Universal American Barge Corp. v. J-Chem, Inc.

• Decision Date: 12 November 1991
• Docket Number: No. 90-2759,J-CHE,J-C,INC,90-2759
• Citation: 946 F.2d 1131
• Parties: UNIVERSAL AMERICAN BARGE CORP., Plaintiff-Appellee, v.,hem, Inc., Etc., et al., Defendants, Degesch America, Inc., and Fumigators, Inc., Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1131

946 F.2d 1131

1993 A.M.C. 1888

UNIVERSAL AMERICAN BARGE CORP., Plaintiff-Appellee, v. J-CHEM, INC., J-Chem, Inc., Etc., et al., Defendants Degesch America, Inc., and Fumigators, Inc., Defendants-Appellants.

No. 90-2759.

United States Court of Appeals Fifth Circuit.

Nov. 12, 1991.

Rehearing Denied Jan. 3, 1992.

Stanley Renneker, Houston, Tex., for Degesch.

Raymond T. Matthews, Bradley Bartlett, Houston, Tex., for Fumigators, Inc.

Ann E. Webb, Eugene J. Silva, Vinson & Elkins, Houston, Tex., for Universal American Barge.

Appeals from the United States District Court for the Southern District of Texas.

Before REAVLEY, POLITZ and JOLLY, Circuit Judges.

REAVLEY, Circuit Judge:

Barge-owner Universal American Barge Corporation ("Universal") sued corporate relatives J-Chem, Inc., Fumigators, Inc., and Degesch America, Inc., (collectively "the fumigators") for indemnification of damages allegedly caused by the fumigators' negligence or breach of warranty in fumigating cargo under contract with Universal. The district court relied on the final award entered in prior arbitration between Universal and the injured cargo interests to collaterally estop litigation of the fumigators' liability and damages. The district court rejected the fumigators' contention that arguments made by Universal's counsel in the arbitration, which arguments would be prejudicial to Universal's indemnification claim, were conclusively binding judicial admissions. We agree that Universal's position in the arbitration with the cargo owner did not bar its claim against the fumigators, but we reverse the judgment in favor of Universal.

I. BACKGROUND

In January 1984, the General Authority for Supply Commodities, Cairo, Republic of Egypt ("GASC") solicited bids for carriage of bagged wheat flour from the United States to Egypt. Universal submitted the low bid, but GASC initially objected to Universal's proposed use of a tug/barge unit because that means of carriage increased the risk of insect infestation in the flour. The United States Department of Agriculture ("USDA"), which subsidized the freight, preferred Universal's cheaper means of carriage. Consequently the USDA proposed, GASC insisted, and Universal agreed that Universal would fumigate the cargo at Universal's expense.

Universal awarded the fumigation contract to J-Chem, which proposed fumigation with Phostoxin (aluminum phosphide). After the bagged flour had been loaded, J-Chem fumigated the holds of the Energy Freedom. J-Chem supplied Universal with the appropriate fumigation forms and instructions. A representative of the Federal Grain Inspection Service ("FGIS") witnessed the fumigation and issued a certificate of approval. But neither J-Chem, Universal, the FGIS or the USDA had experience using Phostoxin to fumigate bagged flour cargo on board a vessel.

The Energy Freedom departed for Egypt on March 11, 1984. On April 9, 1984, in Gibraltar, the barge's hatch covers were opened to aerate the holds and remove Phostoxin residue. The crew saw evidence of a fire in the number three hold, but no sign of an active fire. The hatch covers were replaced and resealed. Approximately four hours later, a "hot spot" was observed near a hatch opening to the number three hold. Approximately 30 hours later, Gibraltar fire authorities had located and extinguished the fire. During the remainder of the voyage, the crew of the Energy Freedom jettisoned roughly 4000 to 5500 damaged bags of flour from the number three hold. The remaining cargo was discharged upon arrival in Egypt.

Because the charterparty between GASC and Universal contained an arbitration clause, Universal instituted an arbitration proceeding claiming payment from GASC, and GASC counterclaimed for cargo damage. Unable to secure personal jurisdiction to compel the fumigators to join the arbitration, Universal tendered them the defense of the arbitration, but the fumigators declined. Universal filed this suit for indemnification in February 1986, while the arbitration was still pending before the arbitral panel.

Universal called the only witnesses in the arbitration, including Universal's owner, its president, its operations manager, and two agricultural experts. The parties developed an extensive documentary record. Universal based its defense in part on 46 U.S.C. 182 ("the fire statute"), which relieves a vessel owner of liability for cargo damage from fire unless the fire was caused by the owner's design or negligence. GASC attempted to establish Universal's negligence. Universal attacked GASC's case, hoping to obtain a finding that the cause of the fire was unknown or speculative. But Universal also may have realized that if its strategy failed, it would benefit later from a finding of negligence on the part of the fumigators. The arbitral panel heard considerable evidence regarding possible causes of the fire, including misapplication of the fumigant.

