Opposition Brief — Cornish Shipping Ltd. v. International Nederlanden Bank

AUG 22 1995

CLERK

IN THE en

Supreme Court of the United States

OCTOBER TERM, 1995

>

CORNISH SHIPPING LTD..,

Petitioner,

Vi:

INTERNATIONAL NEDERLANDEN BANK N.V.,

f/k/a NMB POSTBANK GROEP, N.V.,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

BRIEF IN OPPOSITION

=

Q..

— JOHN M. TORIELLO PETER E. CALAMARI

> © Counsel of Record ANTHONY L. PACCIONE

Letel JAMES H. HOHEN. TEIN HERTZOG, CALAMARI

| oll HAIGHT, GARDNER, POOR & GLEASON

co & HAVENS Co-Counsel for Respondent

= | Attorneys for Respondent 100 Park Avenue

pe 195 Broadway New York, New York 10017

— | New York, New York 10007 (212) 481-9500

— (212) 341-7000

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QUESTION PRESENTED FOR REVIEW

1. Did the Second Circuit Court of Appeals and District

Court for the Southern District of New York correctly deny a

shipowner’s attempt to extend a maritime lien on subfreights

to reach funds that had been paid to a charterer’s agent?

il

CORPORATE DISCLOSURE STATEMENT

Pursuant to Rule 29.1 of the Supreme Court Rules, respon-

dent Internationale Nederlanden Bank N.V., formerly known

as NMB Postbank Groep, N.V. (“INB”) has a publicly traded

parent corporation: ING Group, Amsterdam, The Netherlands.

