3rd Circuit Court of Appeals Deals US Government a Blow in Finding Ship Owners’ Statutory and Contract Claims for Damages to Proceed Before US District Court

On November 16, 2021, the Third Circuit Court of Appeals issued a precedential landmark ruling in Nederland Shipping Corporation v. United States of America, No. 20-2269 reversing the district court’s dismissal of damage claims against the government for lack of subject matter jurisdiction and remanding the matter to the U.S. District Court for the District of Delaware for further proceedings.  The NEDERLAND REEFER (the “Vessel”) arrived at the Port of Wilmington, Delaware on February 20, 2019 to discharge a cargo of refrigerated bananas from Chile. Following a shipboard inspection on February 21-22, 2019; a US Coast Guard Captain of the Port Notice Letter dated February 22, 2019 was issued advising that the Vessel’s departure clearance was being withheld and the Vessel was being detained pursuant to 33 U.S.C. § 1908(e) of the Act to Prevent Pollution from Ships (APPS – 33 U.S.C. § 1901, et seq.).  The Owner and Operator of the Vessel acceded to the government’s demands for an “Agreement on Security” to get the vessel back in service and provided, inter alia, a surety bond totaling $1,000,000 which was answerable for any claims in rem against the Vessel; agreed to continue to employ, house, feed, insure and pay total wages of the thirteen (13) detained sailors; agreed to waive personal jurisdiction defenses; and agreed the security would stand in place of the res.  In exchange, the United States agreed to allow the Vessel to depart and agreed to not arrest, seize, or attach the Vessel or any other property of the ship owner or operator.

Despite the Owner and Operator promptly meeting all the obligations in the Agreement on Security, the government unreasonably delayed the release of the Vessel for thirty-six (36) days.  Nederland Shipping Corporation (“Nederland”) commenced an action in the District of Delaware seeking to hold the government liable for breach of the Agreement on Security and seeking an award for damages as set out at 33 U.S.C. § 1904(h), which provides: “A ship unreasonably detained or delayed by the Secretary acting under the authority of this chapter is entitled to compensation for any loss or damage suffered thereby.”

The government moved to dismiss the lawsuit for lack of subject matter jurisdiction.  District Judge Andrews agreed, ruling that there was no subject matter jurisdiction over the dispute, because the Agreement on Security was not a maritime contract and 33 U.S.C. 1904(h) did not include a waiver of sovereign immunity.  The district court further found that any cause of action, whether brought as a breach of contract or statutory claim must be brought in the Federal Court of Claims pursuant to the Tucker Act. Nederland Shipping Corp. v. United States, 456 F. Supp. 3d 584, 2020 U.S. Dist. LEXIS 76072, 2020 WL 1989166 (D. Del. April 27, 2020).

Nederland appealed the decision to the Third Circuit Court of Appeals.  In reversing the district court, the Third Circuit succinctly summarized the issues: “The fight over the contract claim is thus whether it is a maritime claim and so properly subject to admiralty jurisdiction. As to the APPS statutory claim, the fight is whether 33 U.S.C. § 1904(h) waives sovereign immunity.” p. 10.  The Third Circuit answered both questions affirmatively and reversed the district court on both causes of action.

Specifically, the Third Circuit ruled that the Agreement on Security is a maritime contract with the primary objective being to return the vessel to her maritime trade.   The Court summarized, “the essential character and purpose of the Agreement was not to secure the Vessel and crew in port; that was already done. The primary objective of the Agreement was rather to set the Reefer free to pursue maritime commerce.” (p. 13) (emphasis added).   The Court went on to explain that the Agreement has a “genuinely salty flavor.”

The Circuit Court further found that Nederland Shipping is entitled to pursue its statutory cause of action under 33 U.S.C. §1904(h) in the district court, as the statute waived sovereign immunity as Congress provided a cause of action available for any ship unreasonably delayed or detained by the government  (stating “[N]o other actor could logically be held liable. The federal government causes the unreasonable detention, and the federal government thus provides compensation for the resulting loss or damage.”).

The Third Circuit rejected the government’s argument that the claims were to be exclusively heard by the Federal Court of Claims under the Tucker Act (28 U.S.C. § 1491(a)(1)).  “Claims premised upon statutes that provide for independent causes of action and that waive the government’s sovereign immunity need not be channeled through the Tucker Act.”  The Third Circuit held that the after-the-fact remedy provided by 33 U.S.C. 1904(h) is such a statute that provides an independent cause of action and therefore jurisdiction for the claim exists in the district court.

