Opinion
Case No. 02-10180 (CB), Jointly Administered, 02 CV 8493(RPP)
December 10, 2003
Richard M. Ziccardi, Esq., Manuel A. Molina, Esq., Skoufalos, Llorca Ziccardi, LLP, New York, NY, for Appellant Praxis Energy Agents, S.A.
James H. Hohenstein, Francesca Morris, Holland Knight LLP, New York, NY, Counsel Appellants Allfirst Bank (f/k/a First National Bank of Maryland) and Wayland Investment Fund, L.L.C.
OPINION AND ORDER
Appellant Praxis Energy Agents, S.A. ("Praxis") appeals, pursuant to 28 U.S.C. § 158(a), the order of Hon. Cornelius Blackshear, United States Bankruptcy Judge, entered on August 1, 2000, granting the motion for summary judgment of the adversary defendants, Allfirst Bank ("Allfirst") and Wayland Investment Bank L.L.C. ("Wayland"), and denying the cross motion for summary judgment of Praxis.
I. Background
On or about January 15, 2002, Millenium Seacarriers, Inc. and its Millenium subsidiaries (collectively, "Millenium or "Debtors"), each of which owned a merchant vessel, commenced Chapter 11 proceedings by filing with the Bankruptcy Court voluntary petitions for relief under Chapter 11 of Title 11, United States Code, as amended. (W-1 at ¶ 6.)
Millenium issued notes in the principal amount of $100,000,000 to raise capital in 1998, which were exchanged for the Notes guaranteed by each of the vessel-owning subsidiaries, secured by First Preferred Ship Mortgages on each of the Millenium subsidiary vessels. The Notes were registered with the United States Securities and Exchange Commission ("SEC") pursuant to the Securities Act of 1933. Allfirst was the Indenture Trustee of the Notes pursuant to an Indenture dated July 15, 1998. (W-1, ¶ 3.).
Both the appellants and the appellees have filed records on appeal using the designation "D." For purpose of clarity, in this opinion the appellant Praxis's designated record on appeal will be referred to as "P-," and the appellees' (defendants') designated records on appeal will be the designations "W-."
On January 28, 2003, Wayland, the purchaser of first priority ship mortgage exchange notes issued by Millenium ("Notes"), filed a motion to lift the automatic stay or, in the alternative, to convert the proceedings to Chapter 7 or to appoint a Chapter 11 Trustee. (W-1 at ¶ 7.) Defendant Wayland had purchased a substantial number of the Notes in the secondary market between March 1999 and November 2001, and beneficially owned 85% of the Notes. (Id. ¶ 14.)
The Debtors filed an objection to Wayland's motion, and a hearing was held on Wayland's motion on February 13, 2002. (Id. at ¶ 7.) At the hearing, Wayland and the Debtors came to an agreement which was entered on the record and so ordered by the Bankruptcy Court at the hearing resolving Wayland's motion. (Id. at ¶ 8.) Pursuant to that agreement, on February 28, 2002, the Debtors filed an amended motion pursuant to Section 363 of the Bankruptcy Code to (a) sell substantially all the assets of the Debtors free and clear of liens, claims and interests; and (b) assume and assign contracts and leases in connection with such sale ("Sale Motion"). (Id. at ¶ 9.) The same day, the Bankruptcy Court granted the Sale Motion and established bidding, notice and objection procedures pursuant to which all objections to the Sale Motion were due by March 22, 2002. (Id. at ¶ 9.)
On March 22, 2002, Praxis filed objections to the Sale Motion and maritime lien claims based on Debtors' vessels' consumption of Praxis's bunkers "without any intention of compensating Praxis." (P-1 at ¶ 2.) Praxis's objection to the Sale Motion was supported by a declaration of Theodosios Kyriazis sworn to March 21, 2002, together with Exhibit A (demand for payment of certain invoices outstanding, plus late charges), and Exhibit B (Praxis's Standard Terms and Conditions for Sale of Marine Bunker Fuels). (Id.; P-7, Ex. M ("Kyriazis Decl."); P-7, Ex. M, Exs. A-B.)