TABLE OF CONTENTS

PAGE

I ee na che aees 0c vacdws cies mqews s i

Corporate Disclosure Statement ....................... li

Tee I ai Fives hc ih hava vin od bo sind de ci knee cKes ili

es i ca lca pihaenevssassaces iv

UO I ID ois chcc tb dkbn dec dncereesbrecccsescs l

Reasons for Denying the Petition...................... |

POINT I

A MARITIME LIEN IS NOT MAINTAINED

FOR THE ASSURANCE OF THE PARTIES

INVOLVED. IT IS A SECRET LIEN WHICH

IS INTENDED TO PROMOTE COMMERCE

AND SHIPPING. IT IS STRICTLY CONSTRUED

AND NOT SUBJECT TO EXPANSION SO

AS TO AVOID CREATION OF OBSTRUC-

TIONS TO INTERNATIONAL COMMERCE .... 6

POINT II

THE DECISION OF THE COURT BELOW WAS

NOT AN “EXTRAORDINARY RESULT” BUT

WAS CONSISTENT WITH THE PRECEDENT

OF THIS COURT AND THE DECISIONS OF

THE CIRCUIT COURTS OF APPEAL ........... 8

Da Tay ST il OS BSR a DS SS Sa a a 12

dmnnTEnnE mend worms mene

iV

TABLE OF AUTHORITIES

Cases PAGE

A/S Dampskibsselskabet Torm v. Beaumont Oil Ltd.,

927 F.2d 713 (2d Cir.), cert. denied, 502 U.S.

SGZ CESPS) on occcnpsincvncpecdhspiaksebisshonssseos 7

American Steel Barge Co. v. Chesapeake & O. Coal

Agency Co., 115 F. 669 (1st Cir. 1902) ........... 8,9

Beverly Hills Nat’l Bank & Trust Co. v. Compania de

Navegacione Almirante S.A., 437 F.2d 301

(9th Cir.), cert. denied, 402 U.S. 996 (1971)..... 8

Compania Sud Americana de Vapores v. Atlantic

Caribbean Shipping Co., 587 F. Supp. 410

(5 FPF RE) «cag iceknsia bh eeede ccd eokeaie estes 8

Itel Containers Int’l Corp. v. Atlanttrafik Express

Serv. Ltd., 982 F.2d 765 (2d Cir. 1992)........... 7

Piedmont & Georges Creek Coal Co. v. Seaboard

Fisheries Co., 254°U 8. VATSZO) oeciivievediiics 6, 11

Tagart Beaton & Co. v. James Fisher & Sons,

Dh See acts Se be ce bo eae cee eas 8,9

The DIANA, 423 F.2d 1 (2d Cir. 1970) ............... 8,9, 10

The SATURNUS, 250 F. 407 (2d Cir.), cert. denied,

247 U.S. SES CIGD 6 eC REGS 313

Tramp Oil and Marine, Ltd. v. M/V MERMAID I,

805 F.24:42 Ciat Cas, 1966). 6055 copii ieee 7

Union Industrielle et Maritime v. Nimpex Int'l, Inc.,

439 B26 S20 CP Cie TTA) onic ties chcasccsaiess 8,9

United States v. Freights etc. of the S.S. MOUNT

SHASTA, 274 U.S. 466 (1927)..........0000. 8,9, 10, 11

A Re

IN THE

Supreme Court of the United States

OCTOBER TERM, 1995

No. 95-130

>

CORNISH SHIPPING LTD.,

Petitioner,

Vo

INTERNATIONAL NEDERLANDEN BANK N.V.,

f/k/a NMB POSTBANK GROEP, N.V.,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

—<-

BRIEF IN OPPOSITION

Statement of the Case

A. Introduction

This case presents neither the conflicts the Petition alleges

nor any other issues worthy of this Court’s review. In a well-

reasoned opinion by Chief Judge Jon O. Newman, the U.S.

Court of Appeals for the Second Circuit affirmed the District

Court’s decision concluding that “a shipowner’s lien on sub-

freights does not attach to funds that have been paid to the

charterer or its agent. . .” (App. 2a). Accordingly, the Sec-

ond Circuit properly determined that Cornish was not entitled

to assert a maritime lien on a portion of the proceeds of a

letter of credit paid to the charter’s lender, INB, which was

indisputably the charterer’s agent for purposes of collection

as well as the assignee of the letter of credit proceeds.

Contrary to the arguments raised by Petitioner, Cornish Ship-

ping Ltd. (“Cornish” or “Petitioner”) this result is neither

extraordinary nor is it in contravention of other circuit court

decisions.

B. Background

The present dispute arises out of a New York Produce

Exchange Form charter by Ferromet Resources, Inc. (“Fer-

romet”) of the M/V FILOKTITIS from its owner, Cornish.

Ferromet intended to use the vessel to transport two ship-

ments of steel scrap to Korea pursuant to a contract between

Ferromet, as seller, and Pohang Iron & Steel Co. Ltd.

(“POSCO”), as purchaser. In order to pay Ferromet for the

steel scrap, as well as insurance and the transportation costs

of the steel scrap, POSCO opened an irrevocable letter of

credit at Shinhan Bank (“Shinhan L/C”).

For a period of several years prior to the transaction at

issue, Ferromet had a credit relationship with INB. In the con-

text of this relationship, Ferromet received financing from

INB as well as other banks. INB and Ferromet had entered

into a loan agreement for one of the scrap steel cargoes which

ultimately was loaded on the FILOKTITIS. INB did not nego-

tiate the terms of Ferromet’s sale to POSCO nor its charter of

the vessel; it simply provided financing to Ferromet for this

transaction. As part of its security, INB received an assign-

ment of the proceeds of the POSCO sale and accordingly

made appropriate U.C.C. security filings. INB advanced more

than $3.38 million to Ferromet for the transaction.

In early January 1992, the scrap steel destined for Korea

was loaded on the FILOKTITIS. On January 30, 1992, INB

received the documents from Ferromet necessary to draw

down on the Shinhan L/C. In accordance with standard

banking practice, INB reviewed the documents and dutifully

3

notified Shinhan Bank of five minor discrepancies appearing

in the documents. On February 3, 1992, Cornish sent a notice

of lien on subfreight to POSCO and Shinhan Bank. Because

of the minor documentary discrepancies identified by INB,

POSCO was able to prevent the immediate drawdown of the

letter of credit.

