The opinion
Slip Op. 02-121
UNITED STATES COURT OF INTERNATIONAL TRADE
BEFORE: HONORABLE NICHOLAS TSOUCALAS
___________________________________
:
SL SERVICE, INC., :
:
Plaintiff, :
: Consol. Court No.
v. : 99-03-00151
:
UNITED STATES, :
:
Defendant. :
___________________________________:
Plaintiff, SL Service, Inc. (“SL Service”), moves for summary
judgment pursuant to USCIT R. 56 alleging that the undisputed
material facts in this case show that, as a matter of law, the
United States Customs Service (“Customs”) misapplied the vessel
repair statue, 19 U.S.C. § 1466 (1994), as interpreted in American
Ship Management, LLC v. United States, 25 CIT ___, 162 F. Supp. 2d
671 (2001), and Texaco Marine Servs., Inc. v. United States, 44
F.3d 1539 (Fed. Cir. 1994), by assessing vessel repair duties on SL
Service’s dry-docking expenses on a pro-rata basis during a period
of mandatory inspections by the American Bureau of Shipping (“ABS”)
and the United States Coast Guard (“USCG”). Customs contends that
it acted legally by apportioning the dry-docking expenses on a pro-
rata basis in a fashion mimicking the methodology used by Customs
for apportionment of expenses between dutiable and non-dutiable
work. Since no genuine issue as to any material fact remains, and
for the reasons stated below, SL Service’s motion for summary
judgment is granted.
Held: For the reasons stated below, and since no genuine issue
as to any material fact remains, SL Service’s motion for summary
judgment is granted.
[SL Service’s motion is granted.]
Dated: October 15, 2002
Sonnenschein Nath & Rosenthal (Evelyn M. Suarez) and Robert S.
Zuckerman, Vice President and General Counsel of CSX Lines, LLC,
for plaintiff SL Service, Inc.
Consol. Court No. 99-03-00151 Page 2
Robert D. McCallum, Jr., Assistant Attorney General; John J.
Mahon, Acting Attorney in Charge, International Trade Field Office,
Commercial Litigation Branch, Civil Division, United States
Department of Justice (Barbara S. Williams); of counsel: Karen P.
Binder, Assistant Chief Counsel, International Trade Litigation,
United States Customs Service, for defendant.
Collier Shannon Scott, PLLC (Lauren R. Howard) for amicus
curiae Shipbuilders Council of America, Inc.
MEMORANDUM OPINION AND ORDER
TSOUCALAS, Senior Judge: Plaintiff, SL Service, Inc. (“SL
Service”), moves for summary judgment pursuant to USCIT R. 56
alleging that the undisputed material facts in this case show that,
as a matter of law, the United States Customs Service (“Customs”)
misapplied the vessel repair statue, 19 U.S.C. § 1466 (1994), as
interpreted in American Ship Management, LLC v. United States, 25
CIT ___, 162 F. Supp. 2d 671 (2001), and Texaco Marine Servs., Inc.
v. United States, 44 F.3d 1539 (Fed. Cir. 1994), by assessing
vessel repair duties on SL Service’s dry-docking expenses on a pro-
rata basis during a period of mandatory inspections by the American
Bureau of Shipping (“ABS”) and the United States Coast Guard
(“USCG”). Customs contends that it acted legally by apportioning
the dry-docking expenses on a pro-rata basis in a fashion mimicking
the methodology used by Customs for apportionment of expenses
between dutiable and non-dutiable work. Since no genuine issue as
to any material fact remains, and for the reasons stated below, SL
Service’s motion for summary judgment is granted.
Consol. Court No. 99-03-00151 Page 3
JURISDICTION
The Court has jurisdiction over this matter pursuant to 28
U.S.C. § 1581(a) (2000).
DISCUSSION
I. Background
On November 9, 1999, this Court granted an Order designating
Consolidated Court Number 99-03-00151 a test case. Originally,
this case included SL Service, Inc. and a second plaintiff, namely
American Ship Management (“ASM”). ASM and SL Service filed a joint
motion for summary judgment before this Court on November 9, 2000,
and Customs filed a cross-motion for summary judgment on March 2,
2001. In American Ship Management, 25 CIT ___, 162 F. Supp. 2d
671, this Court denied both motions and ordered that the parties
proceed with the litigation on the merits.
