Cruz v. Chesapeake Shipping Inc.

Decision Date17 May 1990
Docket NumberCiv. A. No. 89-366-JLL.
Citation738 F. Supp. 809
PartiesErnesto C. CRUZ, Victorino A. Domingo, Zaldy N. Bantilan, Leonardo J. Espiritu, Wilfredo D. Jequinto, Juan S. Terencio, Severiano A. Gasataya, Jr., Roberto A. Alejado, Vicente B. Solano, Cesar B. Del Rosario, Renato M. Santiago, Erlito R. Vistar, Richard B. Celoso, Cirilo R. Pacheco, Antonio T. Tanio-An, Armando C. Erediano, Pascualito R. Amistoso and Romeo D. Bardalo, Plaintiffs, v. CHESAPEAKE SHIPPING INC., Gleneagle Ship Management Co., Inc., Kuwait Oil Tanker Company, Kuwait Petroleum Corporation, KPC (U.S. Holdings) Inc., Santa Fe International Corp., Defendants.
CourtU.S. District Court — District of Delaware

Richard K. Herrmann of Bayard, Handelman & Murdoch, P.A., Wilmington, Del., Stephen M. Koslow and Wilma Liebman of Quasha, Wessely & Schneider, Washington, D.C., of counsel, for plaintiffs.

Michael B. McCauley of Palmer, Biezup & Henderson, Wilmington, Del., Michael M. Johnson of McCutchen, Black, Verleger & Shea, Los Angeles, Cal., of counsel, for defendant Kuwait Petroleum Corp.

Craig B. Smith of Lassen, Smith, Katzenstein & Furlow, Wilmington, Del., Eugene P. Miller and T.S.L. Perlman of Fort & Schlefer, Washington, D.C., of counsel, for defendant Kuwait Oil Tanker Co., S.A.K.

MEMORANDUM OPINION

LATCHUM, Senior District Judge.

I. BACKGROUND

This matter is a Fair Labor Standards Act suit that arises out of a unique set of circumstances. During the Iran-Iraq war, the United States government permitted eleven Kuwaiti oil and liquefied gas tankers to be re-flagged with the American flag in order to gain the protection of American naval forces in the Persian Gulf. At the time of the re-flagging the ships were entirely crewed by Filipino seamen. These seamen now claim that they are entitled to the American minimum wage because they were working on American flagged vessels.

A. The Iran-Iraq War

The factual background for this case begins in 1980 when war broke out between Iran and Iraq. See Kuwaiti Tankers: Hearings Before the House of Representatives Committee on Merchant Marine and Fisheries, 100th Cong., 1st Sess. 37 (1987) (hereinafter Kuwaiti Tankers).1 By the end of 1982, Iran had closed down all Iraqi ports. In response, Iraq developed overland routes, including pipelines, to export oil. Iran countered by attacking the nonbelligerent shipping of moderate Gulf states supporting Iraq. See id. at 161-62.2 After engaging in sabotage within territorial Kuwait, Iran singled out Kuwaiti tankers for attack to prevent any further assistance to Iraq. See id. at 38, 163. The tanker war so escalated in 1986 and 1987 that Kuwait turned first to the Soviet Union and then to the United States for assistance. See id. at 37-38, 54. Kuwait sought to either charter foreign ships, or to re-flag their own vessels, in order to gain the protection of foreign naval forces.

The USSR responded to Kuwait's overture quickly, indicating they would permit Kuwait to either charter, re-flag, or both. See id. at 43. In December of 1986, Kuwait approached the United States Coast Guard. See id. at 76. The Coast Guard was told that Kuwait preferred to deal with the United States, but that the Soviet Union had already been contacted and was willing to permit either chartering or reflagging. See id. at 38-39. Kuwait's initial proposal to the United States was to re-flag six oil tankers with the American flag and five tankers with the flag of the USSR. The Kuwait Oil Tanker Company ("KOTC") owned all eleven of these oil tankers.

In "very high-level discussions," the United States convinced Kuwait that it would be best if all eleven ships were American flagged because it would be

against their interest and the interests of other countries in the area as well as the Western interests to give the Soviet Union a major role in protecting oil destined for the West and to allow the Soviet Union to make a strategic foothold in this particular part of the world.

Id. at 39. Kuwait agreed to re-flag the eleven tankers with the American flag, and decided to charter three Soviet tankers on a short term basis. The United States was assured that the USSR would not have access to port facilities in the Persian Gulf. See id. In short, the United States permitted these tankers to be registered and documented under United States law, and to sail under the American flag with United States Naval escort.

B. Conditions of Re-flagging

Under American law, the re-flagging had to be conditioned on the transferral of title to these ships to a United States corporation. See 46 U.S.C. § 12102 (requiring, in pertinent part, American flagged vessels to be owned by a United States corporation whose Chief Executive Officer and Chairman of the Board of Directors are American citizens, and requiring that a majority of the voting power be vested in American citizens); see also Kuwaiti Tankers at 77. Chesapeake Shipping Inc. ("Chesapeake"), a Delaware corporation, was incorporated on May 15, 1987, for this purpose, see Kuwaiti Tankers at 104, and is in compliance with the control requirements. See id. at 41.