On March 27, 2002, a hearing on the Sale Motion was held before the Bankruptcy Court ("Sale Hearing"). (W-1 at ¶ 11.) At the conclusion of that hearing, the Bankruptcy Court granted the Sale Motion and, ultimately, issued the Sale Order (P-2) which, inter alia, ordered the sale of the Debtors' vessels, subject to such lien and related claim, if any, held by the objecting lien party that the Bankruptcy Court "finds, after notice and a hearing, is superior in right to the lien and related claim of the Indenture Trustee. . . ." (Id. at 12-13.) A. The Adversary Proceeding
The Indenture Trustee (Allfirst) was the successful and only bidder for eighteen of the nineteen vessels. (W-1 at ¶ 11.) The bankrupt estate did not profit from the sales to the Indenture Trustee since the amount of each outstanding mortgage exceeded the purchase price for each vessel. A nineteenth vessel was sold for cash, but administrative expenses will exceed its sale price and the value of any remaining assets of the estate.
On April 4, 2002, Debtors, as ordered by Judge Blackshear, filed the complaint in the Adversary Proceeding to resolve the priority of the maritime liens asserted by the Indenture Trustees and by the parties who had objected to the sale. (W-1.) On April 25, 2002, Judge Blackshear signed a scheduling order setting deadlines for discovery and ordering that any motions for summary judgment in the Adversary Proceeding be filed by May 31, 2002. (W-2 at ¶ 6.) On May 31, 2002, appellees filed a motion for summary judgment with supporting memoranda of law (P-3; P-5) and a Local Civil Rule 56.1 Statement (P-4) on the maritime tort claims asserted by Praxis.
Praxis responded and cross moved for summary judgment on June 16, 2002 by filing a Local Civil Rule 56.1 Statement, which "incorporated" Appellees' Rule 56.1 Statement dated May 31, 2002, and set forth facts in support of its cross motion for summary judgment and in opposition to the appellees' motion for summary judgment (P-6), as well as an affidavit of Manuel A. Molina dated June 11, 2002 ("Molina Aff"), with Exs. A-M (P-7), and a supporting memorandum of law (P-8). On June 19, 2002, Appellees filed a further affidavit in support of its motion (P-9), a reply memorandum (P-10), and a reply Local Rule 56.1 statement (P-11). On July 10, 2002, Judge Blackshear filed an opinion granting the appellees' summary judgment motion. (P-12.) On July 30, 2002, Judge Blackshear filed an order granting appellees' motion for summary judgment and denying Praxis's cross motion. (P-13.)
B. The Motions Before the Bankruptcy Court
The Appellees' motion for summary judgment (P-3) was based on a Local Rule 56.1 statement (P-4), which demonstrated (1) that Praxis's objection to the Sale Motion showed that Praxis was seeking payment for its invoices (plus late charges) for bunkers supplied to the Debtors' vessels in places outside the United States, and (2) that All first held mortgages which constituted duly registered foreign preferred ship mortgage liens on each of the Millenium vessels which Praxis is seeking payment for delivery of bunkers. (P-4; P-1 — Kyriazis Decl., Ex. A; P-4 at ¶¶ 1-18.) The principal arguments in Allfirst's memorandum of law were (1) that the bunkers were necessaries, since they were supplied to Debtors' vessels outside the United States, Praxis's claims for liens were subordinate to Allfirst's preferred ship mortgage liens (P-5 at 11), (2) that Praxis objection failed to state a claim for maritime tort; and (3) that Praxis's supply of fuel bankers did not create a bailment. (P-8.)
With the exception of the M/V DINA, which claim Praxis has withdrawn. (P-8 at 5 n. 1.)
