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“OPA 90”

The Oil Pollution Act of 1990, (“OPA 90”), established an extensive regulatory and liability regime for the protection and cleanup of the marine environment from oil spills. Congress enacted the Oil Pollution Act of 1990 (OPA) in the wake of the EXXON VALDEZ oil spill in Prince William Sound, Alaska, as well as a rash of other major spills. OPA’s scope was ambitious, including extensive provisions to prevent the circumstances under which spills occur, to enhance federal authority and resources to respond to spills and to compensate those who incur removal costs or damages when spills do inevitably occur in the navigable waters, adjoining shorelines, and exclusive economic zone of the United States.

As you know, OPA set new requirements for vessel construction, crew licensing and manning, mandated contingency planning, enhanced federal response capability, broadened enforcement authority, increased penalties, created new research and development programs, and increased the liability of those responsible for the vessels and facilities that spill oil. OPA added entirely new compensation provisions for a wide array of costs and damages caused by oil spills, and significantly strengthened financial responsibility requirements to ensure that persons liable for large vessel and offshore facility spills have the ability to compensate claimants up to their liability limit. OPA 90 affects all owners and operators whose vessels trade to the United States or its territories or possessions or whose vessels operate in United States waters, including the United States’ territorial sea and its two hundred (200) nautical mile exclusive economic zone.

Under OPA 90, should a pollution incident occur, vessel owners, operators and bareboat (or demise) charterers are jointly, severally and strictly liable (unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all response, removal, clean-up costs and “other damages” arising from the discharge or threatened discharge of oil from their vessel(s). Other damages are defined broadly to include (1) natural resources damages and the costs of assessing them, (2) real and personal property damages, (3) net loss of taxes, royalties, rents, fees and other lost revenues, (4) lost profits or impairment of earning capacity due to property or natural resources damage, (5) net cost of public services necessitated by a spill response, such as protection from fire, safety or health hazards, and (6) loss of subsistence use of natural resources. Previously, OPA 90 limited the liability of responsible parties to the greater of $1,200 per gross ton or $10 million per tanker that is over 3,000 gross tons (subject to possible adjustment for inflation).

However, following a recent spill incident, these limits have been increased. Up until July 11, the United States had relatively straight-forward sets of limits on liability for oil pollution incidents. Now, the new legislation subdivides tank vessels into those with qualifying double hulls and those without double hulls. The group without double hulls includes not only those with single hulls, but also those with either double sides or double bottoms.

Presently, for a tank vessel greater than 3,000 gross tons that does not have a qualifying double hull, the new limits on liability are the greater of $3,000 per gross ton or $22 million. For a tank vessel of 3,000 gross tons or less that does not have a qualifying double hull, the new limits are the greater of $3,000 per gross ton or $6 million. For tank vessels with qualifying double hulls, the new limits are the greater of $1,900 per gross ton or either $16 million (for tank vessels of greater than 3,000 gross tons) or $4 million (for tank vessels of 3,000 gross tons or less). For any other vessel, the new limits on liability are the greater of $950 per gross ton or $800,000. Of course, these limits only apply if the responsible party (“RP”) successfully demonstrates its entitlement to an OPA 90 limitation of liability.

These limits of liability do not apply if the incident was proximately caused by violation of applicable United States federal safety, construction or operating regulations or by the RP (or its agents’ or employees or any person acting pursuant to a contractual relationship with the RP) or by gross negligence or willful misconduct, or if the RP fails or refuses to report the incident or to cooperate and assist in connection with the oil removal activities.

Under OPA 90, with some limited exceptions, all newly built or converted tankers operating in United States waters must be built with double-hulls, and existing vessels which do not comply with the double-hull requirement must be phased out over a 25-year period (1990-2015) based on size, age and hull construction. Notwithstanding the phase-out period, OPA 90 currently permits existing single-hull tankers to operate until the year 2015 if their operations within United States waters are limited to discharging at the Louisiana Off-Shore Oil Platform, or off-loading by means of lightering activities within authorized lightering zones more than 60 miles off-shore.

Certificates of Financial Responsibility

OPA 90 requires owners and operators of vessels to establish and maintain with the United States Coast Guard evidence of financial responsibility sufficient to meet their potential liabilities under OPA 90. Under the regulations, evidence of financial responsibility may be demonstrated by insurance, surety bond, letter of credit, self-insurance, guaranty or other satisfactory evidence. Under OPA 90, it is generally understood that an Owner or Operator of a fleet of tankers is required only to demonstrate evidence of financial responsibility in an amount sufficient to cover the tanker in the fleet having the greatest maximum liability under OPA 90. The Coast Guard’s regulations concerning certificates of financial responsibility provide, in accordance with OPA 90, that claimants may bring suit directly against an insurer or guarantor that furnishes certificates of financial responsibility. If an insurer or guarantor is sued directly, it is prohibited from asserting any contractual defense that it may have had against the responsible party and is limited to asserting those defenses available to the responsible party and the defense that the incident was caused by the willful misconduct of the responsible party.

State vs. Federal Law

OPA 90 specifically permits individual U.S. coastal states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries. Some states have enacted legislation providing for unlimited liability for oil spills. In some cases, States which have enacted such legislation have not yet issued implementing regulations defining tanker owners’ responsibilities under these laws.

Vessel Response Plans

Owners or Operators of tankers operating in United States waters are required to file Vessel Response Plans (“VRP’s”) with the Coast Guard, and their tankers are required to operate in compliance with their Coast Guard approved plans. These response plans must, among other things, (1) address a “worst case” scenario and identify and ensure, through contract or other approved means, the availability of necessary private response resources to respond to a “worst case discharge,” (2) describe crew training and drills, and (3) identify a qualified individual with full authority to implement removal actions.

Marpol

The International Convention for the Prevention of Pollution from Ships, (hereinafter “MARPOL” or “MARPOL 73/78”), and it’s U.S. codification as the Act to Prevent Pollution from Ships (hereinafter “APPS”), set forth the requirements for the handling and disposal of oil, sludge, oily bilge water, amongst other things, for U.S. flagged vessels and foreign flagged vessels while in U.S. waters. U.S. law and regulation authorizes and obligates the United States Coast Guard to enforce the law, both civilly and criminally. In response, the Coast Guard has utilized Port State Control inspections to examine vessels with an eye towards investigating possible violations.

MARPOL was drafted in 1973 as part of an international effort to prevent the discharge of oil, chemicals, sewage and garbage from vessels into the world’s oceans. MARPOL was initially based on global recognition of the significant environmental damage caused by vessel pollution, as well as the failure of previous international attempts to regulate it effectively.¹ The MARPOL Convention was intended as a “first step” in adding teeth to pre-existing international pollution regulations. Interestingly, the agreement was not binding on signatory states, and the United States did not ratify the Convention.

The International Maritime Organization (hereinafter “IMO”) coordinated the 1978 Protocol in response to numerous oil tanker accidents in 1976-77. The 1978 Protocol absorbed the 1973 Convention and approved measures affecting tanker design and operation.² It entered into force on October 2, 1983. Generally speaking, the MARPOL Protocol is made up of six (6) Annexes: Annex I regulates pollution by oil; Annex II regulates pollution by noxious liquid substances; Annex III regulates pollution by harmful substances in packaged form; Annex IV regulates pollution by sewage; Annex V regulates pollution by garbage; and Annex VI³ regulates air pollution.⁴ This report focuses on Annex I, as more fully discussed below.

The Act to Prevent Pollution from Ships

Although the United States eventually ratified MARPOL 73/78, the Act to Prevent Pollution from Ships (“APPS”) was passed by the U.S. Congress in 1980. In its present form, APPS essentially requires that all U.S. flagged ships, and foreign flagged vessels while in United States territorial waters, must comply with Annexes I, II, and V of the MARPOL Protocol. APPS authorizes the Secretary [of the department in which the United States Coast Guard is operating] to promulgate further regulations to ensure vessels discharge oil and waste consistent with the MARPOL requirements. It is a serious federal crime to knowingly violate APPS, MARPOL, or the regulations promulgated by the Coast Guard pursuant to its authority.

U.S. Enforcement of APPS and MARPOL Annex I Violations

Since the tragic events of September 11th, the United States Coast Guard has undertaken a comprehensive program of boarding vessels calling U.S. ports. As a result of the new heightened security measures, there has been a significant increase in the scrutiny to which vessels, her logs, and her records, are being inspected. Such scrutiny, rightly or wrongly, continues to result in numerous vessel and crew detentions, as well as massive civil and criminal charges against vessel Owners, Operators, Managers, Officers and crew.

Specifically, the U.S. Coast Guard established an Oily Water Separator Task Force to examine a wide range of issues related to pollution control equipment and it use on vessels in U.S. waters. The Coast Guard and other law enforcement personnel regularly examine the use and functionality of oily water separator systems more carefully than ever before, and have made it clear that they will seek jail sentences for Masters and engineers of ships committing pollution offense, or falsifying records, including but not limited to Oil Record Books (hereinafter “ORB”). The fact that an Owner, Operator and/or their shore-side staff may be located outside the U.S. is no deterrent to dogged prosecution efforts. Quite often, even if no pollution incident has occurred, the Coast Guard and U.S. prosecutors, upon the mere “discovery” of potential by-passing paraphernalia, (such as a flexible hose or suspicious fittings and piping in the engine room), will commence a Grand Jury⁵ investigation seeking to prosecute alleged illegal by-passing of the OWS system and/or the presentation of an ORB containing “false entries”.

Document Review During Port State Control Inspection

A document review during a Port State Control inspection will often include an examination of the vessel’s IOPP Certificate, ORB, Incinerator Log, and Shipboard Oil Pollution Emergency Plan (hereinafter “SOPEP”). See 33 C.F.R. § 151.23(a). These documents are often utilized during the inspection of the vessel to ensure the vessel, its documentation and equipment meet all applicable APPS and Annex I requirements.

Oil Record Book

Since the ORB is supposed to record all shipboard oil transfer, and all bilge water and sludge discharge operations, it is thoroughly inspected. For this reason, the ORB must be filled out in accordance with all applicable regulations, and all internal transfers, as well as all overboard discharges, must be recorded without delay.

For example, APPS requires an entry shall be made in the ORB whenever any of the following machinery space operations take place: 1) ballasting or cleaning of fuel oil tanks; 2) discharge of dirty ballast or cleaning water from fuel oil tanks; 3) disposal of oily residues (sludge); and, 4) discharge overboard or disposal otherwise of bilge water that has accumulated in machinery spaces. Entries shall also be made in the ORB whenever any of the following cargo/ballast operations take place on any oil tanker: 1) loading of oil cargo; 2) internal transfer of oil cargo during voyage; 3) unloading of oil cargo; 4) ballasting of cargo tanks and dedicated clean ballast tanks; 5) cleaning of cargo tanks including crude oil washing; 6) discharge of ballast except from segregated ballast tanks; 7) discharge of water from slop tanks; 8) closing of all applicable valves or similar devices after slop tank discharge operations; 9) closing of valves necessary for isolation of dedicated clean ballast tanks from cargo and stripping lines after slop tank discharge operations; and, 10) disposal of residues. See 33 C.F.R. 151.25(e). All such entries “shall be fully recorded without delay in the Oil Record Book so that all the entries in the book appropriate to that operation are completed.” MARPOL, Annex I, Regulation 20(4); 33 C.F.R. §151.25(H).

During a Port State Control inspection, the Coast Guard may question the engine room staff to determine if the recent entries in ORB represent actual procedures followed by shipboard personnel. If the Coast Guard discovers any of the following “red flag” entries in the ORB, they will likely call in the Coast Guard Investigative Service (“CGIS”)⁶ to begin a criminal investigation:

1. An ORB entry where the amount of bilge water or sludge processed exceeds the rated capacity of the pollution prevention equipment that is indicated on the IOPP;
2. ORB entries that utilize the wrong code for the task performed;
3. ORB entries that are not in chronological order;
4. Missing pages in the ORB or entries that are concealed by “White-Out”;
5. Repetitive entries that are indicative of the falsification of ORB activities;
6. If waste oil, sludge, bilge and other tank levels noted during the inspection vary significantly from the last entries in the ORB;⁷ and,
7. If the recorded quantities of oily bilge water pumped to holding or processed by the OWS directly from the bilge wells does not compare to observed conditions within the machinery space.

If the vessel maintains an Incinerator Log, it, too, will likely be inspected by the authorities. If the vessel is utilizing the incinerator to dispose of sludge, the Coast Guard will compare the entries in the Incinerator Log to the corresponding entries in the ORB. If there is a discrepancy between these numbers or if the log indicates that the incinerator is working beyond its rated capacity, suspicions will be raised that the vessel is improperly disposing of sludge.

The Coast Guard will also examine the SOPEP to verify that it has been approved by the vessel’s Flag. The Coast Guard will spot check the pollution response equipment listed in the SOPEP and verify that the phone numbers and points of contact listed in the SOPEP are up to date (i.e., National Response Center, local Captain of the Port, or Coast Guard or Sector offices).

Penalties for Violations of APPS

Generally, it is well settled U.S. law that in order for a person to be guilty of a crime, the person must act with “criminal intent” or “mens rea”.⁸ However APPS, like most environmental and public health and welfare criminal statutes, does not require that the government prove that a defendant wrongfully intended to violate the law. Instead, the government need only prove that an actor knowingly committed an act and that act violated an existing law or regulation. For example, the criminal enforcement provision of APPS provides that any person who “knowingly violates” a specific provision of the statute may be guilty of a felony, even if an individual did not know that such conduct was a crime. In addition to criminal fines, if an individual or corporation is found to have violated a provision of APPS or MARPOL, the government can also impose a civil penalty of up to twenty-five thousand dollars ($25,000.00) for each violation. See 33 U.S.C. § 1908(b).

APPS places an affirmative duty on the Master, Chief Engineer – or other person in charge – of any vessel subject to APPS to report any “discharge, probable discharge, or presence of oil” while the vessel is within the navigable waters of the United States. APPS places the same duty to report on persons in charge of seaports and oil handling facilities within United States jurisdiction. To ensure compliance with these regulations, the Coast Guard is authorized to inspect any vessel at any U.S. port. If it is determined that a vessel or her crew may have violated pollution prevention laws, its customs clearance will be revoked and the vessel “held-up” until the owner and operator post a surety satisfactory to the Secretary [of the department in which the United States Coast Guard is operating].⁹ The vessel may also be arrested and sold to satisfy any fine or penalty under APPS.

As stated above, APPS applies to every vessel that is operated under the authority of the United States (i.e., “U.S. flagged vessels”). In addition, it is applicable to foreign flagged vessels when these vessels are in the navigable waters of the United States¹⁰. This is a critical distinction, since the jurisdiction of the United States to criminally prosecute Owners, Operators and crewmembers of foreign flagged vessels, is strictly limited to acts committed in U.S. navigable waters. Parenthetically, we note that for Owners, Operators, and crewmembers of U.S. flagged vessels there are no such limits on the jurisdiction of the United States to prosecute violations of APPS and MARPOL. Thus, if a U.S. flagged vessel knowingly violates the provisions of APPS or MARPOL anywhere in the world, it can and will be prosecuted by the United States government.

In short, it is a class D felony to knowingly violate the provision of APPS. A class D felony is publishable by up to ten (10) years imprisonment, and a fine up to $250,000 for an individual, and up to $500,000 for a corporation, for each violation. A violation of APPS where the individual or corporation did not knowingly violate these sections is punishable by a civil penalty not to exceed $25,000 for each violation.

Other Pollution and Environmental Protection Statutes

In addition to APPS, there are a number of other federal environmental protection statutes that make it a crime to discharge oil or waste in U.S. waters. Specifically, the Clean Water Act, 33 U.S.C. § 1251, et seq. prohibits the unpermitted discharge of any pollutant, including a discharge of oil, by any person into navigable waters of the United States.¹¹ A “knowing” violation of the Act is a felony. A “negligent” violation of the Clean Water Act is a misdemeanor. Failure to report a discharge is punishable by imprisonment of up to five (5) years, and a fine of up to $250,000 for an individual, and up to $500,000 for a corporation.

Similarly, the Rivers and Harbors Act of 1899, 33 U.S.C. § 401, et seq., provides that any discharge of refuse of any kind from a vessel into navigable waters of the United States is strictly prohibited. A violation of the Act is a misdemeanor. The courts have taken a broad view of what constitutes “refuse” under the Act, and the Act has been extended to a discharge of oil or petroleum. A person can be convicted of a misdemeanor violation of the Rivers and Harbors Act based solely upon proof that the person placed a banned substance into navigable waters of the United States.

A party can also be found guilty of a felony for conduct that does not directly involve the discharge of oil or waste into U.S. waters. Under 18 U.S.C. § 1001, it is a felony to make a false statement to the U.S. Government. To sustain a conviction for a violation of the Act, the Government must only show: (1) that a statement or concealment was made; (2) the information was false; (3) the information was material to a government investigation or activity; (4) the statement of concealment was made “knowingly and willfully;” and (5) the statement or concealment falls within the executive, legislative or judicial branch jurisdiction.

The false statement need not be an affirmative statement, but can also include the concealment of the truth when an individual has a duty to answer. For example, a false statement about, or concealment of, any discharge of oil is a violation.

Additionally, the U.S. authorities vigorously prosecute individuals and corporations suspected of tampering with witnesses in connection with an on-going investigations. Under 18 U.S.C. § 1512, anyone who knowingly uses intimidation or physical force, threatens, or corruptly persuades another person, or attempts to do so, or engages in misleading conduct toward another person with the intent to hinder, delay or prevent the communications to a law enforcement officer or a judge of the United States of information relating to the commission, or the possible commission, of a federal offense, shall be fined or imprisoned up to ten (10) years, or both.

In situations where two (2) or more persons conspire either to commit an offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, (pursuant to 18 USC § 371), each shall be fined or imprisoned up to five (5) years or both.

Recently, the Department of Justice has also been charging crewmembers and vessel owners and operators accused of presenting false records to the government with violations of the Sarbanes-Oxley Act, 18 U.S.C. § 1519.¹² This statute is commonly known as the “Enron” statute and was intended to apply to corporate fraud. The significance of utilizing this statute is that it carries a potential jail sentence of 20 years, which is a powerful motivator for someone threatened with prosecution under this statute to turn “state’s evidence’ as the phrase goes. In fact, no vessel Owner, Operator or crewmember has ever been convicted under this statute, although it has been charged in recent Indictments.

Recommendations for Shipboard Personal on How to Respond to U.S. Authorities Conducting Port State Control Inspections and Prepare for Criminal Investigations

1. Shipboard personnel must, at all times, obey all international and U.S. environmental regulations;
2. All shipboard personnel must be truthful and forthcoming during all port state inspections;
3. If the Port State Control inspection appears to be more than a routine inspection, immediately notify the manager and/or the vessel’s port agent and/or the P&I Club’s local correspondent;
4. Once an investigation commences, do not under any circumstances remove or destroy any documents, computer files, emails, correspondence, piping, flanges, or other potential evidence and do not give or accept any orders to do so;
5. Officers and crewmembers must not attempt to influence other officers and/or crew as to their discussions with the authorities, other than to insist that the officers and crew are honest and forthright with all authorities; and,
6. Seek the advice of competent legal counsel.

The Fifth Amendment to the U.S. Constitution

The most basic, yet essential, advice any maritime criminal lawyer can give to today’s mariner is: seek the advice of counsel as soon as practical, and always be truthful and forthright in your dealings with the U.S. authorities. It is extremely advisable that if U.S. authorities undertake any onboard investigation, which goes beyond the scope of the ordinary port state control inspection, competent criminal counsel should be engaged to protect the rights of the vessel officers and crew, not to mention her Owner, Operator, Manager, and their shore-side personnel. For example, if a member of the CGIS comes onboard a vessel during a Port State Control Inspection, a criminal investigation has begun and it may be in the crewmember’s best interest to invoke his Fifth Amendment Privilege against self-incrimination.

The Fifth Amendment of the United States Constitution states that:
No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury, except in cases arising in the land or naval forces, or in the militia, when in actual service in time of war or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

The Fifth Amendment Privilege against self-incrimination is not dependent upon the nature of the proceeding in which the testimony is sought. It is applicable wherever the answer might tend to subject one to criminal responsibility and applies in both civil and criminal proceedings.

A seaman may also invoke his Fifth Amendment privileges even if there is no U.S. criminal investigation, but rather may subject the seamen to criminal liability outside of the U.S., so long as the seaman can show that the subject of the government’s questions raises “a real danger of being compelled to disclose information that might incriminate him under foreign law,” and second, that there is a “real and substantial fear of foreign prosecution.”

Individual crew members should invoke their Fifth Amendment privilege against self-incrimination until competent counsel is engaged and present. In short, once a criminal investigation has commenced and a mariner invokes his own Fifth Amendment privilege, he is not required to speak with the U.S. authorities and/or respond to any of their questions, which may lead to self-incrimination.

The Oil Spill Liability Trust Fund

The Oil Spill Liability Trust Fund (“OSLTF”) was also established in the wake of the EXXON VALDEZ oil spill to provide funds for those who have suffered loss or damages due to an oil spill. Generally, a party who incurs a loss and/or cost as a result of an oil pollution incident must submit claims against the Responsible Party (“RP”) or its guarantor for reimbursement and compensation. Under certain circumstances, such a claimant may be entitled to submit claims directly to the OSLTF. In a similar fashion, an RP and its insurers may make a claim against the Fund for reimbursement of certain costs and expenses incurred, as expressly authorized by the relevant Regulations.

Administration of the Fund was delegated to the Coast Guard, which in turn, sparked the creation of the National Pollution Funds Center (“NPFC”). The NPFC is an independent Coast Guard unit, which is the fiduciary agent for the OSLTF. In accordance with OPA, and other pertinent laws and regulations, the NPFC executes programs to, inter alia, (1) provide funding to permit timely removal actions following pollution incidents; (2) provide funding for the initiation of natural resource damage assessments (NRDA) for oil spill incidents; and (3) compensate claimants who demonstrate certain types of damages caused by oil pollution.

The general requirements for submitting claims to the Oil Spill Liability Trust Fund (“OSLTF”) are set forth at 33 C.F.R. Part 136. This part prescribes regulations for the presentation, filing, processing, settlement and adjudication of claims authorized to be presented to the OSLTF. Historically, our firm has been retained to present claims on behalf of Responsible Party’s (“RP”) and its insurers to the NPFC for compensation and reimbursement for costs incurred as a result of a spill. Specifically, 33 C.F.R. § 136.107 provides that claims of a subrogor and subrogee for removal costs and damages arising form the same incident should be presented together and must be signed by all claimants. Accordingly, it is important to recognize early in assembling a crisis management team to address a pollution incident that the interests of the insurer and its assured may necessarily merge. Third-party claims may also be presented to the OSLTF pursuant to the applicable statutes.

The OSLTF was established by Congress in 1986. It was authorized for use as part of OPA 90 and is primarily funded by a 5¢ per barrel tax on oil produced and imported to the United States. The OSLTF provides necessary funding for oil spill removal, natural resource assessment and restoration, as well as compensation to authorized claimants. A responsible party may also successfully claim against the OSLTF for removal costs and damages allowed under §2708 of OPA if (a) the responsible party is entitled to OPA §2703 defenses to liability, and (b) no exceptions to limitation of liability apply.

