Atlantic Mut. Ins. Co., Inc. v. Csx Lines, L.L.C.

• Decision Date: 27 December 2005
• Docket Number: Docket No. 04-6670-CV.
• Citation: 432 F.3d 428
• Parties: ATLANTIC MUTUAL INSURANCE COMPANY, INC., as subrogee of Pepsico, Inc., Plaintiff-Appellant, v. CSX LINES, L.L.C., CSX EXPEDITION, her engines, boilers, etc., and Hyundai Mipo Dockyard Co. Ltd., Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

Page 428

432 F.3d 428

ATLANTIC MUTUAL INSURANCE COMPANY, INC., as subrogee of Pepsico, Inc., Plaintiff-Appellant, v. CSX LINES, L.L.C., CSX EXPEDITION, her engines, boilers, etc., and Hyundai Mipo Dockyard Co. Ltd., Defendants-Appellees.

Docket No. 04-6670-CV.

United States Court of Appeals, Second Circuit.

Argued: August 29, 2005.

Decided: December 27, 2005.

Edward C. Radzik, Donovan Parry McDermott & Radzik (Carolyn E. Meers, on the brief), New York, N.Y., for Plaintiff-Appellant.

Chester D. Hooper, Holland & Knight (James H. Power, on the brief), New York, N.Y., for Defendants-Appellees.

Before: WALKER, Chief Judge, CALABRESI and KATZMANN, Circuit Judges.

CALABRESI, Circuit Judge.

This is a case about soda pop and seawater. In mid-August 2000, the CSX Expedition ("Expedition"), a ship bound for Port Elizabeth, New Jersey, docked in San Juan, Puerto Rico to load additional freight. The new cargo included three forty-foot steel enclosures ("the containers") in which a large volume of phosphoric acid solution — a concentrate from which caffeine-free Pepsi is produced — had been stored for shipment. During the journey, one of the containers was flooded under ten feet of ballast water, while the other two containers were partly submerged. After the Expedition reached Port Elizabeth, the consignee, Pepsi Cola Company ("Pepsi"), examined the cargo and accepted the two containers that had only been partially immersed. But, insisting that the integrity of its contents had been compromised, Pepsi rejected the container that had been fully submerged. CSX Lines, L.L.C. ("CSX"), which owned and operated the Expedition, retained a cargo surveyor who independently inspected the cargo and disputed Pepsi's assessment. Despite the disagreement, Pepsi disposed of the contents of the fully-submerged container in late September.

As subrogee of Pepsi, Appellant Atlantic Mutual Insurance Company, Inc. ("Atlantic Mutual"), subsequently brought suit against the Expedition, CSX, and Hyundai Mipo Dockyard Co., Inc.,¹ alleging, inter alia, negligence and breach of contract. In due course, Appellees moved for summary judgment pursuant to Federal Rule of Civil Procedure 56(c), and Atlantic Mutual subsequently filed a cross-motion seeking summary judgment as well. The district court (McKenna, J.) granted summary judgment to Appellees on the grounds that Atlantic Mutual had failed to submit sufficient evidence to establish a prima facie case of liability under the Carriage of Goods by Sea Act ("COGSA"), 46 U.S.C. app. § 1300 et seq .. Atlantic Mutual appeals.

BACKGROUND

On August 21, 2000, Concentrate Manufacturing Operations Pepsico, P.R., Inc. shipped three containers, numbered SEAU 8545382, SEAU 8267018, and MSKU 6056553, to Port Elizabeth, New Jersey. They were stowed in cargo hold No. 7. Each of them contained hundreds of five-gallon plastic pails of phosphoric acid solution from which millions of servings of soda, e.g., caffeine-free Pepsi, were to be produced.

At 1:35 a.m. on August 22, 2000 (three hours after the Expedition had left port), ballast tank No. 8 was intentionally filled with seawater to steady the vessel. Later that morning, at approximately 10:30 a.m., crew members discovered that ballast water had flowed through a starboard opening in tank No. 8 and flooded cargo hold No. 7, where Pepsi's three steel containers had been placed. By the time the crew detected the flooding, the hold had been filled with roughly ten feet of seawater. Although two of Pepsi's three containers, SEAU 8545382 and SEAU 8267018, were only partially submerged, the third container, MSKU 6056553, had been stowed on the bottom tier of the flooded chamber, and, as a result, had been fully submerged for about nine hours. That container held 720 five-gallon pails of Pepsi Free concentrate and was shipped pursuant to a bill of lading that expressly incorporated, and was therefore controlled by, the Carriage of Goods by Sea Act, 46 U.S.C. app. § 1300 et seq ..²

According to Atlantic Mutual, the fully-submerged container, by virtue of being immersed in ten feet of ballast water for a prolonged period of time, had been "severely distorted and deformed and was split on the left side panel near the rear of the container." Shortly after the Expedition docked in Port Elizabeth on August 24, 2000, Pepsi — the party insured by Atlantic Mutual and the consignee of the shipment — inspected the containers. Although Pepsi decided to accept the contents of the two containers that had only been partly submerged, it promptly rejected the cargo shipped in container MSKU 6056553, stating that "the entire container and contents had been fully submerged and the container itself badly damaged."