546 U.S.C. § 31326(b)(2); Cargill Inc. v. Christianssands, et al., 876 F. Supp. 508 (S.D.N.Y. 1995); George L. Varian Rank and Priority of Maritime Liens, 47 Tul. L.Rev. 751, 753 (1979); Mobil Sales Supply Corp. v. Panamax Venus, 804 F.2d 541, 542-543 (9th Cir. 1986) (decided under 46 U.S.C. § 951, allowing a priority for "necessaries performed and supplied in the United States," which was later replaced by 46 U.S.C. § 31326(b)(2), allowing priority only for "necessaries provided in the United States").
Praxis's answering memorandum (P-3; P-4; P-5) did not dispute that the Appellees had valid foreign preferred mortgage liens. It argued — based on the material facts added by its answering Local Rule 56.1 statement (P-6) and supporting documents, including Clause 8.06 of its General Terms and Conditions of Sale of Marine Bunker Fuels (P-7, Ex. C at 2) — that it had preferred maritime liens against the Millenium vessels based not on its supply of necessaries to the vessels but on maritime torts since those vessels consumed its bunkers without paying for them, thereby converting the bunkers, 46 U.S.C. § 31301(5)(B), and that Appellees' preferred ship mortgage liens are subordinate to maritime tort liens.
Praxis also did not dispute (1) the supply of the bunkers did not occur outside the United States or (2) the validity of the ship mortgages on each of the vessels. (P-6 at ¶ 1 ("Praxis hereby incorporates by reference Defendants' Rule 56.1 Statement which Defendants submitted in support of their motion for summary judgment.").
In its memorandum arguing that the Debtors' vessels had converted its property, Praxis cited The Lydia, 1 F.2d 18, 23 (2d Cir. 1924); Thypin Steel Co. v. Certain Bills of Lading, 1998 U.S. Dist. Lexis 20212, at *17-18 (S.D.N.Y. Dec. 28, 1998), aff'd sub nom., Thypin Steel Co. v. Asoma Corporation, 215 F.3d 273 (2d Cir. 2000); and Thyssen, Inc. v. S.S. Rio Capaya, 1998 A.M.C. 1878 (M.D. Fla. 1988). (P-8 at 7.)
Praxis also relied on the depositions of Captain Andreas Androulidakis and Sunil Damodar, who served as officers of the Debtors in 2001-2002, to claim that the Debtors had no good faith basis to believe that Debtors could pay for the bunkers delivered to them in the December-January period. (P-7, Ex. A, I.)
Allfirst's Appellees' reply papers (P-9; P-10; P-11) disputed Debtors' lack of good faith negotiations and attached more pages of the Androulidakis and Damodar depositions and pages from the deposition of William K. S. Williams, an officer of Debtors (P-9, Exs. A-C) to argue that the Debtors had acquired Praxis's bunkers in good faith and had paid creditors, including Praxis's right up to the very morning they filed for bankruptcy. (P-7, Ex. L at 50-52; P-9, Ex. B at 26-31.) Appellees then argued that, as a matter of law, Praxis's supply of fuel bunkers to Debtors' vessels did not create a bailment but rather delivery of the bunkers was pursuant to a contract for sale, citing In re Sitkin Smelting Refining, Inc., 648 F.2d 252, 254 (5th Cir. 1981); Guidry v. Continental Oil Co., 350 F.2d 342, 345 (5th Cir. 1965); and Dryden v. Mick State Industries, et al., 66 F.2d 950, 953 (8th Cir. 1933).
C. The Decision of the Bankruptcy Court
Judge Blackshear's memorandum decision of July 10, 2002 acknowledges that Praxis is making a claim for conversion but found that:
The parties were dealing with each other pursuant to a contract for the sale of blinkers. The bunkers were provided to the Debtors pursuant to that contract. Apparently, Debtors have failed to pay for the bunkers pursuant to the contract. Praxis's remedy, therefore, is not in tort, it is in contract, and as such, its lien occupies a positions subordinate to that of Defendants. Conversion occurs when a defendant exercises unauthorized dominion over personal property in interference with a plaintiffs legal title or superior right of possession. Furthermore, as the damages are merely being sought for breach of contract, the claim of conversation is unsubstantiated because Praxis does not allege any unlawful act on the part of the Debtors.