By Order of Partial Dismissal dated February 28, 2002, ASM was
dismissed, with prejudice, as a party in this pending action. SL
Service proceeded with court ordered discovery and provided Customs
with: (a) Sea-Land Pacific Drydock Report NOV/DEC 1995 - HUD - HKG
(“Dry-Docking Report”); (b) Sea-Land Pacific Planning Schedule; (c)
Spreadsheet prepared by Joseph Breglia; and (d) Declaration of
Joseph Breglia. See Pl. SL Service Inc.’s Mem. Supp. Mot. Summ. J.
at 2-3 (“Pl.’s Mem.”); see also Pl.’s Mem. at Exs. A-D.
Consol. Court No. 99-03-00151 Page 4
II. Undisputed Facts
This case concerns dry-docking duties imposed by Customs on
the vessel Sea-Land Pacific owned by SL Service.1 See American
Ship Management, 25 CIT ___, 162 F. Supp. 2d 671. The Sea-Land
Pacific was dry-docked at the Hongkong United Dockyards Ltd. from
November 22, 1995, through December 1, 1995, in order to comply
with mandatory USCG and ABS regulations requiring certain
inspections and modifications. During the dry-docking, the Sea-
Land Pacific underwent non-dutiable modifications as well as
dutiable repairs. The Sea-Land Pacific was not dry-docked for a
period of time in excess of that necessary for mandatory
inspections and/or modifications pursuant to the guidelines set
forth in American Ship Management, 25 CIT ___, 162 F. Supp. 2d 671.
III. Contentions of the Parties
SL Service asserts that the Dry-Docking Report and additional
exhibits provided to Customs adequately show that “non-dutiable
mandatory inspections and modifications occurred . . . from
November 22, 1995 through December 1, 1995, and that no dry-docking
occurred beyond the period [necessary for] non-dutiable mandatory
1
Plaintiff properly filed a Motion to Amend Summons, changing
plaintiff’s name from Sea-Land Service, Inc. to SL Service, Inc.,
on July 27, 2000. This Court granted SL Service’s motion on August
29, 2000, and considers Customs’ naming of plaintiff as Sea-Land
Service, Inc., instead of SL Service, Inc. in this summary judgment
proceeding, a mere oversight.
Consol. Court No. 99-03-00151 Page 5
inspections and/or modifications [to take place].” Pl.’s Mem. at
3; see also Pl.’s Statement of Material Facts Not in Issue at 2-3.
SL Service contends that such documents support the argument that
under the test established by Texaco, 44 F.3d 1539, and articulated
in American Ship Management, 25 CIT ___, 162 F. Supp. 2d 671, none
of the maintenance expenses of dry-docking the Sea-Land Pacific are
dutiable and, therefore, summary judgment is appropriate. See
Pl.’s Mem. at 4-7.
Customs continues to maintain that “the original methodology
used by Customs in this action to apportion the dry-docking costs
was reasonable, proper, and in accordance with law.” Def.’s Mem.
Resp. Pl.’s Mot. Summ. J. at 3. Customs, however, admits “that the
Sea-Land Pacific was not dry-docked for any period of time in
excess of that necessary for mandatory inspections and/or
modifications pursuant to the guidelines set forth in American Ship
Management[, and that] . . . none of the maintenance expenses of
dry-docking are dutiable in this action.” Id. at 3-4. Customs
further contends that the discovery produced by SL Service “would
not be generally sufficient to satisfy a plaintiff’s burden as set
forth in American Ship Management. . . .”2 Id. at 3 n.4.
2
The Court is not amused by this argument, and finds that the
evidence produced by SL Service, in addition to the statements
provided by Customs in Defendant’s Response to Plaintiff’s
Statement of Material Facts, clearly show that the Sea-Land Pacific
(continued...)
Consol. Court No. 99-03-00151 Page 6
IV. Analysis
A. American Ship Management’s Application of Texaco
1. Statutory Background and the Texaco Test
Section 1466(a) of United States Code, Title 19, provides that
[t]he equipments, or any part thereof, including boats,
purchased for, or the repair parts or materials to be
used, or the expenses of repairs made in a foreign
country upon a vessel documented under the laws of the
United States . . . shall . . . be liable to entry and
the payment of an ad valorem duty . . . on the cost
thereof in such foreign country.
