United States v. Alakai

• Decision Date: 28 February 2011
• Docket Number: Action No. 2:10cv232.
• Citation: 2011 A.M.C. 1424,815 F.Supp.2d 948
• Parties: UNITED STATES of America, Plaintiff,andAUSTAL USA LLC; Hornblower Marine Services, Inc.; HMS–Hawaii, Inc., Intervenor–Plaintiffs, v. ALAKAI (O.N. 1182234), its boilers, engines, machinery, masts, spars, rigging, boats, anchors, cables, chains, tackle, tools, bunkers, pumps and pumping equipment, apparel, furniture, fittings and equipment, spare parts, and all other appurtenances, etc., in rem, Defendant.
• Court: U.S. District Court — Eastern District of Virginia

2011 A.M.C. 1424

815 F.Supp.2d 948

UNITED STATES of America, Plaintiff,andAUSTAL USA LLC; Hornblower Marine Services, Inc.; HMS–Hawaii, Inc., Intervenor–Plaintiffs,

v.ALAKAI (O.N. 1182234), its boilers, engines, machinery, masts, spars, rigging, boats, anchors, cables, chains, tackle, tools, bunkers, pumps and pumping equipment, apparel, furniture, fittings and equipment, spare parts, and all other appurtenances, etc., in rem, Defendant.

Action No. 2:10cv232.

United States District Court, E.D. Virginia,Norfolk Division.

Feb. 28, 2011.

Edmund M. Ferguson, U.S. Department of Justice, Washington, DC, for Plaintiff.

Eugene Paul Miller, John Louis Longstreth, Rolf Marshall, K & L Gates LLP, Washington, DC, Richard Hooper Ottinger, Vandeventer Black LLP, Norfolk, VA, Donald Kenneth McLean, Bauer Moynihan & Johnson LLP, Seattle, WA, for Intervenor–Plaintiffs.

OPINION AND FINAL ORDER

REBECCA BEACH SMITH, District Judge.

This matter comes before the court on the following motions: the United States of America's Motion for Summary Judgment Pursuant to F.R.C.P. 56 and Distribution of Sale Proceeds (“Motion”); Austal USA LLC's Cross–Motion for Summary Judgment (“Austal's Cross–Motion”); and Hornblower Marine Services, Inc. and HMS–Hawaii, Inc.'s Motion for Summary Judgment to Set Priority of Claims (“Hornblower and HMS's Cross–Motion”). For the reasons stated below, the Motion is GRANTED, in part, and DENIED, in part; Austal's Cross–Motion is DENIED; and Hornblower and HMS's Cross–Motion is GRANTED, in part, and DENIED, in part.

I. PROCEDURAL HISTORY

The United States of America (“United States”) filed the present action on May 20, 2010, seeking to foreclose a Preferred Mortgage Lien on the defendant vessel, the ALAKAI, Official No. 1182234 (“the Vessel”). The United States Marshal (“Marshal”) arrested the Vessel on May 25, 2010, pursuant to process issued by this court on May 20, 2010. On August 26, 2010, Austal USA LLC (“Austal”), Hornblower Marine Services, Inc. (“Hornblower”), and HMS–Hawaii, Inc. (“HMS”) all intervened in the action to foreclose their respective liens.

On September 17, 2010, the court ordered the interlocutory sale of the Vessel by public auction, free and clear of all claims, liens, maritime liens, rights, rights of redemption and encumbrances. The court authorized the United States to credit bid at the sale up to the maximum of its mortgage interest on the Vessel. In the event the United States was the successful bidder by way of a credit bid, the court ordered that (1) the amount of the United States' bid would be considered maintained in a fund by the United States Maritime Administration (“MARAD”) as the proceeds of sale pending further Order of the court; and (2) the United States would be required to pay all claims adjudged to be entitled to payment out of the proceeds of the sale, though not exceeding the amount of its bid.¹ On September 30, 2010, the Vessel was sold at auction for $25,000,000 to MARAD. On October 7, 2010, the Clerk of the Court entered an Order of Confirmation of Sale of the Vessel, and on October 13, 2010, the Marshal conveyed a Bill of Sale to MARAD. Default was entered against the Vessel on November 8, 2010.

On November 5, 2010, the United States filed an unopposed Motion for Disbursement of Funds for Custodial Legis Expenses. On November 23, 2010, the court entered partial summary judgment for the United States and ordered that $351,764.79 of the proceeds of the Vessel's sale be distributed to MARAD, leaving $24,648,235.21 remaining in the proceeds fund. On November 19, 2010, the United States filed its Motion. On December 10, 2010, Austal filed an Opposition to the Motion and its Cross–Motion,² and Hornblower and HMS filed their joint Cross–Motion. On December 17, 2010, the United States filed its Reply to Austal's Opposition to the Motion, its Response to Austal's Cross–Motion,³ and its Response to Hornblower and HMS's Cross–Motion. Austal, Hornblower and HMS did not reply to the United States' Responses to their respective Cross–Motions. The Motion and the Cross–Motions are now ripe for review.