The remaining arguments made by Praxis are summarily overruled. . . . For the foregoing reasons Defendant's motion is granted in its entirety.
(P-12 at ¶¶ 3-4 (citations omitted).)
III. Discussion
Although the Court does not subscribe to some of the reasoning articulated in Judge Blackshear's opinion, it does find that its conclusions of law and findings of fact do not constitute reversible error. The Court reviews the Bankruptcy Court's conclusions of law de novo and the findings of fact under a clearly erroneous standard. F.R.Bankr.P. 8013; In re Ionosphere Clubs, Inc., 922 F.2d 984, 988-89 (2d Cir. 1990).
Praxis's position is untenable. Bunker fuel is fuel that is used to power a ship from one port to another. Here, the bunker fuel was sold to Millenium and delivered to its vessels by Praxis with full knowledge and the expectation that it would be consumed by the vessel beginning shortly after delivery. The agreement between the parties called for payment in thirty or sixty days from delivery. (See P-7, Ex. L at 24.) Agreements to sell bunker fuel on those terms are inconsistent with a bailment relationship. Bailment contemplates that the person who receives delivery of goods or personal property will redeliver the goods to the bailor or otherwise deal with the property according to the deliverer's orders. Black's Law Dictionary 136-37 (7th ed. 1999) (defining bailment).
"Historically, bunker fuels have meant only ship fuels/' Glossary Energy Information Administration, Annual Energy Review 358 (2002).
The Second Circuit described the elements of the bailor/bailee relationship in Seaboard Sand Gravel Corp. v. Moran Towing Corp., as follows:
While many of the adjudicated cases refer to a bailment as a contractual relation, the statement is not entirely accurate. The relations may be created by operation of law. It is the element of lawful possession and the duty to account for the thing as the property of another, that creates the bailment, whether such possession results from contract or is otherwise lawfully obtained. It makes no difference whether the thing is intrusted to a person by the owner or by another. Taking lawful possession without present intent to appropriate creates a bailment.154 F.2d 399, 402 (2d Cir. 1946) (finding tug company in possession of plaintiff's barge responsible as bailee for negligent acts of terminal that occurred when loading ballast onto plaintiffs barge).
Here, Praxis, the deliverer of marine bunker fuel to the Millenium vessels, expected those fuels to be consumed after delivery, and the masters of Millenium vessels to whom the bunkers were delivered had a present intent to consume those bunkers starting upon delivery. Thus, Millenium and its vessels had the "present intent to appropriate" the fuel oil at the time of order and delivery, and Praxis expected Millenium's vessels to "appropriate the fuel oil" at the time of order and delivery. Accordingly, by operation of law, the relationship of Praxis and Millenium or Millenium's vessels was not one of bailor and bailee.
Nor does the language of Clause 8.06 of Praxis General Terms and Conditions for the Sale of Marine Bunker Fuels create a bailment based on the agreement between the parties. Here, each of the Millenium vessels ordered the fuel oil from Praxis, and the fuel was delivered for Praxis and invoiced by Praxis at time of delivery. (P-7, Ex. B) Indeed, the General Terms and Conditions are "for the sale of marine bunker fuels," not for the delivery of those bunker fuels. Under these facts, a sale took place on delivery and invoicing, and the Court will not honor a bailment provision such as Clause 8.06.
"[I]n recent times, the real or supposed needs and exigencies of business and the ingenuity of business men and of their lawyers have evolved a class of contracts which have the earmarks of both sale contracts and factorage contracts." Dryden v. Michigan State Industries, et al., 66 F.2d 950, 953 (8th Cir. 1933) (citations omitted).
