Gulf Oil Trading Co. v. Creole Supply

• Decision Date: 25 April 1979
• Docket Number: No. 225,D,No. 78-7276,225,78-7276
• Parties: GULF OIL TRADING COMPANY, Plaintiff-Appellee, v. CREOLE SUPPLY and Creole Shipping Ltd., in personam, and the freights and charterhire of the M/V PYRAMID VIKING and M/V PYRAMID VETERAN, in rem, Defendants, v. The CHASE MANHATTAN BANK, Defendant-Appellant. ocket
• Court: U.S. Court of Appeals — Second Circuit

Page 515

596 F.2d 515

GULF OIL TRADING COMPANY, Plaintiff-Appellee, v. CREOLE SUPPLY and Creole Shipping Ltd., in personam, and the

freights and charterhire of the M/V PYRAMID VIKING and M/V PYRAMID VETERAN, in rem, Defendants, v. The CHASE MANHATTAN BANK, Defendant-Appellant.

No. 225, Docket No. 78-7276.

United States Court of Appeals, Second Circuit.

Argued Nov. 30, 1978.

Decided Feb. 26, 1979.

On Rehearing April 25, 1979.

On Petition For Rehearing

John J. Reilly, New York City (Gary D. Sesser, Haight, Gardner, Poor & Havens and Milbank, Tweed, Hadley & McCloy, New York City, of counsel), for defendant-appellant.

Robert J. Zapf, New York City (Burlingham, Underwood & Lord, New York City, of counsel), for plaintiff-appellee.

Before MOORE, FRIENDLY and GURFEIN, Circuit Judges.

GURFEIN, Circuit Judge:

The District Court for the Southern District of New York (Hon. Charles L. Brieant) entered judgment after a non-jury trial for $294,310 in favor of Gulf Oil Trading Company ("Gulf") against the Chase Manhattan Bank, N.A. ("Chase"), by imposing a constructive trust on freights and proceeds arising from the sale of two vessels, M/V PYRAMID VIKING and M/V PYRAMID VETERAN ("the vessels"), upon foreclosure in the Bahamas of the Chase preferred ship mortgage.

The admiralty jurisdiction of the District Court was invoked by plaintiff Gulf. Gulf sued Chase, the mortgagee of the two vessels. Count I of the complaint sought to impose a constructive trust on freights and proceeds of sale for $301,100.43 for fuel oil supplied to the vessels from January to May 1976 and to assert a maritime lien for Gulf and other creditors. Count II of the complaint was In personam and sought to recover $76,352.44 from Chase for bunkers supplied for the last voyages of the vessels. It was based on a theory of express contract.

Judge Brieant gave judgment for Gulf for the full net amount of the proceeds of the foreclosure sale and freights in the sum of $294,310 by imposing a constructive trust on such proceeds and freights. Several theories were advanced by Gulf to support the full recovery: (1) that Gulf had a maritime lien on freights earned on the last voyage; (2) that Gulf is entitled to an equitable lien on these freights; (3) that Chase expressly agreed to pay for the oil delivered for the vessels' last voyages; and (4) that Gulf is entitled to a constructive trust on the freights and proceeds of sales of the vessels. We affirm the judgment for Gulf in the amount of $76,352.44. We reverse the balance of the judgment for the price of bunkers supplied earlier.

Though the complaint was framed as a claim for relief in admiralty, it appears that, so far as the In personam claim is concerned, there is jurisdiction by virtue of diversity of citizenship. 28 U.S.C. § 1332. Gulf is a Delaware corporation with its principal place of business in Pennsylvania. Chase is a national banking association with its principal place of business in New York City. Creole Supply, Inc. is a Louisiana corporation through which supplies for the vessels were obtained and whose principal place of business is presumably in Louisiana. Creole Shipping Ltd. ("Creole") is a Bahamas corporation with a registered office at Nassau, Bahamas. The vessels were of Nassau registry. The Creole defendants were not served, and there is no alignment of parties that would defeat diversity jurisdiction.

The District Judge found the following facts. Creole Shipping owned the vessels, which carried bulk cargo as "tramp" steamers (I. e., vessels which operated without designated routes at the behest of shippers). Creole Shipping, together with Creole Lines Ltd., a Bahamian corporation which is not a defendant, borrowed five million dollars from Chase on April 1, 1974 for the purchase of the VIKING, to pay outstanding debts of Creole, and to provide working capital. The loan was secured by the joint and several promissory notes of the Creole companies, by mortgages on the vessels, as well as by mortgage on the M/V PYRAMID VENUS owned by Creole. The loan was also secured by a general assignment of freights earned and to be earned, as well as by joint and several guarantees from certain of Creole's shareholders.

The loan principal was to be repaid in four installments of $1,250,000 each, due on August 31, 1974, November 30, 1974, February 28, 1975 and May 31, 1975, with interest.