George M. Chalos, Briton P. Sparkman, and Chalos & Co, P.C. represent Nederland Shipping Corporation in this matter.  George M. Chalos presented oral argument the panel for the Third Circuit Court on April 14, 2021.  To listen to the oral argument, click here.

To read a copy of the Third Circuit’s Opinion, click here.

For more information about the Court’s decision and how it may apply to specific facts and circumstances, please do not hesitate to contact us at info@chaloslaw.com.

Department of Justice Announces “Renewed Focus” on Corporate Crime and Enforcement

On October 28, 2021, U.S. Deputy Attorney General Lisa O. Monaco (“Monaco”) gave the keynote address at the American Bar Association’s 36th National Institute on White Collar Crime. Deputy Attorney General Monaco addressed the U.S. Department of Justice’s (“DOJ”) renewed focus on corporate crimes in the department’s mission to “enforce the criminal law that govern corporations, executives, officers and others, in order to protect jobs, guard, savings and to maintain [their] collective faith in the economic engine that fuels [the] economy.”

Deputy Attorney General Monaco listed three (3) actions the DOJ is taking to strengthen enforcement and the department’s response such crimes. First, the DOJ’s main priority will remain individual accountability.  The DOJ will mandate that for a corporation to receive any cooperation credit, the company must provide “all non-privileged information about individuals,” regardless of their position, status or seniority, involved and/or responsible for the misconduct.  So that DOJ can know the “cast of characters” and will not allow the corporation to control which individuals are investigated and/or charged.

Second, Deputy Attorney General Monaco has confirmed that there is an intense focus on a company’s prior misconduct, which will guide and affect the DOJ’s charging decisions.  The DOJ has issued new guidance for prosecutors highlighting that any past misconduct of a company should be considered, including not only prior criminal history, but also the civil and regulatory records of a company, when deciding what type of resolution is appropriate.  DOJ prosecutors are to take a “holistic approach” and consider all misconduct by a corporation, including the corporation’s “parent, divisions, affiliates, subsidiaries, and other entities within the corporate family.” Deputy Attorney General Monaco stated that, “[t]aking the broader view of companies’ historical misconduct will harmonize the way [the DOJ] treat[s] corporate and individual criminal histories, as well as ensure that we do not unnecessarily look past important history in evaluating the proper form of resolution.”  For shipping companies that are held out in the commercial market as part of a group or large fleet, this focus by DOJ will undoubtedly lead to expansive and comprehensive investigation(s) of the fleet and any affiliated owners or operators (even if owned by different stakeholders and/or trading under a separate Document of Compliance).

Finally, Deputy Attorney General Monaco confirmed that the standards, policies, and procedures for evaluating corporate monitors has been revised to ensure uniformity and clarity in post-judgment monitoring of corporate compliance after an incident.  The DOJ will assess the need for corporate monitors on a case-by-case basis and consider (1) the potential benefits of the corporate monitor; and (2) the cost of monitor and its impact on the corporation’s operations. As the shipping industry is very familiar, the DOJ Environmental Crimes Section has long utilized a comprehensive Environmental Compliance Plan (“ECP”) as part of negotiated plea agreements which is implemented during probation by an Independent Consultant/Third Party Auditor and overseen by a Court Appointed Monitor.  These roles are filled by third-parties which must be paid for by the corporate defendant(s). The cost of successfully implementing the required ECP can easily reach $25,000 – $50,000 per ship, per year.

The announced policies and focus are unlikely to materially change the DOJ’s investigation and prosecution of foreign-flagged shipping companies for alleged violations of the Act to Prevent Pollution from Ships, 33 U.S.C. § 1901, et seq.   (i.e. the U.S. implementation of MARPOL 73/78).  However, it is reasonable to expect that these announced actions, especially the demand for assistance in investigating individuals and the DOJ’s inquiry into group or affiliate company activities, will be utilized to pressure companies into making quick and expensive plea agreements, as well as the extraction of heavy fines and even more onerous ECPs.

