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

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Supreme Court, U.S.

No. 95-130

In The 7

Supreme Court of the United States

October Term, 1995

CORNISH SHIPPING LTD.,

Petitioner,

VS.

INTERNATIONAL NEDERLANDEN BANK .N.V., f/k/a NMB

POSTBANK GROEP, N.V.,

Respondent.

On Petition for Writ of Certiorari to the United States Court

of Appeals for the Second Circuit

REPLY BRIEF FOR PETITIONER

PETER J. GUTOWSKI

Counsel of Record

MICHAEL FERNANDEZ

BARBARA G. CARNEVALE

FREEHILL, HOGAN & MAHAR

Attorneys for Petitioner

80 Pine Street

New York, New York 10005

(212) 425-1900

(800) 3 APPEAL « (600) 5 APPEAL « (800) BRIEF 21

TABLE OF CONTENTS

Cornish’s Preliminary Statement and Response to INB’s

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Further Reasons for Granting the Writ ................

I. The lien on subfreight can hardly be described as

“secret” and the enforcement of an existing lien is

not subject to the doctrine of strictijuris. .......

II. Cornish seeks no expansion of its maritime lien on

subfreight but only enforcement ofthatlien. ....

III. Cornish’s lien on the subfreight was superior to the

bank’s interest and required segregation of the

fund upon receipt since notice was given before the

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TABLE OF CITATIONS

Cases Cited:

Atlantic & Gulf Stevedores v. M/V Grand Loyalty, 608 F.2d

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Clubb Oil Tools, Inc. v. M/V George Vergottis, 460 F. Supp.

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In Re Topgallant Lines, Inc., 125 B.R. 682 (Bankr. S.D. Ga.

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Payne v. S.S. Tropic Breeze, 423 F.2d 236 (1st Cir.), cert.

denied, 400 U.S. 964 (1970), modified on other

grounds, 456 F.2d 137 (1st Cir. 1972) .............. 3

Taiwan Int’! Line Ltd. v. Matthew Ship Chartering Lid.,

546 F. Supp. 826(S.D.N.Y. 1982) ...........e000. 5

The Freights of the Kate, 63 F. 707 (D.N.Y. 1894) ....... 5

The Lottawanna, 87 U.S. 201 (1874) ............0205- 5

Other Authorities Cited:

G. Gilmore & C. Black, The Law of Admiralty (2d ed. 1975)

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G. Robinson, Robinson On Admiralty, §§ 60,61 (1939) .. 5

7A J. Moore, Moore’s Federal Practice, { C.07 (2d ed.

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CORNISH’S PRELIMINARY STATEMENT AND

RESPONSE TO INB’S STATEMENT OF THE CASE

The thrust of INB’s Brief In Opposition is designed to

downplay how significant an impact the Cornish decision will

have on the shipowning community, and otherwise convince the

Court that this is just another “run of the mill” admiralty decision

which should be brushed aside. Nothing could be further from

the reality of the situation. In fact, what this Court has to decide is

whether it is prepared to permit a major erosion of the

shipowner’s lien on subfreight in favor of the banking

community.

Contrary to the position asserted by INB, Cornish does not

seek an extension of the lien on subfreight. Similarly, Cornish

does not even suggest that it should be permitted to chase the

funds into the pocket of the charterer. Instead, Cornish seeks

merely to reestablish the fundamental nature of its in rem right to

proceed against the res.

Prior to the Cornish decision, the test determination of a

shipowner’s entitlement to subfreight was evaluated under a

straightforward, almost mechanical test involving the status of

the res at the time the shipowner exercised its lien. The Cornish

decision changed both this test and the fundamental nature of the

lien in favor of lending institutions which routinely finance these

transactions. Henceforth, such land based junior lienors will be

free to actively participate with impunity in the payment

transaction, thereby destroying the shipowner’s superior lien.

