Equilease Corp. v. M/V SAMSON

• Decision Date: 18 March 1983
• Docket Number: 81-234.,Civ. A. No. 81-112
• Citation: 568 F. Supp. 1259
• Court: U.S. District Court — Eastern District of Louisiana
• Parties: EQUILEASE CORPORATION v. M/V SAMSON, etc., et al. FRED S. JAMES & CO. OF TEXAS, INC. v. EQUILEASE CORPORATION, et al.

568 F. Supp. 1259

EQUILEASE CORPORATION v. M/V SAMSON, etc., et al.

FRED S. JAMES & CO. OF TEXAS, INC. v. EQUILEASE CORPORATION, et al.

Civ. A. Nos. 81-112, 81-234.

United States District Court, E.D. Louisiana, Section "I".

March 18, 1983.

James G. Burke, Jr., Burke & Mayer, New Orleans, La., for plaintiff.

Philip A. Franco, Adams & Reese, New Orleans, La., for defendants.

MENTZ, District Judge.

In C.A. 81-234, Fred S. James & Co. of Texas, Inc. ("James") filed a complaint against Equilease Corporation ("Equilease"), Dunnamis Offshore Towing, Inc., ("Dunnamis"), Unilease 13, Inc., Unilease 14, Inc., and Unilease 20, Inc., in personam, and against the M/V SAMSON, the M/V THOR, and the M/V HERCULES, in rem, both for the insurance premiums due and payable on the vessels in the amount of $231,621.00 and for interest, costs and attorneys fees. James' suit was originally transferred to this section for consolidation with Civil Actions Nos. 80-4785 and 81-112. The latter two cases, except for James' intervention in 81-112, were subsequently dismissed. The Court conducted a non-jury trial in C.A. 81-234 on January 3, 1983. After the trial, the Court took the matter under submission.¹ Having reviewed the evidence, the memoranda of counsel, and the applicable law, the Court now makes the following findings of fact and conclusions of law.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

Equilease, a wholly-owned subsidiary of Eltra Corporation ("Eltra"), engages in financing through both mortgages and leases. James, a national insurance broker, is a principal supplier of marine insurance. James' own offices are located in Texas. It has affiliated offices, however, with Fred S. James & Co. of New York in New York.

In 1974, Equilease agreed to provide interim construction financing to the owner and builder of the tugs M/V SAMSON, M/V THOR, and M/V HERCULES. Equilease foreclosed upon and became the owner of these three vessels in 1977, after a default by the shipyard and the owner. At that time, however, the boats had not been completed but were still sitting in the shipyard at Lockport, Louisiana. Equilease did not decide to complete the three tugs until 1978. The remaining work was then done at the Avondale Shipyard in New Orleans.

After the tugs were completed, Equilease transferred the title of each vessel to a separate "shelf" corporation. One tug was transferred to Unilease 13, Inc.; another to Unilease 14, Inc.; and another to Unilease 20, Inc. In return, each Unilease corporation granted a preferred first mortgage to Equilease. These mortgages covered the cost of each vessel, the fraud losses sustained at the original shipyard, the cost of completion, plus other expenses. The following facts about the Unilease corporations are relevant to the resolution of this dispute. Each was capitalized at the nominal figure of $200 and filed a consolidated federal income tax return with Equilease. The officers and directors of each corporation were employees of Equilease. Finally, at all relevant times, Equilease remained the sole stockholder of each corporation and furnished each with the same attorney.

At trial, Mr. Hal B. Parkerson, Vice President and General Counsel of Equilease and the three Unilease companies, described Equilease's general activities. He stated that in structuring transactions during the period relevant to this suit Equilease generally had to comply with the requirements of companies that lent Equilease money under bond and financing arrangements. When asked about the business purpose of Equilease placing the tugs in separate Unilease corporations, rather than retaining ownership, Parkerson offered the following explanation:

(1) Each Unilease corporation was the type of asset Equilease would get credit on under a lending agreement. He referred specifically to the preferred first mortgage granted by each Unilease corporation to Equilease in return for the transfer of the vessel.

(2) The preferred first mortgage was convenient from the standpoint of a possible sale to a third party. To illustrate, Parkerson mentioned discussions between Equilease and Manufacturers Hanover Bank of New York regarding the possibility of purchasing the three Unilease mortgages on a recourse basis.

(3) The creation of the Unilease "shelf" corporations enabled Equilease to avoid possible exposure for tort losses.

(4) By having the Unilease corporations as wholly-owned subsidiaries and by filing a consolidated tax return, Equilease retained the investment tax credit, as well as the depreciation on the three vessels.