Vessels flying the American flag must also comply with United States shipping and manning regulations. In the Kuwaiti oil tanker situation, the Coast Guard performed an overseas safety inspection of the ships to ensure: that they were suitable for their intended purpose; that they were equipped with proper lifesaving, fire prevention, and fire-fighting equipment; that they had suitable accommodations for the crews; that they could operate with safety to life and property; and that they complied with safety laws and regulations. See id. at 77. The Coast Guard found that the vessels conformed to international standards, but fell short of more stringent American regulations. See id. at 78.

The United States facilitated re-flagging by waiving certain inspection requirements for a period of one year, and drydocking requirements for a period of two years. See id. at 41, 78, 146-48. The Coast Guard also granted a waiver of crew citizenship requirements, except for the positions of ship's master and radio officer, that permitted the Filipino crews to continue manning the vessels. See 46 U.S.C. § 8103(e) (requiring a ship's master and radio officer to be United States citizens at all times) and 46 U.S.C. § 8103(b) (requiring 75% of the unlicensed crew to be American citizens);3 see also D.I. 105B at 159 (letter from Stafford (of KOTC)4 to Santa Fe reporting compliance with FCC regulations and requesting initiation of procedures for the FCC to issue a revised radio license). The United States conditioned the waivers on the ships maintaining their current trading patterns, i.e., not calling at United States ports or operating in American trade, and on Chesapeake retaining ownership. See Kuwaiti Tankers at 83, 87-88. These conditions were imposed to avoid "skewing" or "having an adverse impact on the marketplace." Id. at 87-88.

There is no evidence that these conditions were violated. During the relevant time period, not one of the eleven tankers delivered products directly to the United States or ever called at a United States port. See D.I. 105C, Ex. H at 5; Ex. I at 4; Ex. J at 4. Further, KOTC states that only once did a tanker ship oil to two companies in Europe for later delivery to the United States. See D.I. 105C, Ex. H at 5. The Plaintiffs have not controverted these assertions on the record.

C. The Defendants

The named Defendants in the case are: Chesapeake; Gleneagle Ship Management Company, Inc. ("Gleneagle"), a Delaware corporation; KOTC, a Kuwaiti corporation; Kuwait Petroleum Corporation ("KPC"), a Kuwaiti corporation; KPC (U.S. Holdings), Inc.;5 Santa Fe International Corporation ("Santa Fe"), a Delaware corporation; and Naess Shipping B.V. of Amsterdam ("Naess").6 KPC is wholly owned by the State of Kuwait. See D.I. 86 at ¶ 2.

As noted above, the title of the eleven tankers was transferred from KOTC to Chesapeake. Chesapeake then immediately time-chartered them back to KOTC. KOTC, in turn, time-chartered at least one of the tankers to KPC. See D.I. 105B at 146.7 Chesapeake is a wholly owned subsidiary of KOTC.8 Each of Chesapeake's officers and directors is also an employee of at least one other member of the KPC corporate group. Compare D.I. 105C at Ex. I, attachment 1 (Officers and Directors of Chesapeake) with D.I. 105B at 262 (Officers and Directors of Santa Fe) and D.I. 105C, Ex. G, attachment D1 & D2 (KOTC organizational chart).9 Not one officer or director is on Chesapeake's payroll. See, e.g., D.I. 105B at 395, 432-33, 441; see also D.I. 105A at Ex. A, p. 11-12 (Chesapeake's Vice President and Assistant Secretary is paid by Santa Fe and has never received compensation directly from Chesapeake); see also supra note 4 (discussing the roles of Stafford). Chesapeake has no facilities in either the United States or Kuwait.

Although the vessels were time-chartered, Chesapeake, as owner of the tankers, retained primary responsibility for their manning and operation. See D.I. 105A, Ex. B at 37 (explaining the effect of time chartering a vessel); see also C. Davis, Maritime Law Deskbook 189 (1988) (hereinafter Deskbook) (noting that under a time charter the vessel owner "retains all control over management" of the vessel). Chesapeake's obligations extended to paying the wages of all officers and unlicensed crew members. See, e.g., D.I. 105B, Ex. D at 395, 432-33, 441 (Chesapeake's operating budgets); see also D.I. 112 at 7 ("the masters were employed by the owner not the charterer"); E. Ivamy, Dictionary of Shipping Law 159 (1984) (hereinafter Shipping Law) (Under a time-charter, "the shipowner exercises his rights through the master and crew who are employed by him."). However, the relationship among Chesapeake, the KPC corporate group and the Kuwaiti government is, perhaps, best summed up by a statement made by Chesapeake's counsel at the Kuwait Oil Tanker Hearings:

Mr. Bateman: So
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