On February 27, 1989, the panel returned its final award setting out in detail its factual findings and conclusions. The panel found that Universal had a duty to ascertain the nature and characteristics of Phostoxin and exercise caution in applying it according to the manufacturer's directions, and breached that duty; that the manufacturer's information clearly warned of fire hazard from improper application of Phostoxin, and in fact it was applied contrary to the manufacturer's directions; that Universal knew that neither USDA nor J-Chem had any prior experience in fumigating bagged cargo and that Phostoxin had never before been used on bagged flour cargo in transit; that the fire was caused by the improper application of loose Phostoxin tablets; and that the risk of fire was foreseeable to Universal and therefore the fire was proximately caused by Universal's fault.

The panel also concluded that Universal was responsible for cargo damage in the Energy Freedom's holds that were not affected by fire. As to the quantum of damages, the panel found total cargo damage amounting to $2,347,773.21, plus cargo shortage of $192,557.80, cargo slackage of $3,570.20, sequestering and restacking expenses of $132,929.30, and interest of $1,218,515.00 for a grand total of $3,895,345.51. This award did not segregate damages attributable to the fire from water damage in non-fire damaged holds. The panel noted that, because of Universal's complete failure "to properly quantify losses and damages," the panel was forced to rely exclusively on GASC's damages records. After obtaining this arbitration award, GASC settled with Universal for $3.5 million.

Universal thereafter filed a motion for partial summary judgment ¹ in its district court action against the fumigators, supported principally by the arbitration final award and evidence of the settlement with GASC. The fumigators also filed their own motion for summary judgment, contending that Universal's defensive arbitration posture under the fire statute, that the fire cause was unknown, bound Universal conclusively in the district court. The court granted Universal's Motion, concluding that estoppel was properly applied to preclude litigation of the fumigators' fault, and that Universal was entitled to indemnification from the fumigators in the amount of $3.5 million, plus attorneys' fees of $194,023.04, plus prejudgment interest. The fumigators' motion was denied.

II. COLLATERAL ESTOPPEL AGAINST THE FUMIGATORS

A. ARBITRATION AND THE REQUIREMENT OF FULL AND FAIR LITIGATION

The fumigators contend on appeal that the district court's grant of summary judgment violated their right to a full and fair hearing on their opposition to Universal's claims because the court enforced against them a decision resulting from arbitration even though they were not party to the arbitration or the agreement mandating arbitration, and did not consent to be bound by the arbitration. Universal cites SCAC Transport (USA), Inc. v. S.S. "Danaos", 845 F.2d 1157 (2d Cir.1988) in arguing for preclusion of issues previously litigated in arbitration against a party "vouched in" to the arbitration who chooses not to defend. ² We believe that due process may be accorded a party "vouched in" to an arbitration.

"[A] right, question, or fact distinctly put in issue and directly determined as a ground of recovery by a court of competent jurisdiction collaterally estops a party ... from relitigating the issue in a subsequent action," if the party had reasonable notice and an opportunity to be heard against the claim. Hardy v. Johns-Manville Sales Corp., 681 F.2d 334, 338 (5th Cir.1982) (footnote omitted). But the due process clause of the United States Constitution protects the right to a full and fair hearing on an issue, and therefore collateral estoppel cannot be applied against a party as to issues not fully and fairly litigated. Blonder-Tongue Lab., Inc. v. University of Illinois Foundation, 402 U.S. 313, 329, 91 S.Ct. 1434, 1443, 28 L.Ed.2d 788 (1971); Parklane Hosiery Co. v. Shore, 439 U.S. 322, 332, 99 S.Ct. 645, 652, 58 L.Ed.2d 552 (1979); Hardy, 681 F.2d at 338.

Preclusion of a previously-litigated issue under the doctrine of offensive collateral estoppel requires that the issue under consideration be identical to the issue previously litigated; that the issue was fully and vigorously litigated in the primary proceeding; that the previous determination of the issue was necessary for the judgment in that proceeding; and that no special circumstances exist that would render preclusion inappropriate or unfair. Parklane Hosiery, 439 U.S. at 326-32, 99 S.Ct. at 649-52; In re Lewisville Properties, Inc., 849 F.2d 946, 949 (5th Cir.1988).

The fumigators challenge application of offensive collateral estoppel because the primary determination was rendered in an arbitration proceeding, rather than in a "court of law." That challenge fails. The United States Supreme Court declined to bar the offensive use of collateral estoppel from arbitration in subsequent ...