The §2703 defenses to liability apply if the sole cause of discharge is: (i) an act of God; (ii) an act of War; (iii) an act or omission of an independent third-party, if the responsible party establishes, by a preponderance of the evidence, that it acted with due care and took precautions against foreseeable acts of such third-party, and; (iv) the responsible party reported the incident and provided cooperation in removal activities.

Note well, there are certain exceptions to an RP’s limitation of liability including an act of gross negligence or willful misconduct proximately causing a spill, or; if a violation of a federal safety, construction or operating regulation caused a spill.

Claims that May Be Submitted to the OSLTF

Under 33 U.S.C. §2702, a person or party may submit claims to the OSTLF for uncompensated removal costs and damages that result from an oil spill, to wit, natural resources; real or personal property; subsistence use; revenues; profits and earning capacity; and public services. An RP, under OPA §2708, may recover for damage in excess of its OPA limits of liability noted above. However, an RP may assert a claim to the OSLTF only if it can demonstrate its entitlement to a defense or limitation of liability under OPA 90. In fact, this is the first step which an RP must successfully complete before the NPFC will proceed with the review of any claim.

General Requirements for Presenting a Claim Against the OSLTF

Pursuant to 33 C.F.R. § 136.105, the claimant bears the burden of providing all evidence, information, and documentation deemed necessary by the Director of the NPFC to support the claim. In addition to complying with the general requirements of 33 C.F.R. § 136.105, a claimant must, when submitting a claim, specify all of the claimant’s known removal costs or damages arising out of a single incident; and separately list, with a sum certain attributed to each, all removal costs and each separate category of damages. Further, the NPFC’s Director retains the discretion to treat separately, for settlement purposes, removal costs and each separate category of damages for which a claim has been submitted. With respect to insurance, a claimant must provide, inter alia, pursuant to 33 CFR § 136.111, information concerning any insurance that may cover the removal costs or damages for which compensation is claimed. In this regard, the claimant is to provide the name and address of each insurer; the kind and amount of coverage; the policy number; and whether any insurer has paid the claim in full or in part.

Time Limits for the Filing of Claims

The applicable period of limitations for the filing of claims are set forth at 33 U.S.C. §2712(h) and 33 C.F.R. §136.101 and vary depending upon the specific nature of the claim being presented. The OSLTF will only consider a claim if presented in writing to the NPFC’s Director. A claim is deemed presented on the date it is actually received at the NPFC office, unless otherwise indicated in writing, by the NPFC’S Director.

A claim for recovery of removal costs must be presented, in writing, to the NPFC’s Director, within six (6) years after the date of completion of all removal actions taken as a result of the oil spill. Date of completion of all removal actions is defined as the earlier of either the actual date of completion of all removal actions for the incident or the date the Federal On-Scene Coordinator (“FOSC”) determines that the removal actions which form the basis for the cost being claimed are completed.

A claim for the recovery of damages may be presented within three (3) years after the date on which the injury and its connection with the oil discharge were reasonably discoverable with the exercise of due care. If the claim is for recovery of natural resources damages, the claim must be presented within the later period of either the date prescribed in 33 C.F.R. § 136.101(a)(1)( I), or within three (3) years from the date of completion of the natural resources assessment under 33 U.S.C. § 2706 (e).

Proof Required For Each Claim For Removal Costs Or Damages

Removal Costs

A claim for removal costs may be presented by any claimant pursuant to 33 C.F.R. § 136.201. The claimant must, however, establish that (a) the actions taken were necessary to prevent, minimize, or mitigate the effects of the oil spill; (b) that the removal costs were incurred as a result of these actions; and (c) that the actions taken were determined by the FOSC to be consistent with the National Contingency Plan or were directed by the FOSC.

The amount of compensation allowable is the total of uncompensated reasonable removal costs that were determined by the FOSC to be consistent with the National Contingency Plan or were directed by the FOSC.

Natural Resources Damages

Claims for uncompensated natural resource damages may be presented by an appropriate natural resource trustee. In order to adequately prove such claims, a claimant must provide documented costs and cost estimates for the claim; identify all trustees who may be potential claimants for the same natural resources damaged; certify the accuracy and integrity of any claim submitted to the Fund, and certify that any actions taken or proposed were or will be conducted in accordance with the applicable laws and regulations; certify whether the assessment was conducted in accordance with the applicable provisions of the natural resources damage assessment regulations (33 U.S.C. 2706(e)(1)); and, certify that, to the best of the trustee’s knowledge and belief, no other trustee has the right to present a claim for the same natural resources damages and that payment of any subpart of the claim presented would not constitute a double recovery for the same natural resources damages.

The amount of compensation allowed for these types of claims is the reasonable cost of assessing damages, and the cost of restoring, rehabilitating, replacing, or acquiring the equivalent of the damaged natural resources. If any amounts received from the Fund exceeds the amount actually required to accomplish the activities for which the claim was paid, the trustees must reimburse the Fund for such sums.

Real or Personal Property Damages

A claim for injury to, or economic losses resulting from the destruction of, real or personal property may be presented only by a claimant either owning or leasing the property. A claimant must establish an ownership or leasehold interest in property; that the property was injured or destroyed; the cost of repair or replacement; and the value of the property both before and after the injury occurred.

For each claim for economic damages, the claimant must establish that the property was not available for use and, if it had been, the value of that use; whether the or not substitute property was available and, if used, the costs thereof; and that the economic loss claimed was incurred as the result of the injury to or destruction of the property.

The amount of compensation allowable for damaged property is the lesser of the actual or estimated net cost of repairs necessary to restore the property to substantially the same condition which existed immediately before the damage; the difference between the value of the property before and after the damage; or the replacement value of the property.

For economic losses resulting from the destruction of real or personal property, the amount of compensation which may be allowable is the reasonable costs actually incurred for the use of substitute commercial property, or if substitute commercial property was not reasonably available, in an amount equal to the net economic loss which resulted from not having use of the property. Where substitute commercial property is reasonably available, but not used, the allowable compensation for the loss of use is limited to the cost of the substitute commercial property, or the property lost, whichever is less. Compensation for the loss of use of noncommercial property is not allowable.

Subsistence Use of Natural Resources

The applicable regulations governing the procedure for obtaining compensation for this type of claim are set forth at 33 C.F.R. §§ 136.219, 136.221 and 136.223. A claim for the loss of subsistence use of natural resources may be presented only by a claimant who actually uses, for subsistence, the natural resources which have been injured, destroyed, or lost, without regard to the ownership or management of the resources. A claim for loss of profits or impairment of earning capacity due to loss of subsistence use of natural resources must be included as part of the claim.

For subsistence claims, a claimant must provide, inter alia, the identification of each specific natural resource for which compensation for loss of use is claimed; a description of the actual subsistence use made of each specific natural resource by the claimant; a description of how and to what extent the claimant’s subsistence use was effected by the injury to or loss of each specific natural resource; a description of each effort made by the claimant to mitigate the claimant’s loss of subsistence use; and a description of each alternative source or means of subsistence available to the claimant during the period of time for which loss of subsistence is claimed, and any compensation available to the claimant for loss of subsistence.

The amount of compensation allowable for subsistence claims is the reasonable replacement cost of the subsistence loss suffered by the claimant, if, during the period of time for which the loss of subsistence is claimed, there was no alternative source or means or subsistence available. Such amounts must be reduced by all compensation made available to the claimant to compensate for subsistence loss; all income which was derived by utilizing the time which otherwise would have been used to obtain natural resources for subsistence use; and overheads or other normal expenses of subsistence use not incurred as a result of the incident.

Government Revenues

The applicable regulations for this type of claim are set forth at 33 C.F.R. §§ 136.225, 136.227 and 136.229. A claim for net loss of revenues due to the injury, destruction, or loss of real property, personal property or natural resources may be presented only by an appropriate claimant sustaining the loss. Claims for lost revenue include taxes, royalties, rents, fees and net profit shares.

Such claimants must identify and describe the economic loss for which compensation is claimed, including the applicable authority, property affected, method of assessment, rate and method and dates of collection. Additionally, the claimant must establish that the loss of revenue was due to the injury to, destruction of, or loss or real or personal property or natural resources.

The amount of compensation allowable for such claims is the total net revenue actually lost.

Profits and Earning Capacity

A claim for loss or profits or impairment of earning capacity due to the injury to, destruction of, or loss of real or personal property or natural resources may be presented by a claimant sustaining the loss or impairment. The claimant need not be the owner of the damaged property or resources to recover for lost profits or income. A claim for lost of profits or impairment of earning capacity that also involves a claim for injury to, or economic losses resulting from the destruction of real or personal property must be claimed under 33 CFR 136.213. A claim for lost of profits or impairment of earning capacity that also involves a claim for loss of subsistence use of natural resources must be claimed under 33 CFR 136.219.

Such claimants must establish that real or personal property or natural resources had been injured or lost; that the claimant’s income was reduced as a consequence of injury to, destruction or, or loss of the property or natural resources, and the amount of that reduction; and the amount of the claimant’s profits or earnings in comparable periods and during the period when the claimed loss or impairment was suffered, as established by income tax returns, financial statements and similar documents. Additionally, a claimant must state whether alternative employment or business was available and undertaken and, if so, the amount of income received. All income that a claimant received as a result of the incident must be clearly indicated and any saved overhead and other normal expenses not incurred as a result of the incident must be established.

The amount of compensation allowable for claims for lost profits and earning capacity is limited to the actual net reduction or loss of earnings/profits suffered. Calculations for net reductions or losses must clearly reflect adjustments for all income resulting from the incident; all income from alternative employment or businesses undertaken; potential income from alternative employment or business not undertaken, but reasonably available; and saved overhead or normal expenses not incurred as a result of the incident; and state, local and Federal taxes.

Government Public Services

A claim for the net costs of providing increased or additional public services during or after removal activities, including protection from fire, safety or health hazards, caused by a discharge or oil may be presented only by a State or political subdivision of a State incurring the costs.

Such an authorized claimant must establish the nature of the specific public services provided and the need for those services; that the services occurred during or after removal activities; that the services were provided as a result of the discharge of oil and would not otherwise have been provided; and the net cost for the services and the methods used to compute those costs.

The amount of compensation allowable is the net cost of the increased or additional service provided by the state or political subdivision.

Settlement And Notice To Claimant

Payment in full or acceptance of an offer of settlement is final and conclusive for all purposes, and upon payment constitutes a release of the NPFC from the claim.

Upon completion of review, the NPFC will issue its recommendation and offer for each claim submitted. Once an offer is made, it is a firm and final offer. There will be no negotiation of the claim unless additional proofs are submitted. Acceptance of any compensation precludes the claimant from filing any subsequent action against any person to recover costs or damages which are the subject of the compensated claim; and constitutes an agreement by claimant to assign to the NPFC subrogation rights. The claimant’s failure to accept an offer of settlement within sixty (60) days after the date the offer was mailed by the NPFC automatically voids the offer.

If the NPFC denies a claim, the claimant will be notified by certified or registered mail. Further, failure of the NPFC’s Director to make final disposition of a claim within six (6) months after it is filed, shall be deemed, at the claimant’s option, a final denial of the claim.

Upon written request, the NPFC’s Director may reconsider any claim denied. Requests must be in writing and include the factual or legal grounds for the relief requested. Such requests must be received by the NPFC Director within sixty (60) days after the date the denial was mailed to the claimant or within thirty (30) days after receipt of the denial by the claimant, whichever date is earlier. Disposition of the request for reconsideration will be make within ninety (90) days after its receipt by the NPFC. If the NPFC denies any such motion for reconsideration, the claimant may then commence a federal court action to address the issues of obtaining reimbursement/compensation from the OSLTF.

Remedy For Denial Of Claim

The Administrative Procedure Act (“APA”) provides for judicial review of a final agency action. A denial of appeal for reconsideration is considered to be a final agency action. A court will reverse a final agency action only if an RP can affirmatively prove an abuse of discretion or that such agency was arbitrary and capricious.

If a claimant disputes a final determination by the NPFC, there are certain avenues of recourse available. An illustrative case on point is Gatlin Oil Co. Inc. v. United States. In the Gatlin Oil case, the plaintiff, Gatlin Oil Co., Inc. (“Gatlin”) commenced a suit seeking reimbursement for costs incurred in removing fuel which was discharged from its onshore storage tanks onto the surrounding land and into a local river. It had been determined that Gatlin was entitled to a complete defense because the discharge had been caused by and unknown and unidentified vandal. Gatlin sought compensation from the OSLTF for removal costs.

The NPFC determined that some claims for compensation made by Gatlin, pursuant to 33 CFR Part 136 for an oil spill were not compensable under OPA. Gatlin then filed suit in the United States District Court for the Eastern District of North Carolina. In that action, the Court reversed the NPFC’s ruling and held that the Fund Director had acted in an arbitrary and capricious manner and that Gatlin was entitled to compensation for all its recovery costs and damages with interest. The Court applied the “arbitrary and capricious” standard of review in accordance with the Administrative Procedures Act. The District Court further remanded the matter to the NPFC for further fact finding and for reconsideration in accordance with the Court’s opinion.

However, the United States appealed the District Court’s ruling. The Fourth Circuit reiterated that the Fund Director’s findings must not be arbitrary, capricious or an abuse of discretion. The Fourth Circuit further held that a reviewing court should determine whether the Fund’s Director’s allowance or disallowance of compensation was reasonable. After reviewing the case, the Fourth Circuit vacated the District Court’s rulings and concluded that the Fund Director’s findings were correct and remanded the matter to the District Court for further proceedings.

Practical Considerations For Presenting Claims To The Osltf

When presenting a claim to the OSLTF, each claimant has the burden of proving its entitlement to receive compensation. When presenting a claim on behalf of a RP, the RP is responsible for demonstrating its defenses and right to limitation of liability. In meeting these burdens, the responsible party can rely on the Coast Guard investigative findings, judicial determinations and/or any other evidence the RP wishes to submit.

Difficulty may arise if the Coast Guard investigation report is delayed. The bureaucratic nature of the Coast Guard infrastructure tends to lend itself to requiring a substantial amount of time and internal review before the final findings are available. This may create an obstacle for a party in order to prove its entitlement for further review of its claim.

While the NPFC provides an initial claim form for presenting a claim to the NPFC, there is no prescribed format for presenting a claim to the OSLTF. The claims regulations provide some guidance as to the content of claim submissions generally. In general, a claim submission must be in a signed written document with a sum certain stated. In addition to identifying the date, time, place of incident and identity of claimant, the claim submission must contain a statement to certify that all material facts are included therein, and are accurate.

In providing factual narratives and other evidence as part of the claim process, the claimant must be very careful in selecting what statements to make. Such statements may be used as admissions in third-party litigation and/or by the Coast Guard to supplement its own findings.

In the past, it had been our experience that the NPFC review process could be painstakingly slow, as undertaking such a review is a complex and tedious task. This has dramatically improved in recent years and is continuing to get better. In order to facilitate review and processing, a claim should be presented as neat, detailed, complete and organized as possible. Summary sheets can and should be prepared using spreadsheet software. Such summaries can be used as a guide to review supporting documentation such as invoices, daily job reports, etc.… Additionally, backup/supporting documentation should be segregated in binders for each spill responder and/or contractor with clear delineation of sub-contractor supports and invoices.

The neater, more complete and more organized a claim submission, the more likely it will be reviewed and adjusted “in-house” by the NPFC. We have learned through experience that the NPFC appreciates receiving well organized claim summaries. Such summary spreadsheets may be presented not only by way of hard copy, but also on computer disk. All major spreadsheet applications can be used. Presenting a claim in this manner not only saves the NPFC time by way of facilitating its claim review process, but also may speed up the claim determination process and save the claimant time and money. Haphazard submissions will necessarily result in delays in processing the claim.

Conclusion

In conclusion, while we trust the foregoing is self-explanatory, we stand ready to respond to any and all inquiries you, your colleagues and/or your clients may have. Of course, any specific substantive legal opinion and/or liability analysis will necessarily depend on the facts and circumstances of the underlying incident. We are available to assist in any and all ways possible, and for your convenience, confirm that the undersigned can be contacted on a 24/7 basis either at the above details; on his mobile telephone (+1 516-721-4076); or via Email at gmc@chaloslaw.com.

/s/George M. Chalos, Esq. Chalos & Co. 123 South Street Oyster Bay, New York 11771 E-mail: gmc@chaloslaw.com

1. The potential for oil to pollute the marine environment was recognized by the International Convention for the Prevention of Pollution of the Sea by Oil, 1954 (OILPOL 1954). The Conference adopting the Convention was organized by the United Kingdom, and the Convention provided for certain functions to be undertaken by IMO when it came into being.
2. Additional measures for tanker safety were incorporated into the 1978 Protocol to the International Convention for the Safety of Life at Sea (SOLAS), 1974. The SOLAS Protocol included requirements for steering gear of tankers; stricter requirements for carrying of radar and collision avoidance aids; inert gas systems, and stricter regimes for surveys and certification.
3. MARPOL Annex VI was ratified in May 2004, and went into effect in May 2005. It sets limits on NOx emissions from ship exhausts and the sulfur content of bunkers. Specifically, Annex VI regulates the NOx emissions from diesel engines installed on ships constructed on or after January 1, 2000 and diesel engines that have undergone a majorconversion on or after that date. As of February 2007, the United States has not ratified MARPOL Annex VI.
4. Though the United States signed MARPOL in 1978, it initially agreed only to comply with Annexes I and II. The United States later agreed to comply with Annex V as well. Presently, more than 95% of the world’s shipping tonnage is transported under the flags of signatories to MARPOL 73/78.
5. A federal Grand Jury consists of 16 to 23 ordinary citizens, whose job is to listen to the evidence of a potential crime presented by the prosecutor, usually an Assistant US Attorney, either through the testimony of witnesses, which include government agents, and/or through tangible evidence such as photographs, graphs, charts, physical evidence in MARPOL violation cases such as piping, valves, hoses, etc. The witnesses appear in the Grand Jury without their lawyers at their side; although the lawyer is outside of the Grand Jury room and can be consulted by the witness at any time he or she feels the need to do so. However, it always appears curious and, possibly suspicious, to Grand Jurors when a witness stops the proceedings to repeatedly consult with his or her lawyer. Consequently, the prosecutor generally has a free reign in the Grand Jury room to present evidence unopposed. In the US we have a maxim that says “a prosecutor can indict a ham sandwich if he or she wanted”, meaning, that it is a fairly simple task for the prosecutor to obtain an Indictment from a grand jury. The task of the Grand Jurors is to listen to the evidence presented by the prosecutor and if they feel that “probable cause” exists that a crime has been committed in the district in which they sit, they issue what is known as a “True Bill” which then forms the basis of an “Indictment”. An Indictment is the legal document that formally charges a defendant with a crime or a series of crimes that such defendant must then respond to and defend against. An Indictment is only an accusatory instrument; it does not mean that a person is guilty of the charges proffered against him or her. Guilt or innocence is then decided by a petit jury at trial where the standard for conviction is beyond a “reasonable doubt” which, of course, is a much higher legal standard then mere “probable cause”. In addition, at trial only admissible evidence is allowed and the defendant’s lawyers are present to examine and/or cross-examine all witnesses.
6. The Coast Guard Investigative Service (CGIS) is a division of the Coast Guard that carries out the Coast Guard’s internal and external criminal investigations. When personnel from CGIS board a vessel it is a tell-tale sign that the inspection is no longer civil in nature, and a criminal investigation is underway.
7. For example, the ORB indicates a liquid level in the vessel’s sludge tank at the completion of the previous voyage, the sludge level is currently at a lower level, and the ORB fails to indicate how the ship disposed of this liquid
8. The mens rea is the Latin term for “guilty mind”. The standard test of criminal liability is usually expressed in the Latin phrase, actus non facit reum nisi mens sit rea, which means that “the act does not make a person guilty unless the mind is also guilty”. Ordinarily, there must be an actus reus or “guilty act”, accompanied by some level of mens rea to constitute the crime with which the defendant is charged. As more fully discussed above, when a defendant is charged with a strict liability crime, the government is not required to prove mens rea.
9. The Coast Guard, acting on behalf of Homeland Security, in order to release the vessel from any Custom’s hold, has generally been demanding bond security in amounts of $1 million or more. In addition, as part of its investigation, the Coast Guard generally removes from the vessel as potential “material witnesses the entire engine room crew and many times other crew members, as well. Consequently, as part of any security agreement for the vessel’s release, the Coast Guard requires, among other things, the vessel owner and/or operator to house, feed and pay the salaries for any crewmembers so removed for periods ranging from 90-270 days. Depending on the length and breadth of the investigation, such expenses can be substantial.
10. The navigable waters of the United States are: 1) the territorial seas of the United States; 2) internal waters of the United States that are subject to tidal influence; and, 3) internal waters of the United States not subject to tidal influence that are or have been used as highways for substantial interstate or foreign commerce. See 33 C.F.R. §2.36(a). Territorial seas of the United States are the waters, 12 nautical miles wide, adjacent to the coast of the United States and seaward of the territorial sea baseline. See 33 C.F.R. §2.22.
11. “Navigable waters of the United States are those waters that are subject to the ebb and flow of the tide and/or are presently used, or have been used in the past, or may be susceptible for use to transport interstate or foreign commerce. A determination of navigability, once made, applies laterally over the entire surface of the waterbody, and is not extinguished by later actions or events which impede or destroy navigable capacity.” See 33 C.F.R. § 329.4.
12. 18 U.S.C. §1519 reads: “Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.”

Since the tragic events of September 11th, pursuant to a directive of the Office of Homeland Security, the U.S. Coast Guard has undertaken a comprehensive program of boarding foreign flag-state vessels calling U.S. ports. As a result of the new heightened security measures, there has been a significant increase in the scrutiny in which vessels, and its records/logs, are being inspected. Such scrutiny, rightly or wrongly, has led to a rash of vessel and/or crew detentions, as well as criminal allegations and charges against vessel Owners, Operators, Managers, Officers and crew.

Additionally, we have learned that the U.S. Coast Guard has recently established various task forces, including ‘the Oily Water Separation Systems Task Force’ (OWSSTF), to examine a wide range of issues related to oily water separation equipment and its use on vessels in U.S. waters. Coast Guard personnel and other law enforcement personnel are scrutinizing the use and functionality of oily water separation systems more carefully than ever before, and U.S. and International authorities have made it clear that they have, and will continue to, seek jail sentences for Masters and Chief Engineers of ships committing pollution offenses. Many times, even if no pollution incident has occurred, the Coast Guard and U.S. prosecutors will commence a Grand Jury investigation seeking to prosecute suspected illegal activities (i.e. possibleMarpol violations, presentation of false records and/or obstruction of justice charges). It is now well know that the U.S. authorities have repeatedly successfully prosecuted various cruise operators, as well as commercial vessel operators, captains, and chief engineers of illegal by-passing of the oily water separation system and/or the presentation of an Oil Record Book containing “false entries.” Prosecutors have also successfully prosecuted vessel owners and operators for ‘obstructing justice.’ It is the goal of this paper to introduce key individuals in the maritime industry to ‘need to know’ information to be prepared to address this serious and alarming situation for vessels calling U.S. ports. Additionally, as more fully detailed below, we offer the most basic, yet essential, advice a lawyer can give: shipboard and shore-side personnel should seek the advice of counsel as soon as practical, and must always be truthful and forthright in their dealings with the U.S. authorities. Of course, it is extremely advisable that if the U.S. authorities undertake any onboard investigation, which goes beyond the scope of the ordinary port state control inspection, counsel should be engaged to protect the rights of the owners, managers, officers and crew. It is without question that an ounce of prevention, goes much further than a pound of cure.