To read the full Deputy Attorney General Lisa O. Monaco’s Keynote Address, please click here. To read the Deputy Attorney General Monaco’s Corporate Crimes Memorandum, please click here.

For more information on MARPOL, APPS, or other white-collar crimes, please do not hesitate to contact us at info@chaloslaw.com.

Are Attorneys Allowed to Attend an Independent Medical Examination?

The U.S. District Court for the Southern District of Texas (“SDTX”) recently addressed the question of whether a plaintiff’s attorney is permitted to attend a Federal Rule of Civil Procedure (F.R.C.P) 35 independent medical examination (IME) with his client in a personal injury matter. See In re Callan Mar., Ltd., No. 4:21-cv-01938, 2021 U.S. Dist. LEXIS 169812 (S.D.T.X Sept. 8, 2021).  The Court held that the injured Plaintiff was not allowed to have his attorney present in the examination room as he had not demonstrated that there were “special circumstances” that warranted allowing the attorney to be present.

The Court noted that a number of other Federal Courts have refused to allow a lawyer to attend his client’s medical examination because allowing a third person to be present at a medical examination “would subvert the purpose of Rule 35, which is to put both the plaintiff and defendant on an equal footing with regard to evaluating the plaintiff’s medical status. In other words – where one party has been examined by his or her doctors outside the presence of others… – the other party should be given the same equal opportunity.” See Ornelas v S. Tire Mart, LLC, 292 FRD 388 (SDTX 2013).  The court reasoned that the presence of an attorney has a high probability of causing adverse effects on the examination, carries the possibility of making the attorney a witness, and may result in disruption of the examination. The court noted that an attorney’s presence for moral support and guarding against improper conduct on the part of the physician are not “special circumstances” justifying the presence of plaintiff’s counsel at the examination.

The U.S. District Court for the Southern District of New York (SDNY) has a similar stance on not allowing attorneys to be present for an IME. See Edwina Rance & Westchester Residential Opportunities v Jefferson Vil. Condominium No. 5, 2019 U.S. Dist. LEXIS 238432, at *12 (SDNY Sep. 23, 2019).  SDNY Judges have held that the presence of an attorney at the examination frustrates its purpose by impairing its effectiveness and rendering it adversarial.  See Hirschheimer v Associated Mins. & Mins. Corp., 1995 US Dist LEXIS 18378 (SDNY Dec. 12, 1995). Moreover, when an attorney who is present at an examination becomes a potential witness in the client’s trial it naturally raises conflict of interest problems.

While Federal Courts in New York and Texas are firmly against allowing an attorney to be present at an IME, state courts sitting in New York have held that Plaintiffs are entitled to have a representative present at their physical examinations as long as the representative does not interfere with the examination conducted by defendants’ designated physician and does not prevent defendants’ physician from conducting a meaningful examination.” See Guerra v McBean, 127 A.D.3d. 462 (1st Dept 2015).

To read a copy of the SDTX decision, click here.

For more information please do not hesitate to contact us at info@chaloslaw.com.

Michael G. Chalos Presents at Gallagher Marine Systems 2021 North American Regulatory Seminar

Michael G. Chalos of Chalos & Co, P.C. attended and presented at the Gallagher Marine Systems (GMS) 2021 North American Focus Training and Regulatory Seminar on August 19, 2021 in Galloway, New Jersey. Mr. Chalos presented on the best practices for voluntary reporting of potential non-compliance issues and the consequences of failing to do so.  enactment and enforcement of IMO 2020 in the United States.

To learn more about GMS, please visit their website at https://www.gallaghermarine.com/.

For more information on vessel compliance and voluntary reporting in the United States (and elsewhere), please do not hesitate to contact us with any questions at  info@chaloslaw.com.

Updated COVID-19 Courthouse Protocols in New York

Due to the recent uptick in COVID-19 cases in the U.S., both State and Federal Courthouses are continually updating their protocols to ensure safe access to the Courts.  We briefly summarize the current procedures being implemented in New York.

Both the Southern District of New York (“SDNY”) and New York state courts continue to prohibit entry to each courthouse for individuals who have flu-like symptoms; have recently tested positive for COVID; have been directed to quarantine, isolate or self-monitor at home; had close contact with a person testing positive for COVID; or have returned from international travel within the last 10 days (unless you returned 8-10 days ago and took a viral COVID test 3-5 days after  return).  While each Court is maintaining stringent guidelines if potentially exposed to COVID-19, the requirements for those that are vaccinated vary.