At or about the same time, an unrelated Ferromet creditor

attached the bunkers (fuel oil) aboard the FILOKTITIS while

the vessel was at the Panama Canal. The bunkers ostensibly

were Ferromet’s property and subject to attachment by its

creditor.

Given its various financial problems, Ferromet approached

INB for assistance in resolving the situation. Thus, INB

entered negotiations with Ferromet, Cornish, POSCO and the

unrelated creditor in order to lift the bunker attachment in

Panama. As a result of the negotiations, INB advanced an

additional $250,000 to Ferromet to fund an escrow covering

the disputed claim of the unrelated creditor. In addition, INB

agreed to fund a further loan to Ferromet in the amount of

$52,000 for Panama Canal fees and other charges.

In exchange for INB’s agreement to provide these further

advances to Ferromet which would resolve the dispute with

the unrelated creditor, POSCO agreed to waive the docu-

mentary discrepancies under the Shinhan L/C. POSCO sent a

letter to INB, which reflects the terms of the agreement

between INB and POSCO. There is no mention in the letter of

any promise by INB to pay Cornish’s hire claim against Fer-

romet for the simple reason that no such promise ever was

made by INB. This letter was a part of the record below.

Despite Cornish’s sweeping assertions to the contrary, which

were made both before the District and Circuit Courts, no

competent evidence ever was submitted to any court that INB

acted wrongfully.’

Further, as noted by the appellate court below, POSCO had sub-

sequently initiated a suit against INB and Ferromet in New York Supreme

4

In accordance with the POSCO/INB agreement, INB

escrowed $250,000 and advanced the Panama Canal fees. The

unrelated creditor’s attachment of the vessel’s bunkers was

lifted. On the same day, Shinhan Bank confirmed POSCO’s

waiver of the discrepancies under the Shinhan L/C and the

payment to INB was made by wire transfer through inter-

national banking channels. INB then applied the payment

($2,995,426.01) to reduce the $3.3 million loan made to Ferro-

met to finance the scrap steel transaction. However, even after

application of the L/C payment, Ferromet still owed INB an

additional $16 million from this and other transactions.

Not content with the assertion of its lien against POSCO,

Cornish then obtained an ex parte Order from the Panamanian

Court and arrested the cargo onboard the vessel, despite Cor-

nish’s prior issuance of bills of lading for the cargo which

were marked “freight pre-paid”. The vessel then remained in

Panama for 82 days while Cornish and POSCO litigated

whether Cornish’s cargo arrest was valid. Ultimately, Cornish

and POSCO reached an agreement whereby POSCO paid Cor-

nish $650,000 to obtain the release of the cargo. On May 15,

1992, the vessel left Panama and proceeded to Korea where it

discharged the cargo.

After a period of discovery, Cornish, the intervening plain-

tiff, POSCO, and INB presented cross-motions for summary

judgment before the District Court.” After the District Court

Court, alleging a cause of action, among others, for common-law fraud

in connection with the POSCO/INB agreement (App. 6a n.3). After the

Second Circuit’s decision, POSCO and INB entered into a stipulation of

dismissal of the state court action. Consequently, the state court action

has now been dismissed. Of course, POSCO, the supposed aggrieved

party, has not joined in Cornish’s certiorari petition.

2

Even though Cornish made repeated attempts to make an issue

of INB’s supposed misconduct in this matter, it commenced yet another

action against INB in the Southern District of New York after entry of the

District Court’s judgment and while the present matter was sub judice

before the Second Circuit. That action improperly seeks to spin off com-

mon law claims arising from the same transaction as in this Petition.

found in INB’s favor, Cornish and POSCO appealed to the

Appellate Court below. In affirming the finding of the District

Court, the Circuit Court carefully considered Cornish’s and

POSCO’s arguments but rejected their positions.