U.S. Government’s Modus Operandi

Coast Guard investigators and prosecutors appear to have focused their efforts on alleged illegal by-passes of shipboard oily-water separation equipment through the use of flexible hoses and flanges. While, technically speaking, the U.S. has no jurisdiction over unauthorized discharges by foreign-flag vessels in international waters in violation of MARPOL, it does, indeed, have jurisdiction, and vehemently prosecutes, false Oil Record Book entries, obstruction of justice and witness tampering.

The Nature of Criminal Liability

A. Mens Rea

Historically, the U.S. courts have recognized that in order to be guilty of a crime, a person must have a criminal intent or mens rea. Thus, in order to be guilty of a crime, one needs to have acted with wrongful purpose, knowledge of a particular wrong, or in a reckless and/or willful manner. The basic notion running through the traditional criminal law was not to criminalize conduct absent a showing of evil intent or motive or that which would be traditionally considered a civil wrong, addressed by civil remedies. Most judicial interpretations of traditional general criminal statutes incorporated the concept of mens rea, even if not specifically provided for in the statute. The prescribed mental state necessary to trigger criminal liability varies from statute to statute. Following the traditional rule, one would expect that maritime criminal liability would be predicated upon the individual’s mental status for: willful or knowing conduct, criminal negligence, recklessness and willful ignorance.

Unfortunately, this basic concept of law and fairness relating to minimal intent requirements was abandoned in the application of statutes dealing with the public welfare, including environmental statutes. These “public welfare” statutes were initially concerned with the regulation and protection of the public from adulterated food and drugs. Thus, the courts reasoned that the public safety outweighed the traditional requirement of criminal intent. Such statutes originally came into being to protect the public from the dangerous hazards resulting from the industrial revolution.

Because environmental laws are specifically designed to protect the public safety and welfare, they have been construed by the courts in a manner which maximizes public protection. Consistent with this approach, some criminal environmental statutes, such as the Refuse Act, are based on the notion of strict liability, or impose criminal liability for failure to comply with environmental regulations even when the violator was unaware that his or her conduct violated a law or regulation. In addition, some statutes impose criminal liability upon an individual corporate officer based on his or her position of responsibility in the corporation. According to this public welfare theory, the only mental state required, if any, is that which is explicitly stated in the statute, as opposed to being incorporated through traditional criminal common law. The application of such statutes may result in criminal liability for conduct that would not rise to the level of criminal conduct in traditional criminal statutes.

B. Basic Elements of Criminal Liability

1. Negligence. In criminal law, there is a recognized distinction between criminal negligence and civil negligence. American courts dealing with common law criminal cases have held that the civil negligence standard of failure to use reasonable care is not enough to impose criminal liability. Rather, criminal negligence is required to impose criminal liability. A typical definition of criminal negligence is contained in the New York Penal Law:

A person acts with criminal negligence with respect to a result or circumstance when he fails to perceive a substantial and unjustifiablerisk that such result will occur or that such circumstance exists. The risk must be of such nature and degree that the failure to perceive constitutes a gross deviation from the standard of care that a reasonable person would observe in the situation.

Common sense dictates that these “substantial risk” and “gross deviation” requirements should apply to a maritime incident where a general criminal statute containing negligence as an element is charged. However, the courts have held that where negligence is included as an element in an environmental statute, proof of simple negligence alone is enough for conviction. As an example, the criminal negligence provisions of the Clean Water Act have been construed to require only proof of simple negligence rather than gross negligence to sustain a criminal conviction. Obviously, the proof required to establish simple negligence is much less than the proof required to sustain a charge of gross negligence, and a conviction under such statutes is almost a foregone conclusion. It is precisely because it is so easy for the prosecutors to obtain a conviction under these statutes, that the prosecutions of crewmembers and company officials has become so prevalent.

2. Recklessness. Reckless conduct demands a higher level of culpable conduct than negligence. In traditional criminal statutes, the seriousness of a crime will be greater when there is reckless conduct, as opposed to where there is only criminally negligent conduct. The definition of reckless conduct is:

[A] person acts recklessly with respect to a result or circumstance when he is aware of and consciously disregards a substantial and unjustifiable risk that such result will occur or that such circumstance exists. The risk must be of such nature and degree that disregard thereof constitutes a gross deviation from the standard of conduct that a reasonable person would observe in the situation.

While negligence is the failure to perceive a risk, recklessness is to perceive the risk but to consciously disregard it. Proving recklessness, even under the environmental statutes, is a more daunting task for prosecutors. As a result, while recklessness is a criminal charge that prosecutors pursue, convictions under this theory are more difficult to obtain. Criminal charges based on recklessness often times are used as bargaining chips to obtain guilty pleas of negligence which, in turn, lead to the imposition of fines, often times, significant in quantum.

3. Knowing Conduct. While the public welfare approach to crimes permits strict liability statutes, Congress has attempted to prevent the criminalization of innocent conduct by expressly including a knowledge element as part of the mens rea requirement in the majority of criminal environmental statutes. In order for criminal liability to attach in this class of offenses, the act must be committed ‘knowingly.’ An act is done knowingly if it is done intentionally or voluntarily. It is not necessary that the person be aware that the act is illegal. Also, there is a line of cases which hold that willful ignorance can be considered the equivalent of knowledge. This concept comes into play when there is evidence that a defendant, usually a supervisor, deliberately chooses to ignore what would have otherwise been obvious to him, or consciously avoids learning of illegal conduct.

4. Corporate Liability. It is an established principle in criminal law that a corporation can incur vicarious criminal liability for the actions of employees acting within the scope of their employment. Additionally, a corporation may have direct criminal liability for the acts of directors, officers or employees. Direct liability may be imposed if company policies or directions cause or contribute to the incident. For example, direct liability could result from shore-side personnel being aware of and/or condoning crew incompetence, or a failure to properly train the crews, or a failure to implement and monitor compliance programs or the failure to ignore shipboard practices such as impermissible overboard discharging of waste and/or oily water slops. Furthermore, corporate actions (depending upon privity, knowledge and/or control) can result in individual criminal liability for corporate officers as well as for the corporation.

In addition, a corporate officer may be held criminally liable for violation of an environmental statute, even if the officer did not participate in the illegal activity. Under the “Responsible Corporate Officer Doctrine”, criminal liability can be imposed on corporate officers if they were in a position to know about or prevent the criminal act, even if they did not actually commit the alleged crime. This doctrine is very harsh in that it can result in criminal liability being imposed on a corporate officer merely because of that officer’s position of responsibility, as opposed to any particular conduct on the officer’s part.

The Responsible Corporate Officer Doctrine should be of particular significance and concern to vessel operating and/or management personnel. Under this doctrine, if an officer or responsible individual at such companies actively engages in acts or omissions, which result in a spill incident or a criminal violation, that person and company can be charged with crimes under the various statutes. For instance, if an individual at the management company knowingly hires an incompetent master or crewmember who is responsible for an oil spill incident, that individual and his company are at risk for criminal prosecution. If an individual at the management company fails to comply with the ISM Code, or fails to implement systems to monitor the vessel personnel’s compliance with the ISM requirements, that individual and/or his company is at risk. If an individual at the vessel’s operating company knows, or should have known, of a defect in the vessel’s equipment which causes or exacerbates a pollution incident, that individual and/or his company is at risk of criminal prosecution.¹

The fact that an owning, operating, or managing company and its personnel are located outside the United States should be of little comfort. United States prosecutors have displayed surprising ingenuity, doggedness and resilience in pursuing those responsible for criminal violations, even minor ones. Under the right circumstances, United States prosecutors can (and will) confiscate vessels to collect fines and penalties, charge and hold vessel personnel pending trial, charge owning, operating and/or management companies and responsible corporate officers with violations of environmental regulations, even if such individuals are outside the United States. It should be borne in mind that the United States is a signatory to a number of extradition treaties with other countries and, if necessary, prosecutors can invoke such treaties to bring a responsible individual to the United States to stand trial for violations of environmental criminal statutes.

Criminal Statutes and Sanctions

There is a broad array of criminal sanctions available to the U.S. government in the investigation and prosecution of cases involving a suspected criminal offense. Recently, as alluded to above, there have been an exorbitant number of investigations regarding alleged MARPOL and other environmental offenses. The United States treats such violations seriously, and has demonstrated that it will spare no expense in the investigation of such matters.

For your guidance, below please find a brief outline of a number of laws and statutes which U.S. Federal prosecutors generally have used in criminally charging vessel Owners, Operators, Managers, Officers or, in many circumstances, individual crewmembers.

A. The Act to Prevent Pollution from Ships (APPS)

The Act to Prevent Pollution from Ships, 33 U.S.C. §§ 1901-1911, adopts as U.S. law the provisions of the International Convention for the Prevention of Pollution from Ships (“MARPOL”). Various administration regulations have been promulgated by the Coast Guard to enforce the provisions of MARPOL and the APPS. See 33 C.F.R. pts. 151 and 155.

Under 33 U.S.C. § 1908(a), it is a class D felony to knowingly violate the provisions of MARPOL. A class D felony is punishable by up to 10 years imprisonment, and a fine of up to $250,000 for an individual, and $500,000 for a corporation, for each violation. 33 U.S.C. § 1809(a); 18 U.S. C. § 3559(a)(4); 18 U.S.C. § 3571 (b)(4); 18 U.S.C. § 3571(c)(3). A vessel violating a provision of MARPOL may be arrested and sold to satisfy any fine or penalty under the Act 33 U.S.C. § 1908(d).

The security being requested by Coast Guard officials and U.S. prosecutions for alleged MARPOL violations is a USD500,000 corporate surety bond, rather than the customary P&I Club issued Letter of Undertaking.

B. Security for Release of Vessels Under the Act to Prevent Pollution from Ships (APPS)

Under 33 U.S.C. § 1908(e), the United States may revoke the U.S. Customs clearance of a vessel and detain it where reasonable cause exists to believe that the ship, its owner, operator or person in charge may be subject to a fine or civil penalty for a MARPOL violation under the APPS.

C. The Clean Water Act

The Clean Water Act (CWA) 33 U.S.C. § 1251, et seq. prohibits the discharge of any pollutant by any person into navigable waters of the United States, 33 U.S.C. § 1311(a). A “knowing” violation of the Act is a felony. A “negligent” violation is a misdemeanor. The Act also prohibits the discharge of oil or hazardous substances into the navigable waters of the United States, or into the waters of the contiguous zone . . . in such quantities as may be harmful. 33 U.S.C. § 1321(b)(3). Failure to report a discharge is punishable by imprisonment of up to five years. 33 U.S.C. § 1321 (b)(5). The Clean Water Act also provides that the term “person” includes a “responsible corporate officer.” 33 U.S.C. § 1319 (c)(6), (see, discussion of Responsible Corporate Officer, below at paragraph 6).

D. The Rivers and Harbors Act

Under section 407 of the Rivers and Harbors Act of 1899, 33 U.S.C. § 401, et seq., any discharge of refuse of any kind from a vessel into navigable waters of the United States is prohibited. A violation of the Act is a misdemeanor. 33 U.S.C. § 411. The courts have taken a broad view of what constitutes “refuse” under the Act, and the Act has been extended to a discharge of oil or petroleum. Violation of the Act is a strict liability offense which does not require proof of either intent of negligence. Accordingly, a person can be convicted of a misdemeanor violation under the Act based solely upon proof that the person placed a banned substance into navigable waters of the United States.

E. The False Statements Act

Under 18 U.S.C. § 1001, providing a false statement to the U.S. Government is illegal. To sustain a conviction for a violation of the Act, the Government must show: (1) that a statement or concealment was made; (2) the information was false; (3) the information was material; (4) the statement of concealment was made “knowingly and willfully;” and (5) the statement or concealment falls within the executive, legislative or judicial branch jurisdiction.

Falsity through concealment is found to exist where disclosure of the concealed information is required by a statute, government regulation, or form. Also, a false statement about, or concealment of any prohibited discharge satisfies both the Act to Prevent Pollution from Ships or the Clean Water Act, since both impose the duty to report. Likewise, a false entry in a vessel’s oil record book has been the grounds for numerous felony indictments.

F. Responsible Corporate Officer Doctrine

Under the “Responsible Corporate Officer Doctrine,” criminal liability for violations of environmental laws can be imposed on corporate managers or officers who were in a position to know about and prevent a violation, even if they did not actually commit the alleged crime. A person can be held liable as a responsible corporate officer based upon the persons’ ability or authority to influence the corporate conduct which constituted the violation. In the past, the United States has used this doctrine to convict high level officers of corporations, including presidents of corporations, for violations of environmental laws committed by lower-level employees.

Generally, there are three (3) requirements, which must be satisfied to impose liability under the doctrine. First, the individual must be in a position of responsibility, which allows the person to influence corporate policies or activities. Second, the person, by reason of his corporation position, could have prevented or corrected actions, which constituted the violation. Third, the individual’s actions or omissions facilitated the violation.

The Responsible Corporate Officer Doctrine has been applied in the context of violation of environmental laws. There is certainly a potential for individual criminal exposure for violations by corporate officials for violations of which they have knowledge and the authority to prevent. Knowledge of the facts can be inferred in many cases, requiring only that the government establish that the person had the authority and capacity to prevent the violation, and failed to do so.

G. Perjury/Providing False Information to Government Representatives

Criminal laws of the United States provide for severe penalties for providing false information to a government representative, and similarly, providing false testimony under oath to a Grand Jury. Similarly, influencing or attempting to influence the testimony of another, or destruction or alteration of evidence are viewed under United States law as extremely serious, and would result in extremely serious criminal consequences to any individual crewman or others involved in such activities.

H. Witness Tampering

U.S. authorities vigorously investigate and prosecute individuals and corporations suspected of tampering with witnesses in connection with an on-going investigation of pollution and/or illegal discharge incidents. Under 18 USC § 1512, anyone who knowingly uses intimidation or physical force, threatens, or corruptly persuades another person, or attempts to do so, or engages in misleading conduct toward another person with the intent to hinder, delay or prevent the communications to a law enforcement officer or a judge of the United States of information relating to the commission, or the possible commission, of a federal offense, shall be fined or imprisoned up to ten (10) years, or both.

I. Conspiracy

If two or more persons conspire either to commit an offense against the United States, or the defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, pursuant to 18 USC § 371 each shall be fined or imprisoned up to five (5) years or both.

Recommendations for Owners/Operators/Managers and Shipboard personnel to avoid and
respond to U.S. authorities inspections and criminal investigations

1. Owners/Operators/Managers and Shipboard personnel must, at all times, obey all international and U.S. environmental regulations;
2. Owners/Operators/Managers and Shipboard personnel must ensure that company procedures and directives properly implement international and governmental regulations;
3. Owners/Operators/Managers and Shipboard personnel must ensure that crews and employees are well trained, and that proper reporting procedures are developed;
4. Owners/Operators/Managers and Shipboard personnel must avoid shortcuts and, most importantly, avoid ‘burying your head in the sand’ if you know, or should know, something that requires attention is not being attended to;
5. Owners/Operators/Managers and Shipboard personnel must keep accurate records, but avoid the proverbial “CYA” memos;
6. As a matter of practice and procedure, all flanges should be removed from any flexible hoses maintained on board vessels, so as to avoid creating wrongful suspicion of an illegal by-pass of the oily-water separation equipment;
7. Blank-off any flanges located at or near the oily-water separating equipment and overboard discharge valves, which may exist as original or modified construction, but are not used as a matter of course;
8. As a matter of policy, Owners/Operators/Managers and Shipboard personnel should implement a “no alcohol” policy while the vessel is in the United States waters. Nothing creates a bigger stir or potential for criminal prosecution, fines, penalties and loss of limitation of liability, than a spill incident resulting from the use of alcohol by a crew member.
9. All entries in the Oil Record Book must be truthful, and in compliance with MARPOL requirements;
10. All shipboard personnel must be truthful and forthcoming during all port state inspections;
11. Owners/Operators/Managers must not attempt to influence officers and/or crew as to their discussions with the authorities, other than to insist that the officers and crew are honest and forthright with all authorities; and
12. Legal assistance, including criminal counsel, must be engaged as soon as possible in order to assess the situation and provide advice to the Owner/Operators/Managers/

    Officers and Crew, including engaging individual counsel for all officers and crew, as necessary and appropriate. No one on board a ship can or should be forced to speak to an investigating law enforcement officer if there is a possibility that the person may incriminate himself by doing so. As a matter of policy, shipowning companies, operators and/or managers should ensure that crews are not coerced by company officials to give statements to law enforcement officials on the scene. Each crewmember (and, indeed, any corporate personnel that is a target of a criminal investigation) is entitled to consult with counsel and to have counsel present when being interviewed by law enforcement officials.

For more information regarding any specific inquiries you may have concerning U.S. investigations and prosecutions of suspected Marpol violations, please contact George M. Chalos, Esq. of the U.S. law firm: Chalos & Co., P.C. (www.chaloslaw.com) at gchalos@chaloslaw.com or gmc@chaloslaw.com.

1. In the NORTH CAPE spill incident off the coast of Rhode Island, the owning company, its President and Operations Manager were charged, and pled guilty, to criminal violations of various environmental statutes on the grounds that they knew, or should have known, that the anchoring system on the oil carrying barge that ultimately ran aground was not working properly. In that case, while the President and Operations Manager avoided jail time, they were required to pay huge fines and to bear the stigma of a criminal conviction. The tug master was also charged and convicted, but he paid a substantially smaller fine. A similar corporate officer prosecution occurred as a result of the MORRIS J. BERMAN spill in Puerto Rico.

It is a common belief among the Plaintiff’s bar, (albeit a mistaken belief), that any case involving a fall from a scaffold or ladder will necessarily result in an award of damages. The NYS Court of Appeals has recently clarified such mistaken belief when it clearly and unambiguously held that “at no time did the Court or Legislature even suggest that a defendant should be treated as an insurer after having furnished a safe workplace. The point of Labor Law 240 (1) is to compel contractors and owners to comply with the law, not to penalize them when they have done so.” See Blake v. Neighborhood Housing Service of NYC, 11 N.Y.3d 280 (2003). For your review and reference, we provide the following summary of the salient points of NY Labor Law 240, and this recent Court of Appeals decision interpreting same.

The History Of Law Labor §240 (1)

The first scaffold law, an ancestor of Labor Law § 240 (1), was enacted 118 years ago (i.e. – in 1885), in response to the Legislature’s concern over unsafe conditions for employees who worked at heights. In promulgating the statute, lawmakers reacted to widespread accounts of deaths and injuries in the construction trades. Newspapers carried articles attesting to the frequency of injuries caused by rickety and defective scaffolds. In 1885, there were several articles detailing both the extent of these accidents and the legislation directed at the problem.

The lawmakers enacted the 1885 statute when personal injury suits of this type were based on common law duties of a master to a servant (Vosburg v. Lake Shore & M.S. Ry. Co., 94 NY 374 [1884]; Devlin v. Smith, 89 NY 470 [1882]). For that reason, the Legislature aimed this first scaffold law (“An Act for the protection of life and limb”), at “a person employing or directing another.” Even though the first scaffold law exposed violators to civil and criminal responsibility, it fell short of the mark because the employer could escape liability by blaming the employee’s co-workers (Kimmer v. Weber, 151 NY 417, 421 [1897]; Butler v. Townsend, 126 NY 105, 111 [1891]). This was changed with an 1897 amendment to the scaffold law, as part of a larger Labor Law initiative dealing with factories, bakeries, tenement-made articles, and the employment of women and children. See Blake, supra. The amendment did two things: it placed the onus directly on the employer, and it prompted the Court to interpret the law as creating a presumption of employer liability when a scaffold or ladder collapses.

The Courts have long recognized that sound scaffolds and ladders do not simply break apart (Stewart v. Ferguson, 164 NY 553 [1900]). The legislature looked to employers (and later, contractors and owners) as the entities best able to control the workplace and provide for its safety, casting them in liability for their failure to obey the law.¹ The objective was, and still is, to force owners and contractors to provide a safe workplace, under pain of damages. The 1897 statute was a giant step forward, but it still left employers free to invoke the plaintiff’s contributory negligence (Gombert v. McKay, 201 NY 27, 31 [1911]). Indeed, throughout all the scaffold law’s amendments, including the present section 240 (1), the statutory language has never explicitly barred contributory negligence as a defense. The New York Courts, however, did so in 1948, reasoning that the statute should be interpreted that way if it is to meet its objective (Koenig v. Patrick Constr. Corp., 298 NY 313, 316-317). Since then the NY Courts have repeatedly and consistently held that contributory negligence will not exonerate a defendant who has violated the statute and proximately caused a plaintiff’s injury (Zimmer v. Chemung County Performing Arts, Inc., 65 NY2d 513, 521 [1985]; Stolt v. General Foods Corp., 81 NY2d 918 [1993]). At no time, however, did the Court or the Legislature ever suggest that a defendant should be treated as an insurer after having furnished a safe workplace. The point of Labor Law § 240 (1) is to compel contractors and owners to comply with the law, not to penalize them when they have done so. (Blake, supra).

Labor Law 240(1) Is Not A Strict Liability Statute

As briefly state above, the words strict or absolute liability do not appear in Labor Law § 240 (1) or any of its predecessors. Indeed, it was the Court, and not the Legislature, that began to use this terminology in 1923 (under an earlier version of the statute), holding that employers had an “absolute duty” to furnish safe scaffolding and would be liable when they failed to do so and injury resulted (Maleeny v. Standard Shipbuilding Corp., 237 NY 250, 253 [1923]; Amberg v. Kinley, 214 NY 531, 545 [1915] [Collin, J., dissenting]). The Court used a similar phrase 25 years later in Koenig, supra, [a duty “absolutely imposed”]). In 1958, in Connors v. Boorstein (4 NY2d 172, 175 [1958]) the Court, for the first time, worded the concept as “absolute liability” under section 240 (1), and did so again in Major v.Waverly & Ogden, Inc. (7 NY2d 332, 336 [1960] [“absolute statutory liability”]) and Duda v. Rouse (32 NY2d 405, 408 [1973] [“absolute liability”].

NY Courts have also directed liability under Labor Law § 240 (1) as “absolute” in the sense that owners or contractors not actually involved in construction can be held liable (Haimes v. New York Telephone Co., 46 NY2d 132, 136 [1978], regardless of whether they exercise supervision or control over the work (Ross v. Curtis-Palmer Hydro-Electric Co., 81 NY2d 494, 500 [1993]). Intending the same meaning as absolute liability in Labor Law § 240 (1) contexts, the Court in 1990 introduced the term “strict liability” (Cannon v. Putnam, 76 NY2d 644, 649) and from that point on used the terms interchangeably.

Throughout Labor Law 240 (1) jurisprudence, the NY Courts have stressed two (2) points in applying the doctrine of strict (or absolute) liability. First, that liability is contingent on a statutory violation and proximate cause. As the NY Courts succinctly stated in Duda, supra, “[v]iolation of the statute alone is not enough; plaintiff [is] obligated to show that the violation was a contributing cause of his fall,” and second, that when those elements are established, contributory negligence cannot defeat a plaintiff’s claim. As such, section 240 (1) is an exception to CPLR 1411, which recognizes contributory negligence as a defense in personal injury actions (Mullen v. Zoebe, Inc., 86 NY2d 135, 143 [1995]; Bland v. Manocherian, 66 NY2d 452, 461 [1985]).