  • Southern District of New York:
    • If unvaccinated, visitors are required to have their temperature taken and answer questions related to potential exposure to COVID-19 to determine if the visitor may be allowed to enter.
    • All those in the courthouse are required to wear a face mask regardless of vaccination status.
    • Testifying witnesses and attorneys speaking from semi-enclosed podiums outfitted with HEPA filters may be allowed to remove their face mask at the discretion of the presiding Judge.
    • Everyone must adhere to safe social distancing rules, by standing or sitting at least six (6) feet away from other individuals, and abide by all health and hygiene signage throughout the courthouses, including signage regarding masks, social distancing, occupancy restrictions, and hand washing.
  • New York State Courts:
    • Beginning on September 7, 2021, all non-vaccinated court employees will have to submit to weekly COVID-19 testing. Vaccinated staff will not be tested and are able to obtain a special card which verifies their vaccination status.
    • To enter the Court, one will need to show proof of vaccination or wear a mask.
    • Vaccinated visitors are not required to wear a face mask.  Unvaccinated Court Users are required to submit to a temperature screening and a COVID-19 risk assessment inquiry before entering a court facility and will be required to wear a mask, maintain social distancing, and follow the health and safety instructions of court personnel.
To read a copy of the SDNY Ninth Amended Standing Order, please click here.

To read a copy of the SDNY Bankruptcy Court’s General Order, please click here.

To watch Chief Judge DiFiore’s most recent video message, please click here. For a transcript of the message, click here.

If you have any questions, contact us at info@chaloslaw.com

Failure to follow Service Requirements Leads to Vacatur of Default Judgment

Petitioner Commodities & Minerals Enterprise Ltd. (“Commodities & Minerals”) entered into a Transfer Management Contract with CVG Ferrominera Orinoco, C.A. (“CVG”) to manage and operate CVG’s iron ore transfer system.  CVG is a Venezuelan state owned company responsible for the exploration of iron ore.  Following allegations of breach of the underlying Transfer Management Contract, Commodities & Minerals commenced arbitration pursuant to the contract.  Commodities & Minerals won a final award against CVG in the amount of $188 million dollars in damages, plus interest.

On December 19, 2019, Commodities & Minerals filed a petition in the Southern District of Florida to recognize and confirm the award as a judgment of the Court.  Petitioner served CVG with a copy of the petition, but did not serve a summons issued by the Clerk of the Court.  CVG never appeared in the action and the Court entered an Order confirming the award and granting default judgment against CVG on or about September 23, 2020.  Shortly thereafter, Respondent CVG filed a motion to vacate the Order and final judgment on the grounds that Commodities & Minerals failed to properly serve the petition with a summons as required by the Foreign Sovereign Immunities Act (FSIA), 28 U.S.C. §1608.  Commodities & Minerals argued in response that service was properly effectuated because: (1) service of the petition complied with the Federal Arbitration Act (“FAA”), (2) CVG had actual notice of the action, and (3) service was proper under FSIA.

District Judge Darrin P. Gayles of the United States District Court for the Southern District of Florida rejected Petitioner’s arguments and vacated the judgment.  The District Court held that since the FAA does not provide any guidance on how to serve an instrumentality of a foreign state, the proper procedural rule to consult for compliance with service requirements is Fed. R. Civ. P. Rule 4.   Pursuant to Rule 4(j), a party must serve an instrumentality of a foreign state in accordance with 28 U.S.C. §1608, which requires that a summons be served on a party with the complaint (i.e., petition). The Court concluded that Commodities & Minerals failed to comply with a material requirement of FSIA by its failure to serve the petition with a summons. Furthermore, the District Court found that under FSIA, actual notice must be accompanied by substantial compliance with the statute, simply giving ‘notice’ or ‘potential notice’ of the action cannot substitute for the statutory requirement to serve a summons with the petition. The Court held that Commodities & Minerals’ failure to serve CVG with a summons was fatal to its position and vacated its prior Order and Default Judgment.  Judge Gayles also pointed out that in a related action between the parties, service of process in a similar manner been held insufficient by District Judge Goodman due to a failure by Commodities & Minerals to obtain and serve a summons on CVG in that action.