II. FACTUAL HISTORY ⁴

Unless otherwise noted, the following facts are admitted.⁵

A. THE UNITED STATES AND AUSTAL

Although differing in the particulars, both the United States and Austal financed construction of the Vessel. On April 9, 2004, Austal and Hawaii Superferry, Inc. (“HSF”) entered into a contract for the construction of two vessels, one of which would become the Vessel.⁶ On the same day, the two entered into a Subordinated Loan Agreement under which Austal committed to provide partial financing for the construction of the Vessel and HSF issued promissory notes to Austal. By its terms, the Subordinate Loan Agreement was entered under conditions that “ensure[d] the subordination of [Austal's] rights hereunder to the rights of [the United States] under the Senior Loan Documents.” Subordinated Loan Agreement 1, Mem. in Opp. to Austal's Cross Mot. for Summ. J. Ex. C, ECF No. 71–1. In October of 2005, the United States, represented by the Secretary of Transportation and acting by and through MARAD, and HSF entered into a Commitment to Guarantee Obligations (“Guarantee Commitment”) that bound the United States to guarantee the payment of a portion of HSF's financial obligations pertaining to construction of the Vessel. Thereafter, HSF obtained a loan to fund construction costs, pursuant to which it issued two promissory notes guaranteed by the United States. HSF later refinanced its obligations under the construction loan and the promissory notes by issuing and selling long term bonds guaranteed by the United States.

HSF provided security to Austal and to the United States by executing and delivering mortgages that covered the Vessel as of its May 30, 2007 completion and delivery date. As to the United States, HSF executed a First Preferred Fleet Mortgage (“First Mortgage”). As to Austal, HSF executed a Second Preferred Fleet Mortgage (“Second Mortgage”). Congruent with Austal's subordination of its rights to those of the United States under the Subordinated Loan Agreement, the Second Mortgage provided that it was “fully subject to and fully subordinate to the [United States' First Mortgage].” Second Preferred Fleet Mortgage 13, Mem. in Supp. of United States' Mot. for Summ. J. Ex. B, ECF No. 61–2 [hereinafter “Second Preferred Mortgage”]. At 10:15 AM on May 30, 2007, Austal and HSF agreed construction of the Vessel was complete. At that same moment, both the First and Second Mortgages were properly filed with the Coast Guard's National Vessel Documentation Center, thereby attaining preferred mortgage status. See 46 U.S.C. §§ 31321(a); 31322.

On May 30, 2009, HSF filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. On July 1, 2009, the bankruptcy court ordered that the Vessel could be abandoned and modified the automatic stay to allow HSF's secured creditors to enforce their rights directly against the Vessel. Various defaults occurred under the First Mortgage before and after the bankruptcy petition. Significantly, in December of 2009, the United States made payment in full on HSF's guaranteed obligations and no sums have been paid to the United States under the First Mortgage. Currently, the Vessel is liable to the United States for in excess of $148,000,000. Similarly, Austal advanced sums pursuant to the Subordinated Loan Agreement and promissory notes, yet has not received any payment from HSF. As of the date Austal filed its Cross–Motion, the Vessel is liable to Austal for $30,312,046.31.

B. HORNBLOWER AND HMS

In June of 2004, HSF contracted with Hornblower and HMS to manage the Vessel and to hire crewmembers (“Management Agreement”).⁷ Prior to completion of the Vessel's construction on May 30, 2007, HMS provided HSF with services to obtain necessary permits and documentation for the Vessel. HMS provided other services for the Vessel from the date of its completion until May 1, 2009. On May 1, 2009, HSF owed HMS $108,598.82 for services and $2,709.89 for the medical expenses of an injured crew member. Subsequently, Hornblower renegotiated the Management Agreement with HSF for the continuation of vessel management services. Hornblower is owed $30,050.00 for those vessel management services. Under the renegotiated Management Agreement, HSF was obligated to pay the crew costs associated with the crew that was required on the Vessel. When HSF failed to pay the crew costs, Hornblower advanced $21,025.00 to cover those payments.

III. STANDARD OF REVIEW

Summary judgment is appropriate when a court, viewing the record as a whole finds that there is no genuine issue of material fact and that one party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(a); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248–50, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Terry's Floor Fashions, Inc. v. Burlington Indus., Inc., 763 F.2d 604, 610 (4th Cir.1985). “[W]hen faced with cross-motions for summary judgment, a district court is not required to grant judgment as a matter of law for one side or the other.” Heublein, Inc. v. United States, 996 F.2d 1455, 1461 (2d Cir.1993); see ITCO Corp. v. Michelin Tire Corp., Commercial Div., 722 F.2d 42, 43 n. 3 (4th Cir.1983). Instead, the court must ask “whether the evidence presents a sufficient disagreement to require submission to the jury or whether it is so one-sided that one party must prevail as a matter of law.” Anderson, 477 U.S. at 251, 106 S.Ct. 2505; see also Rossignol v. Voorhaar, 316 F.3d 516, 523 (4th Cir.2003) (“[T]he court must review each motion separately on its own merits ‘to determine whether either of the parties deserves judgment as a matter of law.’ ” (citations omitted)). The court is not to “weigh the evidence and determine the truth of the matter.” Anderson, 477 U.S. at 249, 106 S.Ct. 2505.

IV. ANALYSIS

There is no dispute that the proceeds of the sale are insufficient to...