The phrase “strict (or absolute) liability” in the Labor Law § 240 (1) context is different from the use of the legal term elsewhere. Given the varying meanings of strict (or absolute) liability in different settings, it is not surprising that the concept has generated a good deal of ambiguity, as well as uncertainty and litigation under Labor Law §240 (1), including the mistaken belief that a fall from a scaffold or ladder, in and of itself, will result in an award of damages to the injured party. The NYS Court of Appeals clearly and unambiguously held: “that is not the law, and we have never held or suggested otherwise.” See Blake, supra. Narducci v. Manhasset Bay Assoc. (96 NY2d 259, 267 [2001]), (“Not every worker who falls at a construction site, and not any object that falls on a worker, gives rise to the extraordinary protections of Labor Law § 240 (1)”); Beesimer v. Albany Avenue/Route 9 Realty, Inc. (216 AD2d 853, 854 [3d Dept 1995]). (“the mere fact that [a plaintiff] fell off the scaffolding surface is insufficient, in and of itself, to establish that the device did not provide proper protection”); Alava v. City of New York, 246 AD2d 614, 615 [2d Dept 1997] (“a fall from a scaffold does not establish, in and of itself, that proper protection was not provided”).²

In simple terms, an accident alone does not establish a Labor Law § 240 (1) violation or causation. The NY Courts have repeatedly explained that “strict” or “absolute” liability is necessarily contingent on a violation of section 240 (1). In Melber v. 6333 Main Street, Inc. 91 NY2d 759, 762 [1998]), the Court noted that “we have held that the statute establishes absolute liability for a breach which proximately caused an injury.”In Zimmer (65 NY2d at 522), the Court found that “a violation of section 240 (1) * * * creates absolute liability” and that “[t]he failure to provide any safety devices is such a violation.” Moreover, causation must also be established. As the Court held in Duda (32 NY2d at 410 [1973]), the “plaintiff was obligated to show that the violation [of section 240 (1)] was a contributing cause of his fall.”

In short, there can be no liability under section 240 (1) when there is no violation and the worker’s actions (i.e., his negligence) are the “sole proximate cause” of the accident. In Blake, the Court expressly held that, “extending the statute to impose liability in such a case would be inconsistent with statutory goals since the accident was not caused by the absence of (or defect in) any safety device, or in the way the safety device was placed.” Additionally, in Weininger v. Hagedorn & Co. (91 NY2d 958, 960 [1998]), the NYS Court of Appeals held that “Supreme Court erred * * * in directing a verdict in favor of plaintiff, at the close of his own case, on the issue of proximate cause” where “a reasonable jury could have concluded that plaintiff’s actions were the sole proximate cause of his injuries, and consequently that liability under [section 240 (1)] did not attach.” The Appellate Division also has held (both before and after Weininger) that a defendant is not liable under Labor Law § 240 (1) where there is no evidence of violation and (2) the proof reveals that the plaintiff’s own negligence was the sole proximate cause of the accident.

Finally, while it is well settled that the Labor Law is to be construed liberally, the facts of any Labor Law case must be analyzed within the context and purpose of the statute. In this regard, the Court of Appeals has recently held that:

The language of Labor Law § 240 (1) “must not be strained” to accomplish what the Legislature did not intend (citing Martinez v. City of New York, 93 NY2d 322, 326 [1999]). If liability were to attach even though the proper safety devices were entirely sound and in place, the Legislature would have simply said so, or made owners and contractors into insurers. Instead, the Legislature has enacted no-fault workers’ compensation to address workplace injuries where, as here, the worker is entirely at fault and there has been no Labor Law violation shown.(See Blake, supra).

In conclusion, while we trust the foregoing is self-explanatory, we stand ready to respond to any and all inquiries you, your colleagues and/or your clients may have. Of course, any specific substantive liability analysis will necessarily depend on the facts and circumstances of the underlying incident. We are, of course, available to assist in any way we can, and for your convenience, George M. Chalos, Esq. can be contacted either at the above details, or on a 24/7 basis on his mobile telephone (+516-721-4076). Additionally, if more convenient, Mr. Chalos can be contacted via E-mail at gmc@chaloslaw.com.

1. In 1969, the Legislature amended section 240 (1) to place the responsibility on “all contractors and owners and their agents” in place of “a person employing or directing another to perform labor of any kind” (L 1969, ch 1108).
2. 2 In cases involving ladders or scaffolds that collapse or malfunction for no apparent reason, NY Courts have continued to aid plaintiffs with a presumption that the ladder or scaffolding device was not good enough to afford proper protection. See Panek v. County of Albany (99 NY2d 452, 458 [2003] [summary judgment appropriate for the plaintiff where it was uncontroverted that a ladder collapsed beneath him, causing the fall]); Styer v. Walter Vita Constr. Corp. (174 AD2d 662 [2d Dept 1991]); Olson v. Pyramid Crossgates Co. (291 AD2d 706 [3d Dept 2002]). Once the plaintiff makes a prima facie showing the burden then shifts to the defendant, who may defeat plaintiff’s motion for summary judgment only if there is a plausible view of the evidence – enough to raise a fact question – that there was no statutory violation and that plaintiff’s own acts or omissions were the sole cause of the accident. If defendant’s assertions in response fail to raise a fact question as to these issues, the plaintiff must be accorded summary judgment (see Klein v. City of New York (89 NY2d 833, 835 [1996]). On the other hand, defendant may be granted summary judgment if the record establishes conclusively that no Labor Law § 240 (1) violation was shown to have been a proximate cause of the accident and that the accident was therefore caused solely by plaintiff’s conduct (see e.g. Stark v. Eastman Kodak Co., 256 AD2d 1134 [4th Dept 1998]; Custer v. Cortland Housing Authority, 266 AD2d 619, 621 [3d Dept 1999]).

It is well known throughout the global maritime industry that the U.S. Coast Guard has undertaken a comprehensive program of boarding foreign flag-state vessels calling U.S. ports. As a result of the new heightened security measures, there has been a significant increase in the scrutiny in which vessels, and its records/logs, are being inspected, and consequently, a rash of vessel and/or crew detentions. Similarly, it has been highly publicized that the U.S. Coast Guard has established a ‘Oily Water Separation Systems Task Force’ (OWSSTF), to investigate and prosecute suspected MARPOL violations. U.S. and International authorities have made it clear that they have, and will continue to, seek jail sentences for Masters, Chief Engineers and other crew members of ships found guilty of committing pollution offenses. Many times, even if no pollution incident has occurred, the Coast Guard and U.S. prosecutors will commence a Grand Jury investigation seeking to prosecute suspected illegal activities (i.e. possible Marpol violations, presentation of false records and/or obstruction of justice charges). The U.S. authorities have successfully prosecuted numerous commercial vessel operators, cruise line operators, captains, chief engineers and other engine room personnel of illegal by-passing of the oily water separation system and the presentation of an Oil Record Book containing “false entries.”

Even in matters where it is quickly acknowledged by the U.S. authorities that the suspected criminal conduct did not take place, the stress, strain and pressure on the vessel’s officers and crew is intense and, in plain English, immeasurable. There have been numerous cases where detained crew members have needed emergency medical attention for stress related ailments arising from their detention. The severity of the seafarer’s maladies have ranged from simple headaches, home sickness and indigestion to death. By way of example, we advise that there has been several reported deaths, including one (1) ship’s master who tragically past away as a result of a massive heart attack following his vessel having been detained in the U.S.. In that matter, the vessel was briefly detained due to the USCG’s mistaken suspicion that the vessel was involved in a pollution incident. Additionally, on that very same vessel, shortly before sailing, the Chief Engineer tumbled down the engine room stairs. Undoubtedly, this incident was also the result of overwhelming stress and fatigue caused by the US authorities’ detention and inspection.. We are pleased, however, to report that this particular Chief Engineer’s injuries were not fatal, as he merely broke numerous ribs and punctured a lung. Nevertheless, the individual needed to be air lifted from the vessel to the nearest trauma center for urgent emergency care. More recently, a Chief Engineer on a small bulk carrier calling the United States was not so fortunate. After being detained for several days by the US authorities due to suspected Marpol violations, the Bulgarian-national, without warning and/or explanation, hanged himself in his work-shop on the tween deck of the engine room. These are only a few illustrative examples of the resulting effects of the extreme stress, fear and intimidation felt by foreign seaman during the US authorities’ investigative process.

Knowledge is power!

During the U.S. authorities investigation of a suspected Marpol violation, officers, crewmembers, and various shoreside employees may be contacted by the US prosecution team, including but not limited to representatives of the U.S. Department of Justice, the Coast Guard, the FBI, the Environmental Protection Agency or other government agencies. It is imperative that all seafarer’s and shoreside personnel involved in such a matter know their rights under U.S. law!

In the U.S every person has the right to representation by a lawyer. The most basic, yet essential, advice any lawyer can give to today’s mariner is: seek the advice of counsel as soon as practical, and always be truthful and forthright in your dealings with the U.S. authorities. If U.S. authorities undertake any onboard investigation, which goes beyond the scope of the ordinary port state control inspection, the Owner and/or its’ P&I Club should be immediately contacted and advised of the situation. Similarly, criminal counsel should be engaged immediately to protect the rights of the vessel officers and crew, as well as her owner, operator and/or manager. All of the individual crew members should invoke their Fifth Amendment privilege against self-incrimination until competent counsel is engaged and present. In short, once a criminal investigation has commenced and a mariner invokes his own Fifth Amendment privilege, he/she is not required to speak with the U.S. authorities and/or respond to any of their questions, which may lead to self-incrimination. As a wise, old mariner once said: “The only fish that get caught are the ones with their mouth open.” “Knowledge” is, indeed, “power,” and today’s mariner must be aware of his Fifth Amendment privileges when calling U.S. ports.

The Fifth Amendment of the United States Constitution states that:

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury, except in cases arising in the land or naval forces, or in the militia, when in actual service in time of war or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

Legally speaking, the Fifth Amendment Privilege against self-incrimination is not dependent upon the nature of the proceeding in which the testimony is sought. It is applicable wherever the answer might tend to subject one to criminal responsibility and applies in both civil and criminal proceedings. Lowe’s of Roanoke, Inc. vs. Jefferson Standard Life Ins. Co., 219 F. Supp. 181 (S.D.N.Y., 1963); McCarthy vs. Arndstein, 266 U.S. 34 (1924).¹

The privilege “reflects many of our fundamental values and most noble aspirations: our unwillingness to subject those suspected of crime to the cruel trilemma of self-accusation, perjury or contempt; out preference for our accusatorial rather than an inquisitorial system of criminal justice; our fear that self-incriminating statements will be elicited by inhumane treatment and abuses; our sense of fair play which dictates ‘a fair state-individual balance by requiring the government to leave the individual alone until good cause is shown for disturbing him and by requiring the government in its contest with the individual to shoulder the entire load,'” Murphy v. Waterfront Commission of New York, 378 U.S. 52, 55 (1964).

A seaman may also invoke his Fifth Amendment privileges even if there is no U.S. criminal investigation, but rather may subject the seamen to criminal liability outside of the U.S, so long as the seaman can show that the subject of the government’s questions raises “a real danger of being compelled to disclose information that might incriminate him under foreign law,” and second, that there is a “real and substantial fear of foreign prosecution.” Zicarelli v. N.J. Investigation Commission, 406 U.S. 472, 478-80 (1972); See also United States v. Yanagita, 552 F.2d 940, 946 (2 Cir. 1977).² See also Mishima v. U.S., 1981 AMC 1482, 507 F.Supp. 131 (D. AK. 1981).³

For more information regarding any specific inquiries you may have concerning U.S. investigations and prosecutions of suspected Marpol violations; the Fifth Amendment of the U.S. Constitution and/or other issues relating, please contact George M. Chalos, Esq. of the U.S. law firm: Chalos & Co., P.C. (www.chaloslaw.com) at gchalos@chaloslaw.com or gmc@chaloslaw.com.

1. The determination of whether or not there is justification for one’s silence based upon the possibility that such question may be self-incriminating rests with the court. Rogers vs. U.S., 340 U.S. 367 (1951). However, the waiver of Fifth Amendment privilege is limited to the particular proceeding in which the waiver occurs. United States v. Licavoli, 604 F.2d 613, 623 (9 Cir. 1979).
2. In Zicarelli and in Yanagita the constitutional issue concerning the scope of the privilege was never reached because the petitioners failed to demonstrate any threat of prosecution. See also In re Cardassi, 351 F. Supp. 1080 (D. Conn. 1972) (the Fifth Amendment privilege applies as a protection against foreign prosecution).
3. In the District Court held that several Japanese seamen were permitted to invoke the Fifth Amendment protection in underlying Coast Guard proceedings under threat of prosecution in Japan. The court did not give blanket immunity, but rather extended protection only to specific questions which would tend to incriminate them in any Japanese prosecution.

1. Overview
2. Claims That May be Submitted to the OSLTF
3. General Requirements for Presenting a Claim Against the OSLTF
4. Time Limits for the Filing of ClaimsRemoval Costs
5. Damages
6. Proof Required for Each Claim for Removal Costs or Damages
   1. Removal Costs
   2. Natural Resources Damages
   3. Real or Personal Property Damages
   4. Subsistence Use of Natural Resources
   5. Government Revenues
   6. Profits and Earning Capacity
   7. Government Public Services
7. Settlement and Notice to Claimant
8. Remedy for Denial of Claim
9. Practical Considerations in Presenting Claims on Behalf of Responsible Parties
10. Conclusion

I. Overview

The Oil Spill Liability Trust Fund (“OSLTF”) was established, in the wake of the EXXON VALDEZ oil spill, to provide funds for those who have suffered loss or damages due to an oil spill. Generally, a party who incurs a loss or cost or both as a result of an oil pollution incident must submit claims against the Responsible Party (“RP”) or its guarantor for reimbursement and compensation. Under certain circumstances, such a claimant may be entitled to submit claims directly to the OSLTF.¹ In a similar fashion, an RP and its insurers may make a claim against the fund for reimbursement of certain costs and expenses incurred, as expressly authorized by the relevant regulations.²

On August 18, 1990, the Oil Pollution Act (“OPA”) was enacted into law in response to the need for specific legislation governing the discharge or substantial threat of discharge of oil into navigable waters, adjoining shorelines, and exclusive economic zones of the United States.³ OSLTF was designated the funding source for carrying out the statute. Administration of the fund was delegated to the Coast Guard, sparking the creation of the National Pollution Funds Center (“NPFC”). The NPFC is an independent Coast Guard unit, which is the fiduciary agent for the OSLTF. In accordance with OPA, and other pertinent laws and regulations, the NPFC executes programs to, inter alia: (1) provide funding to permit timely removal actions following pollution incidents; (2) provide funding for the initiation of natural resource damage assessments (“NRDA”) for oil spill incidents; and (3) compensate claimants who demonstrate certain types of damages caused by oil pollution.⁴

The general requirements for submitting claims to the OSLTF are set forth in 33 C.F.R. § 136. This section prescribes regulations for presenting, filing, processing, settling, and adjudicating claims authorized for presentation to the OSLTF.⁵ Specifically, 33 C.F.R. § 136.107 provides that all claimants must sign the presented claim and claims of a subrogor and subrogee for removal costs and damages arising from the same incident and present them together.⁶ Accordingly, it is important in assembling a crisis management team to address a pollution incident so that the interests of the insurer and its assured may necessarily merge. Third-parties may also present claims to the OSLTF pursuant to applicable statutes.⁷

Congress established the OSLTF in 1986.⁸ It was authorized for use as part of OPA and is primarily funded by a five cents per barrel tax on oil produced and imported to the United States.⁹ The OSLTF provides necessary funding for oil spill removal, natural resource assessment, and restoration, as well as compensation to authorized claimants. An RP may also successfully claim against the OSLTF for removal costs and damages allowed under section 2708 of OPA if: (1) the responsible party is entitled to OPA § 2703 defenses to liability; and (2) no exceptions to limitation of liability apply.¹⁰

The defenses to liability apply if the sole cause of discharge is: (1) an act of God; (2) an act of War; (3) an act or omission of an independent third-party, if the responsible party establishes by a preponderance of the evidence that it acted with due care and took precautions against foreseeable acts of such third-party; and (4) the responsible party reported the incident and provided cooperation in removal activities.¹¹

There are certain exceptions to an RP’s limitation of liability including an act of gross negligence, an act of willful misconduct, or the violation of a federal safety, construction, or operating regulation caused a spill.¹²

II. Claims That May be Submitted to the OSLTF

A person or party may submit claims to the OSTLF for uncompensated removal costs and damages that result from an oil spill’s damage to natural resources, real or personal property, subsistence use, revenues, profits and earning capacity, and public services.¹³

An RP, under OPA § 2708, may recover for damages in excess of the limits of liability provided in OPA § 2704. Under OPA § 2704, the limits for tank vessels is the greater of $1,200 per gross ton or $10 million for vessels 3,000 gross tons or greater ($2 million for vessels less than 3,000 gross tons). The limit is the greater of $600 per gross ton or $500,000 for vessels other than tanks.¹⁴

However, as stated above, under OPA § 2708, an RP may assert a claim to the OSLTF only if it can demonstrate its entitlement to a defense or limitation of liability under OPA.¹⁵ In fact, this is the first step which an RP must successfully complete before the NPFC will proceed with the review of any claim.

III. General Requirements for Presenting a Claim Against the OSLTF

Pursuant to the Code of Federal Regulations the claimant bears the burden of providing all evidence, information, and documentation deemed necessary by the Director of the NPFC to support the claim.¹⁶

In addition to complying with the general regulation requirements, a claimant must specify all of the claimant’s known removal costs or damages arising out of a single incident and separately list, with a certain sum attributed to each, all removal costs and each separate category of damages when submitting a claim.¹⁷ Further, the NPFC’s Director retains the discretion to treat removal costs and each separate category of damages for claims submitted separately for settlement purposes.¹⁸

With respect to insurance, a claimant must provide any information that may cover the removal costs or damages for the claimed compensation.¹⁹ In this regard, the claimant is to provide the name and address of each insurer, the kind and amount of coverage, the policy number, and whether any insurer has paid the claim in full or in part.²⁰

IV. Time Limits for the Filing of Claims

The applicable period of limitations for the filing of claims are set forth in the United States Code and the Code of Federal Regulations.²¹ The actual time limit varies depending upon the specific nature of the claim being presented and reasons fully detailed below. The OSLTF will only consider a claim if presented in writing to the NPFC’s Director.²² A claim is deemed presented on the date it is actually received at the NPFC office, unless otherwise indicated in writing by the NPFC’S Director.²³

V. Removal Costs

A claim for recovery of removal costs must be presented in writing to the NPFC’s Director within six years after the date of completion of all removal actions taken as a result of the oil spill.²⁴ Date of completion of all removal actions is defined as the earlier of either the actual date of completion of all removal actions for the incident, or the date the Federal On-Scene Coordinator (“FOSC”) determines that the removal actions forming the basis for the cost being claimed are completed.²⁵

VI. Damages

A claim for the recovery of damages may be presented within three years after the date on which the injury and its connection with the oil discharge were reasonably discoverable with the exercise of due care.²⁵ If the claim is for recovery of natural resources damages, the claim must be presented within the later period of either the date prescribed in 33 C.F.R. § 136.101(a)(1), or within three years from the date of completion of the natural resources assessment under 33 U.S.C. § 2706(e).²⁷ Ostensibly, the relevant statute of limitations time period in question is the later of either: (1) the date the injury and its reasonably discoverable connection with the incident in question in the exercise of due care; or (2) three years from the date of completion of the natural resources assessment.²⁸

VII. Proof Required For Each Claim for Removal Costs or Damages

A. Removal Costs

Any claimant may present a claim for removal costs.²⁹ The claimant must, however, establish that the actions taken were necessary for preventing, minimizing, or mitigating the effects of the oil spill; the removal costs were incurred as a result of those actions; and the actions taken were determined consistent with the National Contingency Plan by the FOSC or directed by the FOSC.³⁰ The amount of compensation allowable “is the total of uncompensated reasonable removal costs… that were determined by the FOSC to be consistent with the National Contingency Plan or were directed by the FOSC.”³¹

B. Natural Resources Damages

An appropriate natural resource trustee may present claims for uncompensated natural resource damages.³² In order to adequately prove such claims, a claimant must provide documented costs and cost estimates for the claim; identify all trustees who may be potential claimants for the same natural resources damaged; certify the accuracy and integrity of any claim submitted to the Fund; certify that any actions taken or proposed were or will be conducted in accordance with the applicable laws and regulations; certify whether the assessment was conducted in accordance with the applicable provisions of the natural resources damage assessment regulations (33 U.S.C. § 2706(e)(1)); and certify that, to the best of the trustee’s knowledge and belief, no other trustee has the right to present a claim for the same natural resources damages and that payment of any subpart of the claim presented would not constitute a double recovery for the same natural resources damages.³³

The amount of compensation allowed for these claims is the reasonable cost of assessing damages, and the cost of restoring, rehabilitating, replacing, or acquiring the equivalent of the damaged natural resources.³⁴ If any amounts received from the Fund exceeds the amount actually required to accomplish the activities for which the claim was paid, the trustees must reimburse the Fund for such sums.³⁵

C. Real or Personal Property Damages

Destruction of real or personal property claims may be presented only by a claimant either owning or leasing the property.³⁶ A claimant must establish an ownership or leasehold interest in the damaged property; the property was injured or destroyed; the cost of repair or replacement; and the value of the property both before and after the injury occurred.³⁷

For each economic damages claim, the claimant must establish that the property was not available for use and, if it had been, the value of that use; whether or not substitute property was available and, if used, the costs thereof; and that the economic loss claimed was incurred as the result of the injury to or destruction of the property.³⁸

The amount of compensation allowable for damaged property is the lesser of three options. Allowable compensation is either the actual or estimated net cost of repairs necessary to restore the property to substantially the same condition that existed immediately before the damage; the difference between the value of the property before and after the damage; or the replacement value of the property.³⁹

For economic losses resulting from the destruction of real or personal property, the amount of allowable compensation is the reasonable costs actually incurred for the use of substitute commercial property, or if substitute was not reasonably available, in amount equal to the net economic loss resulting from not having use of the property.⁴⁰ However, where substitute commercial property is reasonably available, but not used, “the allowable compensation for the loss of use is limited to the cost of the substitute commercial property, or the property lost, whichever is less.”⁴¹ No compensation is allowed for the loss of noncommercial property use.⁴²

D. Subsistence Use of Natural Resources

The Code of Federal Regulations sets forth the applicable regulations governing the procedure for obtaining compensation for the loss of subsistence use of natural resources.⁴³ A claim for the loss of subsistence use of natural resources may be presented only by a claimant who actually uses the natural resources for subsistence which have been injured, destroyed, or lost, without regard to the ownership or management of the resources.⁴⁴ A claim for loss of profits or impairment of earning capacity caused by a loss of subsistence use of natural resources must be included as part of the claim.⁴⁵