The only thing Cornish seeks from this Court is an

opportunity to restore a level playing field in this aspect of

admiralty law on which there is now division among the Circuits.

FURTHER REASONS FOR GRANTING THE WRIT

THE LIEN ON SUBFREIGHT CAN HARDLY BE

DESCRIBED AS “SECRET” AND THE ENFORCEMENT

OF AN EXISTING LIEN IS NOT SUBJECT TO THE

DOCTRINE OF STRICTI JURIS.

The shipowner’s lien on subfreight can hardly be described

as “secret”, especially in the context of financial institutions

which routinely lend on these transactions.' Indeed, it can hardly

be described as secret to anyone even remotely familiar with

ocean transportation. The lien has been recognized as far back as

the last century, and has been incorporated in the standard NYPE

form charter party for almost 100 years (Petition at 7).

In the case of INB, it certainly came as no surprise. INB

admittedly financed numerous prior charter party transactions for

Ferromet (Br. In Opp. at 2), and had specifically required that a

copy of the Cornish charter party be provided to it with the Letter

of Credit documents. More importantly, INB’s own financing

documentation with Ferromet specifically carved out an

exception for these types of carrier liens.? As such, INB’s

intimation that Cornish’s lien came as a surprise rings hollow, and

its suggestion that this so-called secret lien operated to its

prejudice flies in the face of its own financing documentation.

1. The reference to these types of liens being secret merely refers to the

fact that recording is not a prerequisite. The same holds true for INB’s

assignment from Ferromet of the rights to the proceeds.

2. The security agreement between INB and Ferromet specificaily

excluded what was described as “permitted liens”, a term defined to include

liens imposed by law for carriers, materialmen, warehousemen,. . . and other

like liens arising in the ordinary course of business.

Similarly, INB’s repeated references to the doctrine of stricti

juris in connection with its argument that Cornish seeks to

expand its lien is misplaced (Br. In Opp. at 7). Within an

established category of liens, the doctrine is generally not

applied. Instead, a liberal interpretation is given to ensure

effective enforcement. See Atlantic & Gulf Stevedores v. M/V

Grand Loyalty, 608 F.2d 197, 201 (Sth Cir. 1979):

It is abundantly clear that new types of

maritime liens may not be created; however,

it appears equally clear that the doctrine of

stricti juris does not affect the mechanics of

the imposition of traditionally recognized

varieties of maritime liens.’

Therefore, and in the context of Cornish’s enforcement of its

well recognized lien on subfreight, this Court should not apply a

restrictive or narrow interpretation as to how that lien can be

enforced.

3. See also2T. Russel, Benedict on Admiralty, § 39 at 3-44 (1995) citing

Payne v. S.S. Tropic Breeze, 423 F.2d 236 (1st Cir.), cert. denied, 400 U.S. 964

(1970), modified on other grounds, 456 F.2d 137 (1st Cir. 1972); 7AJ. Moore,

Moore’s Federal Practice, { C.07 at 660 (2d ed. 1995) (“Clearly, the

‘extensions’ against which the Supreme Court has long admonished were not

intended to impede normal growth.”); Clubb Oil Tools, Inc. v. M/V George

Vergottis, 460 F. Supp. 835, 840 (S.D. Tex. 1978) (citing authority calling for a

liberal interpretation of the term “necessaries” [an established category of

liens} within the scope of the Federal Maritime Lien Act).

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CORNISH SEEKS NO EXPANSION OF ITS

MARITIME LIEN ON SUBFREIGHT BUT ONLY

ENFORCEMENT OF THAT LIEN.

INB suggests that the relief sought by Cornish would

constitute an expansion of the maritime lien on subfreight.

Cornish is not asking this Court to fashion a new lien or even

extend the scope of its clearly recognized lien on subfreight.

