Steelmet, Inc. v. Caribe Towing Corp.

• Decision Date: 29 November 1984
• Docket Number: No. 82-6142,82-6142
• Citation: 747 F.2d 689
• Parties: , 53 USLW 2299 STEELMET, INC., Plaintiffs-Appellants, Cross-Appellees, Jarrell R. Jackson, Intervening Plaintiff-Appellee, v. CARIBE TOWING CORP., Marine Exploration Co., Inc., Defendants-Appellants, Alabama-Puerto Rico Barge Line, Inc., Defendant, and Frank J. Hall & Company, Third-Party-Defendant-Appellee, American Marine Underwriters, Calvert Fire Insurance Co., Third-Party-Defendants-Appellees, Cross-Appellants.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 689

747 F.2d 689

1985 A.M.C. 956, 53 USLW 2299

STEELMET, INC., Plaintiffs-Appellants, Cross-Appellees, Jarrell R. Jackson, Intervening Plaintiff-Appellee, v. CARIBE TOWING CORP., Marine Exploration Co., Inc.,

Defendants-Appellants,

Alabama-Puerto Rico Barge Line, Inc., Defendant,

and

Frank J. Hall & Company, Third-Party-Defendant-Appellee,

American Marine Underwriters, Calvert Fire Insurance Co.,

Third-Party-Defendants-Appellees, Cross-Appellants.

No. 82-6142.

United States Court of Appeals, Eleventh Circuit.

Nov. 29, 1984.

John B. Culp, Jr., G.J. Rod Sullivan, Jr., Jacksonville, Fla., for steelmet.

Edward F. Gerace, Tampa, Fla., for Caribe and Marine Exploration.

Richard R. McCormack, Miami, Fla., for American & Calvert.

John D. Kallen, Hayden & Milliken, Wm. E. Cassidy, Miami, Fla., for Jarrell R. Jackson.

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

Before GODBOLD, Chief Judge, JOHNSON and CLARK, Circuit Judges.

GODBOLD, Chief Judge:

In this case insurance coverage on cargo was extended to a carrier while the carrier knew its barge was unseaworthy, and the facts of that condition were not communicated to insurers. Barge and cargo were lost, and the shipper attempts to recover on the carrier's protective and indemnity policy. Because the district court erred in giving collateral estoppel effect to findings of an earlier arbitration, we reverse and remand for a new trial.

I. Background ¹

Steelmet is one of a group of shippers of steel bars who are plaintiffs in this action. Caribe Towing Corporation was a carrier and former owner of the tug CARIBE and barge ATC 21. Steelmet and Caribe entered into a charter party for the delivery of steel bars from Tampa, Florida to San Juan, Puerto Rico. Before the voyage began on November 26, 1976 Caribe Towing was acquired by Marine Exploration Company (MEC), which thereby became the beneficial owner of the CARIBE and barge ATC 21, and the charter party was assigned by Caribe to MEC.

Prior to November 21 the tug and barge arrived in Tampa from a previous voyage to Puerto Rico. Seawater was found in the hold of the barge as a result of damage during the voyage. A repair company was engaged to correct this damage. On November 21 a condition survey was made of the barge. The barge passed for loading, but the surveyor severely criticized the barge's condition. On November 22, while cargo was being loaded, the crew heard a loud, hollow, booming noise come from the barge and saw several large air bubbles three to four feet in diameter appear at the stern. Everyone left the barge, but loading recommenced when no problem was discovered. The master requested a diver's inspection, but the owner twice denied the request. The log book reflects the captain's belief that the barge had either broken her back or run aground. After loading was completed, the cargo hatches could not be closed because they had changed in size, an indication of structural damage. They were forced on with hydraulic jacks.

Even after the loading seawater was still present in the hold. Owners attempted a test to determine if a problem was evidenced by the boom and bubble incident but gave up when the test would not work.

Prior to the tug and barge setting sail, MEC requested coverage of barge and tug under its hull and protective and indemnity policies previously issued to MEC by insurers American Marine Underwriters (AMU) and Calvert Fire Insurance Company. Insurers requested condition surveys of the barge and tug. None of the surveys supplied showed the problems indicated by the events we have described. MEC did not communicate those events to the insurers. The barge and tug were added to MEC's fleet policy on November 24. The protective and indemnity policy (P & I) covered certain risks, including cargo losses.

The tug and barge left Tampa on November 26. On December 6, while the tug was en route, MEC telephoned the insurers to have Caribe Towing added as an additional insured, and Jarrel Jackson as an additional loss payee on the tug, and Alabama-Puerto Rico Barge Line as an additional loss payee on the barge. Unknown to the insurers, but known to MEC, the barge was then about to sink. Seas were washing over the top of the barge, and a man stood a continuous ax watch to cut the tow rope if the barge appeared to be going down for the last time. The barge later sank with the steel cargo before reaching Puerto Rico.

