Villaflores v. Royal Venture

Opinion

United States Court of Appeals,

Eleventh Circuit.

No. 97-3182.

Edward WILKINS; William Jenkins, et al., Intervenors-Plaintiffs Appellants,

v.

COMMERCIAL INVESTMENT TRUST CORPORATION, a New York Corporation, in personam, Defendant, Intervener-Defendant, Cross-Claimant, Third-Party-Plaintiff Appellee.

Sept. 4, 1998.

Appeal from the United States District Court for the Middle District of Florida. (No. 96-2103-CIV- T-17B), Elizabeth A. Kovachevich, Judge.

Before TJOFLAT, COX and HULL, Circuit Judges.

PER CURIAM:

This is an appeal concerning admiralty jurisdiction. We conclude that admiralty jurisdiction

is lacking.

I. Background

A. Facts

This action arises from the failed launching of a new cruise line. The defendant CIT

Group/Equipment Financing, Inc., (CIT) acquired the motor vessel Sun1 at a foreclosure sale in the

Bahamas and then sought a buyer.2 In early June 1996, CIT agreed in principle to a sale to Sun

Travel Investment Corporation, part of a group of affiliated corporations that included the proposed

1 The ship has been renamed, but for convenience we will continue to use the old name. For similar reasons of convenience, we refer to CIT as the owner of the Sun even though title reposes in a CIT subsidiary. CIT has taken inconsistent positions in this litigation with respect to which subsidiary has title—an inconsistency of which the plaintiffs make much, but which is irrelevant to the issues at hand. 2 (R.2-29 ¶ 3.) charterer, Royal Venture Cruise Line, Inc., and a third corporation, Royal Shipping Management,

Inc. (collectively referred to as "the Royal companies"), which planned to operate the Sun as a cruise

ship.3 The purchase agreement was developed through an agreed summary of proposed terms,4 a

commitment letter,5 and several amendments to these agreements.6

The deal that emerged was as follows. The purchase price of $25 million was to be mostly

financed by CIT, secured by mortgages on the vessel and a pledge of the contemplated charter and

of Royal Venture stock.7 In addition, consideration for the sale included an initial investment by the

Royal companies of up to $1.5 million to repair and refurbish the vessel.8 The Royal companies

would oversee the repairs and refurbishment, and the parties explicitly agreed that the Royal

companies were uniquely responsible for all repair and refurbishment expenses (hereinafter called

"the refurbishment expenses").9 The Royal companies' payment for refurbishment expenses was to

be guaranteed either by a letter of credit or by an escrow account, issued or opened before

refurbishment began, to be available to CIT upon any default in payment by the Royal companies

to refurbishers.10

3 (R.3-42-Ex.D.) 4 (See R.2-29-Ex. A.) 5 (See id.—Ex. B.) 6 (See id.—Exs. C, D, F.) 7 (See id.—Ex. B.) 8 (Id.) 9 (R.3-42-Ex. C.) 10 (Id. at 2.)

2 The Royal companies began the refurbishment on July 7. As of late July, no Royal company

had yet provided the required security, and CIT—worried that maritime liens on the vessel would

result if the Royal companies defaulted on their obligations to refurbishers—threatened to end the

transaction if security were not provided.11 At the Royal companies' request, the plaintiff Edward

Wilkins, an investor in the Royal companies, stepped in and posted an irrevocable letter of credit

for $1.5 million. CIT could draw upon the letter upon certification that one of the Royal companies

had failed to pay the refurbishment expenses for which it was responsible, and that a maritime lien

would likely result. In exchange for Wilkins's posting the letter of credit, the Royal

companies—reaffirming that they were responsible for payment of the refurbishment

expenses—promised to open, for Wilkins's protection, an escrow account of up to $1.5 million to

be funded by proceeds from a sale of securities.12

Royal Venture also sought help from Gary Kimball, another plaintiff here, who in turn

recruited the plaintiffs other than Wilkins (whom we shall call "the investors") to provide varying

amounts of cash to the Royal companies. In exchange, Royal Venture provided the investors with

notes promising payment from Royal Ventures before certain dates in the fall of 1996 at an 18%

interest rate.13 At no point did CIT promise to reimburse any plaintiff here, and no plaintiff has any

express lien on the Sun.

11 (R.2-29 WW 8-10.) 12 (R.2-29-Ex. O.) 13 (R.2-29-Exs. P-T.) The investors filed affidavits swearing that they lent the money to the Sun, and not to Royal Venture. (R.3-38-Exs.) How this testimony squares with the promissory notes from Royal Venture is unexplained, however, and indeed in his affidavit a CIT vice president who was involved in the transaction denies that CIT ever had any contact with the investors. (See R.2-29 WW 21, 24.)

