In re Prudential Lines, Inc.

• Decision Date: 29 September 1987
• Docket Number: Bankruptcy No. 86 B 11773,Adv. No. 86-5865A.
• Citation: 79 BR 167
• Parties: In re PRUDENTIAL LINES, INC., Debtor. PRUDENTIAL LINES, INC., Plaintiff, v. The UNITED STATES MARITIME ADMINISTRATION, United States Department of Transportation, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

79 B.R. 167 (1987)

In re PRUDENTIAL LINES, INC., Debtor PRUDENTIAL LINES, INC., Plaintiff, v. The UNITED STATES MARITIME ADMINISTRATION, United States Department of Transportation, Defendants.

Bankruptcy No. 86 B 11773, Adv. No. 86-5865A.

United States Bankruptcy Court, S.D. New York.

September 29, 1987.

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Rudolph W. Giuliani, U.S. Atty., S.D.N.Y. by James L. Garrity, Jr., New York City, John Stemplewicz, U.S. Dept. of Justice, Washington, D.C., for defendants.

Stroock & Stroock & Lavan, New York City by Sheldon I. Hirshon, John B. Berringer, for debtor.

DECISION & ORDER

HOWARD C. BUSCHMAN, III, Bankruptcy Judge.

The United States Maritime Administration ("MarAd") and the United States Department of Transportation (collectively, the "Defendants") seek an order pursuant to Rule 12(b) of the Federal Rules of Civil Procedure, Fed.R.Civ.P. 12(b), and Rule 7012 of the Rules of Bankruptcy Procedure, Fed.R.Bankr.Proc. 7012, dismissing the complaint (the "Complaint") filed by Prudential Lines, Inc. ("PLI" or the "Debtor"), the debtor-in-possession in this case under Chapter 11 of the Bankruptcy Code (the "Code"), 11 U.S.C. § 1101 et seq. (1986). Defendants assert, inter alia, that the issues raised by the Complaint should be deferred to their contracting officer (the "Contracting Officer") and the Maritime Subsidy Board ("MSB") or the Court of Claims. We are thus requested to continue developing the roles of the bankruptcy court, agencies and a sister specialized court in the dispute resolution process. Here, moreover, that issue is complicated by sovereign immunity concerns.

I.

In this adversary proceeding, the Complaint¹ seeks a judgment against the Defendants for: (i) "compensatory damages proximately caused by MarAd's precipitous, inequitable and unreasonable conduct which caused PLI to become the subject of an involuntary petition under Chapter 11 of the Bankruptcy Code," (ii) "compensatory damages, based on contract and tort theories, proximately caused by MarAd's breach of contract," (iii) "punitive damages based on MarAd's precipitous, inequitable and unreasonable conduct," (iv) equitable subordination of MarAd's claim to all other allowed claims and a transfer of all liens securing MarAd's claim to PLI's estate, (v) "a permanent injunction against MarAd enjoining the foreclosure of its liens against" the LASH ATLANTICO, the LASH PACIFICO and the LASH ITALIA (collectively, "PLI's Vessels"), (vi) turnover of $2,877,352 (the "Withheld ODS Amount"), the amount of the operating differential subsidy ("ODS") owing to PLI but withheld by MarAd, (vii) "a declaratory judgment decreeing and adjudging that MarAd has no right of setoff against the Withheld ODS Amount," and (viii) "a declaratory judgment decreeing and adjudging that MarAd has no right of recoupment against the Withheld ODS Amount." Complaint ¶ 1.

In support of such relief, PLI alleges that it in conducting its business of providing U.S.-flag ocean liner service between the United States' east coast and various ports in the Mediterranean and Black Seas, PLI utilized its own vessel, the LASH ITALIA, and two chartered vessels, the LASH ATLANTICO and the LASH PACIFICO. Complaint ¶¶ 22-24. The construction of the LASH ITALIA was financed by PLI's issuance to third parties of shipbuilding bonds (the "ITALIA Title XI Debt") the payment of which was insured and guaranteed by MarAd pursuant to Title XI of the Merchant Marine Act ("Title XI"). Id. ¶ 98 The construction of the Chartered Vessels was also financed by the issuance of shipbuilding bonds (the "ATLANTICO and PACIFICO Title XI Bonds") which were insured and guaranteed by MarAd pursuant to Title XI. Id. ¶ 88. PLI was the bareboat charterer of the chartered vessels pursuant to certain bareboat charter parties, dated October 11, 1974, as amended between it and the United States Trust Company of New York, solely in its capacity as trustee under a trust agreement, dated October 11, 1974, with Union Minerals and Alloys Corp. as settlor. Id. ¶ 24.

It is further alleged that on or about December 28, 1977, PLI and MarAd entered into an agreement entitled Operating Differential Subsidy Agreement, No. MA/MSB-421 (the "ODS Contract"). The ODS Contract provides, inter alia, that MarAd is to make ODS payments to PLI in an amount determined by MarAd that is equal to the excess of the sum of subsidizable wage costs of PLI for United States officers and crews plus other operations costs over MarAd's estimate of the fair and reasonable costs of the same items of expense for foreign competitors. Id. ¶ 25. Additionally, the ODS Contract provides that the ODS is to be paid at a rate set by MarAd based on a crew compliment for PLI's Vessels of thirty-eight men with respect to PLI's Mediterranean/Black Sea service. Id. At the termination of each voyage, in accordance with the terms of the ODS Contract, PLI submitted subsidy vouchers to MarAd based upon the subsidy rate determined by MarAd which included the thirty-eight man crew compliment covered by the ODS contract. Id. ¶ 28.

