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Sea Shipping Inc., Mason Finance Corporation, and Ocean Shipping, Inc v. Half Moon Shipping

January 26, 2012

SEA SHIPPING INC., MASON FINANCE CORPORATION, AND OCEAN SHIPPING, INC.,
PETITIONERS-COUNTERCLAIM RESPONDENTS,
v.
HALF MOON SHIPPING, LLC,
RESPONDENTS-COUNTERCLAIM PETITIONERS.



The opinion of the court was delivered by: Paul A. Engelmayer, District Judge:

OPINION & ORDER

Petitioners Sea Shipping, Inc. ("Sea Shipping"), Mason Finance Corporation ("Mason"), and Ocean Shipping, Inc. ("Ocean Shipping") (together, "Petitioners") filed this petition to confirm an arbitration award pursuant to § 9 of the Federal Arbitration Act, 9 U.S.C. § 9 ("FAA" or the "Act"). Respondent Half Moon Shipping, LLC ("Half Moon") has opposed that petition and cross-moved to vacate the arbitration award pursuant to Article V of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 21 U.S.T. 2517, 330 U.N.T.S. 38 (Dec. 29, 1970) ("New York Convention" or the "Convention"), and § 10(a)(3) and § 10(a)(4) of the FAA. For the following reasons, the petition to confirm the arbitration award is granted, and Half Moon's petition to vacate the award is denied.

BACKGROUND*fn1

Sea Shipping and Ocean Shipping are companies incorporated in the Marshall Islands. Mason is a Liberian corporation. Half Moon is a limited liability company that exists under the laws of Delaware and with a principal place of business in Connecticut.

In April 2003, the parties agreed to purchase, own, and operate two second-hand ocean going tanker vessels, the M/T Hawaiian Star ("Star Tanker") and the M/T Hawaiian Leader ("Leader Tanker"). To facilitate this project, the parties formed two corporations under the laws of the Marshall Islands. On April 23, 2003, Sea Shipping and Mason entered into a shareholders' agreement with Half Moon with respect to their holdings in Star Transport, Inc. ("Star Corp."), one of the corporations formed for the project. On the same date, Ocean Shipping and Mason entered into a separate shareholders' agreement with Half Moon with respect to their holdings in Leader Transport, Inc. ("Leader Corp."), the second corporation formed for the project.

The two shareholders' agreements are, for all relevant purposes, identical. As relevant here, each company issued 500 common shares with an ownership structure as follows: ownership of Star Corp. was divided among Sea Shipping (24%), Mason (52%), and Half Moon (24%); ownership of Leader Corp. was divided among Ocean Shipping (24%), Mason (52%), and Half Moon (24%). See Aff. of Bruce Paulsen in Supp. of Cross-Mot. to Vacate, Ex. A at 1 (Dkt. 9) ("Star Agreement"); Paulsen Aff. Ex. B at 1 ("Leader Agreement"). The agreements provided that each company was to "engage in the trade of and owning and operating the [v]essel and chartering or otherwise letting or hiring the [v]essel for reward." Id. § 1(a). Both agreements provide that the conduct of business -- including, inter alia, any sale of material assets or any expenditure exceeding $300,000 -- requires approval by the holders of 76% of the shares of the company. Id. § 2.

Section 4 of each agreement provides that any additional funds required by the company "from time to time shall be procured by borrowing from the [s]hareholders on a pro rata basis." Id. § 4(c). Further, in the event that the company required additional funding and a shareholder failed to loan its pro rata share of the needed funds, such a shareholder would be considered in default. See id. § 4(d). In the event of such a default, both agreements authorize any non-defaulting shareholder to advance the shortfall (or its pro rata share of the shortfall), with such an advance "considered an open account demand loan to the defaulting [s]hareholder bearing interest at a monthly default rate of 2% for each month" until the loan is paid. Id. § 4(e)--(f). Any assumption of debt by either Star Corp. or Leader Corp. pursuant to section 4 -- i.e., by means of shareholder loans -- does not require that the holders of 76% of the company's shares approve the transaction, as is required for all other debts assumed by either company. Id. § 2(b)(xi).

In addition, the shareholders' agreements provide that any controversy arising out of them will be resolved by arbitration in New York City, N.Y., in accordance with the rules of the Society of Maritime Arbitrators ("SMA"). Id. § 16. The SMA's rules, in turn, provide for the consolidation of contract disputes which (1) involve common questions of fact or law, or (2) arise from the same transaction.

In July 2006, more than three years after the execution of the two shareholders' agreements, the parties sold the Leader Tanker. In September 2006, the parties purchased another tanker, the M/T Sea Sapphire ("Sapphire Tanker"), in part funded by accumulated profits from the operation of Star Tanker and Leader Tanker. The parties formed a third Marshall Island corporation, Sapphire Transport, Inc. ("Sapphire Corp.") which was owned in equal parts by Star Corp. and Leader Corp., and which took full ownership of the Sapphire Tanker. In February 2007, the parties sold the Star Tanker.