3 By October, it was evident that the Royal companies would not be able to raise enough

capital to close the deal. CIT notified the Royal companies of their default under the purchase

agreement, and CIT drew upon the letter of credit to pay off the debts that the Royal companies had

incurred in refurbishing the Sun. The investors allege that their loans were also used to pay off

maritime liens, although there is no evidence to that effect in the record—only conclusory affidavits.

B. Procedural History

This action began when a group of the Sun's seamen sued CIT for wages. The plaintiffs (as

we have been calling them here) moved to intervene and assert two claims against the Sun and CIT.

In Count I, they sued the Sun and claimed maritime liens under 46 U.S.C. § 31342, in Wilkins's case

because he furnished the letter of credit, and in the other plaintiffs' cases because they provided cash

to the Royal companies, supposedly to pay refurbishment expenses. In Count II, they sued CIT and

the Sun, claiming fraud by CIT or the vessel.14 The plaintiffs were permitted to intervene; the

seamen who were the original plaintiffs have been dismissed from the case following settlement.

CIT moved to dismiss the Count II fraud claim on the ground of lack of admiralty

jurisdiction. While this motion was pending, the plaintiffs moved for partial summary judgment on

their maritime lien claim. CIT opposed this motion in part on the ground that no maritime

jurisdiction existed over the maritime lien claim. The district court agreed and dismissed the action

for want of subject matter jurisdiction. Although the plaintiffs briefly mentioned diversity as an

alternative basis for jurisdiction in their response to the motion to dismiss, the district court did not

explicitly consider it. The plaintiffs now appeal the dismissal of the action, arguing that either

14 The exact theory of this claim is not clear from the complaint, but it seems that the alleged fraud is that CIT failed to tell Wilkins and the investors of the circumstances in which the letter of credit might be drawn upon, or the investors' loans spent. (See R.3-42 WW 37-40.)

4 admiralty or diversity jurisdiction exists to hear their claims. Our standard of review is de novo.

See Ambassador Factors v. Rhein-, Maas-, Und See-Schiffahrtskontor GMBH, 105 F.3d 1397, 1398

(11th Cir.1997).

II. Discussion

Maritime jurisdiction is a prerequisite to a claim against a vessel asserting a maritime lien.

See E.S. Binnings, Inc. v. M/V Saudi Riyadh, 815 F.2d 660, 662 (11th Cir.1987), overruled in part

on other grounds, Exxon Corp. v. Central Gulf Lines, Inc., 500 U.S. 603, 111 S.Ct. 2071, 114

L.Ed.2d 649 (1991). Thus, whether maritime jurisdiction exists is a question anterior to, although

often coincident with, the question of whether the plaintiff has a maritime lien. See The Resolute,

168 U.S. 437, 439-40, 18 S.Ct. 112, 113, 42 L.Ed. 533 (1897); Inbesa America, Inc. v. M/V Anglia,

134 F.3d 1035, 1036 & n. 2 (11th Cir.1998); Logistics Mgmt., Inc. v. One (1) Pyramid Tent Arena,

86 F.3d 908, 912 (9th Cir.1996). Count I's maritime lien claim is rooted in contract, so jurisdiction

is determined by the general rule for admiralty jurisdiction in contract: for jurisdiction to exist the

subject contract must be wholly maritime in nature, or any nonmaritime elements must be either

insignificant or separable. See Inbesa, 134 F.3d at 1036. A maritime contract in general is one

whose subject matter "is necessary to the operation, navigation, or management of a ship," id.

(quoting Ambassador Factors, 105 F.3d at 1399), and precedent has defined categories that provide

useful boundary posts for the line between maritime and state-law-governed contracts. See Kossick

v. United Fruit Co., 365 U.S. 731, 735, 81 S.Ct. 886, 890, 6 L.Ed.2d 56 (1961).

There are many agreements in the facts of this case, both express and implied. The plaintiffs

urge us to base jurisdiction on the agreements between Royal Venture and the suppliers who

furnished goods and services for the Sun 's refurbishment. Such contracts are maritime, as they are

5 for repair of a vessel. See North Pac. S.S. Co. v. Hall Bros. Marine Ry. & Shipbuilding Co., 249

U.S. 119, 128, 39 S.Ct. 221, 224, 63 L.Ed. 510 (1919). A murkier issue, however, is whether the

plaintiffs' in rem claims asserting maritime liens can rest at all on these refurbishment contracts. The

plaintiffs argue that their claims are based on these contracts, even though they are not parties to the

contracts, because of the maritime rule of advances: "A creditor who advances money specifically

for the purpose of discharging a maritime lien is subrogated to the lienor's rights." Sasportes v. M/V

Sol de Copacabana, 581 F.2d 1204, 1207 (5th Cir.1978); see Crustacean Transp. Corp. v. Atalanta

Trading Corp., 369 F.2d 656, 660 (5th Cir.1966). The money Wilkins paid through the letter of

credit, and the money the investors put up, assertedly ended up (after passing through some

intermediaries' hands) paying off the refurbishers, who were potential lienors of the Sun. Thus, the

plaintiffs are, in their opinion, subrogated to the suppliers' rights. Since jurisdiction would exist to

entertain an in rem claim by one of the suppliers, the plaintiffs reason, jurisdiction exists to hear a

claim by one subrogated to the lienors' rights.