For subsistence claims, a claimant must specifically identify natural resources for which compensation for loss of use is claimed; describe the actual subsistence use made of each specific natural resource; describe how and to what extent the claimant’s subsistence use was affected by the injury to or loss of each specific natural resource; describe efforts mitigating the claimant’s loss of subsistence use; and describe alternative sources or means of subsistence available to the claimant during the period of time for the claimed subsistence loss and any available compensation to the claimant for loss of subsistence.⁴⁶

The amount of allowable compensation for subsistence claims is “the reasonable replacement cost of the subsistence loss suffered by the claimant, if, during the period of time for which the loss of subsistence is claimed, there was no alternative source or means or subsistence available.”⁴⁷ Such amounts must be reduced by all compensation made available to the claimant compensating for subsistence loss; all income derived by utilizing the time that would have been used to obtain natural resources for subsistence use; and overheads or other normal expenses of subsistence use not incurred as a result of the incident.⁴⁸

E. Government Revenues

The applicable regulations governing claims for lost government revenue are set forth at 33 C.F.R. §§ 136.225, 136.227, and 136.229. Only an appropriate claimant sustaining the loss may present a claim for net loss of revenues due to the injury, destruction, or loss of real or personal property or natural resources.⁴⁹ A claim for lost revenue includes taxes, royalties, rents, fees, and net profit shares.⁵⁰

When seeking compensation, claimants must identify and describe the economic loss, including the applicable authority, property affected, method of assessment, rate, and method and dates of collection.⁵¹ Additionally, the claimant must establish that real or personal property or natural resources were injured, destroyed, or lost, resulting in a loss of revenue.⁵² The amount of allowable compensation for this type of claim is the total net revenue actually lost.⁵³

F. Profits and Earning Capacity

A claimant sustaining the loss or impairment may present a claim for loss of profits or impairment of earning capacity due to the injury to, destruction of, or loss of real or personal property or natural resources.⁵⁴ The claimant does not have to own the damaged property or resources to recover for lost profits or income.⁵⁵ A claim for loss of profits or impairment of earning capacity involving a claim for injuries or economic losses resulting from the destruction of real or personal property must be claimed under 33 C.F.R. § 136.213.⁵⁶ A claim for loss of profits or impairment of earning capacity involving a claim for loss of subsistence use of natural resources must be claimed under 33 C.F.R. § 136.219.⁵⁷

Several factors are necessary to substantiate a claim for lost profits or earning capacity. Claimants must establish that real or personal property or natural resources were injured or lost; the claimant’s income was reduced resulting from injury to, destruction of, or loss of property or natural resources, and the amount of the reduction; and the amount of the claimant’s profits or earnings in comparable periods and during the period when the claimed loss or impairment was suffered, established by income tax returns, financial statements and similar documents.⁵⁸Additionally, a claimant must state whether alternative employment or business was available and undertaken and, if so, the amount of income received.⁵⁹ All income that a claimant received as a result of the incident must be clearly indicated and any saved overhead and other normal expenses not incurred as a result of the incident must be established.⁶⁰

The amount of allowable compensation for claims of lost profits and earning capacity is limited to the actual net reduction or loss of earnings/profits suffered. Calculations for net reductions or losses must clearly reflect adjustments for all income resulting from the incident; all income from alternative employment or businesses undertaken; potential income from alternative employment or business not undertaken, but reasonably available; saved overhead or normal expenses not incurred as a result of the incident; and state, local, and federal taxes.⁶¹

G. Government Public Services

Only a state or state political subdivision incurring the costs may present a claim for the net costs of providing increased or additional public services during or after removal activities, including protection from fire, safety or health hazards, caused by a discharge of oil.⁶²

An authorized claimant must establish the nature and need of the specific public services provided; that the services occurred during or after removal activities; that the services were provided as a result of an oil discharge and would otherwise not have been provided; and the net cost for the services and the methods used to compute those costs.⁶³ The net cost of the increased or additional service provided by the state or political subdivision is the amount of allowable compensation.⁶⁴

VIII. Settlement and Notice to Claimant

A settlement payment in full or the acceptance a settlement offer is final and conclusive for all purposes, and upon payment, constitutes a release of the NPFC from the claim.⁶⁵ Upon completion of review, the NPFC will issue its recommendation and offer for each claim submitted. Once an offer is made, it is a firm and final offer. There will be no negotiation of the claim unless additional proofs are submitted.⁶⁶

Acceptance of any compensation precludes the claimant from filing any subsequent action against any person to recover costs or damages that are the subject of the compensated claim, and constitutes an agreement by the claimant to assign to the NPFC subrogation rights.⁶⁷ The claimant’s failure to accept an offer of settlement within sixty days after the date the offer was mailed by the NPFC voids the offer automatically.⁶⁸

If the NPFC denies a claim, the claimant will be notified by certified or registered mail.⁶⁹ Furthermore, failure of the NPFC’s Director to make final disposition of a claim within six months after filing shall be deemed at the claimant’s option a final denial of the claim.⁷⁰ Upon written request, including the factual or legal grounds for relief, the NPFC’s Director may reconsider any claim denied.⁷¹ The NPFC Director must receive such requests within sixty days after the date the denial was mailed to the claimant or within thirty days after receipt of the denial by the claimant, whichever date is earlier.⁷² Disposition of the request for reconsideration will be made within ninety days after its receipt by the NPFC.⁷³ If the NPFC denies any motion for reconsideration, the claimant may then commence a federal court action, addressing the issues of obtaining reimbursement or compensation from the OSLTF.⁷⁴

IX. Remedy for Denial of claim

The Administrative Procedures Act (“APA”) provides judicial review of a final agency action.⁷⁵ Based on the precedent of International Marine v. Oil Spill Liability Trust Fund, a denial of appeal for reconsideration is considered to be a final agency action.⁷⁶ A court will reverse a final agency action if an RP can affirmatively prove an abuse of discretion or that the agency action was arbitrary and capricious.⁷⁷

If a claimant disputes a final determination by the NPFC, there are certain recourse avenues available. In Gatlin Oil Co. v. United States,⁷⁸ the plaintiff, Gatlin Oil Co., (“Gatlin”), commenced a suit seeking reimbursement for costs incurred in removing fuel that was discharged from its onshore storage tanks onto the surrounding land and into a local river.⁷⁹ Initially, Gatlin sought compensation from the OSLTF for removal costs.⁸⁰ The NPFC determined that some claims for compensation made by Gatlin for were not compensable under OPA.⁸¹ Gatlin then filed suit in the United States District Court for the Eastern District of North Carolina. The court, applying the arbitrary and capricious standard of review for agency actions, reversed the NPFC’s ruling holding that the Fund Director had acted in an arbitrary and capricious manner. The court determined Gatlin was entitled to compensation for all its recovery costs and damages with interest.⁸² Gatlin was entitled to a complete defense because the discharge had been caused by an unknown and unidentified vandal.⁸³ The court remanded the matter to the NPFC for further fact finding and reconsideration in accordance with its opinion.⁸⁴

The United States appealed the district court’s ruling. The Fourth Circuit reiterated that the Fund Director’s findings must not be arbitrary, capricious, or an abuse of discretion.⁸⁵ The Fourth Circuit further held that a reviewing court should determine the reasonableness of the Fund Director’s allowance or disallowance of compensation.⁸⁶ After reviewing the case, the Fourth Circuit vacated the district court’s rulings and concluded that the Fund Director’s findings were correct and remanded the matter to the district court for further proceedings.⁸⁷

X. Practical Considerations in Presenting Claims on Behalf of Responsible Parties⁸⁸

When presenting a claim to the OSLTF, each claimant has the burden of proving its entitlement to receive compensation. When presenting a claim on behalf of an RP, the RP is responsible for demonstrating its defenses and right to limitation of liability. Ostensibly, the RP must affirmatively prove that the spill was not caused by its own gross negligence. In meeting this burden, the RP can rely on the Coast Guard investigative findings, judicial determinations, and any other evidence the RP wishes to submit.

Difficulty may arise if the Coast Guard investigation report is delayed. The bureaucratic nature of the Coast Guard infrastructure tends to lend itself to requiring a substantial amount of time and internal review before the final findings are available. This may create an obstacle for a party proving its entitlement for further review of its claim.

While the NPFC provides an initial claim form for presenting a claim to the NPFC, there is no prescribed format for presenting a claim against the OSLTF. The claim regulations provide some guidance as to the content of general claim submissions.⁸⁹ A claim submission must be a signed written document with a sum certain stated. In addition to identifying the date, time, place of incident, and identity of claimant, the claim submission must contain a statement certifying that all material facts are included therein and are accurate.

In providing factual narratives and other evidence as part of the claim process, the claimant must be very careful in selecting what statements to make. Such statements may be used as admissions in third-party litigation or by the Coast Guard to supplement its own findings.

The NPFC review process can be painstakingly slow, as undertaking such a review is a complex and tedious task. Once a claimant has demonstrated its entitlement for claim submission, an NPFC Claims Adjuster must review each and every item on each and every document submitted. In order to facilitate review and processing, a neat, detailed, and organized claim is necessary. The use of summary sheets and spreadsheet software is recommended. Summaries are useful as guides for reviewing supporting documentation such as invoices and daily job reports. Additionally, backup or supporting documentation segregated in binders for each spill responder or contractor with clear delineation of sub-contractor support, documents, and invoices is also recommended.

The neater and more organized a claim, the more likely it will be reviewed and adjusted “in-house” by the NPFC. A claimant may present summary spreadsheets by hard copy or on computer diskette, utilizing any major spreadsheet applications. Presenting a claim in this manner not only saves the NPFC time by way of facilitating its claim review process, but also may speed up the claim determination process, saving the claimant time and money. Haphazard submissions may result in unnecessary delay in the processing of a claim.

Some problems can arise, even when a neat and organized claim has been submitted. The NPFC Claims Adjuster will necessarily review each and every item on all invoices. Thorough review often reveals problems inherent in the supporting documentation. Due to the chaotic nature of an oil spill response, support documents, including sign-in logs or daily reports, are often missing or incomplete. Illegible documents and inconsistent subcontractor documents are problematic. Computation and transcription problems may become evident in summaries or support documents. Other discrepancies may occur when a response contractor’s notes are inconsistent, missing, or otherwise objectionable to the NPFC Claims Adjuster.

The government, in an effort to pay what it deems to be an appropriate rate, will attempt to pay Basic Ordering Agreement (“BOA”) rates rather than the contractor’s actual response rate. However, in evaluating a claim, the government may allow for some reasonable mark-ups. In reviewing claims including overtime payments, “overtime” is generally considered only after the eight hours per day and forty hours per week threshold has been surpassed. New policy directives may be issued in the near future, providing better guidance.

XI. Conclusion

The relevant guidelines and regulations for presenting a claim against the OSLTF are clearly set forth in the United States Code and the Code of Federal Regulations. However, despite such legislation and the fact that OPA and the NPFC have been in existence for nearly a decade, the case law precedent concerning what is or is not a valid claim on behalf of an RP is scarce. In this author’s opinion, the claims process and its controlling legislation is well drafted, however, the without the supplementation of court interpretations, specific guidance is lacking.

There is a scarcity of case law interpreting the provisions of OPA, specifically section 2704, and case law defining when an RP has a limited liability entitlement. As discussed above, an RP must demonstrate its entitlement to a limitation of liability prior to the NPFC undertaking the task of further review of any claim presented. However, from the current precedent available and the statutory legislative history, it seems clear that only a finding of gross negligence or willful misconduct will defeat the assertion of a limitation of liability under OPA § 2704.

In National Shipping Co. v. Moran Mid-Atlantic Corp., the court interpreted OPA § 2704 with respect to a case of a tugboat that collided with another vessel and resulted in an oil spill.⁹⁰ The collision in that case was caused by the tugboat captain’s “failure to properly control his vessel.”⁹¹ The court found that the captain’s actions constituted a “lack of due care” amounting to “negligence under maritime law.”⁹² In discussing whether section 2704(c)(1)(a) should deny the tug operator’s right to limit its liability, the court distinguished the captain’s ordinary negligence from the “gross negligence or willful misconduct” language contained in the statute.⁹³ Holding that section 2704(c)(1)(a) did not apply, the court stated, “[t]his is simply a case of ordinary negligence, a failure to exercise reasonable care.”⁹⁴

The National Shipping decision does not elaborate on the distinction between ordinary negligence and the requisite level of gross negligence or recklessness required before an RP would otherwise be denied its right to limit its liability pursuant to OPA § 2704, although it has been successfully argued to the NPFC that the only reasonable reading of the language of the governing statute and the court’s decision in National Shipping must recognize that in order for section 2704(c)(1)(a) to apply, there must be a finding of something significantly more than mere carelessness or ordinary negligence.

The legislative history of OPA supports this interpretation. One congressman summed up section 2704(c)(1)(a) as follows: “[W]here gross negligence is the case, where there is willful misconduct, there is no limit on liability in this bill. Where there is simple negligence, where there is human error involved, there is a limit on liability.”⁹⁵

In speaking during a congressional debate concerning the removal of the “gross negligence or willful misconduct” language from § 2704(c)(1)(a), Mr. Miller of California stated to the House that “[t]he standard of breaking liability limits [under the unamended Act]… is gross negligence or willful misconduct.”⁹⁶ He further stated that “[b]oth are very difficult to prove.”⁹⁷ In describing the high burden of proving gross negligence, Mr. Miller stated, “Prosser on Torts describes gross negligence as the failure to exercise even that care which a careless person would use. Is that really the standard we want to attribute to the people who would ship oil in ships that hold up to a million barrels of oil?”⁹⁸

Similarly, Mrs. Kenneally of Connecticut used a famous example by Justice Holmes to illustrate why she thought mere negligence should be the standard contained in section 2704(c)(1)(a). She stated:

Take the simple law school banana peel example. If an individual shopping in a supermarket slips on a banana peel and breaks his leg, the supermarket is liable if negligence is proven; that is, if normal and reasonable maintenance was not performed to eliminate obstructions in the aisles of the store. If the liability standard was gross negligence, the burden of proof would rest on the prosecutor to show that the store owner knowingly, and in fact, intentionally placed the banana peel on the floor.⁹⁹

Based upon the foregoing, it has been our position and contention that Congress envisioned a high standard of negligence when it ultimately enacted the final version of OPA. However, there has been no case law upon which to concretely rest such assertion. While it seems to be the clear and logical conclusion drawn from the legislative history and the case law most closely related, this author looks forward to the day when the issue of what constitutes mere negligence and what constitutes gross negligence in an oil pollution incident is decided. Accordingly, when such bright line distinctions are available, an RP may have some guidance and authority to rely upon in presenting its claims for reimbursement to the NPFC, and will not have to defer solely to the NPFC Director’s learned discretion.

For more information of presenting a claim to the NPFC, please contact George M. Chalos at gmc@chaloslaw.com.

1. . National Pollution Funds Center, User Reference Guide 569 (1999).
2. . Id. at 571.
3. . Id. at 13.
4. . Id.
5. . 33 C.F.R. § 136.1(a)(1) (1998).
6. . 33 C.F.R. § 136.107(a) (1998), which, in pertinent part, provides: “The claims of subrogor…and subrogee… for removal costs and damages arising out of the same incident should be presented together and must be signed by all claimants.”
7. . 33 U.S.C. § 2713 (1994).
8. . 26 U.S.C. § 9509 (1994).
9. . Id.
10. . 33 U.S.C. § 2708(a) (1994).
11. . 33 U.S.C. § 2703(a) (1994).
12. . 33 U.S.C. § 2704(c)(1) (1994).
13. . 33 U.S.C. § 2702(b) (1994).
14. . 33 U.S.C. § 2704(a)(1)-(2) (1994).
15. . 33 U.S.C. § 2708(a) (1994).
16. . 33 C.F.R. § 136.105(a) (1998).
17. . §§ 136.105, 136.109.
18. . § 136.109(c).
19. . § 136.111(a).
20. . Id.
21. . See 33 U.S.C. § 2712(h) (1994); 33 C.F.R. § 136.101 (1998).
22. . 33 C.F.R. § 136.101(a) (1998).
23. . See § 136.101(2)(b).
24. . 33 U.S.C. § 2712(h)(1) (1994); 33 C.F.R. § 136.101(a)(2) (1998).
25. . 33 C.F.R. § 136.101(a)(2) (1998).
26. . 33 U.S.C. § 2712(h)(2) (1994); 33 C.F.R. § 136.101(a)(1)(i) (1998).
27. . 33 C.F.R. 136.101(a)(1)(ii) (1998).
28. . Id.
29. . 33 C.F.R. § 136.201 (1998).
30. . § 136.203.
31. . § 136.205.
32. . § 136.207(a).
33. . § 136.209(f).
34. . 33 C.F.R. § 136.211(a) (1998).
35. . § 136.211(b).
36. . § 136.213(a).
37. . § 136.215(a).
38. . § 136.215(b).
39. . § 136.217(a).
40. . 33 C.F.R. § 136.217(b) (1998).
41. . Id.
42. . Id.
43. . See §§ 136.219; 136.221; 136.223; 136.225.
44. . § 136.219(a).
45. . 33 C.F.R. § 136.219(b) (1998).
46. . § 136.221.
47. . § 136.223(a).
48. . § 136.223(b).
49. . § 136.225.
50. . Id.
51. . 33 C.F.R. § 136.227(a) (1998).
52. . § 136.227(b).
53. . § 136.229.
54. . § 136.231(a).
55. . Id.
56. . § 136.231(b).
57. . 33 C.F.R. § 136.231(c) (1998).
58. . § 136.233(a)-(c).
59. . § 136.233(d).
60. . Id.
61. . § 136.235(a)-(e).
62. . § 136.237.
63. . § 136.239(a)-(d).
64. . 33 C.F.R. § 136.241 (1998).
65. . § 136.115 (a).
66. . National Pollution Funds Center, supra note 2, at 579-80.
67. . 33 C.F.R. § 136.115(a) (1998).
68. . § 136.115(b).
69. . § 136.115(c)
70. . Id.
71. . § 136.115(d).
72. . Id.
73. . 33 C.F.R. § 136.115(d) (1998).
74. . The jurisdiction of the relevant district court rests on 28 U.S.C. § 1331 (1994) (which deals with issues of federal question); 33 U.S.C. § 2717(b) (1994) (original jurisdiction granted under the Oil Pollution Act); and section 10(a) of the Administrative Procedure Act, codified at 5 U.S.C. § 702 (1994).
75. . 5 U.S.C. § 702 (1994).
76. . International Marine v. Oil Spill Liab. Trust Fund,903 F. Supp. 1097, 1102 n.3 (S.D. Tex. 1994).
77. . 5 U.S.C. § 706(2)(A) (1994).
78. . Gatlin Oil Co. v. United States,169 F.3d 207 (4th Cir. 1999).
79. . Id. at 209.
80. . Id.
81. . Id.
82. . Id.
83. . Id. at 210.
84. . Gatlin Oil, 169 F.3d at 210.
85. . Id. at 212.
86. . Id. (citing 33 C.F.R. §§ 136.205 and 136.235, providing for the type of compensation allowable under these regulations).
87. . Id. at 214.
88. . Based on the experience of The Chalos Law Firm, LLC in presenting claims against the OSLTF and the NPFC, this section is intended as a summary of experience and suggestions which may prove useful to others in presenting claims to the NPFC.
89. . See 33 C.F.R. §§ 136.105-136.113 (1998).
90. . National Shipping Co. v. Moran Mid-Atlantic Corp.,924 F. Supp. 1436 (E.D. Va. 1996), aff’g, 1998 A.M.C. 163 (4th Cir. 1997).
91. . Id. at 1452.
92. . Id. (citing Benedict on Admiralty § 3.02[B][4] (7th ed. 1995)).
93. . Id. at 1453.
94. . Id.
95. . 135 Cong. Rec. H 8120, 8134 (1989) (statement of Mr. Carper).
96. . 135 Cong. Rec. H 8157, 8157(1989).
97. . Id.
98. . Id.
99. . Id. at H 8165.

Insurers, generally speaking, owe a duty of good faith and fair dealing to their insureds. Any determination that an insurer has acted in bad faith will require a predicate determination that coverage existed for the loss in question. The relevant key questions for interested underwriters to consider in order to make certain they are not exposing themselves to a claim for bad faith, depending on substance of the underlying claim(s), are the following:

1. Does the policy provide coverage for the loss in question?
2. Does the insurer have a duty to indemnify the claim?
3. Does the insurer have a duty to defend the claim?
4. Is the insurer acting in the insured’s best interest?

Additional Insureds

As a practical matter, additional insureds are treated no differently than insureds under a given policy of insurance. Additional insureds take the policy of insurance as they find it and are subject to all of the same conditions, limitations and exceptions as the insured. See 12 Couch, Insurance 2d §§ 45:301, 45:307. In considering the rights of additional insureds, New York courts apply the “separability doctrine,” whereby the insurer has separate and distinct obligations to the various insureds, both named and additional. See Morgan v. Greater New York Taxpayers Mutual Ins. Ass’n, 305 N.Y. 243, 249 (1953); see also, Greaves v. Public Service Mutual Ins., 5 N.Y.2d 120, 124 (1959); Pelych v. Potomac Insurance Co., 401 N.Y.S.2d 374, 377 (N.Y. Sup. Ct. 1977). And, like an insured, an additional insured can tender their defense to the insurer and proceed against the insurer on the basis of bad faith. See Yonkers Contracting Co., Inc. v. General Star National Ins. Co., 14 F.Supp.2d 365 (S.D.N.Y. 1998).

Basic Rules Of Policy Construction

It is well settled that insurance contracts must be interpreted to effectuate the intent of the parties at the time the contract was formed. An insurance contract must be read as a whole to determine what the parties reasonably intended by its terms. “The ascertainment of the substantial intent of the parties is the fundamental rule in the construction of all agreements.” Madawick Contracting Co. v. Travelers Ins. Co., 307 N.Y. 111, 119, 120 N.E.2d 520, 524 (1954) (quoting People ex rel. New York Central & Hudson River Railroad Co. v. Walsh, 211 N.Y. 90, 105 N.E. 136 (1914).

As a general rule, the language of an insurance policy will be given its ‘plain meaning,’ and there will be no resort to any of the other rules of contract construction unless an ambiguity exists. Specifically, whenever there is any question of interpretation of a written insurance contract, the court will seek to determine “the intention of the parties as derived from the language employed.” 4 Williston, Contracts Section 600, at 280 (3d ed.). Courts may not disregard clear provisions, which the insurers inserted in an insurance policy, and the insured accepted. Caporino v. Travelers Ins. Co., 62 N.Y.2d 234, 239, 465 N.E.2d 26, 28, 476 N.Y.S.2d 519, 521 (1984).

If there appears to be an ambiguity in a policy, a court may consider extrinsic evidence submitted by the parties to assist in determining the actual intent of the parties. McCostis v. Home Ins. Co., 31 F.3d 110 (2d Cir. 1994) (citing Ostrager & Newman, Handbook on Insurance Coverage Disputes Section 1.01{b} (4th ed. 1991)). However, any extrinsic evidence to be considered must relate to the mutual intent of the parties. Alfin, Inc. v. Pacific Ins. Co., 735 F. Supp. 11, 120 (S.D.N.Y. 1990). Extrinsic evidence of an undisclosed unilateral intent is immaterial to the interpretation of a contract. Lubrication & Maintenance, Inc. v. Union Resources, Co., 522 F. Supp. 1078, 1081 (S.D.N.Y. 1981). In legal terms, the “parol evidence rule”¹ will generally serve to preclude consideration of any extrinsic evidence concerning the meaning of an insurance contract unless the policy language is ambiguous. Garza v. Marine Transport Lines, Inc., 861 F.2d 23, 26-27 (2d Cir. 1988); McNeilab, Inc. v. North River Ins. Co., 645 F. Supp. 525, 543-45 (D.N.J. 1986), aff’d, 831 F.2d 287 (3d Cir. 1987). The determination of whether a provision in an insurance policy is ambiguous, and whether extrinsic evidence of intent is therefore admissible, “is a threshold question of law for the court.”² Garza v. Marine Transport Lines, Inc., supra. 861 F.2d at 27.