On August 30, 2000, Lew Silver, Senior Manager of Quality for Pepsi, examined the contents of the submerged container on Pepsi's behalf and provided his assessment of the condition of the cargo. He found that the "damage to the container seemed to be consistent with the forces of external water pressure substantial enough to distort and tear the steel." Silver observed that water had penetrated the shrink-wrap surrounding the pails, that the top and sides of these plastic drums, made of high density polyethylene, were "completely wet," and that most of the metal caps exhibited varying degrees of rust as a result. In his report, he added: "I observed that the pallets along the left side of the container, which was bowed and creased inward, suffered some crushing damage. Since the pails are made of plastic, any pressure on them from crushing would have caused the spout to deform and the seal around the metal cap to become displaced." On the basis of these observations, and because neither the pails nor the caps were, in Silver's view, designed to be submerged in ballast water during transit, Silver concluded that "seawater may have entered into the pails and adulterated the concentrate within." Accordingly, he declared the concentrate unfit for use.³ In so doing, he emphasized that the cargo was meant to produce millions of servings of soda destined for human consumption.

Silver's appraisal of the damage to the cargo did not go uncontested. CSX dispatched cargo surveyor, Richard T. Allen, to assess what, if any, damage the container and its contents had suffered as a result of the flooding. Allen examined the shipment on August 30, 2000 at a warehouse in Edison, New Jersey to which it had been transported. According to Allen's deposition, the cargo "appeared to be in the same stow configuration as it had been at loading." Although he conceded that there were indications that the external surface of the containers had been exposed to ballast water, Allen contended that the available evidence did not demonstrate that the pails containing the concentrate had been breached:

Examination of the pails revealed that they had been submerged in seawater. There was visible evidence of water accumulation in the folds of the plastic wrap as well as water on the tops of the individuals pails. The metal Tri-Sure® tab seals showed varying degrees of rust ranging from none to heavy in some areas. The presence of rust on some of the sealing caps did not, in my opinion, indicate that the integrity of the seals had been compromised. Upon inspection, the rust was clearly cosmetic.

On the same day as his inspections, Allen also asked for an opportunity to examine the concentrate directly. According to Allen, Pepsi refused the request (though Pepsi maintains that Allen would only have been barred from taking a sample of Pepsi Free concentrate away from the site).⁴ Concurrently with the refusal, Allen was informed that all 720 pails would be destroyed since "the contents of the pails had been contaminated because the pails had been submerged in seawater." Atlantic Mutual confirmed this intention in a September 19, 2000 letter to Allen, explaining that the concentrate would "probably be destroyed early next week before the lids start popping off." The letter continued: "If this occurs we will have to have hazmat dispose of it at an expensive cost." In addition, Atlantic Mutual offered to meet Allen at the warehouse if he wanted another opportunity to examine the cargo.⁵ Allen immediately responded to Atlantic Mutual's September 19th letter, explaining that there had been "no demonstration of contamination to the product other then [sic] wetting of the exterior of the pails." He insisted that Atlantic Mutual agree to a joint examination of the shipment and cautioned that "allowing the shipment to remain as is will in all probability result in progressive rusting of the metal caps which could have an effect on the contents."

Two days later, Allen returned to conduct further examination of the pails' exterior and observed "considerable progressive rust damage." He was allegedly again prohibited from removing the phosphoric acid solution from the sealed containers, but he examined the Tri-Sure® tab seals on the pails and "found them to be tight with no evidence of movement or loosening and no evidence that the seal had been compromised." Based on this second examination, Allen reiterated (in a letter dated September 22, 2000) that he could not concur with Pepsi's rejection of the cargo or with its decision to destroy 720 pails of Pepsi Free concentrate. In this letter, Allen yet again asked for samples from the putatively contaminated pails "for further examination and testing if . . . necessary."⁶ The request went unanswered, and the concentrate was burned at the end of September. By that time, Pepsi had submitted a claim to CSX for the invoice price of the 720 pails of Pepsi concentrate, $984,600, and for the costs of shipping and destroying the ostensibly unusable cargo.⁷

Subrogating to Pepsi's claim, Atlantic Mutual brought suit against Appellees for, inter alia, negligence and breach of contract. Appellees moved for summary judgment under Fed. R. Civ. Pro. 56(c), and Atlantic Mutual...