We are unpersuaded because the plaintiffs cannot benefit from the rule of advances. Not

just any creditor whose money goes to discharge maritime liens himself acquires a maritime lien.

Rather, the advance must be on the credit of the vessel. Tramp Oil & Marine, Ltd. v. M/V "Mermaid

I", 805 F.2d 42, 45 (1st Cir.1986). This qualification carries with it a common-law presumption that

anyone making advances to provide necessaries to a vessel does so on the vessel's credit, and not

merely on the credit of any individual. See The Emily Souder, 84 U.S. (17 Wall.) 666, 671, 21 L.Ed.

683 (1873); The Cimbria, 214 F. 128, 129 (D.N.J.1914); cf. 46 U.S.C. § 31342(a)(3) (providing

that an alleged lienor, to whose rights a creditor may become subrogated, need not prove that credit

was given to the vessel). The origin of the presumption is common sense about the paradigmatic

6 loan to the master of a foreign ship who needs the money to keep going: "Moneys are not usually

loaned to strangers, residents of distant and foreign countries, without security, and it would be a

violent presumption to suppose that any such course was adopted when ample security in the vessel

was lying before the parties." The Emily Souder, 84 U.S. (17 Wall.) at 671. But two circumstances

of this case together remove it so far from the paradigm that indulging this ancient common-law

presumption is unjustified.15

The first circumstance is that the very purpose of the advance was to satisfy the purchaser's

contractual obligation to protect the vessel owner from the maritime liens. CIT shifted the

responsibility of paying maritime suppliers to the Royal companies. Thus, CIT was vulnerable to

a default beyond its control. Fearing this possibility, from day one of this transaction CIT took every

possible measure to protect itself from the possibility that the Royal companies' default would leave

any liens on the vessel that would either be superior to CIT's purchase-money mortgage (if the sale

closed) or impede a future sale (if the deal with the Royal companies fell through). Indeed, it was

only because CIT insisted on enforcing its rights to protection that Wilkins and the investors

participated in the transaction. With this background, it would be unjust to presume that the vessel

would end up encumbered, anyway—because of the Royal companies' apparent default in

reimbursing their investors as well as the vessel's refurbishers.

15 We are aware that at least one circuit has implicitly considered the rule of advances to arise from 46 U.S.C. § 31342, which contains a mandatory presumption that credit is extended to the vessel. See 46 U.S.C. § 31342(a)(3); International Seafoods of Alaska, Inc. v. Park Ventures, Inc., 829 F.2d 751, 753-54 (9th Cir.1987). We disagree; the statute says nothing about the rule of advances, and the rule has a long common-law history, as the cases we cite show. While the rule of advances may be a corollary in some sense to § 31342, its elements are independent of the statute and susceptible to judicial change to reflect the economic realities of a case. Cf. Sasportes, 581 F.2d at 1209 (borrowing into the rule of advances the high standard of § 31342's rebuttable presumption that credit is extended to the vessel).

7 The second circumstance is that the advances were made not to, or on behalf of, the owner,

the vessel, or their agents. Rather, the advances were at the instance of, and with promise of

reimbursement from, a party with no property interest in any vessel—the Royal companies. In the

paradigmatic case, the advancer deals with the owner or his agent, and the advance is either straight

to the owner or to a lienholder, on the owner's behalf. See, e.g., Sasportes, 581 F.2d at 1209;

Crustacean Transp. Corp., 369 F.2d at 659; International Seafoods of Alaska, Inc. v. Park Ventures,

Inc., 829 F.2d 751, 753 (9th Cir.1987); Pavlis v. Jackson, 131 F.2d 362, 365 (5th Cir.1942). Here,

the Royal companies, not CIT, sought out Wilkins and the investors in order to complete the sales

transaction. Indeed, only Wilkins and Kimball had any contact with CIT at all. And before

advancing money, the plaintiffs secured promises of reimbursement from the Royal companies.