As of July 20, 2021, Commodities & Minerals has re-filed its petition against CVG to recognize and enforce the arbitration award and has obtained a summons issued by the District Court Clerk to effectuate service in compliance with Rule 4 and the FSIA.

To read a copy of the Order, please click here. For more information on the Recognition and Enforcement of Arbitration Awards, please do not hesitate to contact us at info@chaloslaw.com.

Second Circuit Holds PDVSA Waived Ability to Argue Impossibility Defense based upon U.S. Sanctions  

On July 9, 2021, the United States Court of Appeals for the Second Circuit issued a summary order affirming the decision issued by the United States District Court for the Southern District of New York granting a partial final judgment against Venezuela’s state owned oil company, PDVSA Petroleo, S.A. (“PDVSA”), relating to its default on a $150 million Note issued by Plaintiff, Dresser-Rand Company (“Dresser-Rand”).

The Note Agreement which PDVSA failed to pay under specifically stated that payment was “absolutely, irrevocably, and unconditionally guaranteed,” and “the obligations of the Guarantor hereunder are unconditional and absolute and not subject to any reduction, limitation, impairment or termination for any reason.”  The Note Agreement further stated that the obligations of the Guarantor (PDVSA) were not subject to any “defense or setoff, counterclaim, recoupment or termination, whatsoever by reason of the invalidity, illegality or unenforceability of any of the guaranteed obligations.”  The Second Circuit reviewed the language contained in the Note Agreement in accordance with New York law which holds that a contractual guarantee stated by plain terms, in broad, sweeping and unequivocal language may foreclose any challenge to the enforceability and validity of the documents which establish a defendant’s liability for payments arising under an agreement as well as any other possible defenses.

PDVSA sought to argue in the Second Circuit that it could not have waived impossibility or illegality of performance as a defense because U.S. Sanctions prohibited PDVSA from making payments to Dresser-Rand absent a license granted by OFAC.  PDVSA further argued that the U.S. Sanctions blocking transactions between U.S. entities and PDVSA made it legally impossible for it to pay under the Note Agreement after it first defaulted on its payments in 2019.

The Second Circuit held that in view of the plain and broad language contained in the Note Agreement, PDVSA’s wavier of defenses in the Note Agreement, and the established enforceability of such provisions in New York, PDVSA had waived its impossibility defense.  The Second Circuit also held that by failing to timely raise the impossibility defense in the District Court, PDVSA forfeited its argument that its breach of the Note Agreement was excused for reasons of public policy and the potential illegality of making payments due to the U.S. sanctions in place at the time of default.

To read a copy of the Summary Order, please click here.

If you have any questions, contact us at info@chaloslaw.com

Biden Administration Weighs in on 28 U.S.C. § 1782 Dispute

As previously reported, there is a split in U.S. courts on the issue of whether a district court may order a person or entity in its district to give discovery (either documents or a deposition) for use in a foreign private arbitration pursuant to 28 U.S.C. § 1782. The Fourth and Sixth Circuit Courts of Appeals have held that the statute permits the use of the discovery tool even when the underlying proceeding is a foreign private arbitration. The Second, Fifth, and Seventh Circuit Courts of Appeals have ruled that private arbitral bodies are not “tribunals” under the statute and therefore the use of Section 1782 is not permitted in aid of a foreign arbitration. The U.S. Supreme Court has only addressed Section 1782 once in a decision from 2004, but that matter did not specifically address the question of whether discovery was permissible for use in a foreign arbitration. However, the U.S. Supreme Court did write that the “tribunal” definition in the statute was “unbounded by categorical rules” and quoted from a 1965 law review article by Professor Hans Smit which stated that the legislative history of the statute intended to include “arbitral tribunals.” Intel Corp. v. Adv. Micro Devices, Inc., 542 U.S. 241 (2004). The Court’s dicta in the Intel Corp. decision led to many different results in the lower courts around the United States.