Steelmet sued Caribe Towing and MEC alleging that their acts caused the sinking of the barge and the loss of its cargo. This dispute was forced to arbitration pursuant to the arbitration clause in the charter party. The arbitrators rendered their decision in favor of Steelmet, holding that the barge was unseaworthy when it left Tampa, that the unseaworthiness caused the sinking and loss of the cargo, and that MEC knew of facts upon which reasonable inspection would have revealed the unseaworthiness of the barge.

Steelmet moved in district court to enforce the arbitration award. Jarrel Jackson filed an intervening complaint contending that his $50,000 ship's mortgage on the tug took preference over Steelmet's claim (the tug had been arrested in rem and sold, with funds paid to the court). MEC filed a third party complaint against AMU and Calvert seeking to enforce its rights under the P & I policy and the hull policy. AMU and Calvert denied liability to MEC, alleging that MEC did not have an insurable interest in the tug or the barge, that MEC willfully misrepresented its interest in both, and most important, that MEC knew the barge was unseaworthy and notwithstanding this knowledge willfully misrepresented or concealed the condition, which was material to the placement and issuance of the coverage.

Steelmet attempted to file a direct action against the insurers, but the trial court never ruled on its motion to do so. Instead the trial court allowed Steelmet to participate in the trial of MEC's claim against the insurers as if it had a direct action.

After a nonjury trial the district court granted Steelmet judgment on the arbitration award against MEC. The district court held that under established rules of marine insurance MEC's failure to inform the insurers of adverse changes in the condition of the barge, as previously determined by the arbitrators, voided coverage under the insurance policies. The court dismissed MEC's and Steelmet's claim against the insurers and awarded Jackson the amount of his lien.

The district court held that collateral estoppel precluded MEC and Steelmet from relitigating the issues decided in the arbitration, which established sufficient knowledge and concealment to void the policies.

Steelmet and MEC appeal. Insurers also attack the court's findings that MEC beneficially owned and had an insurable interest in the tug and barge on November 24 when the binder was issued and that MEC had been assigned the charter on the barge.

II. Collateral estoppel effect of the findings of arbitrators

The insurers argue that the district court correctly made offensive use of the findings of the arbitrators against Steelmet and MEC in order to establish that MEC knew of problems with the barge that indicated its unseaworthiness but failed to inform the insurers of those problems. The policy, according to insurers, was properly voided. MEC and Steelmet contend that the arbitrators' findings are not binding because the issues and burden of proof in this proceeding and the arbitration are not the same.

Offensive use of collateral estoppel is no longer prohibited. See Parklane Hosiery Co. v. Shore, 439 U.S. 322, 331, 99 S.Ct. 645, 651, 58 L.Ed.2d 552, 562 (1979). When there is a significant likelihood of unfairness, however, application of the doctrine constitutes an abuse of discretion. See Deweese v. Town of Palm Beach, 688 F.2d 731, 734 (11th Cir.1982).

Three general requirements for application of the doctrine exist:

(1) that the issue at stake be identical to the one involved in the prior litigation;

(2) that the issue have been actually litigated in the prior litigation; and

(3) that the determination of the issue in the prior litigation have been a critical and necessary part of the judgment in that earlier action.

Id. at 733.

In the arbitration proceeding the issues were governed by the Carriage of Goods by Sea Act (COGSA), 46 U.S.C. Secs. 1300-1315 (1976). Under that act the shipper (Steelmet) establishes a prima facie case by showing that it delivered cargo to the carrier (MEC) in good condition and that the cargo was unloaded in a damaged condition or, as in this case, never delivered because of sinking. See Terman Foods, Inc. v. Omega Lines, 707 F.2d 1225, 1227 (11th Cir.1983); Blasser Bros. v. Northern Pan-American Line, 628 F.2d 376, 381, 382 (5th Cir.1980). Then the burden shifts to the carrier to prove that it exercised due diligence in handling the cargo and making the ship seaworthy. 628 F.2d at 381. In the arbitration proceeding MEC argued that it exercised due diligence in investigating and acting upon the sea water leaks, the boom and bubble incident, and the ill-fitting hatches and in putting to sea in spite of these conditions. The arbitrators found that the barge was unseaworthy and that with knowledge of the surrounding facts MEC did not exercise due diligence to make it seaworthy or sufficiently test its unseaworthiness. The arbitrators further found that the unseaworthiness caused the sinking of the barge.

Steelmet and MEC contend that the issues are not the same in the arbitration and in the third party action against the insurer to recover on the policy, and that the lack of identity of issues precludes offensive use of collateral estoppel. They argue that, as between them and the insurers, it must be shown that MEC knew of the unseaworthiness or of facts sufficient to put it on notice of unseaworthiness, that it concealed this from the insurer and that such facts were material to the...