Cornish merely seeks enforcement of its lien against the res — the

traditional enforcement remedy.‘

INB’s motivation in this case is clear. The Cornish decision

significantly enhances the value of the bank’s land based security

interest. Further, the decision insulates the bank against criticism

for manipulation of the transfer into its hands — the very basis

upon which it now argues that the lien is lost. Cornish seeks only

to reestablish the lien to its original status.

Ill.

CORNISH’S LIEN ON THE SUBFREIGHT WAS

SUPERIOR TO THE BANK’S INTEREST AND

REQUIRED SEGREGATION OF THE FUND UPON

RECEIPT SINCE NOTICE WAS GIVEN BEFORE THE

TRANSFER.

There is no dispute that INB was a competing creditor of the

shipowner (Cornish) in this case (Br. In Opp. at 2). In addition,

there is no dispute that Cornish’s maritime lien primes the bank’s

interest and, in fact, prevails over all non-maritime security

4. In fact, it is INB that seeks an artificial restriction of the shipowner’s

lien, narrowing its focus solely to an in personam action against the payor.

interests.’ Finally, the shipowner’s superior lien on subfreight

mandates that a land based assignee “assumes the risk that his

rights are subordinate to the owner's.” 2 T. Russel, Benedict on

Admiralty, § 45 at 3-70 (1995).

Despite these established principles, the Court below

fashioned a new subfreight test which changed the focus of the

lien. By so doing, the Court allowed the bank to retain the

subfreight, despite prior service of Cornish’s notice of lien and

Rule C Arrest. In an effort to sustain this ruling, INB would have

this Court believe that restoring the focus of the lien to the res

itself would wreak havoc on the banks because it would

supposedly enable a shipowner to chase subfreight into a

charterer’s account. This is not Cornish’s position, Cornish does

not seek such relief, and INB grossly overstates the ramifications

of a restoration of the lien.

INB’s obligation upon receipt of the subfreight was simple:

it was obliged to segregate that fund pending further Court order

regarding priority. This obligation could hardly be described as

being even remotely disruptive of banking practice. Moreover,

such duty will not work to the prejudice of other creditors of the

charterer since the fund would be maintained in a segregated

account, thereby providing notice of the shipowner’s interest.

5. See The Lottawanna, 87 U.S. 201, 221 (1874); G. Robinson, Robinson

On Admiralty, §§ 60, 61 (1939); 2 T. Russell, Benedict on Admiralty, § 51

(1995); G. Gilmore & C. Black, The Law of Admiralty, at 734 (2d ed.

1975)(“The two simplest propositions are that maritime claims outrank non-

maritime claims. . .”); see also In Re Topgallant Lines, Inc., 125 B.R. 682, 687

(Bankr. S.D. Ga. 1991) citing The Freights of the Kate, 63 F.707 (D.N.Y. 1894);

(“It is well settled that the holder of a valid maritime lien enjoys a priority

position superior to the holder of a consensual assignment for collateral

purposes of an interest in freights.”); Taiwan Int'l Line Lid. v. Matthew Ship

Chartering Lid., 546 F. Supp. 826, 829 (S.D.N.Y. 1982) (Shipowner’s lien on

subfreight prevails over prior land based security interest in proceeds of the

charterer.)

In a similar vein, INB’s argument that Cornish’s position

will have a negative impact on banking commerce is groundless.

For as long as this lien has been in existence, banks have been

lending money to charterers to finance ocean transportation

notwithstanding the lien on subfreight. Accordingly, there is no

substantive justification for the erosion of the shipowner’s lien

which has occurred in this case in favor of the banks.

CONCLUSION

This is the only time a bank has been able to interject itself

into the subfreight payment transaction, and successfully retain

those subfreights despite a prior exercise by a shipowner of its

superior lien on that res. The Cornish decision’s nullification of

such a fundamentally important shipowner’s remedy stands in

stark contrast to general maritime lien law, and necessitates this

Court’s intervention so as to restore uniformity among the

Circuits. Certiorari should be granted.

Respectfully submitted,