In Guidry v. Continental Oil Company, the Fifth Circuit was confronted with a similar type of contract between a gasoline supplier and service station operator entitled, "Supplemental Bailment Agreement" on Continental's printed forms. Guidry, 350 F.2d at 343. By the terms of the "bailment," the plaintiff agreed "to hold and care for the gas delivered hereunder without compensation as the property of Conoco." Id. at 345. The Fifth Circuit disregarded the bailment provision, stating:
While the purchase is effected when and as the Bailee delivers gasoline to his customers from the gasoline storage tanks, "title passing from Conoco to Bailee at the meters on the pump," it is a title effectively passed. We find "in the contracts themselves and their operation plain provision for purchases by the so-called agents which necessarily made the contracts as to an indefinite amount of the consignments to them, contracts of sale rather than of agency."350 F.2d at 345 (citing United States v. General Electric Co., 272 U.S. 476, 487 (1926); Dr. Miles Medical Co. v. John D. Park Sons, 220 U.S. 373 (1911)).
The Guidry court went on to state, "[i]n distinguishing bailments from sales, the test of a bailment is that the identical thing is to be returned in the same or some altered form; if another thing of equal value is to be returned, the transaction is a sale." Guidry, 350 F.2d at 345 n. 10 (citing Blacks Law Dictionary 185 (3d Ed. 1983)); see also, In re Sitkin Smelting Refining, Inc., 648 F.2d 252, 254 (5th Cir. 1981) (citing cases) ("unconditional promise to purchase and pay indicates a sale rather than a bailment"). Accordingly, Judge Blackshear's conclusion that Praxis provided fuel to the Debtors under a contract of sale was correct.
Secondly, Praxis has not shown that any maritime conversion occurred. In Evergreen Marine Corp. v. Six Consignments of Frozen Scallops, the court gave a definition of conversion: "In the admiralty context, as elsewhere, conversion is simply an intentional and wrongful exercise of dominion or control over a chattel, which seriously interferes with the owner's right in the chattel." 4 F.3d 90, 94 (1st Cir. 1993); See also Rolls Royce Motor Cars. Inc. v. Schudroff. 929 F. Supp. 117, 124 (S.D.N.Y. 1996) ("Conversion occurs when a defendant exercises unauthorized dominion over personal property in interference with plaintiffs legal title or superior right to possession"). Here, regardless of the validity of Praxis's General Terms and Conditions for the Sale of Marine Bunker Fuels, there was nothing wrongful or unauthorized in the vessels' or Millenium's exercise of dominion or control over the fuel oil. In consuming the fuel oil, each of the vessels did what Praxis expected it to do.
Praxis had had a right to demand cash on delivery. Instead, Praxis relinquished that right and agreed to thirty or sixty day payment terms as shown by the deposition of Mr. Kyriazis (P-7, Ex. L at 24), and by the schedule of invoices owed (P-7, Ex. B). In agreeing to credit terms allowing thirty days for payment, Praxis assented to the consumption of the bunker fuel at least for that period. (P-7, Ex. A at 152, 154-156; P-7, Ex. B.) Praxis also had the right to arrest those vessels whose invoices were overdue. (P-6 at ¶ 27.) It neither demanded cash on delivery or arrested the vessels. Under these conditions, Praxis consented to the bunkers being consumed.
Furthermore, as Judge Blackshear's opinion pointed out, Praxis's claim is calculated on the contractual amounts due for the bunkers under the terms of the invoices, including late charges. (P-12 at 3; P-7, Ex. M., Ex. A) Since Praxis's damages claim is not based on the value of the chattel at time of loss but, rather, is based on the terms of the contract of sale, Praxis's cross motion does not state a claim in tort. Rolls-Royce, 929 F. Supp. at 123 (S.D.N.Y. 1999); Peters Griffin Woodwork, Inc. v. WCSC Inc., 452 N.Y.S.2d 599, 600 (N.Y.App.Div. 1st Dep't 1982).