Reasons for Denying the Petition

In the decision below, the Second Circuit reviewed the

nature of the res that was the subject of the lien on sub-

freights. The court determined that that lien reaches the debt

for subfreights, but does not reach any particular funds in the

consignee’s account, or more pertinently, in the charterer’s

own accounts. Petitioner misconstrues the holding of the Sec-

ond Circuit and overlooks the court’s rationale. Chief Judge

Newman summarized the court’s holding:

Although this precise issue has not previously been

resolved, prior cases and important policy considerations

favor the view that a shipowner’s lien on subfreights rep-

resents a contingent right to collect a debt directly from

a consignee, rather than a right to specific funds that the

consignee intends to use or has used to satisfy that debt.

In accordance with this view, we conclude that the

shipowner’s lien does not give it a right to trace specific

funds that the consignee has paid to a charterer.

(App. 7a).

Chief Judge Newman explained that the exercise of the lien

“should vest the owner with the rights that the charterer

would otherwise have under the contract of affreightment to

proceed against that debt.” (App. 11a).

This hoiding and rationale is perfectly in accord with prece-

dent and the public policy underlying the strict construction

of maritime liens. Contrary to Petitioner’s assertion, there is

Cornish’s new action against INB currently is before the District Court

and INB intends to defend that matter vigorously.

6

no conflict among the circuits, nor is the decision a radical

revision of the maritime lien on subfreights. Indeed, Cornish’s

overstatement that the Second Circuit decision “pulls most of

the teeth out of the lien on the subfreights” (Petition at 5) is

belied by Cornish’s ability in this case to force POSCO to

settle by paying an additional $650,000 in freight to Cornish

after it already had paid more than one million dollars for the

freight to Ferromet.

In seeking the review of the decision of the Second Circuit,

Cornish chooses to blink at its ability to enforce the lien on

subfreights in the traditional manner by asserting it against

the payor of the debt. By defining further the nature of sub-

freight that is affected by the lien, the Second Circuit reaches

a conclusion that is in accord with prior case law. In sum, a

shipowner such as Cornish remains able to seek redress

against the payor, but as before, simply cannot attempt to

trace and recover funds from the charterer or its agent.

POINT I

A MARITIME LIEN IS NOT MAINTAINED FOR

THE ASSURANCE OF THE PARTIES INVOLVED.

IT IS A SECRET EHEN WHICH IS INTENDED

TO PROMOTE COMMERCE AND SHIPPING.

IT IS STRICTLY CONSTRUED AND NOT SUBJECT

_ TO EXPANSION SO AS TO AVOID CREATION OF

OBSTRUCTIONS TO INTERNATIONAL COMMERCE

As recognized by both courts below (App. 17a, 27-28a), it

is a well-established principle that maritime liens are con-

strued strictly and disfavored in the law. In Piedmont &

Georges Creek Coal Co. v. Seaboard Fisheries Co., 254 U.S.

1, 12 (1920), this Court stated:

The maritime lien is a secret one. It may operate to the

prejudice of prior mortgagees or of purchasers without

notice. It is therefore stricti juris and will not be

extended by construction, analogy or inference.

Any attempt to extend the reach of a maritime lien should

be summarily rejected, where such an extension would inter-

fere with the settled course of maritime affairs, see, e.g.,

Tramp Oil and Marine, Ltd. v. M/V MERMAID I, 805 F.2d 42,

46 (ist Cir. 1986) or disrupt the normal course of interna-

tional commerce. Cf. A/S Dampskibsselskabet Torm v. Beau-

mont Oil Ltd., 927 F.2d 713, 721 (2d Cir.), cert. denied, 502

U.S. 862 (1991) (financing bank not liable for freight charges

due to disturbing effect on banking and commerce).

As expressed more than 70 years ago:

The ancient. . . lien of the sea is not maintained. . .

for the convenience or assurance of the parties, but for

the encouragement of commerce and shipping .. . .