In 1978, while negotiating for the completion of the three tugs, Equilease entered into a bareboat charter agreement for all three tugs with Solar Fleet, Inc., a company whose sole shareholder and president was Mr. Speck Denning. A year later, Solar's interest in the agreement was transferred to or inherited by Dunnamis, another of Denning's wholly-owned corporations. Equilease decided to enter into this agreement and to maintain it even though the company had previously had financial problems with Denning, including having to bring a suit against him, which the company won.

Parkerson testified at trial that the charter agreement contained a provision requiring Dunnamis to purchase insurance. That provision brought James into the picture. Knowing that its New York affiliate handled the Eltra account, James was very interested in retaining the business generated by the Eltra-Equilease companies. To put Denning and Dunnamis in an operating position, Equilease advanced $200,000 in working capital but did not require monthly payments for the first several months. Denning took out the necessary insurance with James, at a cost of over $200,000. Although $184,000 of the first year's premiums were still unpaid at the end of the first policy year, James did not bring suit against Dunnamis. Instead, in late September or early October of 1980, James financed the premiums with Borg-Warner Finance Company ("Borg-Warner"). When the financing took place, for $215,000, that sum consisted mostly of earned premiums for the 1979-1980 premium year, so that James had to endorse the note. The financing agreement itself involved only Dunnamis and James.

Denning worked the three vessels in the Gulf for several months but did not generate sufficient funds to pay Equilease under the bareboat charter. To ensure full use of the vessels, Dunnamis executed a contract with Newpark Marine Services ("Newpark") under which Newpark would receive a 10% commission for its services in obtaining full use of the three boats. Shortly thereafter a dispute arose between Dunnamis and Newpark over whether Newpark or Dunnamis should pay the fuel bill. Following this dispute, relations between Dunnamis and Newpark continued to deteriorate until they were terminated. After the Newpark arrangement was terminated, Denning thought he could obtain a better contract from Pemex, the Mexican national oil company. Toward this end, Denning apparently set out with the three vessels for Tampico. Owing to various misunderstandings, however, Denning brought the vessels to Panama, where they were finally brought back into the custody of Equilease-Unilease. Parkerson stated that he had made a trip to Tampico, where he ascertained that Denning had misrepresented the nature of the Mexican contract to Equilease. Only at that point did Parkerson conclude that Equilease-Unilease could no longer rely on Denning.

While neither Equilease nor Unilease had control over the purchase of insurance from James, and while James was responsible for Denning's return from Mexico to sign the Borg-Warner finance agreement, the Court finds that the only reason James cooperated with Denning and Dunnamis was because James reasonably believed that Equilease was Denning's firm financial backer. This finding is strongly supported by the trial testimony of Mr. William K. Hargrove, an expert in marine insurance who was employed by James during the period relevant to this dispute. Hargrove testified that, from the beginning, when James originally decided to issue Dunnamis a policy, James' understanding was that Dunnamis would pay the premiums but that the money would be coming from Equilease.

On Dunnamis' 1979-80 policy, the named assureds were "Dunnamis and Equilease and Unilease." Both Equilease and Unilease were listed as owners. On the 1980-81 policy, however, when Dunnamis' receivables were being assigned to Equilease, only Equilease was named as owner. According to Hargrove, instructions for this latter policy were given by Mr. Barranko, Risk Manager of Eltra. All correspondence went directly to Denning, with copies going to Parkerson and to Mr. Harrigan, Vice President of Equilease. The premiums on this policy were paid in part by Dunnamis. Hargrove testified that he thought Equilease was advancing money to Dunnamis to pay the bills, but none of the insurance premiums were ever paid by Equilease itself. After financial problems developed Denning advised Hargrove that Equilease was "taking over" and would pay the Dunnamis premiums. Although Denning received "favorite son" treatment from Equilease throughout this period, this treatment did not make him the agent of Equilease.

Hargrove emphasized that, when the boats left for Mexico, James decided to stay on the risk only after talking to Parkerson. When asked, however, whether Parkerson had agreed to pay the insurance, Hargrove said "no."² Parkerson's only relevant comment appears to have been that "Equilease would be taking over" from Dunnamis and Denning. There is a contention that Exhibit 22, signed by "Speck", stating that "Equilease is taking over," is also important. Since this communication came from Denning, however, rather than from any agent of Equilease, the Court disagrees. Hargrove stated that, after the boats went to Mexico, Barranko asked whether there was coverage on the "breach of warranty" portion of the policy. Hargrove...