Thereafter, PLI ran into financial difficulties. In addressing its problems, it, on or about September 17, 1982, obtained a concession from the National Maritime Union ("NMU"), one of the four sea-going unions supplying crewmen for PLI's Vessels. Pursuant thereto the crew compliment on PLI's Vessels involved in the Mediterranean/Black Sea service was temporarily reduced from thirty-eight men to thirty-three men (the five man difference is referred to as the "Crew Differential"). Id. ¶ 27. The concession was conditioned on PLI adhering to a negotiated payment schedule regarding amounts it owed to various NMU-sponsored benefit plans. Id. PLI failed to adhere to the payment schedule and, on or about January 6, 1984, the NMU withdrew the crew compliment concession but it never reassigned the additional five crewmen to each of PLI's Vessels. Id.

It is alleged that, except for certain sums withheld, MarAd made ODS payments to PLI based upon the thirty-eight man crew compliment covered by the ODS Contract notwithstanding PLI's reporting of and MarAd's awareness of the Crew Differential. Id. ¶¶ 28-29, 34-36.

In a further effort to work out its financial problems, PLI met with MarAd in September 1984 to negotiate the final amount of ODS payable to PLI for the subsidy years 1981 through 1984 and to resolve all issues between MarAd and PLI regarding ODS payable to PLI pursuant to the ODS Contract for said subsidy years. Id. ¶ 30. PLI alleges that, in order for PLI to receive the amount of ODS offered by MarAd, MarAd required PLI to (i) waive any claim PLI then had or might in the future have against MarAd with respect to asbestosis claims asserted against PLI by its crewmen, (ii) waive the right to seek additional ODS in the event actual costs exceed negotiated costs, (iii) accept an unfavorable base rate cycle to establish the ODS rate, and (iv) agree that the amount of offered ODS be discounted to present value. Id. ¶ 31. PLI objected to the unfavorable base rate cycle but MarAd took the position that it was fair in view of the Crew Differential. Id. ¶ 32. PLI and MarAd agreed upon a negotiated amount of ODS to be paid for the subsidy years 1981 through 1984 which recognized that PLI had the benefit of the Crew Differential. Id. ¶ 33.

It is further averred that in March 1985, MarAd submitted proposed subsidy wage rates for the subsidy year July 1, 1984 through June 30, 1985 based on a crew compliment of thirty-eight men to PLI despite MarAd's awareness of the Crew Differential. Id. ¶ 37. PLI objected to certain components of MarAd's computation and after further negotiations MarAd and PLI agreed upon a subsidy wage rate in excess of the rate originally proposed by MarAd. Id.

In March 1986, MarAd submitted proposed subsidy wage rates for the subsidy year July 1, 1985 through June 30, 1986, again based on a crew compliment of thirty-eight men, to PLI. Id. ¶ 38. When these proposed rates were under review and negotiation, however, PLI's Vessels were arrested and thus the rates were never actually agreed upon. Id.

In May 1986, various creditors threatened to arrest PLI's Vessels. Id. ¶ 47. PLI asserts that it negotiated with each such creditor in order to prevent the threatened arrests and agreed to pay a negotiated amount that was typically significantly less than the amount for which the vessel was threatened to be arrested. Id. It avers that it, with MarAd's knowledge, intended to utilize the ODS that was payable with respect to then current voyages in making these negotiated payments. Id. ¶¶ 47-48. Upon the arrival of the LASH ATLANTICO on May 5, 1986 in Naples, Italy, that vessel was arrested by SIB, a foreign creditor, which liened the vessel in the approximate amount of $300,000. Id. ¶ 49. SIB agreed to accept one-half of its claim in cash and the balance over an eight-week period and to transfer its lien to the LASH ITALIA pending payment of the deferred portion. Id. ¶ 50. On May 8, 1986, SIB's lien was transferred from the LASH ATLANTICO to the LASH ITALIA and the LASH ATLANTICO departed for the east coast of the United States. Id. ¶ 52.

It is then alleged that, PLI thereupon submitted a subsidy voucher of $800,000 to MarAd relating to a voyage of the LASH PACIFICO. Id. ¶ 54. On the next day, May 9, 1986, the LASH PACIFICO arrived in the Port of New York at approximately 6:00 a.m. Id. ¶ 53. The crewmen received their wages and were released with respect to that voyage and the next voyage officially began. Id. MarAd withheld the LASH PACIFICO ODS payment on May 9, 1986 and PLI was thus unable to pay SIB the cash portion of the negotiated amount promised to it or to make other negotiated creditor payments of $125,000 to avoid the arrest of the LASH PACIFICO by two equipment lessors who were owed some $900,000. Id. ¶¶ 55, 66-67. Accordingly, PLI alleges that had...