Anything more than this multiplies secret liens and ham-

pers instead of advances ease and freedom of commerce.

Merchant and mariner alike subject their property to the

municipal law of every country into which their venture

comes, but a maritime lien is as near an approach to jus

gentium as can be found in private jurisprudence and any

extension thereof not internationally well founded is to

be opposed as jealously as is a denial of its accepted

extent.

The SATURNUS, 250 F. 407, 414 (2d Cir.), cert. denied, 247

U.S. 521 (1918) (emphasis added); see also Itel Containers

Int'l Corp. v. Atlanttrafik Express Serv. Ltd., 982 F.2d 765 (2d

Cir. 1992).

Before the District and Circuit Courts, Cornish (and

POSCO) sought to expand the scope of a maritime lien on

subfreight beyond any previous decision. The District Court

properly rejected the attempt. So too, the appellate court

below recognized that allowing the multiplication of these

secret liens can lead to the disruption, not advancement, of

maritime commerce as exemplified by the fact that Cornish

was prosecuting its supposed lien claims both in the District

Court and the Panamanian Court. (App. 17a).

POINT II

THE DECISION OF THE COURT BELOW WAS NOT

AN “EXTRAORDINARY RESULT” BUT WAS

CONSISTENT WITH THE PRECEDENT OF

THIS COURT AND THE DECISIONS OF THE

CIRCUIT COURTS OF APPEAL

Petitioner argues that there is a conflict with United States

v. Freights etc. of the S.S. MOUNT SHASTA, 274 U.S. 466

(1927); Union Industrieile et Maritime v. Nimpex Int’l, Inc.,

459 F.2d 926 (7th Cir. 1972); The DIANA, 423 F.2d 1 (2d Cir.

1970); American Steel Barge Co. v. Chesapeake & O. Coal

Agency Co., 115 F. 669 (1st Cir. 1902); and Tagart Beaton &

Co. v. James Fisher & Sons, 1 K.B. 391 (C.A. 1903)°. None

of these decisions, however, held that the lien on subfreights

3 Cornish also urges a conflict with Beverly Hills Nat'l Bank &

Trust Co. v. Compania de Navegacione Almirante S.A., 437 F.2d 301 (9th

Cir.), cert. denied, 402 U.S. 996 (1971). In Beverly Hills, however, a

claim was made for imposition of a constructive trust. No such claim was

presented in this case. Indeed, as stated in note 2, supra, Cornish has

commenced a separate action against INB while this matter was sub

judice before the Second Circuit, urging this precise claim. Moreover,

Cornish’s arguments in notes 17 and 18 of the Petition are not well

founded. Freight pre-paid bills of lading are not misrepresentations of the

status of the freight, but an expression of the extension of credit to the

recipient of the bill of lading. See, e.g., Compania Sud Americana de

Vapores v. Atlantic Caribbean Shipping Co., 587 F. Supp. 410 (S.D. Fla.

1984). The relationship between Ferromet and INB was a debtor-credi-

tor relationship, not a confidential relationship. Finally, there was no

competent evidence of an assumption by POSCO regarding satisfaction

of Cornish’s claim. To the contrary, POSCO’s own letter agreement

makes no reference to such a payment or use of the L/C funds.

9

reached a specific fund and allowed tracing of the fund into

the charterer’s accounts.

In this Court’s decision in the MOUNT SHASTA, the sub-

freights were specifically referred to as an intangible, i.e., the

debt owing from the consignee to the charterer. 274 U.S. at

470. Enforcement of the lien on the debt required only that

the debtor be subject to the jurisdiction of the court. This

Court explained:

Here the debtor is within the power of the Court and

therefore the debt, if there is one, is also within it.

Id. at 471.