19 U.S.C. § 1466(a) (emphasis added).
The case at bar involves the interpretation of the term
“expenses of repairs” used in 19 U.S.C. § 1466(a). Prior to the
Federal Circuit decision in Texaco, 44 F.3d 1539, Customs used a
restrictive interpretation of the term. For example, Customs did
not treat the dry-docking as an “expense of repairs” making dry-
docking expenses non-dutiable. See Texaco, 44 F.3d 1539. Customs’
pre-Texaco treatment was based upon the premise that dry-docking
expenses were not “part of” and/or “directly involved” in a
dutiable repair. See id.
The court in Texaco examined the statutory language,
determined the language to be clear and unambiguous, and concluded
(...continued)
was only dry-docked for the length of time necessary to perform
non-dutiable mandatory inspections and/or modifications.
Consol. Court No. 99-03-00151 Page 7
that it is proper to
interpret [the term] “expenses of repairs” as covering
all expenses (not specifically excepted in the statute)
which, but for dutiable repair work, would not have been
incurred. Conversely, [the term] “expenses of repairs”
does not cover expenses that would have been incurred
even without the occurrence of dutiable repair work. [In
sum,] the “but for” interpretation accords with what is
commonly understood to be an expense of a repair.
Texaco, 44 F.3d at 1544 (citations omitted).
The court in Texaco also specified that
[t]he mere drawing up of a vessel on a dry dock is not a
part of her repairs, but is rather a method of making an
inspection of her to determine whether any repairs are
necessary. The examination might show the hull to be in
perfect condition, requiring no attention of any kind.
Id. at 1546 (citing United States v. George Hall Coal Co., 142 F.
1039 (2d Cir. 1906)).
In American Ship Management, 25 CIT at ___, 162 F. Supp. 2d at
674, this Court observed that Customs started assessing duty on the
dry-docking expenses which would not have been incurred “but for”
dutiable repairs even if the expenses were not “part of” and/or
“directly involved” in the repair itself, in light of the Texaco
decision.
2. Apportionment Under the Texaco Test
In American Ship Management, 25 CIT ___, 162 F. Supp. 2d 671,
the plaintiff, SL Service, argued that any imposition of duties on
Consol. Court No. 99-03-00151 Page 8
dry-docking expenses on a pro-rata basis is per se illegal under
the Texaco test. SL Service further pointed out that “the Federal
Circuit has specifically ruled” that “mixed purpose dry-docking .
. . do[es] not qualify as expenses of repairs.” American Ship
Management, 25 CIT at ___, 162 F. Supp. 2d at 674 (internal
quotations and citation omitted). While the Court agreed with the
plaintiff’s reading of Texaco with regard to “mixed purpose” dry-
docking expenses in American Ship Management, 25 CIT ___, 162 F.
Supp. 2d 671, the Court disagreed with the plaintiff’s unreasonable
expansion of the Texaco holding.
In essence, the court in Texaco delineated two categories of
expenses under 19 U.S.C. § 1466(a), specifically: (1) dutiable
expenses that would not be undertaken “but for” the need to repair;
and (2) non-dutiable expenses undertaken for a purpose either
unrelated to repair or for a “mixed purpose” related to a dutiable
repair as well as to a non-dutiable activity, e.g., an inspection
or modification. The Texaco classification, however, does not make
an apportionment of dry-docking expenses per se illegal if there is
a clear identification of the dutiable dry-docking expenses
undertaken solely for the purpose of repair and the non-dutiable
dry-docking expenses undertaken for a purpose either unrelated to
repair or for a “mixed purpose.” See generally, Texaco, 44 F.3d
1539. Therefore, the Court held that Customs correctly concluded
Consol. Court No. 99-03-00151 Page 9
that it could apportion dry-docking expenses under the mandate of
19 U.S.C. § 1466(a), as clarified by Texaco, 44 F.3d 1539.
3. Pro-Rata Apportionment Used by Customs
In American Ship Management, 25 CIT ___, 162 F. Supp. 2d 671,
the dutiable and non-dutiable dry-docking expenses were apportioned
by Customs according to the percentage corresponding to the value
of dutiable repairs and non-dutiable expenses incurred by each
vessel. While the general concept of apportionment of dry-docking
expenses does not contradict the holding of Texaco, 44 F.3d 1539,
the particular apportionment used by Customs was arbitrary,
capricious and in violation of the classification designated by
Texaco, 44 F.3d 1539.