Moreover, since Praxis does not allege any unlawful or wrongful act by the Debtors' vessels, Praxis has not stated a claim based on the conversion of its property by the vessels or their masters. Praxis argues that in The Lydia, 1 F.2d 18 (2d Cir. 1924), the Second Circuit held that the vessels may be liable for conversion for wrongfully consuming bunkers. In The Lydia, the coal bunkers were delivered pursuant to a contract between the supplier (the Hugh Company) and the owner or master, but the ship's crew refused to accept the receipt for the bunkers and sailed away from the port with the bunkers and the cargo. Id. at 23. The Hugh Company's assignee sued the Lydia for the bunkers. The court found that when the Lydia refused receipt for bunker coal, "it refused even to acknowledge the character of that shipment or lading. It used its bunkers merely as an excuse for getting the coal on board and then ran away with it." Id. Under the circumstances, the action of the crew constituted a wrongful act and a conversion. Id. In view of the Lydia's refusal to accept the delivery invoice, the contract for supply was frustrated and the Lydia did not obtain title to the bunkers. Id. Praxis has not alleged or shown-that any Millenium vessel or its crew committed wrongful acts similar to those of the crew of The Lydia.
Praxis also cites Thyssen, Inc. v. S.S. Rio Capaya, as standing for the proposition that a contract between a third party and a ship owner can give rise to a bailment between the third party and the ship itself. InThyssen, however, the contract was not a contract of sale but a lease of containers for use on the vessel. 1988 A.M.C. at 1879-80. Accordingly, when the lease ended and the vessel did not return the containers, the master of the vessel was held to be a bailee and liable for conversion. Id. at 1880. The lease, however, required the return of the containers at the end of the lease, whereas the contract for sale of bunker fuels between Praxis and Millenium did not require the return of the bunkers. Both parties expected the vessel to consume them. Other cases cited by Praxis holding that the owner of goods damaged by dereliction of a common carrier has the option of bringing an action either in contract or in tort, are irrelevant to Praxis's claims for bunker fuel since the bunker fuel is not cargo. See Associated Metals Minerals Corp. v. Alexander Unity M/V, 41 F.3d 1007 (3d Cir. 1995).
Although Praxis also cites Thypin Steel Co., that case dealt with a conversion by a third party, not the vessel. 1998 U.S. Dist. Lexis at * 17-18.
Praxis argues that the vessel's consumption of the bunkers was wrongful because of the Debtors' documented inability to pay; that Debtors lacked any present or foreseeable ability to honor their financial obligations to Praxis; that Debtors did not have a good faith basis to believe that their cash flow would improve sufficiently to enable Debtors to pay Praxis. All those arguments are addressed to the conduct of Millenium's management in conferences, telephone calls or correspondence with Praxis. They constitute allegations of bad faith negotiations with Praxis, a failure to disclose facts relevant to the Debtors' true financial condition. Appellees contest plaintiffs' allegations pertaining to Debtors' conduct in dealing with Praxis and show that payments were made to Praxis for bunkers in December and January.
The acts set forth by Praxis are evidence that bear on the credibility of Debtors' actions with respect to Praxis. However, they do not constitute a maritime tort, which must satisfy conditions of both location on navigable waters and connection with maritime activity. Jerome B. Grubart, Inc. v. Great Lakes Drudge and Dock Co., 513 U.S. 527, 534 (1995). The acts of Debtors' management did not take place on navigable waters, and Praxis's claim that Clause 806 of the General Terms and Conditions required the person in possession of its fuel to hold it as bailee until the price was received by Praxis is inconsistent with marine customs and inconsistent with the intent of the parties who negotiated thirty-day and sixty-day payment terms to enable the vessels to earn income by using the fuel. Accordingly, Praxis's cross motion fails to set forth a claim for a maritime tort.
Since Praxis does not dispute that (1) the unpaid invoices for fuel oil involve deliveries to Debtors' vessels in foreign ports, and (2) the priority of the appellees' ship mortgage claims over any claims Praxis may have based in its provision of necessaries in those ports, the findings of fact and conclusions of law of the Bankruptcy Judge in his opinion dated July 10, 2002, and in his order of August 1, 2002, are affirmed and the appeal of Praxis is dismissed.