An ambiguity will be found to exist when a word or phrase is reasonably susceptible to more than one meaning. United States Fire Ins. Co. v. General Reins. Corp., 949 F.2d 569, 572 (2d Cir. 1991) (holding “a provision in an insurance policy is ambiguous when it is reasonably susceptible to more than one reading”). The Courts will find an ambiguity only when each of the competing interpretations is objectively reasonable. A word or phrase is ambiguous when it is capable of more than a single meaning “when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business.” Garza v. Marine Transport Lines, Inc., 861 F.2d 23, 27 (2d Cir. 1988).

An ambiguity may be either patent or latent. Garza v. Marine Transport Lines, Inc., supra. 861 F.2d at 27. A patent ambiguity exists on the face of the contract, while a latent ambiguity exists when the language becomes unclear in light of extrinsic or collateral circumstances. While such esoteric distinctions may be conceptually complex, perhaps the real practical questions for insurers to address are: What happens when: (1) the terms of a policy are ambiguous; and (b) the ambiguity may not be resolved by resort to extrinsic evidence of intent?

Rules Of Construction “Against The Insurer”

“The longstanding general rule is that where a policy of insurance is so framed as to leave room for two constructions, the words used should be interpreted most strongly against the insurer.” Liverpool & London & Globe Ins. Co. v. Kearney, 180 U.S. 132, 135-36 (1901). The insurer has the responsibility of making its intention clearly known, and where an insurer attempts to limit liability by use of an ambiguously worded term which is subject to more than one reasonable construction, most courts will construe such an ambiguity strictly against the insurer.

The rationale for the contra-insurer rule was summarized long ago by the New York Court of Appeals, which held the following in Matthews v. American Central Ins. Co., 154 N.Y. 449, 456-59, 48 N.E. 751, 752 (1897);

The policy, although of the standard form, was prepared 
by insurers, who are presumed to have had their own 
interests primarily in view; and hence, when the 
meaning is doubtful, it should be construed most 
favorably to the insured, who had nothing to do with
the preparation thereof.

This ‘contra-insurer rule’ is based upon the doctrine of contra proferentem, which literally means “against the offeror” or drafter of the language. See generally Restatement (Second) of Contracts Section 206 (1981)(“In choosing among the reasonable meanings of a promise or agreement or a term thereof, that meaning is generally preferred which operates against the party who supplies the words or from whom a writing otherwise proceeds.”)

Contra-insurer rules of construction apply with particular force when there is an ambiguity in an exclusionary clause. Breed v. Insurance Co. of N. Am., 46 N.Y.2d 351, 353, 385 N.E.2d 1280, 1282, 413 N.Y.S.2d 352, 354 (1978); Ingersoll Milling Mach. V. M/V Bodena, 829 F.2d 293, 306 (2d Cir. 1987), cert. denied, 484 U.S. 1042 (1988). Of course, exclusionary clauses never grant an insured coverage, but rather limit the scope of the basic protection statement. As such, the insurer has the duty to use precise language. American Home Assur. Co. v. Libbey-Owens-Ford Co., 786 F.2d 22, 26, 28 (1st Cir. 1986). It has long been held that exclusions are generally to be construed narrowly, while exceptions to exclusions are generally construed broadly to find coverage. Borg-Warner Corp. v. Insurance Co. of N. Am., 174 A.D.2d 24, 33, 577 N.Y.S.2d 953, 958 (3d Dep’t), appeal denied, 80 N.Y. 2d 753, 600 N.E.2d 632, 587 N.Y.S.2d 905 (1992).

The Duty To Defend Vs. The Duty To Indemnify

It is well settled New York law that an insurer’s duty to defend is broader than its duty to indemnify an insured. In fact, and insurer’s duty to indemnify is “exceedingly broad” and is separate from and more expansive than the duty to indemnify. Plants and Goodwin, Inc. v. St. Paul Surplus Lines Ins. Co., 99 F.Supp.2d 293 (WDNY 2000); McCostis v. Home Ins. Co. of Ind., 31 F.3d 110, 112 (2d Cir. 1994); Colon v. Aetna Life & Cas. Ins. Co., 66 N.Y.2d 6, 494 NYS2d 688, 689, 484 N.E.2d 1040 (1985). An insurer must provide a defense to its insured in an action if the underlying complaint, liberally construed, sets forth any claim which can reasonably be said to fall within the coverage for the policy or if the carrier has actual knowledge of the facts which tend to establish the reasonable possibility of coverage. Continental Cas. Co. v. Rapid American Corp., 80 NYS2d 640, 648; Fitzpatrick v. American Honda Motor Co., Inc. 78 NY2d 61, 65; New York City Trans. Auth. v. Aetna Cas. & Sur. Co.,207 AD2d 389,390). If the complaint in an action brought against an insured upon its face alleges facts, which come within the coverage of the liability policy, the insurer is obligated to assume the defense of the action, even if those allegations are false or groundless. Frontier Ins. Co. v. State, 87 NY2d 864, 867; Seaboard Sur. Co. v. Gillette. Co., 64 NY2d 304, 310.

In order to illustrate the customary manner in which New York courts address questions concerning an insurers duty to defend and/or indemnify an insured, we summarize the decision of the New York Supreme Court, Kings County, in the matter captioned Daily News, L.P. v. OCS Security Inc., et al. In this matter, the Supreme Court addressed a motion for summary judgment on the issue of whether an insurer had the duty to defend and/or indemnify an insured. Specifically, the insurance coverage dispute arose out of an underlying action for personal injuries, which was occasioned by an accident at a Daily News printing facility. The accident involved a man who was hit by a door of a freight elevator, which a security guard was allegedly operating. The security company was insured by the defendant insurer, however, by contract, the security company was required to name the Daily News as an additional insured. The Daily News moved for summary judgment and a declaration that defendant insurer had a duty to defend and indemnify it. The court ruled that, as the complaint in the underlying action contained some allegations against the Daily News for the conduct of a security employee, who was acting “on behalf of” the Daily News, and the policy clearly named the Daily News as an additional insured, the insurer had a duty to defend the Daily News as a matter of law.

Specifically, with respect to the duty to defend, the Court stated that if the alleged facts failed to bring the case within the policy coverage, the insurer would be free of such obligation. (Citing Allstate Ins. Co. v. Mueavero, 79 NY2d 153,159; Dana Enterprises. Inc. v. Twin City Fire Ins. Co., 215 AD2d 320, 321). Since an insurer’s obligation to defend arises whenever a complaint alleges facts and circumstances, some of which would, if proved, fall within the risk covered by the policy, the language of the relevant endorsement extended coverage for the underlying action. Thus, the Court found that the complaint alleged a potential basis for coverage, and, consequently, gave rise to a duty to defend. Accordingly, the portion of the motion seeking a declaration that the defendant insurance company was obligated to provide a defense for the Daily News was granted.

With respect to the duty to indemnify, the Court noted that pursuant to the language of the endorsement and the policy, defendant insurer was required to indemnify the Daily News for work or operations performed by the Daily News or on its behalf for which it would be found liable. However, the Court wrote “the acts for which the Daily News may ultimately be held liable can not be determined at this time. The issue of indemnity should await resolution of the underlying action and, accordingly, the portion of plaintiffs’ motion seeking a declaration that defendant insurer was obligated to indemnify plaintiffs was denied.”

Notwithstanding the foregoing, it must be noted, however, that an insurer’s broad duty to defend is not without its’ limits. An insurer can not be obliged to defend an insured if there is no legal or factual allegation in the underlying complaint for which the insurer might eventually have to indemnify the insured. McCostis, supra, at 112; Allstate Ins. Co. v. Mugavero, 79 NY2d 153, 581 NYS2d 142, 147, 589 N.E.2d 365 (1992); Commercial Union Assur. Co., PLC v. Oak Park Marina, Inc., 198 F.3d 55, 59 (2d Cir. 1999).

Bad Faith
The Law Of New York

New York has modified the standard for actionable bad faith. In rejecting the previous requirement of “an extraordinary showing of a disingenuous or dishonest failure to carry out a contract,” and in further rejecting the negligence standard recognized in several other states, the New York Court of Appeals held that:

In order to establish a prima facie case of bad 
faith, the plaintiff must establish that the insurer’s 
conduct constituted a “gross disregard” of the 
insured’s interests-that is, a deliberate or reckless
failure to place on equal footing the interests of
its insured with its own interests when considering
a settlement offer. In other words, a bad-faith plaintiff
must establish that the defendant insurer engaged in a 
pattern of behavior evincing a conscious or knowing
indifference to the probability that an insured would be
held personally accountable for a large judgment if a 
settlement offer within the policy limits were not accepted.

The gross disregard standard…strikes a fair balance
between two extremes by requiring more than
ordinary negligence and less than a showing of 
dishonest motives.

Pavia v. State Farm Mut. Auto. Ins. Co., 82 N.Y.2d 445, 453-54, 626 N.E. 2d 24, 27-28, 605 N.Y.S.2d 208, 211-12 (1993); See also Soto v. State Farm Ins. Co., 83 N.Y.2d 718, 723, 635 N.E.2d 1222, 1224, 613 N.Y.S.2d 350, 354 (1994).

The law pertaining to bad faith claims in New York is well settled, and is premised upon time-honored principles of agency, (i.e. “because insurers typically exercise complete control over the settlement and defense of claims against their insureds, . . they may fairly be required to act in the insured’s best interests.”) Pavia, 82 NY2d at 452-453. An insurer’s duty to act in good faith is also owed to excess insurance carriers. Pavia, 82 NY2d at 452; St. Paul Fire & Marine Ins. Co. v. United States Fid. & Guar. Co., 43 NY2d 977, 978-79, 404 NYS2d 552, 375 N.E. 2d 733 (1978). This duty of good faith reflects the inherent conflict between the primary insurer’s duty to settle the claim for as little as possible and the excess insurer’s desire to avoid a judgment exceeding the primary policy limit. Smith v. Gen. Accident Ins. Co., 91 NY2d 648, 653, 674 NYS2d 267, 697 N.E.2d 168 (1998).

Whether an insurer has acted in bad faith to settle is generally held to be a question of fact. DiBlasi v. Aetna Life & Casualty Ins.Co., 147 A.D.2d 93, 99, 542 N.Y.S.2d 187, 192 (2d Dep’t 1989). Courts are reluctant to dismiss complaints sounding in bad faith since “bad faith ‘is generally proven by evidence largely circumstantial in nature.`” Reifenstein v. Allstate Ins. Co., 92 A.D.2d 715, 716, 461 N.Y.S.2d 104, 106 (4th Dep’t 1983). Kulak v. Nationwide Mut. Ins. Co., 40 N.Y.2d 140, 351 N.E.2d 735, 386 N.Y.S.2d 87 (1976); Knobloch v. Royal Globe Ins. Co., 38 N.Y.2d 471, 344 N.E.2d 364, 381 N.Y.S.2d 433 (1976); Town of Poland v. Transamerica Ins. Co., 53 A.D.2d 140, 385 N.Y.S.2d 987 (4th Dep’t 1976).

Factors To Be Considered In Determing ‘Bad Faith’

Factors that enter into the bad faith equation include the likelihood of success on the liability issue in the underlying action, the potential magnitude of damages and the resulting financial burden each party may be exposed to as a result of a refusal to settle, and the information available to insurance carrier at the time the demand for settlement is made. Vecchione v. Amica Mut. Ins. Co., 274 A.D.2d 576, 711 NYS2d 186, (2000); Smith v. Gen. Accident Ins. Co., 91 NY2d 648; 14 Couch, Insurance Section 203:23[3d]. Also to be considered in making the determination is “any other evidence which tends to establish or negate the insurer’s bad faith in refusing to settle.” Smith v. Gen. Accident Ins. Co., 91 NY2d 648, 654; Pavia v. State Farm Mut. Auto. Ins. Co., supra, at 455.

To establish a prima facie case of bad faith refusal to settle, a plaintiff must demonstrate that the insurance carrier’s conduct constituted a gross disregard of the policyholder’s interests—that is, a deliberate or reckless failure to place on an equal footing its own interests and those of the policy holder when considering a settlement offer. Smith v. Gen. Accident Ins. Co., 91 NY2d 648, 652. In other words, a bad faith plaintiff must establish that the defendant insurer engaged in a pattern of behavior evincing a conscious or knowing indifference to the probability that an insured would be held personally accountable for a large judgment if a settlement offer within policy limits were not accepted. Vecchione v. Amica Mut. Ins. Co., 274 A.D.2d 576, 711 NYS2d 186, (2000). This gross disregard standard, like gross negligence and reckless disregard, requires a higher level of culpability than ordinary negligence. Pavia v. State Farm Mut. Auto. Ins. Co., supra, at 453.

In New York, “bad faith” has been found in circumstances other than the traditional “failure to settle” context. In Oppel v. Empire Mutual Insurance Co., 517 F. Supp. 1305 (S.D.N.Y. 1981), the court stated:

Bad faith by the insurer…includes:

1. a failure to investigate;
2. a refusal to settle within the policy limits;
3. failure to inform the insured of a compromise offer; and
4. failure to induce the insured to contribute.

In Cornwell v. Safeco Insurance Co. of America, 42 A.D2d 127, 346 N.Y.S.2d 59 (4th Dep’t 1973), the court held that an automobile insurer, which undertook to defend two “additional” insureds pursuant to a policy with the named insured, and which failed to assert a defense that was available to the additional insureds, was liable for the verdict in excess of policy limits rendered against the additional insureds. The court also upheld an award of attorney’s fees and damages to compensate the additional insureds for physical injury and mental anguish.

In Fredericks v. Home Indemnity Co., 101 A.D.2d 614, 474 N.Y.S.2d 870 (3d Dep’t 1984), the court held that a primary insurer which was unaware of the amount of its coverage on the eve of trial was guilty of bad faith because the insurer’s lack of knowledge frustrated meaningful settlement negotiations.

In Young v. American Casualty Co. of Reading, Pa., (CA2 NY) 416 F2d 906, the Court referred to the carrier’s failure to negotiate as evidence of bad faith. Likewise, a refusal to make an offer of settlement unless a co-insurer and/or a co-defendant does may be found to be bad faith. Harris v. Standard Accident & Ins. Co., 191 F. Supp 538, rev’d on other grounds (CA2 NY) 297 F2d 627.

Finally, although, to date, no New York case has held that another factor to consider is an underwriters failure to accept its attorney’s or adjustor’s recommendation to settle, logic dictates inclusion of this factor, as well as various out-of-state authority. Keeton, Liability Insurance and Responsibility for Settlement, 67 Harv L Rev 1136.

Compensatory Damages In New York Bad Faith Actions

It is well established in New York that “compensatory damages in excess of the policy limits may be recovered where an insurer, in violation of its implied obligation to act in good faith, has failed to make a reasonable settlement of a claim within policy limits.” AFIA v. Continential Ins. Co., 140 A.D.2d 167, 168, 527 N.Y.S.2d 420, 421 (1st Dep’t 1988). Where a primary insurer acts in bad faith by refusing a reasonable settlement demand within policy limits, and a verdict is rendered in excess of policy limits, damage to the insured is measured by the entire amount of excess liability. AFIA v. Continental Ins. Co., 140 A.D.2d 167, 169, 527 N.Y.S.2d 420, 422 (1st Dep’t 1988). However, the rule is applied only where the evidence establishes that the case could have been settled without any contribution by the insured or its excess insurers. United States Fidel. & Guar. Co., v. Copfer, 48 N.Y.2d 871, 873, 400 N.E.2d 298, 298, 424 N.Y.S.2d 356, 356 (1979); DiBlasi v. Aetna Life & Casualty Ins. Co., 147 A.D.2d 93, 103, 542 N.Y.S.2d 187, 194 (2d Dep’t 1989). Where a settlement would have required contribution from either the insured or an excess insurer, the primary insurer is obligated to pay the difference between the amount ultimately paid by the insured or its excess insurer and what would have been paid if the primary insurer had offered its policy limit. Feliberty v. Damon, 129 A.D.2d 207, 209-10, 517 N.Y.S.2d 632, 634 (4th Dep’t 1987), aff’d 72 N.Y.2d 112, 527 N.E.2d 261, 531 N.Y.S.2d 778 (1988) (cause of action sounding in bad faith will not lie where, contrary to insured’s wishes, insurer settles claim within policy limits).

In United States Fidelity & Guaranty Co. v. Copfer, supra, the New York Court of Appeals held that the insurer breached its contractual duty to defend and indemnify, and could be held liable for expenses incurred in the defense and for any judgment up to the policy limits. However, since the insured failed to demonstrate that an actual opportunity to settle within policy limits was lost, the insurer was not held liable for any sums in excess of the policy limits. The court observed that “the insured’s speculations that a satisfactory settlement might have ensued had the insurer sought out the injured party and attempted to negotiate on behalf of its insured are simply not sufficient to support a claim against the insurer for what are essentially excess liability damages.” 48 N.Y.2d at 873, 400 N.E.2d at 298, 424 N.Y.S.2d at 357.

On the other hand, in State v. Merchants Insurance Co., 109 A.D.2d 935, 486 N.Y.S.2d 412 (3d Dep’t 1985), the court upheld a “bad faith” judgment, noting:

The record before us supports the view that the defendant was well aware that its proposed $45,000 settlement figure was substantially lower than the liability it could reasonably expect to incur. The jury could reasonably have reached the conclusion that the defendant exercised bad faith in failing to protect the interest of its insured by coming forth with a reasonable and fair settlement offer, as it was contractually and statutorily required to do.

109 A.D. 2d at 936, 486 N.Y.S.2d at 413 (citation omitted). See also Hartford Ins. Co. v. General Accid. Group Ins.Co., 177 A.D.2d 1046, 578 N.Y.S.2d 59 (4th Dep’t 1991); Roldan v. Allstate Ins. Co., 149 A.D.2d 20, 37, 544 N.Y.S.2d 359, 370 (2d Dep’t 1989) (holding, “…it is necessary for the plaintiff to prove that the rejection by the insurer of an offer of settlement within its policy limits constituted a deliberate, or at least reckless, decision to disregard the interests of its insured”).

Damages recoverable when bad faith is found and the insured is solvent are the amount by which the tort judgment exceeds the policy limits. Gordon v. Nationwide Mut. Ins. Co., 30 NY2d 427; Peterson v. Allcity Ins. Co., (CA2 NY) 472 F2d 71. Since interest runs on the tort judgment from its date, CPLR 5003, should include interest on the excess. DiBlasi v. Aetna Life & Casualty Ins. Co., 147 AD2d 93, 542 NYS2d 187. The recoverable damages also include (as in any case where an insurer fails to provide a defense) expenses incurred by the insured in providing for his own defense. United States Fidelity & Guaranty Co. v. Copfer, 48 NY2d 871, 424 NYS2d 356, 400 NE2d 322.

Punitive Damages In New York In Bad-Faith Actions

New York permits punitive damages for breach of an insurance contract if the claim will vindicate a public as opposed to a merely private right. But the New York courts routinely dismiss claims for punitive damages against insurers when there has been no allegation or showing that the insurer, “in its dealings with the general public, had engaged in a fraudulent scheme evincing such a high degree of moral turpitude and…such wanton dishonesty as to imply a criminal indifference to civil obligations.” Eccobay Sportswear, Inc. v. Providence Washington Ins. Co., 585 F. Supp. 1343 (S.D.N.Y. 1984) (emphasis added) quoting Buttignol Constr. Co. v. Allstate Ins. Co., 22 A.D.2d 689, 253 N.Y.S.2d 172 (2d Dep’t 1964), aff’d, 17 N.Y.2d 476, 214 N.E.2d 165, 266 N.Y.S.2d 982 (1965). See Standard & Poor’s Corp. v. Continental Casualty Co., 718 F. Supp. 1219, 1222 (S.D.N.Y. 1989); Leidesdorf v. Fireman’s Fund Ins. Co., 470 F. Supp. 82 (S.D.N.Y. 1979); Philips v. Republic Ins. Co., 108 A.D.2d 845, 485 N.Y.S.2d 566 (2d Dep’t), aff’d, 65 N.Y.2d 1000, 484 N.E.2d 664, 494 N.Y.2d 301 (1985); Royal Globe Ins. Co. v. Chock Full O’Nuts Corp., 86 A.D.2d 315, 449 N.Y.S.2d 740, (1st Dep’t 1982), appeal dismissed, 58 N.Y.2d 800, 445 N.E.2d 649, 459 N.Y.S.2d 266 (1983); Catalogue Serv. v. Insurance Co. of N. Am., 74 A.D.2d 837, 425 N.Y.S.2d 635 (2d Dep’t 1980); Granato v. Allstate Ins. Co., 70 A.D.2d 948, 418 N.Y.S.2d 108 (2d Dep’t 1979).

Thus, in New York, allegations of breach of an insurance contract, without more, are insufficient to warrant the imposition of punitive damages. Carat Diamond Corp. v. Underwriters at Lloyd’s, London., 123 A.D.2d 544, 506 N.Y.S.2d 708 (1st Dep’t 1986); Jacobson v. New York Property Ins. Underwriting Ass’n, 120 A.D.2d 433, 501 N.Y.S.2d 882, 884 (1st Dep’t 1986); Dawn Frosted Meats, Inc. v. Insurance Co. Of N. Am., 99 A.D.2d 448, 470 N.Y.S.2d 624 (1st Dep’t), aff’d 62 N.Y.2d 895, 467 N.E.2d 531, 478 N.Y.S.2d 867 (1984); Reifenstein v. Allstate Ins. Co., 92 A.D.2d 715, 461 N.Y.S.2d 104 (4th Dep’t 1983). Indeed, in Roldan v. Allstate Insurance Co., 149 A.D.2d 20, 544 N.Y.S.2d 359 (2d Dep’t 1989), the Appellate Division wrote:

We conclude that the allegations that an insurance company is engaging in a persistent course of conduct involving fraud or unfair claims practices may more properly be evaluated and, if proved, be redressed by the Superintendent of Insurance, who is charged by law with the regulation of this industry, rather than by private litigants. The availability of punitive damages in private lawsuits premised upon unfair claim practices has been preempted by the administrative remedies available to the Superintendent of Insurance pursuant to Insurance Law Section 2601. Accordingly, the plaintiff’s demand for punitive damages in the present case is stricken.