Dry-docking expenses include, among other things, maintenance
expenses and the cost of tugs to put the vessel into and out of dry
dock.3 See, e.g., Dahlia Maritime Co. v. M/S Nordic Challenger,
1993 U.S. Dist. LEXIS 10170 (E.D. La. 1993). Consequently, the
cost of tugs is an inevitable expense of a mandatory inspection
and, thus, is non-dutiable. See Texaco, 44 F.3d 1539. Similarly,
all maintenance charges (along with all other charges related to
3
The latter usually comprises the main expense of the dry-
docking process.
Consol. Court No. 99-03-00151 Page 10
the maintenance)4 associated with the dry-docking during the period
of mandatory inspection and/or modifications are non-dutiable
expenses under the test posed by Texaco notwithstanding whether or
not the vessel undergoes any repair during this period. See id.
Therefore, only the maintenance expense of dry-docking for the
period of time in excess of that necessary for a mandatory
inspection and/or modifications are dutiable under the Texaco test.
See id.
While, under an unlikely scenario, such calculation may create
a result accidently corresponding to that reached by Customs in the
given case, this possibility is irrelevant to the validity of
Customs’ method of calculation because the method violates, as a
matter of law, the test offered by Texaco, 44 F.3d 1539.
Accordingly, this Court, in American Ship Management, 25 CIT ___,
162 F. Supp. 2d 671, ordered Customs to obtain from SL Service the
information necessary to make a calculation supported by logic
rather than random guessing.5
4
The term “maintenance” in the context of dry-docking usually
associates with utilities and analogous services. The related
charges could include, for example, the procedures and tools
necessary to bring and keep the vessel in a stable position.
5
In American Ship Management, 25 CIT ___, 162 F. Supp. 2d 671,
Customs asserts that SL Service failed to satisfy the plaintiff’s
“burden” because, according to Customs, there was no pertinent
information in the plaintiff’s original brief. This Court presumed
that Customs was referring to the term “burden of production.” The
(continued...)
Consol. Court No. 99-03-00151 Page 11
B. Determination at Bar
“On a motion for summary judgment, it is the function of the
court to determine whether there are any factual disputes that are
material to the resolution of the action.” Phone-Mate, Inc. v.
United States, 12 CIT 575, 577, 690 F. Supp. 1048, 1050 (1988)
(citation omitted). In this case, the parties now stipulate to the
central fact at issue, namely, that the Sea-Land Pacific was not
dry-docked for a period of time longer than that necessary to
perform the mandatory inspections and/or modifications pursuant to
the guidelines set forth in American Ship Management, 25 CIT ___,
162 F. Supp. 2d 671. In accordance with the holding in American
Ship Management, this Court finds that SL Service met its “burden
of production,” and therefore SL Service’s motion for summary
judgment is granted.
(...continued)
term “burden of production” defines the burden on one party to
introduce sufficient evidence to avoid judgment against that party
as a matter of law. Specifically, the plaintiff shall go forward
with the evidence on the issue, thus, shifting the burden to the
defendant to produce evidence showing otherwise. See, e.g.,
Environmental Defense Fund, Inc. v. EPA, 179 U.S. App. D.C. 43, 548
F.2d 998, 1013 (D.C. Cir. 1976) (noting that the burden of
production does not necessarily lay with the same party carrying
the burden of persuasion). In the case at bar, SL Service and
Customs now stipulate that the vessel, Sea-Land Pacific, was not
dry-docked for a period longer than that necessary to perform the
mandatory inspections and/or modifications required by the USCG and
ABS.
Consol. Court No. 99-03-00151 Page 12
V. CONCLUSION
For the foregoing reasons, the Court grants SL Service’s
motion for summary judgment. Judgment will be entered accordingly.
____________________________
NICHOLAS TSOUCALAS
SENIOR JUDGE
Dated: October 15, 2002
New York, New York