Wilkins purchased the letter of credit only after Royal Venture promised to open an escrow account

available to Wilkins if the letter of credit were drawn upon.16 The investors, for their part, all

obtained promissory notes from the Royal companies. These two distinctions from the

paradigm—who sought the advance and who agreed to pay for it—are important simply because in

a case such as this one, where investors pay on behalf of a corporation that owns no vessel, potential

16 It appears from the record that the escrow account was never provided; a letter from Royal Venture's chairman in October 1996 describes Wilkins as "an unsecured creditor of a company which is producing no income." (R.2-29-Ex. U.)

Interestingly, the agreement recites that "a portion of the consideration for the purchase of Vessel by Sun [Travel] is the establishment of a $1.5 million standby letter of credit with NationsBank." (R.2-29-Ex. O ). If the letter of credit is so characterized, its purchase plainly does not grant Wilkins a maritime lien: advances for the purchase of a vessel do not give rise to a lien. See The Sarah Harris, 21 Fed.Cas. 447, 448, No. 12,346 (S.D.N.Y.1874).

8 collateral in the form of the vessel is not "lying before the parties." The Emily Souder, 84 U.S. (17

Wall.) at 671.

Because of these important distinctions from the typical advance case, we hold that the

presumption that money is advanced on the credit of the vessel does not apply. There is no

substantial evidence to support such a finding without the presumption, only conclusory statements

by the plaintiffs in their affidavits. This mere scintilla of evidence is not enough. Cf. Dolihite v.

Maughon By and Through Videon, 74 F.3d 1027, 1046 (11th Cir.1996) (conclusory statement in

affidavit that doctor was negligent not enough to avoid summary judgment). This element of the

rule of advances claim is thus missing, and Wilkins and the investors are not entitled to be

subrogated to the refurbishers' maritime liens. Wilkins and the investors accordingly may not rely

on the refurbishers' contracts to furnish a basis for maritime jurisdiction under Count I. For this

reason, we agree with the district court that maritime jurisdiction does not exist over the maritime

lien claims asserted in Count I.

Jurisdiction over Count II, which claims fraud against the Sun and CIT, was not explicitly

addressed by the district court. The fraud claims are plainly not, in any event, within the court's

admiralty jurisdiction; torts fall within maritime jurisdiction only if they occur or have effects on

navigable water, see Jerome B. Grubart, Inc. v. Great Lakes Dredge & Dock Co., 513 U.S. 527, 533,

115 S.Ct. 1043, 1048, 130 L.Ed.2d 1024 (1995), and there is no evidence or assertion that any

element of the alleged fraud was committed anywhere close to navigable water, or had any effect

on water. Cf. Kuehne & Nagel v. Geosource, Inc., 874 F.2d 283, 289 (5th Cir.1989) (reaching

similar conclusion on similar facts).

9 On the other hand, the plaintiffs contend that jurisdiction may be based on diversity. This

possibility was alleged in the complaint. But apart from a brief remark in response to CIT's motion

to dismiss, the plaintiffs did not argue in the district court that diversity is a valid alternative basis

for jurisdiction. The district court accordingly did not determine if diversity jurisdiction is available.

Rather than addressing the issue, we remand to the district court for it to consider in the first

instance. A complete remand, however, is unnecessary. Diversity jurisdiction does not exist over

Count I and the Count II fraud claim against the vessel; vessels may not be sued in diversity.

Powell v. Offshore Navigation, Inc., 644 F.2d 1063, 1065 n. 3 (5th Cir. Unit A May 11, 1981). The

only claim here alleged that falls within diversity jurisdiction is that against CIT for fraud. We note

that the jurisdictional allegations relating to that claim are, however, incomplete as to citizenship.17

Furthermore, for all it appears, six of the investors (F.H. Bell, Harry and Ruby Key, Louis and

Claudette Lombardo, and Robert Major or Majors) claim less than the $50,000 minimum amount

in controversy required by 28 U.S.C. § 1332(a) at the time the investors filed their complaint in

intervention.18 Whether the plaintiffs should be allowed to amend the complaint and whether

diversity jurisdiction in fact exists over the complaint are questions we leave to the district court.

III. Conclusion

17 The complaint does not allege, for instance, where CIT has its principal place of business or of what states some of the individual plaintiffs are citizens. 18 The plaintiffs' motion to intervene was granted November 26, 1996, and the complaint was filed that same day. The amendment to § 1332(a) raising the required amount in controversy to $75,000 became effective January 17, 1997, 90 days after the amendment was enacted. See Federal Courts Improvement Act of 1996, Pub.L. No. 104-317, § 205(b), 110 Stat. 3847, 3850 (1996).

10 For the foregoing reasons, we affirm the dismissal for want of subject matter jurisdiction of

the claims in Count I and the Count II claims against the Sun. We vacate the dismissal of the Count

II claims against CIT and remand for the district court to determine whether diversity jurisdiction

exists over these claims.

AFFIRMED IN PART; VACATED AND REMANDED IN PART.