Even though a breach may be willful and without justification, an isolated transaction will be insufficient unless it constitutes a “gross and wanton fraud upon the public.” Fleming v. Allstate Ins. Co., 106 AD2d 426, 482 NYS2d 519 aff’d, 66 NY2d 838; Parks v. Cambridge Mut. Fire Ins. Co., 105 AD2d 1068, 482 NYS2d 382; Catalogue Service of Westchester, Inc. v. Insurance Co. of North America, 74 AD2d 837, 425 NYS2d 635; DiBlasi v. Aetna Life & Casualty Ins. Co., 147 AD2d 93, 542 NYS2d 187 (holding “in the absence of malice or intent to harm, he plaintiff is not entitled to punitive damages); AFIA v. Continental Ins. Co., 140 AD2d 167, 527 NYS2d 420 (holding “allegation of bad faith by insurer in failing to settle does not, without more, support a claim for punitive damages). Absent evidence from which malice, as distinct from lack of good faith, can be found, punitive damages, therefore, should not be charged. Dano v. Royal Globe Ins. Co., 59 NY2d 827, 464 NYS2d 741, 451 NE2d 488; Cohen v. New York Property Ins. Underwriting Asso., 65 AD2d 71, 410 NYS2d 597.

In fact, in Hebert v. State Farm Mutual Automobile Insurance Co., 124 A.D.2d 958, 508 N.Y.S.2d 710 (3d Dep’t 1986), appeal dismissed, 69 N.Y.2d 1038, 511 N.E.2d 89, 517 N.Y.S.2d 1030 (1987), the court declined to award punitive damages, holding that such damages:

. . are not awardable for an isolated transaction incident to a
legitimate business, such as a breach of an insurance 
contract, even a breach committed willfully and without
justification; accordingly, even if the allegations of the 
complaint herein are proven, a punitive award would be
unwarranted.

124 A.D.2d at 959, 508 N.Y.S.2d at 710 (citation omitted). See also Naja v. Pennsylvania Gen. Ins. Co., 144 A.D.2d 213, 213, 534 N.Y.S.2d 526, 527 (3d Dep’t 1988) (“This court has continually denied awards of punitive damages for isolated breaches of insurance contracts even if the breaches were committed willfully and without justification…”).

The Statute Of Limitations For ‘Bad-Faith’ Actions

The governing statute of limitations governing actions based upon contractual indemnification and bad faith refusal to settle is six (6) years. See CPLR 213(2); See also Roldan v. Allstate Ins. Co., 149 AD2d 20, 544 NYS2d 359(holding that “statute of limitations is tolled during period that judgment was vacated). The cause of action for breach of contract to indemnify accrues upon entry of the judgment in the underlying action, rather than when the insured pays that judgment. Roldan v. Allstate Ins. Co., supra. Similarly, the cause of action based on an insurer’s bad faith refusal to settle accrues upon entry of the judgment in the underlying action. Henegan v. Merchants Mut. Ins. Co., 31 AD2d 12, 294 NYS2d 547.

The Scope Of Discovery In Bad-Faith Actions

In general terms, a bad-faith action involves the manner in which an insurer handled a claim. Since the claims file reflects the unique history of the insurer’s handling of the claim, there is no basis to withhold the claims file from discovery in a bad-faith action. Indeed, a number of courts have gone further and held that documents in the claims file reflecting the advice of counsel are not protected by the attorney-client privilege.

In Zurich Insurance Co. v. State Farm Mutual Automobile Insurance Co., 137 A.D.2d 401, 402, 524 N.Y.S.2d 202, 203 (1st Dep’t 1988), the court held that in a bad-faith action by an excess insurer against the primary insurer for refusal to settle:

The insurer may not use the attorney-client or work product privilege as a shield to prevent disclosure which is relevant to the insured’s bad faith action. Thus, the same principle obtains 
in a bad faith action between the excess insurer and the primary insurer.

Additionally, the privilege and work product rules do not protect the carrier’s file on the negligence action or the testimony of the attorney hired by the carrier to defend the prior action since the file was produced and the services were rendered in the interest of both the insured and the insurer. Colbert v. Home Indem. Co., 45 Misc2d 1093, 259 NYS2d 36, aff’d, 24 AD2d 1080, 265 NYS2d 893; Groben v. Travelers Indem. Co., 49 Misc.2d 14, 266 NYS2d 616, aff’d, 28 AD2d 650, 282 NYS2d 214.

Conclusion

The development of a cause of action for breach of the implied covenant of good faith and fair dealing has created a number of concerns for insurers, particularly in relation to liability for damages in excess of stated limits specified in the insurance contract. Multi million dollar bad faith awards against both domestic and foreign insurers are a reality, and in some jurisdictions, such awards are common place. The good news for New York insurers, who underwrite New York risks, is that New York maintains one of the most stringent standards, requiring an extraordinary showing of a disingenuous or dishonest failure to carry out a contract before bad faith liability can be imposed on an insurer. As a result, the efforts of dogged plaintiff’s lawyers to recover extra-contractual damages from insurance companies have largely failed in New York. Notwithstanding, whenever a question as to what an insurer’s contractual obligations are to their insured, it is always sound practice to engage counsel to render an opinion. Depending on the applicable law and jurisdiction governing the dispute, “an ounce of prevention” can certainly be better than “a pound of cure,” and at the very least, a lot cheaper.

1. It is well settled that where the parties have reduced an agreement to writing, and the writing is clear in its terms and purports to express the parties’ entire agreement, evidence of a prior or contemporaneous communication between the parties that contradicts, varies or explains the agreement is generally barred by the parole evidence rule. Braten v. Banker Trust Co., 60 NY2d 155; Clark v. American Morgan Co., 268 App.Div. 209; 58 NY Jur. 2d 555.
2. Custom or usage is not established by showing that an expert in the field would attach a particular meaning to the terms of the policy. See Encyclopaedia Britannica, Inc. v. SS Hong Kong Producers, 422 F.2d 7, 17-18 (2d Cir. 1969), cert. denied. 397 U.S. 964 (1970); Gelb v. Automobile Ins. Co., 168 F.2d 774, 775 (2d Cir. 1948).

The Oil Pollution Act of 1990 (“OPA”), § 2702(a) provides, in part,

“… each responsible party for a vessel or a facility from which oil is discharged,
or which poses the substantial threat of a discharge of oil, into or upon the navigable waters or adjoining shorelines
or the exclusive zone, is liable for the removal costs and damages…”.

For pollution incidents involving a vessel, OPA expressly defines a responsible party as “any person owning, operating or demise chartering the vessel.”

While a ship’s agent has no legal liability under OPA for either an actual or potential pollution incident, it has been our experience that clever plaintiff’s attorneys may seek recovery from a vessel’s agent in ensuing third-party claims litigation (assuming, of course, the pollution incident impacted third parties). Of course, if the pollution incident was caused by an act or omission of the agent, a responsible party may seek indemnity for its statutorily prescribed liability under OPA. Notwithstanding, we are unaware of any third-party claims litigation wherein a claimant successfully prosecuted a recovery against a ship’s agent.

For more information on ship agents liabilities and/or the Oil Pollution Act of 1990, please feel free to contact George M. Chalos, Esq. at the above noted details or by Email at: gmc@chaloslaw.com.

Introduction

At the heart of any substantive discussion about U. S. bankruptcy law are at least two (2), conflicting, perhaps even diametrically opposed, issues. The first is reconciling the use of insolvency law to benefit both the insolvent and its creditors. The second is finding a way to distribute the debtor’s inadequate assets among competing meritorious claims. Simply stated, such problems arise from the fact there are not enough assets in a bankruptcy proceeding to satisfy everyone. On one hand, bankruptcy is a way out of trouble for hopelessly troubled debtors. On the other hand, it is an efficient means of collecting obligations. Unfortunately, however, what often times is “escape” to a debtor may be viewed as a “swindle” to a creditor.

The U. S. Congress historically has given favored treatment to a variety of creditor groups. In recent years, these favored groups have included, inter alia, labor unions, retirees, the victims of drunk (or drugged) drivers, government agencies that guarantee student loans, consumers who buy on layaway plans, ex-spouses, landlords, shopping mall operators, farmers, and the Federal Reserve System. There is sometimes little logic, other than political logic, behind the rationale as to who is granted a favored position. Moreover, there is little consistency in the favors granted. For example, some tax claims are protected by giving them priority and by making them non-dischargeable in some, but not all, forms of bankruptcy. Wage claims are given a priority but are dischargeable. Drunk driving claims are given no priority, but are not dischargeable. Student loan claims have no priority but are sometimes dischargeable and sometimes not. Labor contracts are protected in an entirely different way: unlike most other contracts, the debtor must honor them except in limited circumstances. Why a particular creditor is given favored treatment is only part of the mystery. Why it is given one form of favored treatment and not another is often equally baffling.

Historical Analysis of the U. S. Bankruptcy Code

Laws governing financial relationships and maritime transactions have common roots in the Roman times and the English legal system.¹Although the United States Constitution provided Congress with the power to create uniform bankruptcy laws,² federal legislation modeled on English law was not enacted until 1800.³ Temporary Bankruptcy laws were enacted and subsequently replaced in 1800-1803, 1841-1843, and 1867-1878.⁴ Bankruptcy laws during the 19th century were created periodically to meet the various needs of the expanding market economy. Ultimately, the 1878 Act was replaced with the enactment of the first permanent bankruptcy law, the Bankruptcy Act of 1898.⁵

Following a depression in the 1890’s, the 1898 Act created both voluntary and involuntary forms of bankruptcy, and provided a new means of collection for lenders and a “fresh start” for debtors.⁶ This Act was amended by the Chandler Act of 1938⁷ as a reaction toeconomic problems resulting from the 1929 stock market crash. These amendments provided for the treatment of business and individual reorganization.

By the 1960’s, dissatisfaction with the Act intensified, and in 1970, the Burdick Commission for Bankruptcy Law Reform was created. Its findings led to the enactment of The Bankruptcy Reform Act of 1978,⁸ the Bankruptcy Code and numerous jurisdictional and procedural rules. Among the many issues addressed by the U. S. Bankruptcy Code are: (1) creation of independent bankruptcy court with nationwide jurisdiction to deal with all matters arising under bankruptcy laws; (2) Presidential appointment of bankruptcy judges; (3) abolition of filing of bankruptcy proceedings as grounds for default; and (4) establishment of a broad “automatic stay” combined with the new concept of adequate protection of creditors.

Subsequently, in 1982, jurisdictional provisions of the Bankruptcy Reform Act were deemed “unconstitutional” by the U. S. Supreme Court in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co⁹ (hereinafter “Marathon“). Specifically, the U. S. Supreme Court was concerned with the Act’s grant of jurisdiction to bankruptcy judges to rule on state law issues. Following almost two (2) years of Congressional attempts to resolve the problematic provisions, the Bankruptcy Amendments and Federal Judgeship Act of 1984, a/k/a BAFJA, was enacted in 1984.¹⁰ Some of the significant changes from BAFJA include: the resting of jurisdiction in Title 11 bankruptcy cases with the district courts; the appointment of bankruptcy judges by the court of appeals for a fourteen year term in “bankruptcy unit” of each district court; and the diminution power and status of the bankruptcy judges. In 1994, the Bankruptcy Reform Act was enacted, creating a Bankruptcy Review Commission to investigate problems and formulate recommendations for needed reforms.¹¹

In brief, it is fair to say that the U. S. Bankruptcy Code is fundamentally a politically motivated document which, like most statutes, represents a series of “horse-trades” among legislators. For those so inclined, it is possible to trace many of these historical “horse-trades,” as the legislative history of the U. S. Bankruptcy Code is fairly well reported and complete.

General Overview of U. S. Bankruptcy Law

One of the central concepts of bankruptcy law is a “fresh start,” whereby a debtor who has surrendered non-exempt assets to the trustee receives another chance to succeed.  However, as stated above, the U. S. Bankruptcy Code has traditionally afforded special status to “property” interests such as mortgages, security interests, and leasehold rights, and, as such, a debtor cannot claim a “fresh start” free of property interests unless their holders have so agreed or have been fully compensated.¹² Accordingly, the “fresh start” label is somewhat misleading. Moreover, in theory, although private companies are prevented from discriminating on the basis of the debtor’s bankruptcy, lenders can, in reality, (and often do) refuse to provide credit or restrict such lending to conform to discriminating terms.¹³ Nevertheless, bankruptcy proceedings are, generally speaking, intended to be for the benefit of both debtors and creditors. As stated above, debtors are intended to benefit from discharge and the fresh start, and the creditors from the presumably efficient and even-handed administration and distribution of the debtor’s non-exempt property.

In virtually all bankruptcy cases, most creditors play a passive role. Simply stated, besides filing a “proof of claim” in hopes of later receiving a potential distribution, the typical creditor does nothing. The reason for this is simple economics; the bankruptcy value of the typical claim is negligible. Most times, creditors who have already given up hope of collection are rarely interested in paying “good money after bad” to participate in the bankruptcy proceeding. In most cases, only creditors with priority secured claims will have claims with any potential “real value. ”

Commencement of the Bankruptcy Case

Bankruptcy cases are commenced by the filing of a bankruptcy petition in the proper form, with the proper fee, in the proper district. The petition may either be voluntary (that is, filed by the debtor) or involuntary (that is, filed by the creditors). There are detailed requirements for each type of petition, and detailed eligibility requirements for each “Chapter” filing, as detailed below. For your guidance, we note that not all persons and/or entities are eligible for relief under all Chapters. Nor are involuntary petitions always permitted. There is a general requirement that the debtor must have a significant nexus with the United States. Individual and business entities must either reside in, or have a domicile, place of business, or property in the United States.¹⁴ There is no requirement, however, that the debtor be a United States citizen.

The filing of the petition constitutes an “order for relief,”¹⁵ and no further action is required for the case to begin. The filing of a bankruptcy petition has many other implications. Perhaps most notably, the filing of a bankruptcy petition triggers the “automatic stay” of other proceedings against the debtor and serves to determine many time limits, such as the ninety (90) day preference period, the fraudulent transfer period, and the time the debtor has to file various documents with the court.

The eligibility of a person or entity to be either a voluntary or an involuntary debtor under the Code varies from Chapter to Chapter. The main eligibility rules relating to voluntary filings are as follows:

Chapter 7 (Liquidation) Virtually any individual or business entity may be a voluntary debtor in a Chapter 7 proceeding. The only exceptions are (1) railroads, (2) most domestic financial institutions, (3) most foreign financial institutions¹⁶ and (4) governmental units.¹⁷ Each of the exclusions reflects the fact that there are other methods for dealing with their insolvencies. For example, there are state and federal institutions and structures, such as the FDIC, to deal with the most insolvent financial institutions. There is a special subchapter in Chapter 11 of the Bankruptcy Code for railroads; and Chapter 9 of the Code deals with insolvent municipalities.

Chapter 9 (Adjustment of Debts of a Municipality)Chapter 9, which is rarely used, is available only to amunicipality, and only under limited circumstances. The debtor must have been authorized to be a debtor under the law of the state that created it, must be insolvent, and must “desire to affect a plan to adjust” its debts.¹⁸ In addition to those requirements, the debtor must have either (1) have obtained creditor agreement to the filing, (2) have failed to obtain creditor agreement after good faith negotiation, (3) be unable to negotiate with its creditors or (4) reasonably believe that a creditor may attempt to obtain a preference.¹⁹

Chapter 11 (Reorganization) The eligibility requirements of Chapter 11 are virtually the same as those for Chapter 7. There are only two (2) differences. First, a stockbroker or commodity broker is eligible for Chapter 7 but not for Chapter 11.²⁰ Second, a railroad, which is not eligible for Chapter 7, is eligible for Chapter 11.²¹Note, however, that railroad reorganizations are subject to a somewhat different set of Chapter 11 rules.

Chapter 12 (Adjustment of Debts of a Family Farmer with Regular Annual Income)With the possible exception of Chapter 9, Chapter 12 has the most complex eligibility requirements under the Code, and is available only to “afamily farmer with regular income. “²² A family farmer with regular income is defined as a “family farmer whose annual income is sufficiently stable and regular to enable such family farmer to make payments under” a Chapter 12 plan.²³ Generally speaking, to qualify for Chapter 12 protection, an individual (or individual and spouse) must be engaged in farming operations and must have no more than $1,500,000 in debt. Generally, at least eighty percent (80%) of those debts must arise from the farming operation and more than fifty percent (50%) of the income must come from the farming operation. Corporations and partnerships may also qualify for Chapter 12, but only if they are controlled by a single family.

Chapter 13 (Adjustment of Debts of an Individual with Regular Income) Chapter 13 eligibility is also somewhat restricted, but by no means as much asChapter 12 eligibility. Several requirements must be met including, but not limited to, the debtor must be either an individual or an individual and spouse. Corporations, partnerships, and other legal entities are not permitted to file under this Chapter.

Petition and Schedules

Along with the petition, the debtor must file a number of other documents. All of these documents are standard forms provided in the Bankruptcy Rules and Forms. The main purpose of filing such other documentations is to provide the court, the trustee, and the creditors with information about the debtor’s financial situation. These documents include, among other things, a list of creditors, along with various “schedules” of assets, obligations, and other pertinent information. Generally, the schedules to be filed are the following:

Schedule A -All real property interests of the debtor other than leasehold interests and any encumbrances.

Schedule B -All personalproperty other than leases orexecutory contracts. Encumbrances on theproperty are not included on Schedule B.

Schedule C – All property that the debtor claims as exempt.

Schedule D – F -All Secured, Priority, and General Unsecured Claims.

Schedule G – Executory contracts and unexpired leases.
Schedule H – Co-obligors of the debtor.
Schedule I and J – Current income and expenses (for individual Debtors only).

The Automatic Stay

“Automatic stay” refers to the stay of all civil actions involving the debtor, debtor’s property and/or property of the bankruptcy estate. Pursuant to section 362 of the Code, the filing of a bankruptcy petition operates as a stay of nearly all non-criminal actions against the debtor, debtor’s property and/or property of the estate.²⁴ The stay functions to further bankruptcy law’s goal of orderly reorganization of the debtor’s property by giving the debtor and the liquidating trustee “breathing room” to organize the assets of the estate. In certain limited circumstances, a creditor can move to have the stay lifted.

There are, of course, numerous implications of the automatic stay. The stay blocks the commencement or continuation of any judicial or administrative action against the debtor that was or could have been initiated before the commencement of the case.²⁵ The stay also prohibits any action to obtain possession of the estate; to obtain possession of property from the estate; or to exercise control over the property of the estate. ²⁶ Any action to create, perfect, or enforce any lien against property of the estate is also stayed pending bankruptcy actions.²⁷

Although the automatic stay affects numerous proceedings, there are some limitations on its application. The stay ceases to exist once the bankruptcy case is over (or property is abandoned), and does not apply to collection of alimony, maintenance, or support from property that does not belong to the estate.²⁸ Certain governmental actions are also immune to the prejudicial effects of the automatic stay.²⁹

While the automatic stay may adversely impact the substantive rights of the creditors, the purpose of the automatic stay is merely procedural. The automatic stay is intended as a form of procedural protection under which the debtor can prepare and present a proposed plan free from unauthorized creditor pressure.

Enforcement of the Stay

The great majority of U. S. courts have held that actions in violation of the automatic stay are entirely void, even if the party taking the action had no notice of the stay. Even actions taken by the government, such as a foreclosure sale, may be entirely without legal effect. The fact that the action taken may have been entirely innocent and in good faith may be a defense against sanctions, however, does not protect the underlying action itself.

Claims and Interests

In addition to the debtor, rights in the property of the bankruptcy estate are classified as either “claims” or “interests. “A “claim” refers to either (i) a debt owed or potentially owed; or (ii) a right against the debtor to an equitable remedy that arises from the breach of contract. The term “interest” also has two (2) meanings: it can refer to a right to specific property of an estate or a right to the remainder of the estate after all claims have been satisfied.³⁰

Claims can either be “secured” or “unsecured. “A secured claim exists where the claimant is owed a debt and has collateral securing the debt. An unsecured claim, however, exists where there is merely a debt and the creditor has no interest in any debtor property in the event that the debt is not paid. The distinctions between secured debt, unsecured debt and equity are not created by the Bankruptcy Code. Rather, the Code largely, but not entirely, preserves the traditional common-law priority structure, which is founded upon the basic principle that debt always precedes equity, and that secured debt precedes unsecured debt.

Allowance of Claims

The broad definition of “claim” in Code section 101 is somewhat narrowed by section 502. Generally speaking, for a claim to be given status in the bankruptcy, and for its holder to exercise rights based on the claim, the claim must be “allowed. “In most cases, claims are allowed perfunctorily. Claims are “deemed allowed” if a Proof of Claim is filed and a party in interest (such as the debtor, the trustee, or another creditor) fails to object. If there is an objection, the court, after notice and an opportunity for a hearing, determines the amount of the claim (if any) to be allowed.

Exemptions and Redemption

Some property is “exempt,” meaning that it is not subject to seizure. Other property is subject to “redemption,” meaning that the debtor has the right to purchase it for a lump sum from lien holders. “Exemptions” are based upon the principle that no individual should be totally deprived of the basic necessities of life, no matter how severe his/her financial troubles. Exemptions are primarily governed by state law. Due to the high degree of variety among state exemptions, the Bankruptcy Code added federal exemptions (but authorizes individual states to “opt out” and thereby limit their residents to state-mandated exemptions). In addition to state and federal exemptions, section 522(b)(2) of the Bankruptcy Code provides debtors exemptions for property protected under the non-bankruptcy federal law.³¹ The debtor is permitted to choose between federal exemptions within section 522(d) of the Bankruptcy Code or the federal non-Bankruptcy Code exemptions and the law of the debtors domicile state.³² However, if the domicile state of the debtor has “opted out” of federal exemptions, the debtor must use state exemption provisions.³³

In the few states that have not opted out, the debtor can choose federal exemptions instead of state exemptions. Federal exemptions consist of a “homestead” exemption,³⁴ a “wildcard” exemption,³⁵ and various specific exemptions. Under the homestead exemption a debtor can exempt up to $17,425 in qualifying property. Qualifying property includes, for example, real property that the debtor or his dependent use as a residence; personal property the debtor or his dependent use as a residence; an interest in a cooperative that the debtor or his dependent use as a residence; or a burial plot for the debtor or his dependent. The debtor is also provided with a wildcard exemption of $925 plus up to $8,725 of any unused homestead exemptions which can be used for anything. Additionally, the numerous specific exemptions are aimed at the protection of particular pieces of property up to a pre-determined value. In the event the property is worth more than the cap and the debtor cannot subsidize the remaining portion, the property is sold and the debtor will receive the portion of the proceeds equal to the corresponding exemption amount.³⁶

State exemptions are generally divided into three categories: homestead exemptions, specific exemptions of tangible property, and specific exemptions of income equivalents. Although the homestead exemption protects the value of the debtor’s home, the exemption amount is relatively small and usually only allows for the debtor to keep a portion of the proceeds from selling his house. The specific exemptions in tangible personalty are capped at a low amount, while exemptions covering earned income substitutes can be more generous.³⁷ The third exemption option for debtors is the alternative federal exemptions. Any debtor who either chooses or is compelled to use the state exemptions is also entitled to these alternative federal exemptions. However, many of the alternative federal exemptions are included in the state exemptions ³⁸ so that the alternative federal exemptions, ostensibly, have little effect.

