The opinion of the court was delivered by: Richard J. Sullivan, District Judge
Defendant Transfield ER Cape Ltd. ("Transfield") moves for security for its counterclaim in this maritime action pursuant to Rule E(7) of the Supplemental Rules for Certain Admiralty and Maritime Claims of the Federal Rules of Civil Procedure ("Supplemental Rules").*fn1 For the following reasons, the motion is granted.
Plaintiff Front Carriers Ltd. ("FCL") alleges that Transfield breached a contract of affreightment (the "COA") with FCL, wherein FCL agreed to employ some of Transfield's vessels. The matter is subject to arbitration in Paris, and concerns questions of French law. FCL commenced this action seeking security for its claims in the Paris arbitration. On July 11, 2007, the Honorable Kenneth M. Karas, District Judge, issued an ex parte order, pursuant to Rule B of the Supplemental Rules, authorizing the attachment of up to $14,321,644.30 of Transfield's assets. Subsequently, on September 13, 2007, the undersigned issued an amended order, pursuant to Rule B of the Supplemental Rules, authorizing the attachment of up to $15,101,338.00 of Transfield's assets. During oral argument regarding Transfield's motion, FCL represented to this Court that it had attached assets of defendants up to the full amount permitted by the Court.
On October 5, 2007, Transfield filed an answer and a counterclaim against FCL, asserting that FCL breached the COA, and seeking damages and countersecurity in the amount of $5,210,280.00. (Answer at 11.) Specifically, Transfield alleges that FCL's failure to employ Transfield's vessels breached the COA, and forced Transfield to obtain "alternative employment" for its vessels in locations other than those specified under the COA. (Counterclaim ¶ 6.) It is undisputed that the daily payments to Transfield under the "alternative" shipping contracts were significantly higher than they would have been under the COA. (Id.) Nevertheless, Transfield asserts that, upon FCL's breach of the COA, Transfield lost the opportunity to complete certain "positioning voyages" pursuant to the COA - that is, voyages terminating in Northern European ports, which, following their completion, would "enable [Transfield] . . . to charter the vessels [in] the more lucrative North Atlantic market." (Id.; see Purcell Decl. ¶ 9.) Thus, because FCL's breach of the COA allegedly denied Transfield its expected opportunity to complete "positioning voyages", Transfield now seeks to recover lost profits in the amount equal to what it would have earned by chartering its vessels in the North Atlantic market upon completion of the voyages under the COA.
Rule E(7)(a) provides that:
When a person who has given security for damages in the original action asserts a counterclaim that arises from the transaction or occurrence that is the subject of the original action, a plaintiff for whose benefit the security has been given must give security for damages demanded in the counterclaim unless the court for cause shown, directs otherwise. "[T]he final clause of the quoted language makes clear that the trial court possesses broad discretion in deciding whether to order countersecurity." Result Shipping Co. v. Ferruzzi Trading USA Inc., 56 F.3d 394, 399 (2d Cir. 1995). "In exercising this discretion, the court should be guided primarily by two principles": (1) the purpose of Rule E(7), which is "to place the parties on an equality as regards security"; and (2) the countervailing need to avoid "impos[ing] burdensome costs on a plaintiff that might prevent it from bringing suit." Id. at 399-400 (internal quotation marks and citations omitted). Notably, the first principle "usually favors granting countersecurity when a defendant whose property has been attached asserts non-frivolous counterclaims growing out of the same transaction, especially when the counterclaimant could have proceeded in rem or quasi in rem in an independent suit." Id. at 399 (emphasis added).
Here, FCL concedes that Transfield has satisfied the elements of Rule E(7) - namely, that Transfield has asserted a counterclaim arising out of the same transaction as the initial complaint, and has previously given security in this action. See Rule E(7). Nevertheless, FCL argues that Transfield is not entitled to countersecurity because its counterclaim cannot, as a matter of law, support an award of damages under French law. Specifically, FCL asserts that, because Transfield "has introduced no proof" that its alleged damages relating to "positioning voyages" were foreseeable at the time the parties entered into the COA, Transfield's "damages claim" is "speculative," and, thus, Transfield is "not entitled to counter-security." (FCL's Opp. Br. at 2.)
The Court rejects FCL's argument because it calls for this Court to conduct an intensive inquiry into the merits of Transfield's counterclaim - an inquiry that is contrary to the relevant authority in this Circuit, and in other circuits, applying Rule E(7). The Rule E(7) standard set forth by the Second Circuit in Result Shipping provides for a severely limited inquiry into the merits of the counterclaim at issue. Specifically, with regard to the merits of a movant's counterclaim, the court in Result Shipping simply stated that Rule E(7) "favors granting countersecurity when a defendant . . . asserts non-frivolous counterclaims . . . ." Result Shipping, 56 F.3d at 399.
Similarly, the overwhelming weight of authority among courts in this Circuit, and in other circuits, favors the view that, with regard to the merits of the movant's counterclaim, the court should do no more than screen out "totally frivolous claims" by the counterclaimant upon review of a motion under Rule E(7). Finecom Shipping Ltd. v. Multi Trade Enterp. AG, No. 05 Civ. 6695 (GEL), 2005 WL 2838611, at *1 (S.D.N.Y. Oct. 25, 2005) (Lynch, J.); see Starboard Venture Shipping, Inc. v. Casinomar Transp., Inc., No. 93 Civ. 0644 (SS), 1993 WL 464686, at *6 (S .D.N.Y. Nov. 9, 1993) ("[C]courts have considered whether counterclaims might be frivolous before deciding to order countersecurity.") (Sotomayor, J.); see also Afram Lines Int'l, Inc. v. M/V Capetan Yiannis, 905 F.2d 347, 350 (11th Cir. 1990) ("[T]he court should consider, if applicable, . . . the extent to which the counterclaim may be deemed frivolous.") (internal citations omitted); Titan Nav., Inc. v. Timsco, Inc., 808 F.2d 400, 404 (5th Cir. 1987) ("[T]he court should not require countersecurity where the counterclaim is frivolous or so lacking in merit that the court can only conclude that the counterclaim was advanced solely to secure a negotiating advantage over the complainant."). As guided by the Second Circuit's holding in Result Shipping, this Court adopts the majority view and, thus, joins in Judge Lynch's observation - in a case where he found a counterclaim to be "non-frivolous" and ordered security under Rule E(7) - that
[A] court's ability to understand the merits of a dispute at an early stage is limited, and courts should be reluctant to prejudge the merits of claims based essentially on the pleadings and a sparse record consisting of a few documents, in advance of any discovery. 2005 WL 2838611, at *1.
Here, FCL asserts that Transfield should be denied countersecurity on the ground that it "has failed to sufficiently support its counter-claim in the following respects": (1) failing "to attach any documents" to the counterclaim; (2) submitting a declaration "executed by counsel, not Transfield"; (3) failing to submit a "declaration from a broker or market expert assessing the rates [in the North Atlantic shipping market] at the time of [FCL's] alleged breach"; and (4) failing to proffer testimony from an "expert on French law . . . to assess issues under the law." (FCL's Opp. Br. at 8.) These assertions make clear that FCL seeks to have this Court engage in an intensive review of the merits of Transfield's counterclaim - an inquiry that, as discussed supra, has no basis in the text of Rule E(7) or relevant case law in this Circuit. Accordingly, the Court declines to prejudge the merits of Transfield's claim for damages under French law, at least where the parties have not engaged in any discovery and the Court has only a ...