Given the split of authority among the Circuit Courts on the issue, the U.S. Supreme Court granted certiorari on March 22, 2021 in the case arising from the Seventh Circuit Court of Appeals. Servotronics Inc. v. Rolls-Royce PLC, et al., No. 20-794. The petitioner and respondents have filed their respective opening briefs on the merits of the appeal and numerous third parties have filed amicus curiae briefs for the Supreme Court’s consideration on the issue. On June 28, 2021, the United States of America, through the Solicitor General’s office filed an amicus curiae brief in support of the respondents. The government argued that the United States has a substantial interest in the resolution of the question and application of Section 1782, because the statute plays an important role in “encouraging international cooperation, facilitating the resolution of foreign disputes, and fostering international comity.” The United States utilizes Section 1782 to present to courts letters rogatory and letters of request that are received through the Department of State or the Department of Justice. The government’s brief argues that a review of the background of the existing law and Congress’ objective in undertaking the statute’s revisions in 1964 was meant to merely put foreign quasi-judicial entities (and intergovernmental bodies) on the same footing with foreign courts. Bluntly, in no way was it meant to sweep up private, commercial foreign arbitrations into Section 1782’s ambit.

The government offers two (2) public policy arguments in further support of the position that Section 1782 does not apply to foreign private arbitration. First, that such a broad interpretation of “proceeding in a foreign or international tribunal” would create significant tension with the Federal Arbitration Act which narrowly limits available discovery in connection with arbitration. The government argues that by permitting discovery in aid of foreign arbitrations under Section 1782, parties to foreign arbitration would have broader access to court-assisted discovery than parties in domestic arbitration. In addition, the government argues that if the Supreme Court were to permit such a broad interpretation, it could potentially be used by a future party in an “investor-state arbitration.” Investor-state arbitration permits a foreign investor to arbitrate a claim directly against the government of the state in which the investment is held or was sought to be made. The government argues that investor-state arbitrations share many of the features of private commercial arbitration and it could not have possibly been the intent of Congress to have Section 1782 apply to treaty-based investor-state arbitration when it enacted the language in the 1964 version of Section 1782, because that type of arbitration did not exist. Furthermore, the government argues that permitting Section 1782 discovery in investor-state arbitrations would jeopardize the predictability and efficiency of those types of arbitrations.

The United States has requested ten (10) minutes of argument time at the upcoming oral argument, which has not yet been set by the Court. Respondents have agreed to cede ten (10) minutes from its oral argument time to the government. It is anticipated that oral argument will be set during the fall October 2021 Term. It is unlikely a decision will be issued prior to December 2021 at the earliest, and most likely not until the first half of 2022.

A copy of the amicus curiae brief by the United States, can be found here.

If you have any questions, contact us at info@chaloslaw.com

Is the U.S. Planning to Remove Certain Sanctions on the Iran Oil and Shipping Industries?

Reuters is currently reporting that Iran claims the United States has agreed to remove all sanctions on Iran’s insurance, oil, and shipping industries.  Iran also claims the U.S. is planning to remove a number of high-ranking officials from the U.S. Specially Designated Nationals list (SDN).  The U.S. and five (5) other world powers have been in talks with Iranian officials since April to work towards restoring the 2015 Joint Comprehensive Plan of Action (“JCPOA”).  The talks remain ongoing in Vienna.

We are closely monitoring the situation and will provide further updates when there is official U.S. regulatory action to report.

For more information, please contact us at info@chaloslaw.com

A Return to Normal: All New York Judges and Staff to Return to In-Person Work

On April 19, 2021, New York Chief Judge Janet DiFiore issued a message requiring all judges and court staff, including clerks, officers, and other employees, to return to in-person work effective Monday, May 24, 2021. The order comes on the heels of the state of New York resuming civil and criminal jury trials on March 22, 2021. The return to in-person work for all staff marks the end of the work-from-home measures which had been in place for fourteen (14) months. As part of the press release, Chief Judge DiFiore stated: “It is time to return to our normal and full courthouse staffing levels in order to support the fuller resumption of in-person operations, including jury trials and other proceedings in our courts.”

Notwithstanding the return to in-person work for staff, New York courts will continue to utilize virtual and telephonic court proceedings developed and implemented in response to the coronavirus pandemic.   Chief Judge DiFiore confirmed that plans are being drafted to ensure protocols for the effective use of technology for conferences and hearings (which do not require in-person attendance by attorneys and parties) are in place so as to limit the number of people in the state courthouses to maintain safe occupancy levels.   The return of normal operations is both welcome and critical, as Judges and staff attempt to dig out from the backlog of cases caused by the pandemic.

For more information, please contact us at info@chaloslaw.com.