 16, 1994. A joint pretrial order is due by June 1, 1994, and the case shall be ready for trial on June 2, 1994. Counsel are directed to review the court's Individual Rules regarding trial readiness.
DATED: New York, New York
April 4, 1994
Kimba M. Wood
United States District Judge