Similarly, in American Steel Barge, the First Circuit likened

the owner’s rights under the lien on subfreights to that of an —

assignee, 115 F. at 673, being subrogated to the remedies of

the charterer, Jd. at 674. The court explained that the action

proceeds against the freight, with process to be served on “the

holder of the bill of lading, or owner of the cargo, requiring

him to pay the freight into the registry of the court.” /d. at

674. Although not explicitly stated, the holder or owner are

the proper parties to be notified, since they are the debtors

responsible for payment of the freight.

In Tagart, Beaton, Lord Alverstone similarly concluded:

[B]ut such a lien does not confer the right to follow the

money paid for freight into the pockets of the person

receiving it simply because that money has been

received in respect of a debt which was due for freight.

1 K.B. at 395.

In Nimpex and DIANA, the courts reviewed the payment

history of the freights. The Nimpex court found that freight

payment had been made, thereby extinguishing claims by

the owner. 459 F.2d at 930. This conclusion accords with the

Second Circuit’s analysis in the case at bar. As Chief Judge

Newman explained:

10

If it were true that the lien gave the owner an interest in

the subfreights as funds, it would be logical for the

owner to be able to execute the lien against those funds,

or any identifiable portion of them, even if the consignee

had paid them to the charterer before receiving notice of

the lien. Under those circumstances, payment prior to

notice should, at most, discharge the consignee’s per-

sonal liability, rather than extinguish the owner’s lien

altogether. On the other hand, if the lien attaches to the

subfreight only as a debt, it is easy to see why payment

prior to notice completely extinguishes the lien: in that

case, there is no longer any debt to attach.

(App. 13a-14a).

The comments by the DJANA court regarding payment sim-

ilarly rest on the conclusion that the lien attaches to the sub-

freights as a debt, not as a separate fund. 423 F.2d at 5-6.

Otherwise, the payment issue which the DIANA court found

significant enough to require a remand for trial would actually

have been immaterial.

The Second Circuit’s opinion in this case harmonizes the

many precedents regarding the lien on subfreights. It identi-

fies the thread that runs through the analysis of each of these

prior decisions; an analysis that in each case, explicitly or

implicitly, recognizes that the lien operates on the intangible,

i.e., the debt which was due for freight.

Contrary to the argument of Cornish, this analysis does not

undermine or obstruct enforcement of the lien. Thus, pro-

ceedings may be begun against the debtor, wherever the

debtor is present either personally or through an agent. As this

Court observed in MOUNT SHASTA, the debt is subject to

arrest in these jurisdictions. This is, of course, without men-

tion of the fact that the owner retains its right to assert its

claims against the charterer or the payor.

Equally important, the Second Circuit’s well-reasoned anal-

ysis preserves the limited nature of the lien, recognizing that

11

it exists solely to encourage commerce and shipping, not “for

the assurance of the parties.” The SATURNUS, 250 F. at 414.

In view of the absence of notice, such a lien “may operate to

the prejudice of prior mortgagees or of purchasers without

notice.” Seaboard Fisheries, 254 U.S. at 12. The lien is there-

fore strictly construed.

In summary, this case does not conflict with this Court’s

decision in MOUNT SHASTA, nor with the decisions of the

other Courts of Appeal. The Second Circuit’s analysis and

conclusion recognizes the lien on subfreights and provides an

appropriate framework for its enforcement.

12

CONCLUSION

RESPONDENT RESPECTFULLY SUBMITS THAT A

WRIT OF CERTIORARI SHOULD NOT ISSUE TO

REVIEW THE DECISION BELOW.

Respectfully submitted,

JOHN M. TORIELLO

Counsel for Respondent

Internationale Nederlanden

Bank N.V. f/k/a NMB

Postbank Groep N.V.

195 Broadway

New York, New York 10007

(212) 341-7000

JAMES H. HOHENSTEIN

HAIGHT, GARDNER, POOR

& HAVENS

—and—

PETER E. CALAMARI

ANTHONY L. PACCIONE

HERTZOG, CALAMARI

& GLEASON

100 Park Avenue

New York, New York 10017

(212) 481-9500

Of Counsel