In May 2007, Sea Shipping, Mason, and Half Moon sold their shares in Star Corp. to Leader Corp. As a result of that sale, Leader Corp. gained full ownership of Sapphire Corp..

Also in May 2007, Sea Shipping, Ocean Shipping, and Mason approved a request by Half Moon to redeem its shares in Star Corp. and to take a cash payout equal to its proportionate share of the company's accumulated profits. This transaction benefited Half Moon, in that the company experienced no adverse tax consequences from redeeming its Star Corp. stock, and it maintained its 24% ownership interest in Leader Corp., and accordingly, in Sapphire Corp. A stock redemption agreement between Star Corp. and Half Moon was executed by the parties in May 2007, and Half Moon received its proportionate share of Star Corp.'s accumulated profits, which amounted to approximately $4.38 million. The parties agree that in June 2007, following Half Moon's stock redemption, the ownership structure of Leader Corp. remained the same as at the company's formation: Ocean Shipping held 24%, Mason held 52%, and Half Moon held 24%. See Arbitration Award,Paulsen Aff. Ex. H at 3 ("Award").

Following the sale of Star Corp. to Leader and the redemption of Half Moon's shares in Star Corp., Sapphire Tanker required an estimated $4 million in additional funds to support its continued operation. Pursuant to the Leader shareholders' agreement, which directed that such funds be loaned to the company by its shareholders, Petitioners advanced a loan of $3 million -- approximately its pro rata share of the needed funds -- to Sapphire Corp. Later, in May 2009 when Sapphire Corp. required additional funding, Petitioners requested that Half Moon contribute its pro rata share of the previous loan, or $960,000. However, claiming it was not legally bound to fund Sapphire Corp., Half Moon declined to make the requested loan.

On September 17, 2009, the Petitioners demanded arbitration with respect to claims arising out of the Leader shareholders' agreement, and Half Moon's refusal to make the requested loan to Sapphire Corp. On the same date, Petitioners appointed an arbitrator. On October 3, 2009, Half Moon appointed its arbitrator, and on October 29, 2009, the two arbitrators appointed the third arbitrator.

In early 2010, a second claim arose, in which Half Moon was alleged to have defaulted on its obligations. Due to diminishing market prospects, Leader's majority shareholder decided to sell the Sapphire Tanker. Mason approached the other shareholders, including Half Moon, seeking approval to sell the ship at a substantial loss. Half Moon asserted that it had abandoned its shares in Leader Corp., and in turn, was not liable for losses arising out of the operation of Sapphire Corp. The Sapphire Tanker was sold at a loss, with $7.93 million outstanding on its mortgage. The mortgage had been guaranteed by both Star Corp. and Leader Corp. To satisfy the mortgagee, Petitioners loaned Sapphire Corp. an additional $13.15 million. Petitioners alleged that the shareholders' agreement required Half Moon to contribute $2,196,000 -- its pro rata share of the amount needed to satisfy the mortgage. Half Moon maintained that it was not liable for any part of the balance due on the mortgage guaranteed by Leader Corp.

Arbitration hearings were held on February 9, 2010 and October 11, 2010, after which the parties each submitted post-hearing briefs. The arbitration addressed both Petitioners' claim relating to the $960,000 that they claimed Half Moon had been obligated to contribute in May 2009, and the $2,196,000 that they claimed Half Moon has been obligated to contribute in 2010.

Petitioners alleged that, pursuant to section 4 of the Leader shareholders' agreement, the shareholders, including Half Moon, had committed to lend money on a pro rata basis to Leader Corp. when it required additional funding. Petitioners further alleged that pursuant to this commitment, Half Moon had been obligated to contribute its 24% share (1) in 2009, when the company required $4 million to cover anticipated operating costs, and (2) in 2010, when the company sold the Sapphire Tanker at a loss and required an infusion of $13.15 million to satisfy the outstanding mortgage on the tanker. Petitioners asserted that Half Moon had failed to make either of the contributions and was therefore in default.

Half Moon disputed that claim. It argued that clause 4 of the Leader shareholder agreement did not require all shareholders to lend money to the company whenever it required additional funds. Rather, Half Moon claimed that if Leader Corp. sought a loan from its shareholders, each shareholder was entitled to consider the risks of such a loan and decide for itself whether to make the loan. Thus, Half Moon argued, the requirements of clause 4 were triggered only if a shareholder committed to making such a loan, and later defaulted on that commitment. Half Moon separately argued that the Stock Sale and Purchase Agreement that it had ...


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