In most circumstances, the debtor must claim exemptions by filing a list of exemptions with the bankruptcy court. Pursuant to bankruptcy procedural rules, this list of exemptions should be filed with the debtor’s schedule of assets.³⁹ If the debtor fails to file the exemptions, a dependent of the debtor is given thirty (30) days from the time required for filing such schedules to file the list.⁴⁰ Exemptions, however, only provide protection for unencumbered property. Any liens on exempt property remain unaffected.⁴¹

“Redemption” refers to the debtor’s right to “redeem” property from a lienholder, whereby a debtor can buy out the lien and become the property owner. Although many states include rights of redemption, the Bankruptcy Code additionally includes a right of redemption for individual Chapter 7 debtors trying to hold on to encumbered but exempt or abandoned personal property.⁴²Redemption eligibility is only possible with property that is either exempt under Bankruptcy Code section 522 or has been abandoned by the trustee to the lien holder.

Discharge and Reaffirmation

The main bankruptcy goal of nearly all debtors is discharge. Discharge is also the primary distinguishing feature of bankruptcy, and what most clearly separates bankruptcy proceedings from state insolvency proceedings. Simply stated, discharge means that those obligations not satisfied through or in conjunction with the bankruptcy proceeding cease to be binding on the debtor. A creditor may take no action to collect discharged debts from the debtor. In this regard, although the debtor may feel and/or otherwise have a moral obligation towards discharged debts, it has no legal obligation to pay them.

Non-Dischargeable Debts

Section 523 lists a number of debts which are not dischargeable in most bankruptcies. These non-dischargeable debts have little in common beyond the obvious fact that U. S. Congress has found them to be unworthy of discharge. Whether these debts actually will be paid is, at best, speculative, as practically speaking, most non-dischargeable debts are seldom recovered.

At present, there are more than a dozen types of debt that are classified non-dischargeable under section 523. The most noteworthy non-dischargeable debts are:

Taxes: A number of tax obligations are non-dischargeable, including those given priority under section 507, some of those for which a return was filed late or not at all, and those for which the debtor filed a fraudulent return or otherwise evaded. In addition, if the debtor borrows money to pay a non-dischargeable tax obligation it owes to the United States, the debtor’s obligation on the loan is itself non-dischargeable.

Fraud: Generally, debts arising from fraudulent actions by the debtor to obtain property, money, services, or credit are non- dischargeable. The same is true with regard to fraudulent actions to obtain an extension, renewal, or refinancing of credit; thus, the debt may be non-dischargeable either because it was initially obtained by fraud or because the lender was induced to extend the due date by fraud. The statutory provision is written broadly, to encompass many actions that have been labeled “fraud. “These include false pretenses, false representations, and actual fraud In addition, the debt will be non-dischargeable if the debtor used a written statement that contains a materially false representation of the debtor’s financial condition or an insider’s financial condition if (1) the creditor reasonably relied on it and (2) the debtor “caused to be made or publishes with intent to deceive. ” This last provision is often used to block discharge of a loan made in reliance on a false financial statement; the most litigated aspect of the exception is that the statement must be materially false. Minor errors not clearly relevant to the decision to lend
are not enough.

Unscheduled Debts: Under some circumstances, debts not scheduled by the debtor are not discharged. Generally speaking, this applies only if the creditor did not have timely notice of the proceeding; if it did, and failed to file a proof of claim, the debt owed to it is discharged.

Fraud by a Fiduciary: Debts arising from the debtor’s fraud or defalcation while acting in a fiduciary capacity, as well as debts arising from the debtor’s embezzlement or larceny, are not dischargeable.

Alimony, Maintenance and Support; Other Related Obligations: Generally speaking, obligations of the debtor to provide alimony, maintenance, or support of a spouse, former spouse, or child are non-dischargeable. This provision reflects a general policy of preventing bankruptcy from becoming a haven for those who are unwilling to provide for their present or prior families, and who thereby increase the support burdens places on the taxpayer. To be non-dischargeable, these obligations must arise in connection with a separation agreement, divorce decree, or other order of a court of record.

Intentional Torts: A debt arising from a “willful and malicious injury” by the debtor is non-dischargeable. This provision has been read rather broadly to encompass generally any obligation arising from an intentional tort.

Fines, Penalties, and Forfeitures: Most fines, penalties, and Forfeitures owed to governmental units are non-dischargeable. Those fines that are compensation for pecuniary loss, and certain tax penalties, are excluded from this rule and are thus dischargeable unless made non-dischargeable under another provision.

Education Loans: An outcry about alleged bankruptcy abuse by students who had received government-backed student loans led to the enactment of what is now section 523(a)(8). That section restricts, although it does not entirely prohibit, the bankruptcy discharge of student loans made, insured, or guaranteed by the government. These loans are not dischargeable unless (1) the loan first became due more than seven (7) years before the bankruptcy or (2) excepting the loan from discharge would impose undue hardship on the debtor and the debtors’ dependents. The undue hardship exception to non-dischargeability has generated a mass of litigation, most of it fact specific. Courts are most likely to find undue hardship if the debtor’s income is at or near the federal poverty line, especially if there are other circumstances, such as health problems. Some courts have gone so far as to say that even poverty-level income is not enough to demonstrate undue hardship if the debtor has the capacity to make more money but is refusing to do so. Other courts have been more lenient, requiring only that the debtor need only demonstrate “modest” income an a “no-frills” budget.

DUI Debts: Politics also played a significant role in theenactment of section 523(a)(9). It makes non-dischargeable any obligation for death or personal injury that is caused by the debtor’s operation of a motor vehicle while unlawfully intoxicated on alcohol, drugs, or “another substance. “Perhaps surprisingly, this provision has engendered little litigation.

Debts Undischarged in Prior Proceedings: Under section 523(a)(10), a debtor may not obtain discharge for an obligation that either was or could have been scheduled in a prior bankruptcy proceeding, if the debtor either waived discharge or (with a few exceptions) was denied discharge. The primary effect of this provision is to prevent a debtor who was denied discharge because of misconduct in one proceeding from obtaining discharge in a subsequent proceeding.

Fraud on Depository Institutions: As part of its reaction to the collapse of a large part of the American financial industry in the late 1980’s. Congress added two (2) non-dischargeable obligations. The first of these relates to certain obligations arising out of any act of fraud or defalcation while acting in a fiduciary capacity with respect to any depository institution or insured credit union. This provision appears to be wholly redundant to section 523(a)(4), which more generally makes debts arising from fraud by a fiduciary non-dischargeable.

Failure to Maintain Capital Requirements: The second addition to section 523 that arose from the collapse of banks and thrift institutions is section 523(a)(12), which applies to debtors for “malicious or reckless” failure by the debtor to fulfill its commitment to a Federal depository institution regulatory agency (such as the F. D. I. C. to maintain the capital of a financial institution.

Criminal Restitution Orders: Finally, the 1994 Amendments added certain criminal restitution Orders as non-dischargeable debts.

Effect of Discharge

Discharge has a number of direct and indirect effects on the debtor and the debtor’s obligations. The discharge voids any judgment based on the debtor’s liability for a discharged debt.⁴³ It operates as an injunction against any action to collect, recover, or offset any discharged debt as a personal liability of the debtor.⁴⁴ There are also special rules that deal with the effect of the discharge on community property.⁴⁵

Preferences

One of the more controversial powers given in the Bankruptcy Code is the power of the trustee (or debtor in possession) (hereinafter “DIP”), to avoid certain pre-petition transactions as “preferences. “Generally speaking, a preference occurs whenever a debtor favors one creditor over another in paying out its limited resources. In bankruptcy, some, but not all, preferences may be avoided. Avoidance means that the transferee is forced to return the transferred property or its value.

The Code’s primary preference provision is section 547. “Preferences” are defined in section 547 (b). In short, preference is a transfer (i) of property, (ii) to or for the benefit of a creditor, (iii) on an antecedent debt, (iv) made while the debtor was insolvent, (v) made during the preference period (usually the ninety (90) days before the bankruptcy, but one (1) full year for insiders of the debtor), and (vi) that enables to creditor to receive more than it would get in a Chapter 7 liquidation of the debtor.⁴⁶

Preference law is not self-executing. The trustee/DIP must take action to recover the alleged preferential transfer. This is normally done by an “adversary proceeding” in the bankruptcy court.⁴⁷ If the creditor has submitted itself to the jurisdiction of the bankruptcy court (as, for example, by filing a proof of claim) there is no right to a jury trial.⁴⁸ The trustee/DIP carries the burden of persuasion as to all elements of the preference; however, there is a rebuttable presumption that the debtor was insolvent during the ninety (90) days prior to the filing of the petition.⁴⁹ The creditor carries the burden of persuasion as to the applicability of any exception to the avoidance rules.⁵⁰

Preference Period

Section 547 does not avoid all transfers that prefer one creditor over another. Transfers that are relatively remote from the filing of the bankruptcy traditionally have been left untouched. Under the current version of the Code, the preference period generally extends backninety (90) days.⁵¹

Exceptions to Avoidance

The U. S. Bankruptcy Code provides that preferential payments may not be treated as a recoverable transaction in eight (8) specific circumstances.⁵² Most notably, preferential payments may not be treated as recoverable where the payments are made as part of the parties’ “ordinary course of business. “Specifically, section 547 of the U. S. Bankruptcy Code provides, in pertinent part, the following:

The trustee may not avoid under this section a transfer – …
(2) to the extent that such transfer was –

in payment of a debt incurred by the debtor in the ordinary course of business or

• financial affairs of the debtor and the transferee;
• made in the ordinary course of business or financial affairs of the debtor and the transferee; and
• made according to ordinary business terms.⁵³

The “ordinary course of business” defense was established as a matter of policy “to induce creditors to continue dealing with a distressed debtor so as to kindle its chances of survival without a costly detour through, or a humbled ending in, the sticky web of bankruptcy.”⁵⁴ However, in order to successfully establish an ordinary course of business defense, a creditor is required to meet the burden of proving each element of the defense by a preponderance of the evidence.⁵⁵ For your guidance, we note that neither the U. S. Bankruptcy Code nor the implementing case law specifically defines the terms “ordinary course of business” or “ordinary business terms. “In fact, “there is no precise legal test which may be applied to determine whether the requirements of section 547(c)(2) have been met. “⁵⁶The U. S. Bankruptcy Court has expressly acknowledged that “few issues in Bankruptcy Law are as unsettled as is the question of how one defines the ‘ordinary course of business’ and ‘ordinary business terms’ for purposes of11 USC 547(c)(2). “⁵⁷

Generally speaking,”subjective inquiries will be made as to whether the payment of a debt was made in the ordinary course of business of the debtor and the transferee. “⁵⁸In determining whether or not payments were ordinary, the court will look at “several factors, including timing, the amount and manner a transaction was paid and the circumstances under which the transfer was made. “⁵⁹ Additionally, in determining “ordinary business standards,”courts generally will make an objective determination as to whether “the subject payments were ordinary in relation to the prevailing standards in the creditor’s industry. ” ⁶⁰ Notwithstanding, most courts look most heavily to the ongoing payment practices of the parties.⁶¹Even quite long time lags between the due date of the obligation and its payment may be excused, if it truly reflects an established practice between the parties.⁶²Sporadic and irregular payments may indeed be ordinary course if they are consistent with the parties’ mode of dealing.⁶³ Also of great significance are the actions of the creditor. It is interesting to note that if the creditor exerts pressure on the debtor to make payments, most courts hold that the payments are not in ordinary course.⁶⁴

Additionally, the Code provide an exception for “substantially” contemporaneous exchanges for new value.⁶⁵This exception protects transfers to the extent they were intended by the debtor and the creditor to be a contemporaneous exchange for new value and were in fact substantially contemporaneous.⁶⁶The legislative history of section 547(c)(1) indicates that Congress had in mind the technical preference problem created when the debtor pays by check. As you may be aware, payment by check is not complete until the check is paid by the bank on which it is drawn.

International Bankruptcy

Insolvency is not a problem limited to the United States. Courts around the world, must deal with it. In today’s world of international business, and globalization, this inevitably creates problems of overlapping legal systems and legal rules. As there is no overriding sovereignty to force any one nation’s courts to defer to another’s, either in procedural or substantive matters, the resolution of these problems is left to the vagaries of international law and the hopeful application of “comity.” .

In reality, most issues are resolved by what is colloquially known as the “grab” rule. Generally, the courts of any given country will grab whatever assets are within its borders, and thus subject to its sovereignty, administer them. This often means that the multinational insolvent will be administered piecemeal, in multiple proceedings, with duplicated expenses and inconsistent results. Although it is widely recognized that the grab rule is inefficient, many U. S. bankruptcy commentators opine that it is likely to remain predominant. The most fundamental reason for this is that there is a wide divergence among countries concerning their respective bankruptcy policy. Indeed, in the eyes of many, U. S. bankruptcy laws are absurdly tilted toward debtors and necessarily result in huge and unnecessary costs to creditors.

The United States Bankruptcy Code has made at least a minor attempt to deal with transnational bankruptcies without employing the grab rule. Under section 304, a representative appointed in a foreign insolvency proceeding⁶⁷ may petition for an ancillary proceeding in U. S. Bankruptcy Court. An ancillary proceeding is not a full-blown bankruptcy case; rather, it is a way of facilitating the foreign court’s proceeding by requesting assistance in the administration of assets located within the U. S.

Conclusion

In nearly every bankruptcy, there are far more claims than there are assets. In metaphorical terms, in a bankruptcy, there is no such thing as a “free lunch. “In fact, most times, there is hardly any lunch, and in some cases, there is nothing to eat at all (except, perhaps, for the bankruptcy lawyers). Nevertheless, in the bankruptcy proceeding, there is only so much to go around, and although the available assets are insufficient, it is all there will ever be. The foregoing text is only intended to provide a basic understanding of U. S. bankruptcy proceeding. However, should you or your colleagues have any specific questions or comments, we stand ready to respond to any specific questions/comments you may have. For your guidance, the author of this paper can be reached by telephone at:(+1 516 714 4300); via E-mail (gmc@chaloslaw. com) or AOH at (+ 1 516 721 4076).

Rule B of the Supplemental Rules for Certain Admiralty and Maritime Claims (hereinafter “Rule B”) permits a claimant having an in personam claim against a defendant that is cognizable in admiralty to attach the goods or chattels of the defendant, or the latter’s credits or effects in the hands of garnishees, within the district, when the defendant cannot be found in the district. A Rule B attachment permits the assertion of jurisdiction over a defendant’s property located within the district even though the court has no in personam jurisdiction over the defendant. Attachment is not necessarily dependent on the existence of a maritime lien or preferred mortgage lien, but necessitates merely an in personam claim against the defendant that falls within U.S. admiralty jurisdiction.

The attachment is not restricted to maritime property (ships, cargo, freight, bunkers), but may be taken against any goods or chattels of the defendant located within the jurisdiction of the federal district court seized of the claim, as well as the credits or effects of the defendant in the hands of third parties. Hence, it is used to seize both tangible and intangible assets, including, notably, bank accounts.

Because Rule B jurisdiction is in personam, if the defendant makes a general appearance in the action and the plaintiff’s claim is allowed, the judgment is enforceable against all of the defendant’s property, and not only against the property seized as in the action in rem. If the defendant fails to appear, however, the plaintiff’s judgment is enforceable only against the value of the property attached. In addition, the defendant can choose to make a “special” or “limited” appearance, and merely appear for the purpose of seeking to vacate the attachment. By making a special or limited appearance, the defendant does not subject all of its assets to the jurisdiction of the court.

For maritime actions involving a writ of attachment pursuant to Rule B of the Supplemental Rules of Maritime Attachment, the procedure begins with the filing of a verified complaint. This sort of action is entitled to priority, in recognition of the fact that there is often the need to act quickly, before the moveable assets which are the subject of the seizure request can be removed from the jurisdiction of the court. In fact, the Rules also reflect that “exigent circumstances” may exist which require expedited consideration and handling of the initial application to the court.

Once the verified complaint is filed, the procedure routinely provides for ex parte issuance of the requested writ of attachment pursuant to Rule B. Although ex parte, these procedures pass constitutional muster because of the safeguard in Rule E enabling the defendant or any person claiming an interest in the property to seek a hearing immediate after the property is seized. At the Rule E hearing, the plaintiff is the party who has called for the seizure of the property in question and thus has the burden to show why the attachment should not be vacated. That the plaintiff has carried the burden has been defined as a preliminary determination, and the form of evidence that may be considered is within the discretion of the court.

While Rule B requires the presence of property within the jurisdiction of the court, the Rule also requires that the “defendant cannot be found within the district.” The defendant may be considered “found” in the district, by conducting regular business and maintaining offices, but may not defeat a Rule B attachment by designating, after suit has been filed, an agent in the district for service of process. Once an appearance has been filed by the claimant of the property subject to Rule B attachment, additional Rule B writs may be disallowed in the same action, since the purpose of Rule B, that is, to secure that appearance, is no longer served. The more traditional view, however, is that the relevant period for determining if the defendant is “found within the district” by its presence and activities is at the time of the attachment. The authorities are split as to whether the presence of a vessel husbanding agent, prior to the attachment, is alone sufficient to defeat Rule B process. Mere presence of an agent for service of process in the district, in the absence of ongoing business activities of the defendant, is not sufficient to defeat a Rule B attachment.

If the attachment is upheld following a hearing pursuant to Rule E, the amount of security may be resolved by agreement of the parties or by the court. In the absence of agreement, the Rules require the court to fix the principal of the bond or stipulation at an amount sufficient to cover the amount of the plaintiff’s claim “fairly stated with accrued interest and costs. . . .” The Rule provides for a maximum of “twice the amount of the plaintiff’s claim or the value of the property on due appraisement, whichever is smaller.” Despite the plain “whichever is smaller” language of the Rule, some courts explicitly “err on the high side” in setting the bond. The court has latitude in setting the amount of the bond, which properly includes accrued interest and costs. A plaintiff may attempt to re-arrest or re-attach property, after accepting security, only on a showing of fraud or misrepresentation, or mistake by the court in setting initially the amount of security.

The experienced litigant frequently accepts a P & I club letter of undertaking as security standing in place of a vessel or other property, and enabling its release, or in lieu of arrest in the first place; but the courts will not force a plaintiff to accept a letter of undertaking in lieu of a bond. Club letters may reserve the right to challenge the propriety of the arrest, or the amount of the security, after the property is released. A number of courts will not revisit the fact or amount of security until trial, if it has been provided by agreement, and without the involvement of the court in setting its amount. Where the court has determined the amount of security, on the other hand, the Rule expressly provides for a reduction in the amount of security “for good cause shown.

If the court requires security for the benefit of a plaintiff, it is often met with a request for counter security by the opposing party. The Rules specifically provide, in limited circumstances, that a person who has provided security for attachment in the initial action, may file a counterclaim and seek security on the counterclaim. In practice, the requirement of counter security is conservatively applied, and any request for counter security must be based on something more than a claim for wrongful attachment, for which courts routinely deny the request. In ruling on motions for counter security, courts often invoke general equitable principles and the policy against imposition of burdensome costs on a plaintiff that might, otherwise, prevent it from bringing suit.

In conclusion, while we trust the foregoing is self-explanatory, we stand ready to respond to any and all inquiries you, your colleagues and/or your clients may have. Of course, any specific substantive liability analysis will necessarily depend on the facts and circumstances of the underlying incident. We are available to assist in any way we can, and for your convenience, George M. Chalos, Esq. can be contacted either at the above details, or on a 24/7 basis on his mobile telephone (+1 516-721-4076). Additionally, if more convenient, Mr. Chalos can be contacted via Email at gmc@chaloslaw.com.

On Jun 25, 2009, the US Supreme Court, In a narrow 5-4 majority decision authored by one of its perceived judicial conservatives ( Mr. Justice Thomas), handed down  an important decision in the matter of Atlantic Sounding Co. v. Townsend, 557 U.S._______  (2009)- in the jurisprudentially volatile area of punitive damages under US maritime law.

The narrow issue was whether an injured seaman may recover punitive damages for his employer’s willful failure to pay maintenance and cure. The seaman, who was employed onboard a tug boat, slipped and fell on the deck injuring his shoulder and elbow. The tug owner refused to pay maintenance and cure. The seaman filed the usual injured seafarer’s lawsuit (i.e.: alleging claims sounding in Jones Act negligence; general maritime law unseaworthiness; and maintenance and cure). The employer filed a separate complaint in Federal court seeking a declaration of non-liability for maintenance and cure. The seaman counterclaimed for punitive damages predicated on the employer’s failure to pay maintenance and cure. The two (2) cases were consolidated.

Subsequently, the employer moved to dismiss the punitive damages claim. The district court denied the motion but certified the question for interlocutory appeal to the Eleventh Circuit Court of Appeals. The Court of Appeals upheld the decision of the District Court that the seaman was entitled to claim punitive damages. There were conflicting decisions on the issue among the circuits so the U.S. Supreme Court granted certiorari.

The US Supreme Court upheld the seaman’s right to seek punitive damages predicated on the employer’s refusal to provide maintenance and cure. The Court rejected arguments that the punitive damages claim for was precluded by its earlier decision in Miles v, Apex Marine Corp., 498 U.S. 19 (1990) in conjunction with the Congressional judgment expressed in the enactment of the 1920 Jones Act. In relevant part Miles had held that, though the general maritime law recognized a wrongful death cause of action for the death of a seaman, the damages recoverable could not include items for loss of society and future earnings that were unavailable under the Jones Act and the Death on the High Seas Act statutory causes of action. In this case the Court holds that “…unlike the facts presented by Miles, the Jones Act does not address maintenance and cure or its remedies. It is therefore possible to adhere to the traditional understanding of maritime actions and remedies without abridging or violating the Jones Act. “The availability of punitive damages for maintenance and cure actions is entirely faithful to these “general principles of maritime tort law” and no statute casts doubt on their availability under general maritime law”. The Court also rejected the contention that the Jones Act replaced the common law remedies available to seamen for maintenance and cure, and upholds seaman’s rights to use in this regard both, statutory and general maritime law remedies, though these may be overlapping.

The Court further noted that American jurisprudence has permitted punitive damages ever since the colonial era, indeed before the ratification of the US Constitution. Punitive damages remained a feature of U.S. common law at least since 1784 and have been part of the (judge-made) general maritime law since the 1800’s. There is no question then that a seaman is entitled to pursue punitive damages for the denial of his maintenance and cure rights “unless Congress has enacted legislation departing from this common-law understanding”. The purpose of the Jones Act is remedial in nature, and meant to augment the rights of seamen, not to decrease them. “Limiting recovery for maintenance and cure to whatever is permitted by the Jones Act would give greater pre-emptive effect to the Act than is required by its text, Miles, or any of [the]  Court’s other decisions interpreting the statute..”

This case is part of the wider ongoing debate over the availability of punitive damages under the general maritime law of the United States and the effect that Acts of Congress are thought to have in this area. One view is that where Congress has acted, related legal issues are also governed by a form of indirect preemption. This is, in effect, at the core of the dissenting opinion authored by Mr. Justice Alito, which was joined by the Chief Justice and Associate Justices Scalia and Kennedy. However, the majority decision notes that Congress has had occasion to actually enact statutory restrictions expressly addressing general maritime law claims in certain instances and, accordingly, knows how to restrict the traditional remedy of maintenance and cure when it wants to. Thus, the availability of punitive damages under the General Maritime Law of the United States, whether in maintenance and cure actions or in other maritime claims areas,  should not be considered restricted under Congressional enactment,  unless the enactment restricts the availability expressly and specifically.

To read the US Supreme Court’s decision in Atlantic Sounding Co. v. Townsend, please click here.

For more information on the US Supreme Court’s decision, please do not hesitate to contact us at:  info@chaloslaw.com.