The mortgage on each vessel was to be a "(s)tatutory mortgage with first priority for an account current on the Vessel," and the loan agreement provided that the shipowner would comply with Bahamian law "to establish and maintain the Mortgage as a first preferred mortgage upon the Vessel and upon all renewals, improvements and replacements made in or to the Vessel." It was also provided that no lien whatsoever other than for crew's wages would be permitted to be placed upon the vessels, with the further requirement that the shipowner would keep certified copies of the loan and mortgage documents on board the vessels and display them to any party who might do such business with the vessels as to give rise to a lien on the vessels and/or her freights. A notice of mortgage was required to be displayed prominently in the chart room and master's cabin. The mortgages were also to be recorded with the vessels' documents of registry. In addition, the shipowner undertook to discharge all liens within thirty days after the charges became payable.

The obvious purpose of these provisions was to create a legal situation in which maritime liens would be precluded by notice of the prior lien of the preferred ship mortgage. This preclusion had limited effectiveness, however, because the Ship Mortgage Act, 46 U.S.C. § 951, provided by the 1954 Amendment that a "preferred mortgage lien" in the case of a foreign vessel shall be subordinate to maritime liens for repairs and necessaries performed or supplied in the United States. See G. Gilmore & C. Black, The Law of Admiralty § 9-70 (2d ed. 1975).

A so-called "lien preclusionary clause," such as the one here, has been held to be ineffective against maritime liens of American suppliers of necessaries to foreign vessels. State of Israel v. M/V NILI, 435 F.2d 242, 246-50 (5th Cir. 1970), Cert. denied, 401 U.S. 994, 91 S.Ct. 1232, 28 L.Ed.2d 532 (1971) (applying Morse Drydock & Repair Co. v. THE NORTHERN STAR, 271 U.S. 552, 46 S.Ct. 589, 70 L.Ed. 1082 (1926), to the foreclosure of foreign ship mortgages provided in the 1954 Amendment).

Accordingly, if the foreign preferred ship mortgage were to be foreclosed in the United States, the supplier of bunkers necessary to the operation of the vessel would prevail over the mortgagee. Chase knew this and ordered the shipowner who was in default to take the vessel out of the jurisdiction of the United States. And thereby hangs this tale. ¹

Gulf and Chase never had any direct communication about the vessels. Mortgagee and supplier each went its separate course.

Chase's course of action was described by Judge Brieant in the following terms:

In order to receive the freights according to the terms of the Assignment, cash collateral accounts for each vessel were established at Chase. All freights were paid by shippers directly into those accounts. Creole had no signature authority over the accounts. Chase debited the accounts as loan principal and interest payments became due, and released funds as required to cover operating expenses of the vessels. On several occasions Chase wire-transferred funds from Creole's cash collateral accounts to pay for bunkers supplied to the vessels by Gulf.

The method employed was for Creole to request Chase by telegram for a release of funds which, if granted, was carried out by direct transfer to the account of Gulf in a Philadelphia bank.

Gulf's course of action was as follows:

When Gulf initially began to supply bunkers to the Creole vessels, the credit terms required that payment be made within 30 days from the invoice date. Late in 1975 Gulf changed those credit arrangements because Creole's account was extended beyond the original credit terms. Under the new arrangement, Creole was to pay cash for the bunkers before their delivery to the vessel. Keeler (a Chase representative) testified that he knew of this arrangement.

Gulf was not paid for the bunkers for the vessels' last voyage.

In the meantime, Creole had defaulted in payment of the Chase loan in February 1975. After the default, the freights collected were insufficient to bring the outstanding loan payments up to date. Chase, nevertheless, continued to release funds to operate the vessels, as the court found, "in the hope that refinancing negotiations being held during the default period would prove successful, thereby avoiding foreclosure of the mortgages." Chase gave no notice to anyone that the vessels were in default.

The negotiations having proved unsuccessful, Chase notified Creole on May 14, 1976 that the loan was being called immediately. On May 18, 1976, Chase applied the balances in the cash collateral account against the outstanding debt. The amounts applied to the outstanding debt of $1,900,000 were $122,758.27; $94,940.02; and $4,194.32.

Chase, which now controlled the vessels for all practical purposes, permitted them in these circumstances to leave the United States with cargo destined for the Dominican Republic. When they got there the vessels were arrested by Chase. Thereupon, Pyramid Marine, Inc., the operating agent of the vessels, requested that Chase release the arrested vessels. It did so, and permitted the VETERAN to sail to the Bahamas and the VIKING to sail to Jamaica to discharge additional cargo, and thence to the Bahamas. The District Court found that the sole reason for sailing to the Bahamas was that Chase had been advised that Dominican Republic law was " 'so antiquated that it would take forever and forever to get it (the mortgage foreclosure) through the courts.' " It found that Chase believed...